21 Nov 2014
November 21, 2014

FAMILY FEUD #2 – FAMILY BUSINESSES, TAKE NOTE

In my September 2010 Newsletter I reported on a case where two brothers were fighting each other over who had the right to hire and fire a certain employee. By the time the dust settled the employee was awarded almost $100,000 from the Employment Standards Branch, subsequently reduced on judicial review, and the legal fees would have been substantial for all parties. I imagine the brothers also lost their relationship in the process. See September 2010 Newsletter:  Family Feud – Gulf Coast Materials Ltd. v. Helgesen

I concluded that article with the following:

“I encourage family-run business clients to address business issues including corporate governance, estate planning, successorship, tax and, yes, even employment issues, well in advance of any potential family fall-out. So avoid becoming the next contestant on the Family Feud, where only the lawyers win.”

The recent decision of Consbec Inc v. Walker reminds us that disputes in family-run or small, closely-held businesses occur at great cost to the business and to the family / personal relationships. In this case the family company sued a cousin who had left to compete with Consbec. The claims were substantial including over $2 million for damages for breach of fiduciary duties and punitive damages.

Consbec was owned by Rick and Judith Walker. Their three sons, Richard, Jeff and Trevor, were very much involved in the management of the company. Peter Walker was a nephew of Rick and a cousin to the three sons. Peter had worked for Placer Dome and after leaving there he was hired by Richard to work for Consbec. Interestingly, the judge preferred the evidence of Richard over that of Peter regarding the circumstances of Peter’s hiring.

Peter left Consbec in June 2002 and set up in business in competition with Consbec. Consbec sued Peter and his wife Tracy and their companies for damages for breach of fiduciary obligations ($1.8 million); damages for the loss on a project ($28,000); damages for “false salary paid to Tracy” ($120,000); damages for Peter’s “wrongful resignation without notice” and costs relating to two employees who replaced Peter (~$60,000); and punitive damages ($250,000). Peter counterclaimed for wrongful constructive dismissal.

The court found:

  • Peter was not a fiduciary; Peter’s obligations to Consbec were that of an employee. [189]
  • Peter was entitled to solicit business from Consbec after leaving the company but he could not compete during the employment relationship. Here the court found that Peter did not breach his contractual responsibilities to Consbec. [206]
  • Peter was not constructively dismissed. [211]
  • Peter failed to give proper notice of his departure. The court did not need to determine the exact amount of notice as it could assess damages based on the opportunity loss and the costs of replacing Peter. Those damages were assessed at $56,000. [234].
  • Peter and Tracy engaged in a fraudulent conveyance and the transfer of property was found to be void. The court noted “It was not truthful that it was for tax planning purpose, which is the explanation that Peter gave for its transfer.” The appropriate orders were made. [244-246]
  • No award for punitive damages was made. [254]

I remind my young on-ice officials that “experience is just the way we describe our mistakes” and that “mistakes are good…if we learn from them”.  All family businesses or owners of small, closely-held companies can learn from the experience of these litigants. The starting point I suggest is found in this comment by the judge:

“Consbec and Peter did not enter into a written contract of employment nor did Peter sign a non-solicitation or non-competition agreement.”

Here the hiring of Peter occurred in 1996 and his resignation occurred in 2002. The trial took place 12 years later. In the absence of written agreements and job descriptions, the court had to rely on witnesses’ recollections of what had occurred some 16 years earlier.

Not only should there be written, clear, enforceable employment agreements in place but other related documents, such as shareholders’ agreements, successorship plans, and tax plans, also need to be carefully considered and well drafted to avoid costly “family feuds”.

Consbec Inc. v Walker 2014 BCSC 2070

Michael Weiler practices employment and labour law including human rights and prevention of workplace harassment/bullying and independent investigations; advising on the practical and legal issues affecting private family-owned businesses; and more – see his website at www.WeilerLaw.ca . Michael is a frequent seminar presenter and the assistant editor of Canadian Cases on Employment Law. Michael can be contacted at mweiler@htln.com . For those who wish to receive articles, seminar notices and blog comments please contact Carolyn Weiler at cweiler@htln.com or call her at 604 408 5627.  

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    The content in the Michael Weiler Employment + Labour newsletters is for your general information and should not be taken as legal advice.  If you have a specific problem, please contact Mike Weiler to discuss your situation.