Relief for <i>Wallace</i> worriers

Appeal court strikes down <i>Wallace</i> award in finding bad faith is more than simply claiming just cause

Stuart Rudner
Lack of just cause doesn’t mean bad faith

By now, readers are likely familiar with Wallace damages and they have become part of the boilerplate wrongful dismissal claim despite explicit wording in the Wallace decision itself, which warned against making such claims as a matter of routine. Former Supreme Court of Canada Justice Frank Iacobucci foresaw the danger but was unable to prevent it with his words of wisdom in the 1997 ruling.

In the intervening years since the Wallace decision, there has been some judicial backlash against the indiscriminate use of claims for Wallace damages without any legitimate basis. Justice Randall Echlin of the Ontario Superior Court of Justice in particular has expressed his displeasure with this practice and warned of potential sanctions against employees who perpetuate it.

There hasn’t been a judge that has followed up on Echlin's suggestion and penalized a plaintiff for frivolous Wallace claims. However, the Ontario Court of Appeal recently struck down a Wallace award and may have provided some guidance in determining when an employer’s conduct constitutes bad faith in the course of dismissal and when it doesn’t. If anything, the decision indicates a claim for Wallace damages doesn’t necessarily mean an employee is entitled to them, even if just cause isn’t found.


It’s become common in wrongful dismissal claims for there to be an assumption of bad faith on the part of the employer in the course of dismissal, which means these claims are often accompanied by a request for extra damages as in the landmark Wallace decision. However, there is some encouraging news for employers emanating from the Ontario Court of Appeal.

In Mulvihill v. Ottawa (City), the trial judge awarded Donna Mulvihill four and one-half months' pay in lieu of notice, and then added five and one-half months as a result of the employer’s bad faith in the course of dismissal. However, the Court of Appeal reviewed the nature of Wallace damages and found there was no basis for awarding such damages. In so doing, it provided guidance for future cases where Wallace damages are sought.

Behaviour and performance concerns

Mulvihill was the advisory committee co-ordinator in secretariat services, a position within the corporate services department of the City of Ottawa. There were significant concerns regarding Mulvihill’s performance and behaviour. These included the spreading of rumours, her intimidating and aggressive nature, poor communication skills, lack of co-operation and misinforming the committee on a material issue.

In September 2004, Mulvihill had a significant dispute, via e-mail, with one of her colleagues. This led her to submit a memorandum of complaint, which she subsequently asked to have treated as a formal complaint of harassment. After an investigation, Mulvihill was advised the other employee had been reprimanded as a result of her conduct. However, Mulvihill was unsatisfied with the result, continued to complain about her colleagues and said she would not return to work in the same area. She expressed particular concerns regarding her supervisor, Elaine Fleury. Mulvihill was on sick leave at this time, although those at the meeting formed the view she was refusing to return to work because she did not want to remain in the department.

The city investigated further, looking into the relationship between Mulvihill and Fleury and found no evidence of harassment. Mulvihill was unhappy with this investigation and asked for Fleury to be stripped of her managerial responsibilities and to be transferred to a different position.

Terminated for insubordination

Mulvihill then sent an e-mail complaining of harassment to two senior city officials and the mayor. A subsequent meeting was held, at which it was decided her employment would be terminated due to her insubordination and failure to return to work. Mulvihill sued for wrongful dismissal while the city claimed to have just cause to dismiss her. Ultimately, the city amended its defence prior to trial and withdrew the just cause defence.

In the trial decision, the court found the City had acted in bad faith in the course of dismissal and Wallace damages were warranted. Mulvihill was dismissed while she was on sick leave, the court said, and the fact just cause was alleged and then abandoned shortly before the trial was bad-faith conduct. The city appealed.

The Ontario Court of Appeal considered the nature of Wallace damages and the types of behaviour upon which such damages could be based. “When dismissing employees, employers are to act fairly,” the Court of Appeal said. “They should be candid, reasonable, honest and forthright. If they act otherwise during the dismissal process — for example, by being untruthful, misleading or unduly insensitive — they may be held to have conducted themselves in an unfair or bad faith manner.”

Reasonable belief for just cause not bad faith

The Court of Appeal went on to confirm that: “so long as an employer has a reasonable basis on which to believe it can dismiss an employee for cause, the employer has the right to take that position without fear that failure to succeed on the point will automatically expose it to a finding of bad faith.”

The court found the evidence supported the conclusion the city had an honest and reasonably held belief that just cause for dismissal existed. It also noted there are many reasons why an employer might allege just cause and abandon that argument at, or shortly before, trial, and in and of itself, such behaviour does not justify Wallace damages.

With respect to the fact the dismissal took place at a time when Mulvihill was on sick leave, the Court of Appeal found, in the absence of other factors, such a termination is not inherently unfair or in bad faith. The Court of Appeal determined there must be other evidence of bad faith in order to justify Wallace damages. The trial court said the city made a mistake in dismissing Mulvihill while she was on sick leave and the Court of Appeal confirmed a mistake is not conduct that is unfair or in bad faith.

Court considered full context of employment relationship

In reaching the conclusion Wallace damages were not warranted, the Court of Appeal wrote:

“What Wallace requires is an examination of the manner of dismissal, taking into consideration the full context of the employment relationship. There is nothing that supports a characterization of the city's conduct in the manner of dismissal as "bad faith conduct" or "unfair treatment." The evidence at trial does not support a finding that the city was untruthful, misleading or unduly insensitive in the manner in which it dismissed Mulvihill. On the contrary, the trial judge made numerous findings of fact that support the conclusion that the city was neither misleading nor insensitive in its dealings with Mulvihill. Even if the circumstances surrounding the manner of dismissal extend to include the City's conduct in investigating and dismissing Mulvihill's harassment complaint, the city acted fairly towards Mulvihill at all times.”

This decision is an encouraging development from the standpoint of employers, as it is a real effort by Ontario's Court of Appeal to define when Wallace damages should (and should not) be awarded. Implicitly, it suggests employees should think twice before seeking such damages and trial judges should think twice before awarding them. However, employers should keep in mind it also confirms employers who do act in bad faith will be ordered to pay Wallace damages.

For more information see:

Mulvihill v. Ottawa (City), 2008 CarswellOnt 1511 (Ont. C.A.).

Stuart Rudner is a partner who practices commercial litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672.
Mistake is not unfair conduct or bad faith

The Ontario Court of Appeal determined the City of Ottawa had legitimate reasons for believing it had just cause for dismissal, which does not constitute bad faith even if it was wrong: “This was not a case of an employer playing ‘hardball’ by asserting cause when there was no reasonable basis for such an assertion. The record shows the city held, and acted on, an honest and reasonably held belief that Ms. Mulvihill’s insubordination gave rise to just cause for termination. This evidence included:

•Ms. Mulvihill’s persistent and unfounded allegations of bias and incompetence against her manager and the city clerk;
•Ms. Mulvihill’s refusal to return to employment unless the city met her condition that she be transferred to another city department; and
•Ms. Mulvihill’s escalation of her complaint, in which it appeared that she had involved the mayor in her allegations of harassment.”

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