What remedies does an employer have when it discovers that it has suffered damages as the result of the fraud of one of its employees? It can certainly terminate the employee without cause. However, can it also sue the employee to recover any loss suffered or sue any third parties who benefited or participated in the fraudulent scheme?

A decision of the Court of Queen’s Bench in Alberta has provided some persuasive answers other courts may be persuaded to follow. The decision involved monetary kickbacks received by the employee from two suppliers to the company. Mr. Cottle would issue purchase orders at an inflated price and when they were paid by his employer, receive from between 3 and 10% of the PO amount from the supplier. Mr. Cottle had signed an employment contract. It contained a Code of Ethics which

“prohibited employees from, inter alia, receiving any payment from any business enterprise having current or known prospective dealings with MID as a supplier without the prior written approval of MID’s chief executive officer upon complete disclosure of the facts.”

In the midst of the scheme, one kickback was discovered by the employer and the employee was given a written reprimand acknowledging that the receipt of this single payment was a breach of the Code of Ethics, which he signed.

Despite this, he did not then advise the employer of past kickbacks and continued on with the scheme. In the employee’s own words at trial “I decided I was going to continue doing things the same way I had been doing them and accept the consequences.” His assumption was that the only consequence of his actions would be termination. By the time he was let go, he had collected almost $89,000.00. over four years.

The Employment Issues:

Not surprisingly the employee was found to have breached his employment contract and his common-law employment duties since every contract of employment imports the common law duties of good faith, fidelity, and loyalty.

The employee was also found to be a fiduciary as a key employee. He had a great deal of autonomy in his work and was the company’s primary contact with the suppliers. He was therefore in a position to have a marked impact on his employers economic interests.

Civil Fraud:

The defendants were, of course, the employee, but also included his operating company, one of the supplier companies and the principal of that company. The second supplier was not named which was not explained but was likely was due to the kickback amounts being much smaller ($11,113.86) than the named supplier.

All defendants were found to have committed the tort of deceit or civil fraud. This was based on the tests set out by the British Columbia Court of Appeal in Kranz Investments Ltd v S&D Investments Ltd and the Supreme Court of Canada (SCC) in  Hryniak v Mauldin.

The element of loss, despite the lack of any evidence of lost profits, was made out as there is a presumption at law that the value of the kickback was the value of the loss. Any loss beyond that had to be proved. It was left open whether the presumption was rebuttable as no evidence was led in the matter. This analysis was based on the decision in Alberta Housing Corporation v. Achtem.

Conspiracy:

The defendants were also found to have committed the tort of civil conspiracy by unlawful means. The test used was found in the Ontario Court of Appeal decision of Agribands Purina Canada Inc. v. Kasamekas.

Remedies:

Disgorgement:

A claim in damages was clearly open to the employer. It, however, sought a disgorgement of the amount of the payments received by the employee-the full $89,000 paid by both suppliers. This was granted on the basis that the employee was a fiduciary based on the SCC authority of Can Aero v. O’Malley.

Punitive Damages:

The employer further sought $50,000 as punitive damages. Citing the SCC in Hill v. Church of Scientology and a number of cases involving employee fraud, an award was made in the amount of $12,000 based on the governing rule of proportionality in Whiten v. Pilot Insurance Co.

Joint & Several Liabilities:

So far we have really only dealt with the remedies against the employee in his personal capacity. The employer also sought to have the defendants held jointly and severally liable but only for the amounts paid to the employee by the named defendant supplier ($77,751.98) and the amount awarded for punitive damages.

The court decided that the defendants, other than the principal of the named supplier, were jointly and severally liable for the $77,751.98 and the punitive damages of $12,000. It declined to pierce the corporate veil against the principal. The court relied on several cases beginning with Procon Mining & Tunneling Ltd. V. McNeil as authority to do so.

It should be noted that the court reluctantly decided it could not make the principle of the supplier liable for the damages.

Finally, the employee and his company were held to be jointly and severally liable for the $11,113.86 paid by the unnamed supplier.

Take Aways:

• Beyond dismissal for cause there are several potential remedies available to a business following a fraud being perpetrated against it including breach of contract, conspiracy and potentially a breach of fiduciary duty;
• Punitive damages are also a potential remedy to serve as a deterrent;
• The remedies extend their reach to any co-conspirators to better effect recovery and serve as a message to other suppliers;
• A caution is necessary given the facts of this case. They screamed out for a remedy. Less onerous facts may not lead to the same results.

If you have a question about civil fraud, asset recovery, injunctive relief, enforcement of foreign judgments or similar, the highly skilled Toronto corporate lawyers at Milosevic & Associates can help. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.