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In the recent decision of Mady Development Corp. v.
Rossetto, the Ontario Court of Appeal restored
part of an arbitrator's decision that granted a terminated
executive his earned bonus amounts despite his misappropriation of
his employer's money and resources during the period to
which the bonuses were attributable.
Facts and Judicial History:
Leonard Rossetto (Mr. Rossetto) worked as the vice-president of
a division of Mady Development Corp. (Mady), a commercial and
residential real estate development company. In 2008, Mady
discovered that Mr. Rossetto had misappropriated company labour,
materials and funds to renovate his house over a period of three
months in 2007. In light of this discovery, Mady terminated Mr.
Rossetto for cause and further sued Mr. Rossetto for damages,
conversion, breach of contract, unjust enrichment and breach of
fiduciary duty. In response, Mr. Rossetto counterclaimed
against Mady for his unpaid bonuses earned in 2007 and 2008.
Under his employment contract, Mr. Rossetto was entitled to a bonus
of 30 per cent of Mady's profits after overhead.
Both parties submitted the dispute to arbitration, where Mady
was awarded damages of $546,452 for breach of fiduciary duty and
for delay related to one of its projects. Despite Mr.
Rossetto's wrongdoing, the arbitrator found he was entitled
to his annual bonuses that were "clearly an integral part of
his contract." Accordingly, Mr. Rossetto was awarded
$364,661.33 in satisfaction of these unpaid bonuses.
Mady appealed the bonus-related portion of the
arbitrator's decision to the Ontario Superior Court of
Justice, where Justice Allen agreed with Mady, holding that the
arbitrator failed to correctly apply the principles governing
fiduciary duty and further that, "had Mady been aware that Mr.
Rossetto was secretly diverting the company's assets and
resources...Mady would have most assuredly terminated Mr.
Rossetto's employment contract as it did immediately upon
discovering Mr. Rossetto's dishonest activities." As
such, Mr. Rossetto was deprived of his bonus payments.
The Decision of the Court of Appeal
Mr. Rossetto then appealed to the Ontario Court of Appeal, where
a unanimous court restored the arbitrator's award granting
Mr. Rossetto his bonus amounts.
The Court of Appeal held that Justice Allen erred in holding
that employees in breach of their fiduciary duties can never be
entitled to bonus compensation for the period of their
wrongdoing. The Court emphasized that remedies for breach of
fiduciary duty are fact-specific and discretionary, and further
noted that one of the primary goals of fiduciary relief, namely
restitution, was achieved when the arbitrator ordered Mr. Rossetto
to pay for damages. Further, the bonus amounts payable to Mr.
Rossetto related to bonuses already earned in 2007 and 2008 (even
though his breach of fiduciary duty occurred over a three month
period in 2007) and were an integral part of his employment
contract and non-discretionary. In that sense, Mr. Rossetto
was entitled to his bonuses just as he had been entitled to his
salary. The Court noted that while in some cases denying a
"wayward fiduciary" their bonus may be warranted, this
was not one such instance.
Our Views:
The Court of Appeal's decision makes it clear that where
a bonus is an integral, non-discretionary part of a fiduciary
employee's compensation package, a breach of fiduciary
duties may not necessarily disentitle the employee from their
bonus, particularly where the bonus entitlement is
non-discretionary and losses arising from this breach are readily
quantifiable and the employer can be made whole for such losses
though an award of damages.
Any judicial determination in such circumstances will be highly
fact-driven and dependent on the nature of the bonus at issue.
Considerations will include the proportion of the
employee's total compensation the bonus encompasses,
whether the bonus is discretionary or non-discretionary and the
employer's past practice in regards to awarding and paying
bonuses, and the particular language of any employment contract or
employer policy as it pertains to bonus entitlements.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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