Keays v. Honda:1 a Chill on Punitive and Wallace2 Damages in Wrongful Dismissal Litigation?

When the Supreme Court of Canada released its decision in Keays v. Honda on June 27, 2008, Canadian employment lawyers were expecting something interesting. But the decision went well beyond interesting, signalling a significant shift in many principles in wrongful dismissal law. The decision will affect not only how employment lawyers advise their clients, but could also redefine how employers and employees get along in the business world on a far greater scale.

Keays was a long-time employee with Honda. In 1997, he was diagnosed with chronic fatigue syndrome, a condition that has irritated employers and confounded judges for some time. After time away from work on disability benefits, Keays returned to work, but his attendance remained inconsistent and his medical notes explaining his absences appeared less and less convincing to Honda. Eventually, Honda asked Keays to consult with a doctor hired by Honda. Keays refused and Honda ultimately dismissed him for his repeated absences. Keays sued for wrongful dismissal, claiming punitive damages and an increase in the period of notice to account for Honda's alleged bad faith in terminating him (a "Wallace extension").

The trial judge found that Keays had been wrongfully dismissed and awarded 15 months' salary in lieu of reasonable notice with an additional nine month Wallace extension for the manner of dismissal. Most notable, however, was the award of $500,000 in punitive damages for the discriminatory and high-handed treatment of Keays by Honda. 

The Ontario Court of Appeal upheld the 15-month notice period and the nine-month Wallace extension, but reduced the punitive damages award to a less stunning $100,000.

Cue the Supreme Court of Canada. While the majority agreed that 15 months was an appropriate period of notice, there was little further concurrence with the lower court decisions. Most significantly, the Supreme Court eliminated the award of punitive damages entirely, along with the nine-month Wallace extension.

So what does the decision mean for employers, employees, and their lawyers? It is still early, but some key factors are clear for employment lawyers advising their clients.

Wallace damages

Since the landmark 1997 Supreme Court decision in Wallace, judges typically have awarded Wallace damages by way of an arguably arbitrary increase to the period of reasonable notice. With the Keays decision, the Supreme Court has clarified that this is no longer the appropriate method. Instead, such damages must be determined through a specific monetary award that reflects the actual damages suffered by the plaintiff as a direct result of the employer's bad faith conduct. This new standard should make it more difficult for counsel to prove, and for judges to quantify, Wallace damages.

Proponents of the decision forecast a reduction in the incidence of routine, "boiler-plate" claims for Wallace damages in wrongful dismissal actions. Such claims have often been made as a matter of course, and often accomplished little more than to muddy the waters around the other legitimate issues in the action. And they were surely a thorn in the side of employers and their counsel.

Punitive damages

Similarly, in eliminating entirely the award for punitive damages, the Supreme Court has clarified and narrowed the test for making such awards in the wrongful dismissal context. As in other tort actions, punitive damages must only be awarded in "exceptional cases" where the employer's deliberate bad faith actions "are so malicious and outrageous that they are deserving of punishment on their own." While this has always been the correct principle in tort litigation, the test has tended to be enforced less consistently in employment matters. This is a high standard, and should ease employers' concerns of being subject to duplicative punitive and Wallace damages for essentially the same conduct.

So, does the Keays decision signal the end of punitive and Wallace damages in wrongful dismissal litigation? Not quite. But we can expect employers to feel much more comfortable that they will not have to face outrageous, specious and speculative damages claims except in the most "exceptional circumstances." Is it a dark day for employees? Only time – and a few more judicial decisions under this new structure – will tell. Lawyers in all areas of practice would do well to read this interesting and ground-breaking decision.

Duane Chris is a non-practicing lawyer providing legal research and editing services in Southern Ontario. He can be reached at dchris@sympatico.ca or 519-588-2602.

¹ Keays v. Honda Canada Inc., 2008 SCC 39.
² Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701.