Court of Appeal Decision of the Week

Leaving to Set Up a Competing Business – Who is/is Not a Fiduciary; Standard of Review

Case: HRC Tool & Die Mfg Ltd v Naderi, 2016 ABCA 334 (CanLII)

Keywords: fiduciary relationship; voluntary vulnerability; Frame v Smith, 1987 CanLII 74 (SCC), [1987] 2 SCR 99, 42 DLR (4th) 81

Synopsis:

The appellant, HRC Tool & Die Mfg Ltd (“HRC”) operates a machine shop in Edmonton; hires the respondent Mr. Onkar Bahra in 1998 as a purchasing agent and the respondent Mr. Mehrdad Naderi as a machine operator. The respondents become “key employees”. HRC operates such that the owner/shareholder is absent for days and months at a time (though remaining in contact by telephone). The respondents run the day-to-day business of the machine shop. They have access to some, but not all, confidential information and customers.

In June 2008 both respondents resign. By the following October they’re set up their own machine shop, Prowest Machine Ltd (“Prowest”). HRC claim both that Mr. Bahra and Mr. Naderi owe the company fiduciary obligations, and that they are in breach of those obligations – misusing confidential client information and taking HRC’s clients.

At trial, HRC’s claim is dismissed. Mr. Bahra and Mr. Naderi are found not to have been fiduciaries; their conduct does not breach any fiduciary obligation. On appeal, HRC argues the Trial Judge erred in determining that:

  1. Bahra and Naderi were not fiduciaries
  2. Bahra and Naderi did not solicit the clients
  3. Any fiduciary obligations owed to the appellant would have expired after three months
  4. The appellant was not harmed when Bahra and Naderi breached their obligation to provide reasonable notice of resignation, despite the Trial Judge’s finding that they owed between 2-3 months’ notice of resignation to the appellant.

Although the Court of Appeal determines the Trial Judge erred in determining the respondents were not fiduciaries, there is insufficient evidence to establish any breaches which give rise to damages. The appeal is dismissed. There is no palpable and overriding error in the Trial Judge’s reasons.

Importance:

Standards of Review

The Court of Appeal (reasons written by “The Court”) provided the following clear and practical summary of standards of review (see paras. 11):

  • Questions about whether the Trial Judge applied the correct tests to a fixed set of facts are questions of law reviewable on a standard of correctness: Housen v Nikolaisen, 2002 SCC 33 (CanLII) at para 8, [2002] 2 SCR 235.
  • Questions about whether the facts satisfy the correct legal tests are questions of mixed fact and law: Canada (Director of Investigation and Research) v Southam Inc, 1997 CanLII 385 (SCC), [1997] 1 SCR 748 at para 35, 209 NR 20.
  • When the Trial Judge’s interpretation of the evidence as a whole is at issue, the applicable standard of review is palpable and overriding error: Housen v Nikolaisen at para 36.

Citing Hodgkinson v Simms, 1994 CanLII 70 (SCC), [1994] 3 SCR 377 at paras 425-426, 171 NR 245, the Court of Appeal confirmed that the finding of a fiduciary relationship from the specific circumstances of a case is a finding of fact. As such, it is not to be disturbed absent palpable and overriding error.

Finding Fiduciary Relationships

The Court of Appeal found that, by agreeing to become key employees, the respondents “implicitly undertook to discharge the fiduciary duties inherent in that employment” (See para. 19).

Notwithstanding the decision of the Trial Judge below and the Court of Appeal’s decision to dismiss the appeal, the Court found the conditions required to establish a fiduciary relationship were present in the circumstances of the case. (See para. 20).

The Court of Appeal found the nature of the relationship between the respondents and HRC offered “compelling circumstances” which, when coupled with the Trial Judge’s “express finding of vulnerability”, resulted in a fiduciary relationship. (See para. 14).

The Trial Judge reasoned the respondents had not “undertaken” to be fiduciaries; that the “vulnerability” in this case was not the same as was found in Frame v. Smith (where the employer was at the mercy of the fiduciary employee because of the fiduciary’s discretionary power). Here, the vulnerability was voluntary – for the Trial Judge, “It was a choice…he could choose to be away, because he had experienced employees who could ensure that the business ran smoothly in his absence. Or he could choose to be present, in which case there is no evidence that HRC was vulnerable…” (See para. 15).

For the Court of Appeal, it is “not a relevant consideration” whether a fiduciary relationship arises because the beneficiary “voluntarily placed itself in a vulnerable position”. In other words, “Voluntary vulnerability does not licence the fiduciary to take advantage of the relationship.” [Emphasis added] (See para. 17).

Furthermore, the Court of Appeal found vulnerability or discretionary power need not be “total” (as had been suggested by the Trial Judge): “The scope of the powers given to the fiduciary will inform the scope of the fiduciary duties that are owed, but a limited discretion does not mean that no fiduciary duty exists.” (See para. 18).

Brief Conclusion

The appellant successfully established the Trial Judge erred in determining the Respondents were not fiduciaries. That being said, the Court of Appeal found there was insufficient evidence to establish a breach giving rise to damages.

Counsel for the Appellant: Walter Pavlic, Q.C. (MacPherson Leslie & Tyerman LLP, Edmonton)

Counsel for the Respondent: Ken Fitz and Clarissa Dhillon (McLennan Ross LLP, Edmonton)

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Posted: Wednesday, November 09, 2016