Bonus payable to executive despite termination for breach of fiduciary duty

April 25, 2012

In the recent decision of Mady Development Corp. v. Rossetto, the Ontario Court of Appeal restored part of an arbitrator’s decision that granted a terminated executive his earned bonus amounts despite his misappropriation of his employer’s money and resources during the period to which the bonuses were attributable.

Facts and Judicial History:

Leonard Rossetto (Mr. Rossetto) worked as the vice-president of a division of Mady Development Corp. (Mady), a commercial and residential real estate development company.  In 2008, Mady discovered that Mr. Rossetto had misappropriated company labour, materials and funds to renovate his house over a period of three months in 2007. In light of this discovery, Mady terminated Mr. Rossetto for cause and further sued Mr. Rossetto for damages, conversion, breach of contract, unjust enrichment and breach of fiduciary duty.  In response, Mr. Rossetto counterclaimed against Mady for his unpaid bonuses earned in 2007 and 2008.  Under his employment contract, Mr. Rossetto was entitled to a bonus of 30 per cent of Mady’s profits after overhead. 

Both parties submitted the dispute to arbitration, where Mady was awarded damages of $546,452 for breach of fiduciary duty and for delay related to one of its projects. Despite Mr. Rossetto’s wrongdoing, the arbitrator found he was entitled to his annual bonuses that were “clearly an integral part of his contract.” Accordingly, Mr. Rossetto was awarded $364,661.33 in satisfaction of these unpaid bonuses.

Mady appealed the bonus-related portion of the arbitrator’s decision to the Ontario Superior Court of Justice, where Justice Allen agreed with Mady, holding that the arbitrator failed to correctly apply the principles governing fiduciary duty and further that, “had Mady been aware that Mr. Rossetto was secretly diverting the company’s assets and resources…Mady would have most assuredly terminated Mr. Rossetto’s employment contract as it did immediately upon discovering Mr. Rossetto’s dishonest activities.” As such, Mr. Rossetto was deprived of his bonus payments.

The Decision of the Court of Appeal

Mr. Rossetto then appealed to the Ontario Court of Appeal, where a unanimous court restored the arbitrator’s award granting Mr. Rossetto his bonus amounts.

The Court of Appeal held that Justice Allen erred in holding that employees in breach of their fiduciary duties can never be entitled to bonus compensation for the period of their wrongdoing.  The Court emphasized that remedies for breach of fiduciary duty are fact-specific and discretionary, and further noted that one of the primary goals of fiduciary relief, namely restitution, was achieved when the arbitrator ordered Mr. Rossetto to pay for damages.  Further, the bonus amounts payable to Mr. Rossetto related to bonuses already earned in 2007 and 2008 (even though his breach of fiduciary duty occurred over a three month period in 2007) and were an integral part of his employment contract and non-discretionary.  In that sense, Mr. Rossetto was entitled to his bonuses just as he had been entitled to his salary. The Court noted that while in some cases denying a “wayward fiduciary” their bonus may be warranted, this was not one such instance.

Our Views:

The Court of Appeal’s decision makes it clear that where a bonus is an integral, non-discretionary part of a fiduciary employee’s compensation package, a breach of fiduciary duties may not necessarily disentitle the employee from their bonus, particularly where the bonus entitlement is non-discretionary and losses arising from this breach are readily quantifiable and the employer can be made whole for such losses though an award of damages. 

Any judicial determination in such circumstances will be highly fact-driven and dependent on the nature of the bonus at issue. Considerations will include the proportion of the employee’s total compensation the bonus encompasses, whether the bonus is discretionary or non-discretionary and the employer’s past practice in regards to awarding and paying bonuses, and the particular language of any employment contract or employer policy as it pertains to bonus entitlements. 

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