Case Demonstrates Risks of Unwritten Business Agreements
It is always recommended that business dealings and employment relationships be set out in a formal written agreement or contract. An oral agreement can lead to uncertainties and unintended legal outcomes, as an Ontario court case recently illustrated. The case centred on the difficulties faced by two parties when no written agreement was in place.
The case involves two small marketing firms and their owners. VPM was owned and run by David and Patricia Mitchell. BAMS was owned and run by Stephen and Barbara Jenne. The two firms entered into a business relationship in 1992. No contract was ever signed to establish the partnership or set out each firm’s rights and obligations to each other. David and Stephen entered a verbal agreement that they would share earned commissions from their customers: 55 per cent went to VPM and 45 per cent to Stephen.
As far as their clients were concerned, VPM provided a full service. But David and Stephen kept their business entities separate. They each operated from home offices, did their own banking, and paid their own companies’ bills. The parties operated under this arrangement for 20 years and enjoyed a successful business relationship working in the media consulting industry.
In 2010, David unexpectedly passed away. After his death, his widow, Patricia, and Stephen agreed to try carrying on the business in a similar fashion for one year. Patricia would continue as Chief Financial Officer and Stephen would continue his existing work as well as taking on David’s former duties as the face of the company.
However, the relationship between Patricia and Stephen began deteriorating by May 2011. Two meetings that month eventually led to Stephen terminating his relationship with VPM in August 2011. After this break-up, virtually every VPM client continued dealing with BAMS and ceased dealing with VPM.
Subsequently, Stephen and his wife Barbara offered Patricia $48,000 in consideration for her retirement. She rejected the offer and brought a claim in damages against Stephen and Barbara for breach of contract, breach of fiduciary duty, and interference with economic relations. She also claimed punitive damages.
At trial, the nature of the parties’ relationship had to be determined.
Patricia’s claim rested on her submission that Stephen was VPM’s employee or was a “dependent contractor”, which meant that he owed VPM a fiduciary duty. She also submitted that he had breached his common-law duty of good faith to act honestly in dealings with VPM; as a consequence, she was entitled to damages.
In response, Stephen submitted that he was not an employee of VPM; rather, the relationship was a partnership or a contractual association and there was no fiduciary duty.
At the outset, the court held that Stephen was a dependent contractor of VPM. It relied on the leading case on the matter, McKee v. Reid’s Heritage Homes Ltd. In that case, the Ontario Court of Appeal held that certain individuals who were not employees fell into a category known as “dependent contractor”, which it described as follows:
“I conclude that an intermediate category exists, which consists, at least, of those non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity. Workers in this category are known as “dependent contractors” and they are owed reasonable notice upon termination.”
On this basis, the court determined that Stephen was a dependent contractor because he had worked exclusively for VPM for 20 years and his income was solely based on his work for VPM.
As a result of this determination, the court found that he was in a fiduciary duty relationship with VPM and he breached that duty by taking all of VPM’s clients. In addition, the court found that he had breached his duty of good faith and honest performance.
The court therefore awarded Patricia $614,624 in compensatory damages, which represented the amount of income lost over a four-year period. In addition, the court ordered Stephen to pay $30,000 in punitive damages, finding that:
“Stephen’s conduct falls well within the category […] where ‘there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.’”
The Kitchener-Waterloo employment lawyers at Petker Campbell Postnikoff have many years of experience advising businesses and non-unionized employees and employers on a variety of issues. Our team will walk you through the details of your dispute, advise you on your rights, responsibilities and obligations, and help you understand your options. If your dispute cannot be settled through negotiation, we can represent you through mediation and the court process.
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