Divisional Court weighs in on arbitrator’s significant damage award

In Greater Toronto Airports Authority v. Public Service Alliance Canada Local 004¹, the Divisional Court has weighed in on a significant damage award ordered by arbitrator Owen Shime for a former employee of the Greater Toronto Airports Authority ("GTAA"). The Divisional Court's decision upheld parts of the arbitrator's award, but concluded that the arbitrator made some errors that needed to be corrected in order to calculate the proper amount of the award.

The case involved an almost 23-year employee of the GTAA, who was 47 years of age at the time of her dismissal. She had suffered a knee injury in 2003. The GTAA accommodated her by assigning her light duties until February 19, 2004 when she underwent arthroscopic surgery. On February 24, 2004 her surgeon provided her with a medical note saying that she should be off work for four weeks.

Unbeknownst to the GTAA, the grievor was living with another GTAA employee who was under surveillance for suspected sick leave abuse. On February 27, 2004, the grievor was observed in the course of that surveillance. From this surveillance, the GTAA discovered that the grievor could shop at a grocery store for as much as 20 minutes – and the GTAA leapt to the conclusion that the grievor was being dishonest about the scope of her disability. Rather than follow up with her doctor (as invited), the GTAA dismissed the grievor from her employment.

After a four-year arbitration hearing, the arbitrator concluded that the GTAA did not have just cause to impose any form of discipline, let alone dismissal. The arbitrator made a number of findings, including:

• All of the union's medical evidence supported the grievor's inability to return to work when asked, and it was apparent that the GTAA did not rely on any medical evidence in terminating her.
• The GTAA was entirely unjustified in its assessment of the video surveillance evidence and in its conclusion that the grievor was walking normally and engaging in activities inconsistent with her reported work restrictions. The GTAA management personnel improperly assessed the medical condition of the grievor without possessing the necessary medical knowledge.
• The GTAA should have been put on notice that it should obtain further medical advice, given Dr. Gordon's note that a patient needs six weeks to physiologically heal and his statement that the grievor still had swelling. By not seeking confirmation from a qualified medical practitioner to verify the GTAA's suspicions of sick leave abuse, as it could have under article 24.07(c) of the collective agreement, the GTAA violated article 24.07. Therefore, the grievor's entitlement to sick leave continued to be operative in accordance with that article.
• The grievor was at all times honest and candid in responding to questions put to her in the March 19 meeting. The GTAA's conclusion that she had been evasive and dishonest was entirely unjustified. Moreover, the GTAA had come to the meeting with a preconceived notion that the grievor was dishonest.
• Before terminating her employment, the GTAA had a positive duty to consider the grievor's seniority, satisfactory work record and work performance, and to consider lesser penalties, in accordance with principles of corrective discipline. The GTAA made no assessment of the grievor's circumstances whatsoever.
• The GTAA did not establish that there was modified work activity that the grievor could have performed, given her post-operative condition. Therefore, there was not cause to terminate her for failing to perform modified work.

The arbitrator went on to conclude that the GTAA acted in bad faith during the process of dismissal. The grievor admitted during cross-examination that she no longer wished to return to the GTAA. Therefore, the arbitrator went on to award very significant damages to the grievor instead of reinstatement:

1. Loss of compensation and benefits from the date of termination to the date of the issuance of his award, subject to a deduction of six months due to the unavailability of union counsel. He awarded interest on this amount.
2. Future economic loss, in the amount the grievor would have earned from the date of the award until her early retirement date of age-55 (less amounts earned from other jobs during that period).
3. Damages for pain and suffering as a result of aggravation of her knee injury (she could not afford physiotherapy and psychotherapy at the same time, and chose the latter), and for mental distress as a result of the GTAA's bad faith, in the amount of $50,000.
4. Punitive damages of $50,000.

The Divisional Court upheld the first two damage awards, but quashed the last two and referred them back to the arbitrator for a better calculation.

First, the Divisional Court had to determine the standard of review of the arbitrator's decision. The Divisional Court decided that the appropriate standard of review was reasonableness because in "determining the appropriate remedies, the arbitrator had to consider the terms of the collective agreement and the provisions of the Code, as well as the facts of the particular case"² – a matter within the arbitrator's expertise. Then, the Divisional Court went on to consider the four different heads of damages set out above.

Damages for lost salary and future wage loss

The Divisional Court began by recognizing that the usual remedy in the case of a dismissal involving a unionized employee is reinstatement. However, arbitrators do not have to award reinstatement: sometimes, damages are the more appropriate remedy. The Divisional Court went on to recognize that some arbitrators awarding damages have applied common law principles from the law of wrongful dismissal and awarded compensation on the basis of an appropriate notice period. However, the Divisional Court concluded that it was not necessary for an arbitrator to award damages based upon a notice period. An arbitrator could also, as in this case, award damages for lost compensation up to the date of the decision: either approach could be reasonable, depending upon the facts of the case. The Divisional Court pointed out that in this case the employee was completely blameless: this is not a case of an employee who committed some offence for which a lesser penalty should have been imposed. Further, the reason why the employment relationship was ruptured beyond repair was entirely the fault of the GTAA's bad faith. In these circumstances, an award of back pay to the date of the decision was reasonable.

The decision to award future losses until age 55 was also reasonable in the circumstances. The arbitrator made a finding of fact that the grievor would have stayed in her position until the earliest possible date of retirement (age 55). The arbitrator was simply putting the grievor back into the position she would have been in had the GTAA not dismissed her from her employment.

Finally, the Divisional Court concluded that the arbitrator's decision was reasonable because it was based upon "the principle that compensation for loss of a unionized position is not achieved by simply replicating the calculation of pay in lieu of notice at common law."³ The Divisional Court did not come out and state explicitly that the approach of awarding a notice period instead of full back-pay was always unreasonable: indeed, it took pains to distinguish the facts of this case from the facts of the notice period cases. However, this passage may be interpreted as critical of the notice period approach, and as an indication that such an approach should not be applied in the normal case.

Mental Distress and "Pain and Suffering" damages

The Divisional Court quashed the $50,000 in damages under this head, but only because the arbitrator did not separate the amounts for "mental distress" and "pain and suffering."

The arbitrator set out two grounds for the award for mental distress, and the Divisional Court only upheld the second ground. The first ground was based upon the 2006 Supreme Court of Canada's decision in Fidler v. Sun Life Assurance of Canada⁴. In that case, the Supreme Court of Canada awarded damages for mental distress because of a breach of an insurance contract. Such a contract was a "peace of mind" contract, and therefore mental distress damages were within the reasonable contemplation of the parties when they entered into the contract. Similarly, the arbitrator concluded that the collective agreement was a "peace of mind" contract and that mental distress damages were within the reasonable contemplation of the parties when they entered into the collective agreement.

The Divisional Court did not agree with this reasoning. First, the Divisional Court pointed out that the collective agreement was entered into in 2003 – before the Fidler decision. Therefore, the parties would not have thought at the time that there could be damages for a breach of the contract: prior to Fidler a plaintiff had to prove an independent actionable wrong in order to receive mental distress damages for breach of contract.

The Divisional Court's reasoning on this point is not very persuasive: the contract itself in Fidler pre-dated 2006, and yet it could still support mental distress damages. Changes in the common law do not only apply to events that post-date Supreme Court of Canada decisions: they apply to all events. However, the Divisional Court had a second reason for rejecting mental distress claims based on Fidler: a collective agreement is not a "peace of mind" contract. The principle purpose of a collective agreement is not to promote psychological well-being and mental security of employees. There may be particular clauses in a collective agreement that serve this purpose (no-discrimination clauses, sick leave clauses etc.), but the arbitrator did not rely upon those clauses: he concluded that the collective agreement as a whole was a "peace of mind" contract. This was unreasonable. Therefore, the arbitrator could not base his award on Fidler.

However, the arbitrator based his mental distress award on a second line of reasoning. In Wallace v. United Grain Growers⁵, the Supreme Court of Canada concluded that an employer owes an obligation of good faith and fair dealing in the manner of dismissal. In Wallace, the Supreme Court ordered that breaches of this obligation were to result in an increase to the notice period for an employee. Since unionized employees did not have a notice period, arbitrators were typically skeptical of the Wallace case's application to arbitrations. However, in 2008 the Supreme Court of Canada decided a case called Keayes v. Honda Canada Inc⁶. in which it decided that a breach of the obligation of good faith and fair dealing in the manner of dismissal would be remedied by damages, not by an extension of a notice period. While the obligation of good faith and fair dealing in the manner of dismissal exists in part because of the inequality of bargaining power between individual employees and employers – an inequality that is decreased by the existence of collective bargaining and other protections afforded by a union – it also exists because employees are uniquely vulnerable at the time of dismissal. This vulnerability also exists for unionized employees. Dismissal is a traumatic event for any employee, union or non-union. Therefore, the arbitrator acted reasonably by awarding mental distress damages based upon the GTAA's bad faith in the manner of dismissal.

The amount for "pain and suffering" as a result of the aggravation to the grievor's knee injury was not reasonable in this case. There was no medical evidence that the grievor's knee injury was actually aggravated by the break in physiotherapy. Further, the Divisional Court concluded that the arbitrator did not have the jurisdiction to award damages for pain and suffering (and the arbitrator did not set out the source of his jurisdiction): damages for mental distress in the manner of dismissal do not encompass knee injuries, and the arbitrator did not explain (using the Fidler analysis) why such an award would be in the reasonable contemplation of the parties.

Therefore, the matter was sent back to the arbitrator to decide how much of the $50,000 was attributable to the "mental distress" and how much to the "pain and suffering".

Punitive Damages

The Divisional Court quashed the award of punitive damages for two reasons. First, it concluded that the award was procedurally unfair. An award of punitive damages requires an "independent actionable wrong". The arbitrator identified some collective agreement provisions (management rights clause and sick-leave clause) that GTAA breached, meeting that requirement. However, the union did not rely upon those clauses when making its submissions about punitive damages, and the grievance also did not refer to them. In a normal case, the wording of the grievance is not analyzed extensively: arbitrators are expected to get to the core of the dispute despite any awkwardness in wording the grievance⁷. However, courts have held in civil lawsuits that punitive damages require specific pleadings. The Divisional Court decided to apply that same approach to labour arbitrations, and concluded that the grievance and union submissions were not specific enough about punitive damages.

Second, and more importantly, the Divisional Court had concerns about the substance of the arbitrator's decision on punitive damages. There are essentially three requirements for an award of punitive damages in a contract case: 1) harsh, vindictive or egregious conduct; 2) an independent actionable wrong; and 3) a rational reason for the damages. Punitive damages are rational when they serve the purposes of retribution, deterrence, and denunciation. The Divisional Court concluded that the arbitrator did not properly justify his award on the second and third grounds.

An "independent actionable wrong" is usually a tort or a criminal act outside of the scope of a contract. However, it may also include a breach of a separate provision in the same contract. In this case, the arbitrator did not specifically identify the independent actionable wrong he was relying upon. He mentioned the duty to bargain in good faith in the Canada Labour Code, but even the union counsel had to concede that the duty to bargain in good faith does not mean that an employer has to administer the collective agreement in good faith. The arbitrator also mentioned the management rights clause, but did not clarify whether he did so in the context of the dismissal (where it would not be an "independent" wrong) or for some other reason.

The Divisional Court was also unsatisfied with the arbitrator's assertion that the other damages were not sufficient to deter and denounce the GTAA's conduct. The Divisional Court wanted more from the arbitrator about why a $50,000 award for mental distress, plus approximately eight years of salary, was not a sufficient deterance for GTAA or another employer.

The Divisional Court sent the matter back to the arbitrator to decide whether punitive damages were possible or appropriate in light of its ruling.

Conclusions and lessons learned

It is noteworthy that the Divisional Court accepted that an arbitrator could award punitive damages and damages for mental distress. Such damages are not the norm: typically, an employee is "made whole" by reinstatement and back pay, and that is the end of the matter. It takes truly disturbing conduct to justify these sorts of awards for unionized employees.

Where a union believes that it has a case where mental distress or punitive damages are possible, it should be sure to draft the grievance with greater than the normal care. Most grievances are drafted quickly with a view to having the matter dealt with quickly. A case for punitive damages and mental distress damages are more like a "lawsuit" than a typical grievance arbitration; therefore, arbitrators and courts will want the initial grievance to look more like a Statement of Claim than a typical grievance. The union needs to specifically identify why conduct is in bad faith, why it caused mental distress, what the "independent actionable wrong" is, and why normal compensation is not sufficient to deter and denounce the employer's conduct.

Finally, this case is useful for cases in which – through no fault of the employee – reinstatement is not possible. An employee who convinces an arbitrator that he or she would have worked for the employer until retirement will be paid until retirement (minus income from new jobs). Unionized employees are not paid "notice periods": they are paid as if they had been reinstated. This case thus forms a useful basis for settlement discussions when the employer and union are looking at resolving a dismissal grievance without reinstatement.

¹2011 ONSC 487.
²Ibid. at para. 40.
³Ibid. at para. 93.
⁴[2006] 2 S.C.R. 3.
⁵[1997] 3 S.C.R. 701.
⁶[2008] 2 S.C.R. 362.
⁷Parry Sound (District) Social Services Administration Board v. OPSEU, Local 324, [2003] 2 SCR 157 at paragraph 68.