BMO Nesbitt Burns Inc. v. Wellington West Capital Inc. et al.

[Indexed as: BMO Nesbitt Burns Inc. v. Wellington West Capital Inc.]

77 O.R. (3d) 161

[2005] O.J. No. 3566

Docket: C42611

Court of Appeal for Ontario,

Doherty, Laskin and MacFarland JJ.A.

August 29, 2005

Civil procedure -- Pleadings -- Statement of defence -- Plaintiff bringing action against competing brokerage firm alleging that defendant had aggressively recruited plaintiff's employees and induced them to breach their employment contracts and their fiduciary duties -- Plaintiff seeking damages and equitable remedies -- Defendants seeking to rely on plaintiff's past recruiting practices as defence to plaintiff's claims -- Defendants not entitled to plead plaintiff's past recruiting practices as defence to claim for equitable relief -- Defendants entitled to rely on plaintiff's past recruiting practices as defence to claim for punitive damages -- Each defendant entitled to plead plaintiff's recruiting practices to establish implied contractual term if they pleaded specific instances of recruitment that were known to them while employed by plaintiff and that gave rise to implied contractual terms.

BMO Nesbitt Burns Inc. ("BMO") and Wellington West Capital Inc. ("WWC") were competing brokerage firms and investment dealers. BMO alleged that S and D (WWC's Chief Executive Officer and National Sales Manager) aggressively recruited BMO employees (the "transferring employees") to join WWC, induced them to breach their contracts of employment and their fiduciary duties, wrongfully interfered with BMO's economic and contractual interests, and unlawfully used confidential information. BMO brought an action against WWC, S, D and the transferring employees for damages for loss of profits and goodwill, for exemplary and punitive damages and for interlocutory and permanent injunctions. In their statement of defence, WWC, S and D said that the transferring employees were recruited in accordance with industry custom, including practices and procedures employed by BMO itself in its recruitment of investment advisors. In their defence, the transferring employees said that their employment contracts included the implied term that they could conduct themselves in accordance with the practice in the industry and the historical practice of BMO. BMO brought a motion to strike from the statement of defence the references to its own past recruiting practices unrelated to the recruitment of the transferring employees. The motion was granted. The motions judge struck out those parts of the statement of defence that made general allegations about BMO's recruiting practices, but the defendants were granted leave to amend to plead specific instances of recruitment or specific recruitment materials of which they had personal knowledge. The motions judge also held that the defendants could not plead BMO's recruiting policies, practices and directives as a defence to BMO's claim for equitable relief or its claim for punitive damages. The defendants appealed.

Held, the appeal should be allowed in part.

With respect to the issue of whether the defendants were entitled to plead and prove BMO's policies, practices and directives known to the transferring employees in respect of their allegation of implied contractual terms, the parties reached a sensible agreement. They accepted that each defendant may plead the recruiting practices of BMO if the defendant pleaded, with material facts in support, specific instances of the recruitment of employees that were known to the defendant while at BMO and that gave rise to the asserted implied terms of the defendant's employment contract. [page162]

In response to BMO's allegations of breach of fiduciary duty and breach of confidence, and claim for equitable relief, the defendants sought to invoke the clean hands doctrine, pleading that BMO was not entitled to equitable relief because it had used the very same recruiting practices and policies it now alleged were improper. They sought to rely not just on practices and policies of which they had knowledge while employed at BMO, but also on practices and policies that might come to their knowledge from others. The motions judge did not err in finding that the defendants were not entitled to rely on BMO's past recruiting practices as a defence to the claim for equitable relief. Resort to similar conduct in the marketplace to support the defence of clean hands is not tenable in law. A more direct connection is required. The defendants did not allege any direct connection. They did not allege that BMO breached its contractual obligation to any of the defendants or that it otherwise behaved inequitably towards any defendant. The pleadings did not come within the scope of the clean hands doctrine.

The defendants were entitled to plead and prove properly particularized recruiting practices, policies and directives of BMO as a defence to BMO's claim for punitive damages. They should be able to argue that the conduct of which BMO now complained did not attract the kind of outrage associated with punitive damages because it is widely accepted in the industry and indeed has been employed by BMO in its own recruitment of investment advisors.

APPEAL from the order of Cumming J., 2004 ONSC 33776, [2004] O.J. No. 4194, 35 C.C.E.L. (3d) 82 (S.C.J.), striking portions of the statement of defence and counterclaim.

Cases referred to Hill v. Church of Scientology of Toronto, 1995 SCC 59, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64, 24 O.R. (3d) 865n, 126 D.L.R. (4th) 129, 184 N.R. 1, 30 C.R.R. (2d) 189, 25 C.C.L.T. (2d) 89; Raso v. Dionigi (1993), 1993 ONCA 8664, 12 O.R. (3d) 580, [1993] O.J. No. 670, 100 D.L.R. (4th) 459, 31 R.P.R. (2d) 1 (C.A.); SBS Sealants Inc. v. Robroy Industries Ltd. (2002), 2002 ONCA 41884, 59 O.R. (3d) 257, [2002] O.J. No. 1535, 2 R.P.R. (4th) 1 (C.A.); T.L.C. v. Vancouver (City), 1995 BCSC 300, [1995] B.C.J. No. 2317, 13 B.C.L.R. (3d) 201, [1996] 2 W.W.R. 529, 28 C.C.L.T. (2d) 35 (S.C.); Toronto (City) v. Polai, 1969 ONCA 339, [1970] 1 O.R. 483, 8 D.L.R. (3d) 689 (C.A.) Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 21.01, 25.11

Jeremy J. Devereux, for respondent BMO Nesbitt Burns. Jonathan B. Kroft, for appellants Wellington West Capital Inc. et al.

The judgment of the court was delivered by

LASKIN J.A.:--

Introduction:

[1] The plaintiff BMO Nesbitt Burns Inc. has sued the defendants, Wellington West Capital Inc., and two of its senior officers for soliciting the other defendants to resign from Nesbitt Burns [page163] and join Wellington. On a pleadings motion brought by Nesbitt Burns, Cumming J. struck out portions of the amended statements of defence and counterclaim on the ground that they disclosed no reasonable defence. The defendants appeal three aspects of his order. Their appeal raises the general question whether the defendants can rely on the plaintiff's past recruiting practices as a defence to the plaintiff's claims.

Background

(a) The claim and defence

[2] The corporate appellant Wellington and the respondent Nesbitt Burns are both full service brokerage firms and investment dealers. They compete with each other in some parts of Canada. The appellant Spiring is Wellington's Chief Executive Officer, and the appellant Degelman is its National Sales Manager. The remaining appellants (the "transferring employees") are investment advisors or administrative assistants who worked for Nesbitt Burns, but then resigned and joined Wellington.

[3] Nesbitt Burns alleges that in 2002, Spiring and Degelman aggressively recruited the transferring employees to join Wellington. According to Nesbitt Burns, this was part of Wellington's overall strategy to build its business by soliciting experienced investment advisors and their support staff away from Nesbitt Burns.

[4] In October 2003, Nesbitt Burns started an action in British Columbia against eight of the transferring employees. It then started an action in Ontario against the remaining defendants. In April 2004, the two actions were consolidated in the Ontario Superior Court of Justice.

[5] In its statement of claim, Nesbitt Burns alleges that Wellington, Spiring and Degelman induced the transferring employees to breach their contracts of employment and their fiduciary duties, wrongfully interfered with Nesbitt Burns' economic and contractual interests and unlawfully used confidential information.

[6] Nesbitt Burns claims that the transferring employees breached their obligations to the company, including resigning without notice, inducing other employees to resign without notice, removing confidential information belonging to Nesbitt Burns and using that information to solicit clients of Nesbitt Burns.

[7] Nesbitt Burns seeks damages for loss of profits, loss of goodwill and the cost of replacing the transferring employees, as well as exemplary and punitive damages against all defendants. It also seeks an interlocutory and permanent injunction against Wellington, Spiring and Degelman prohibiting them from wrongfully interfering with its economic and contractual interests. [page164]

[8] The defendants filed eight separate statements of defence and counterclaim, each of which was later amended. In their amended pleadings, Wellington, Spiring and Degelman say that the transferring employees were recruited "in accordance with industry custom, including practices and procedures employed by Nesbitt Burns itself in its recruitment of investment advisors". These defendants plead a number of examples of these alleged practices and procedures: awarding bonuses to employees who successfully recruit other firms' advisors; negotiating agreements with advisors while they are associated with other firms; seeking and acquiring client lists and other information from recruited advisors; and advising or permitting recruited advisors to bring their administrative assistants with them.

[9] In their defences, the transferring employees say that their employment contracts included the implied term that they could conduct themselves "in accordance with the practice in the industry and the historical practice at Nesbitt Burns". The transferring employees particularized the historical practice at Nesbitt Burns in identical terms to that pleaded by Wellington, Spiring and Degelman in their amended defence.

(b) The motion

[10] Nesbitt Burns moved to strike from the amended defences the references to its own past recruiting practices unrelated to the recruitment of the transferring employees. It relied on rule 21.01(1)(b) Rules of Civil Procedure, R.R.O. 1990, Reg. 194(a court may strike a pleading on the ground that it discloses no reasonable cause of action or defence) and on rule 25.11 (a court may strike a pleading on the ground that it may prejudice or delay the fair trial of the action; is scandalous, frivolous or vexatious; or is an abuse of the process of the court).

[11] In his order dated October 14, 2004, the motions judge granted Nesbitt Burns' motion. He struck out those parts of the amended defences and counterclaim that made general allegations about Nesbitt Burns' recruiting practices. However, he granted the defendants leave to amend to plead specific instances of recruitment or specific recruitment materials of which they had personal knowledge. The motions judge also held that the defendants could not plead Nesbitt Burns' recruiting policies, practices and directives as a defence to the plaintiff's claim for equitable relief or its claim for punitive damages. In the motions judge's view, these "determinations will bring a sharper focus to obtaining relevant evidence on the examination for discovery and will limit the production of documents by Nesbitt to those that are relevant". [page165]

(c) The appeal

[12] The defendants asked the motions judge to clarify his order to specify whether he intended his rulings to limit the defendants' right to plead and prove certain defences. He declined to do so. Nesbitt Burns has taken the position that the motions judge's rulings constitute final determinations in this litigation. Hence, this appeal.

[13] The defendants raised three issues on the appeal:

(1) Are the defendants entitled to plead and prove Nesbitt Burns' policies, practices and directives known to the transferring employees in respect of their allegation of implied contractual terms?

(2) Are the defendants entitled to plead and prove properly particularized recruiting policies, practices and directives of Nesbitt Burns as a defence to Nesbitt Burns' claim for equitable relief?

(3) Are the defendants entitled to plead and prove properly particularized recruiting policies, practices and directives of Nesbitt Burns as a defence to Nesbitt Burns' claim for punitive damages?

[14] During oral argument, the parties reached agreement on the first issue. I would answer no to the second issue and yes to the third issue.

Analysis

[15] In considering the defendants' appeal, the usual principles governing a rule 21.01(1)(b) motion apply. The court accepts as true the factual allegations in the amended statements of defence and counterclaim, and will strike a defence only where it is "plain and obvious" that it cannot succeed.

First issue: are the defendants entitled to plead and prove Nesbitt Burns' policies, practices and directives known to the transferring employees in respect of their allegation of implied contractual terms?

[16] I will briefly review the dispute on this issue and the agreement reached by the parties, which in my view is a sensible resolution.

[17] In its claim, Nesbitt Burns alleges that the transferring employees breached various implied terms of employment when they left Nesbitt Burns and joined Wellington. The transferring [page166] employees deny that their contracts contained these implied terms but they allege other implied terms. They also allege that Nesbitt Burns' own recruiting practices are inconsistent with the implied terms on which the plaintiff relies, and consistent with the implied terms on which the defendants rely.

[18] On its motion, Nesbitt Burns sought to strike from the amended statements of defence any reference to its recruitment practices, save as they related to the recruitment of the defendants. The motions judge largely accepted Nesbitt Burns' position. He concluded that Nesbitt Burns' recruiting practices relating to persons other than the defendants were relevant to whether the employment contracts contained implied terms "but only to the limited extent that [the transferring employees] may have had actual and specific knowledge of those practices at the point of assuming employment or gained such knowledge during the course of their employment" (emphasis in original).

[19] Thus the motions judge struck out the parts of the defence that referred to Nesbitt Burns' "practices and procedures" and its "historical practice" in recruiting investment advisors. He also struck out the paragraphs in the defences that gave general examples of these practices and procedures. However, he granted leave to amend on the following terms:

This court orders that the following paragraphs or portions of paragraphs of the Amended Statements of Defence and Counterclaim are to be struck with leave to amend to plead, if such be the case, with the material facts in support, that there are, as known to the Defendant, specific instances of the recruitment of employees which gave rise to the asserted implied terms and/or that there are, as known to the Defendant, specific Plaintiff's materials which give rise to the asserted implied terms of the employment contract of the Defendant(s) relating to the content of the duties of employees . . .

The parties disagreed on the scope of this order. Their disagreement centered on whether the defendants were entitled to plead practices, policies or directives of which they had knowledge but for which they could not provide specific examples. The defendants contended that the motions judge's order did not permit them to do so. Nesbitt Burns agreed that the order prohibited the defendants from pleading its recruiting practices, unless they could state a specific example of that practice. However, Nesbitt Burns contended that the order permitted the defendants to plead and prove Nesbitt Burns had a written recruitment policy or directive without also citing a specific example of that policy or directive. During oral argument, Nesbitt Burns also agreed that the defendants could plead and rely on oral, as well as written policies and directives. With that acknowledgment, both sides accepted that each amended statement of defence and counterclaim may include the following: [page167]

(a) each defendant may plead the recruiting practices of Nesbitt Burns if the defendant pleads with material facts in support:

(i) specific instances of the recruitment of employees;

(ii) that were known to the defendant while at Nesbitt Burns; and

(iii) that gave rise to the asserted implied terms of the defendant's employment contract.

(b) each defendant may plead with material facts in support:

(i) specific written or oral policies or directives of Nesbitt Burns relating to the recruitment of investment advisors;

(ii) that were known to the defendant while at Nesbitt Burns; and

(iii) that gave rise to the asserted implied terms of the defendants' employment contract.

[20] The parties' agreement on this issue is consistent with the motion judge's order and produces a sensible result.

Second issue: are the defendants entitled to plead and prove properly particularized recruiting policies, practices and directives of Nesbitt Burns as a defence to Nesbitt Burns' claim for equitable relief?

[21] Nesbitt Burns has sued for breach of fiduciary duty and breach of confidence, and has claimed equitable relief. In response, the defendants have sought to invoke the clean hands doctrine. They have pleaded that Nesbitt Burns is not entitled to equitable relief because it has used the very same recruiting practices and policies it now alleges are improper.

[22] The motions judge struck out the defendants' pleading of the clean hands doctrine on the ground that it "relates to general allegations of alleged conduct by Nesbitt on unspecified occasions in the recruitment of investment advisors other than the defendants" (emphasis in original). In his view, to sustain the pleading the allegation must "relate to the specific resignations of the Nesbitt defendant employees".

[23] The defendants concede that they cannot point to any improper conduct by Nesbitt Burns that relates either to their [page168] contracts of employment or to their resignations. The defendants also concede that the general morals or unrelated bad conduct of a plaintiff are irrelevant when the defendant seeks to rely on the principle that those who seek equity must come to court with clean hands. The question is how close a connection between the plaintiff's conduct and the contract to be enforced need exist for a defendant to rely on the principle as a defence to a claim for equitable relief?

[24] Here, the defendants submit that similar conduct in the same marketplace is a sufficient connection. In other words, the defendants argue that in deciding whether to grant equitable relief a court is entitled to consider whether Nesbitt Burns secured its own competitive position in the marketplace through practices it now seeks to deny to a competitor.

[25] Nesbitt Burns, on the other hand, submits that to rely on the clean hands principle the defendants must show a direct connection between the plaintiff's conduct and the relief sought. In other words, the plaintiff's misconduct must relate to the very contract it now seeks to enforce.

[26] It is tempting to accede to the defendants' position for two reasons. First, as the plaintiff has already accepted, many of the facts on which the defendants will likely rely are relevant to the first issue, the issue of implied terms; and second, the "plain and obvious" test for striking out a defence is a high threshold to meet. However, in relying on Nesbitt Burns' past recruiting practices and policies to support a clean hands defence, the defendants seek to cast a wider net than they did on the first issue. They seek to rely not just on practices and policies of which they had knowledge while employed at Nesbitt Burns, but also on practices and policies that might come to their knowledge from others. More important, in my view, resort to similar conduct in the marketplace to support the defence of clean hands is not tenable in law. Our court has repeatedly said that a more direct connection is required.

[27] For example, in Toronto (City) v. Polai, 1969 ONCA 339, [1970] 1 O.R. 483, 8 D.L.R. (3d) 689 (C.A.), at pp. 493-94 O.R., Schroeder J.A. stressed that the clean hands principle is applicable only where the plaintiff's impugned conduct is directly related to the transaction it has sued on.

The maxim "he who comes to equity must come with clean hands" which has been invoked mostly in cases between private litigants, required a plaintiff seeking equitable relief to show that his past record in the transaction is clean . . .

The misconduct charged against the plaintiff as a ground for invoking the maxim against him must relate directly to the very transaction concerning which the complaint is made, and not merely to the general morals or conduct of the person seeking relief; or as is indicated by the reporter's [page169] note in the old case of Jones v. Lenthal (1669) 1 Chan. Cas. 154, 22 E.R. 739: ". . . that the iniquity [sic] must be done to the defendant himself".

(Emphasis in original)

[28] In Raso v. Dionigi (1993), 1993 ONCA 8664, 12 O.R. (3d) 580, [1993] O.J. No. 670, 100 D.L.R. (4th) 459 (C.A.), at p. 590 O.R., p. 469 D.L.R., this court quoted from and applied the statements of Schroeder J.A. More recently, in SBS Sealants Inc. v. Robroy Industries Ltd. (2002), 2002 ONCA 41884, 59 O.R. (3d) 257, [2002] O.J. No. 1535 (C.A.), at p. 265 O.R., Carthy J.A. affirmed the need for a direct connection between the plaintiff's conduct and the equitable relief sought.

Sharpe J.A. discusses the doctrine of clean hands in his text Injunctions and Specific Performance, loose leaf (Toronto: Emond Montgomery Publications Ltd., 2001) at para. 1.1030. The author makes it clear through the authorities cited that the misconduct complained of must have secured a person an advantage in the very contract sought to be enforced. It is not a doctrine admitting of a general moral assessment of the plaintiff.

(Emphasis added)

[29] It seems to me that the requirement of a direct connection between the plaintiff's conduct and the contract to be enforced is sensible. Even at the pleading stage, permitting the defendants to argue a broader connection based on the plaintiff's general recruiting practices is not justified. And, as I have said, the defendants do not allege any direct connection. In seeking to rely on the clean hands doctrine, they do not allege that Nesbitt Burns breached its contractual obligation to any of the defendants or that it otherwise behaved inequitably towards any defendant. Because the defendants' pleadings do not come within the scope of the clean hands doctrine set out by this court, I see no error in the motions judge's ruling on this issue. Therefore, I would not give effect to this ground of appeal.

Third issue: are the defendants entitled to plead and prove properly particularized recruiting practices, policies and directives of Nesbitt Burns as a defence to Nesbitt Burns' claim for punitive damages?

[30] Nesbitt Burns seeks punitive damages from each of the defendants. The defendants wish to defend the claim for punitive damages by arguing that Nesbitt Burns built its own business by the very same conduct it now describes as "arrogant, high-handed and reprehensible".

[31] The motions judge held that the defendants' general allegations about Nesbitt Burns' recruiting practices had no relevance to the claim for punitive damages. In my view, the motions judge ought to have permitted the defendants to plead the plaintiff's [page170] recruiting practices, policies and directives as a defence to the punitive damages claim.

[32] The typical case where the plaintiff's conduct is relevant to its punitive damages claim is where the conduct led to or caused the misconduct of the defendant -- in other words, where there is a causal connection between the plaintiff's conduct and the defendant's conduct. For example, in the case of assault, any provocation by the plaintiff will usually diminish the impropriety of the defendant's reaction. See for example T.L.C. v. Vancouver (City), 1995 BCSC 300, [1995] B.C.J. No. 2317, [1996] 2 W.W.R. 529 (S.C.), at paras. 95-96.

[33] This, however, is not the typical case. The defendants do not allege that Nesbitt Burns' conduct in recruiting others caused the wrong doing on which the plaintiff relies. Nonetheless, I think the defendants should be able to argue that the conduct of which Nesbitt Burns now complains does not attract the kind of outrage associated with punitive damages because it is widely accepted in the industry and indeed has been employed by the plaintiff in its own recruitment of investment advisors. In Hill v. Church of Scientology of Toronto, 1995 SCC 59, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64, at p. 1208 S.C.R., Cory J. pointed out that an award of punitive damages "is the means by which the jury or judge expresses its outrage at the egregious conduct of the defendant". Here the defendants contend that any outrage at their conduct will be diminished because the plaintiff itself has engaged in the very same conduct. It is not plain and obvious that this argument cannot succeed.

[34] I appreciate that allowing the defendants' appeal on this issue may expand the discovery to which Nesbitt Burns is subjected. As they did in respect of the clean hands defence, the defendants seek to plead and prove not just the recruiting practices and policies of Nesbitt Burns that they knew of while employed there, but recruiting practices and policies they have become aware of from others. On my holding, they are entitled to do so in defending the punitive damages claim. Having asserted this claim, the plaintiff cannot escape relevant questioning about its recruiting practices. The requirement for particulars will put manageable limits on the production and discovery process. I would allow the defendants' appeal on this issue.

Conclusion

[35] I would allow the defendants' appeal in part, in accordance with these reasons. Because success on the appeal has been divided, I would order no costs of the appeal. I would not disturb the costs order of the motions judge.

Appeal allowed in part. [page171]