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August 08 2018
Key employees are crucial to the success of any organisation. They are the top performers and the faces of the company – entrusted with authority and autonomy to execute their duties. Inherent in any such relationship is trust.
M-I Drilling Fluids Canada Inc v Cottle (2018 ABQB 143) concerned a key employee who broke this trust by profiteering for several years from kickbacks while the employer paid inflated prices for supplies. When the fraud was discovered, the employee was fired. However, termination alone may be cold comfort to an employer that has suffered losses from fraud. Can anything else be done?
Defendant Mr C was an employee of plaintiff M-I Drilling Fluids Canada Inc (MID). C worked his way up to become a high-level manager, operating with significant discretion and minimal supervision.
C repeatedly certified that he had read and agreed to the company's code of ethics, which prohibited him from receiving payments from suppliers without first obtaining permission from MID.
C did not follow the code. Unbeknown to MID, between May 2009 and September 2013, C received kickbacks from two MID suppliers, one of which was defendant Ingeveld and Associates Ltd (IAL). In February 2012 MID discovered one of the IAL kickbacks and issued a written reprimand to C.
Despite the reprimand, C continued taking kickbacks without MID's knowledge. The scheme unravelled when another employee discovered evidence of additional kickbacks.
MID terminated C for cause and sued for the kickbacks.
Is termination an employer's only remedy?
C claimed that MID's only remedy was termination for cause. He argued that in its 2012 reprimand, MID had represented that he would only be terminated if he failed to abide by the code in the future. As the reprimand made no reference to lawsuits, C assumed that the worst that could happen was termination. Based on this purported representation, C argued that MID was estopped from advancing its claim.
The court dismissed these arguments, holding that the reprimand neither released nor waived MID's remedies, including its right to sue. Further, the defence of estoppel failed since it required C to have "clean hands" before the court and, as he had been engaged in dishonest conduct, his hands were not clean. Termination was not MID's sole recourse against C – it was also entitled to advance a claim for its losses.
Causes of action to recover ill-gotten gains
MID advanced multiple arguments in an effort to recuperate its losses. In particular, it claimed – and the court found – that C:
MID was awarded a disgorgement of C's profits from the kickback scheme. The underlying principle for the decision was that C should not enjoy the fruits of his misconduct. The court also found C's conduct to be malicious, oppressive and high-handed, and awarded punitive damages.
The following lessons can be learned from the decision:
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