Condonation Requires Full Disclosure

Just Cause

In the case of Dunsmuir v. Royal Group Inc., the Ontario Court of Appeal held that an employee’s failure to comply with his duty to disclose the wrongdoings of senior management meant that he could not rely on the defence of condonation.

The Appellant, Ronald Goegan (“Goegan”), was employed by  Royal Group (“Royal”), a publicly traded company, as its Senior Vice President, Chief Financial Officer and he was a member of its Board of Directors.

In November 2004, Goegan’s employment was terminated for cause. He brought an action against Royal for wrongful dismissal which was ultimately dismissed. The trial judge determined that there were three separate incidents of misconduct that justified Goegan’s termination:

  1. Goegan failed to disclose to anyone with oversight authority information relating to the acquisition of property by the controlling shareholder and its immediate resale to Royal for a significant profit;
  2. Goegan covered up the reason why his and other senior management bonuses were greater than what the approved bonus plan provided; and
  3. Goegan misled the Canada Revenue Agency to reduce his tax liability as well as the tax liability of other senior management.  

The trial judge held that Goegan was a fiduciary of Royal and as a fiduciary, he owed Royal a duty of loyalty, honesty, candour and to scrupulously avoid actual and potential conflicts of interest. The trial judge held that this duty was owed to Royal as a whole and not just to the controlling shareholder. Goegan was under a duty to say to the controlling shareholder that what he was proposing was wrong and to disclose any misconduct to those with oversight authority.

The trial further judge rejected Goegan’s argument that the management of Royal condoned any wrongdoing that he was found to have committed. In some circumstances, an employer who retains an employee after it discovers that the employee has committed misconduct may be found to have condoned the wrongdoing and might be prohibited from dismissing the employee for cause, absent further or new misconduct. This is true even for those employees who have a strict fiduciary duty to their employer. Previous court decisions have also made it clear that a finding of condonation requires that the employer be fully informed about the employee’s misconduct, so that the employer is in a position to make an informed decision to act or not act, as the case may be.

In Pagliaroli v. Rite-Pak Produce Co., the Court found that a hierarchical analysis of the inner workings of the employer should be conducted in order to discern the identities of the people with “the ability to terminate or trigger a review and influence the continuation of the employer-employee relationship.” Therefore, in order for the defence of condonation to apply, it is those people who should have knowledge of the misconduct and choose to ignore or approve it.

In this case, the trial judge held that Goegan could not in good faith rely on the approvals of the senior managers (including the controlling shareholder, who the judge accepted was an autocratic leader) when he knew they were in conflict of interest and in breach of their duties to Royal. They all actively acted together to hide the misconduct from the independent directors, who were, in the context of this case, the only people in a position to make an independent and informed decision on Royal’s behalf.

The trial judge concluded that the corporate culture was lax because of senior management’s deception and failure to disclose and not because the independent directors allowed senior management to breach their duties.

Ultimately, the trial judge concluded that Goegan could not rely on the defence of condonation.

On appeal, the Court of Appeal agreed with the trial judge and upheld the dismissal. The Court rejected Goegan’s argument that the trial judge failed to conduct a contextual analysis of the entire employment situation. The Court held that no corporate culture existing in a public company could reasonably support Goegan’s conduct. He owed a fiduciary duty to Royal and its shareholders, which included a duty to disclose, and his breach of that duty went to the heart of the employment relationship.

The above case highlights that an employee who owes a fiduciary duty to their employer is not entitled to just do as they are told by the dominant shareholder. Their duty is to their employer (the company) and not to any one shareholder.

Our team is here to assist you, whether you are an employer contemplating a dismissal, an employee who finds themselves unexpectedly dismissed, or whether you are facing any other form of employment law issue.   

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