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Alberta Court of Appeal reverses the burden of proof for employee theft

by Jordan R.M. Deering and Byron Reynolds

The Alberta Court of Appeal recently considered and clarified the nature of the relationship between employers and the employees they entrust with handling funds. As a result of the decision in 581257 Alberta Ltd. v Aujla, 2013 ABCA 16, employers may more easily recover assets stolen, converted or misappropriated by dishonest employees using a civil cause of action. The Alberta Court of Appeal found that, in cases of theft, an employee owes fiduciary obligations to its employer. In addition, the Court overturned the lower court’s decision that the plaintiff employer was responsible not only for demonstrating that a fraud or theft had occurred, but also for showing that all of the discovered loss was a result of the employee’s theft or fraudulent acts.

According to the Alberta Court of Appeal, where an employer gives an employee the responsibility for handling the employer’s funds, that employee has fiduciary obligations with respect to those funds. Employers have a strong argument that a similar fiduciary relationship exists where:

• Employees handle inventory or valuable assets.

• Employees handle cheques or transfers and have signing authority.

The fiduciary obligation does not impose obligations of non-competition or fidelity, but it shifts the evidentiary burden respecting dealings with those funds.

The Court of Appeal held that once the employer proves fraud or breach of fiduciary duty, the employer only needs to establish reasonable efforts to determine the amount taken by the thieving employee. At that point, the evidentiary burden shifts to the employee to disprove the amount and the cause of the loss. This shifting burden of proof enforces the policy that an employer should not be precluded from recovery where the employee has covered his tracks and compromised the ability of the employer to prove the quantum of loss.

In Aujla, the defendants were cashiers and shelf stockers at the plaintiff’s liquor store. The plaintiffs became suspicious that funds were going missing, but did not have sufficient evidence because their inventory system was unsophisticated and their surveillance was inadequate. The employer later installed a hidden camera, which showed the employees stealing some money from the till. This evidence established fraudulent behavior and breach of fiduciary obligations, but only proved a small quantum of thefts. However, the employee’s bank records disclosed $116,000 in funds that were not accounted for.

The shifting burden of proof of quantum of losses for breach of fiduciary or fraud dramatically reduces the difficulty faced by employers, who can only prove a few incidences of theft, but fairly believe this theft represents part of a larger pattern. Employers may be able to rely on the employee’s lifestyle, habits (such as gambling or shopping), or bank records to prove the loss.

While employers previously considered recovery impossible because of insufficient proof of the full quantum of the loss, the Alberta Court of Appeal has now leveled the playing field and provided significant recourse for employers.

Please feel free to contact Jordan Deering of our Fraud Corruption & Asset Recovery Group directly if you would like to discuss the application of this decision to your particular circumstances.

581257 Alberta Ltd v Aujla, 2013 ABCA 16


Alberta Court of Appeal reverses the burden of proof for employee theft

Oilfield Employee Free to Compete with Former Employer

The recent Alberta decision of ADM Measurements Ltd. v. Bullet Electric Ltd. provides a useful summary of post-employment obligations and the extent to which ex-employees may compete with their former employer.

ADM is an instrumentation business for oilfield companies. As the business grew, ADM decided to hire Gregory Young, through Young’s company Bullet Electric Ltd., to help manage the business. The relationship between the parties eventually broke down and Young and a business partner formed a new competing company, Bullet Energy (Canada) Inc.  Bullet Energy became more and more successful and ADM faltered. ADM commenced an action against Bullet Electric and Young for breach of fiduciary duty.  ADM further made a claim against Bullet Energy, Young and his business partner for unjust enrichment and unfairly interfering with ADM’s contractual relations with its customers and employees.

In reaching its decision to dismiss ADM’s claim, the Court considered a number of issues, as discussed below.

Existence of an Employment Relationship

The first issue considered was whether Young was an employee of ADM.  Young clearly provided services to ADM through Bullet Electric; however, the Court found that Young was an employee of ADM, rather than an independent contractor, based on the following factors:

• Young’s management activities were clearly subject to ADM’s direct control;

• Young assigned work to and supervised other ADM employees and independent contractors, suggesting integration into the business of ADM;

• Young used ADM’s office infrastructure and supplies rather than supply his own;

• Young contracted for his services alone, no subcontractors were used to provide services to ADM; and

• Young received a fixed monthly salary from ADM without any associated risk of expenses.

Post-Employment Obligations

Once it was determined that Young was an employee of ADM, the Court considered whether Young owed any post-employment obligations to ADM and if so, whether he breached those obligations.  The Court found no evidence of any contract prohibiting Young from opening a competing business.  The Court also held that Young was not a fiduciary of ADM: Young did not possess the necessary control over ADM typical of a key employee. Finally, the Court held that ADM had constructively dismissed Young, and that even if Young had contractual non-competition obligations or fiduciary obligations, the wrongful termination ended those obligations.

Interference with Contractual Relations & Causation

The Court went on to consider whether any damages could be awarded against Young, Warnock and Bullet Energy for interference with contractual relations, as a result of former customers and employees of ADM moving to Bullet Energy. Firstly, the Court determined that there was no interference with contractual relationships between ADM and its customers given the precarious nature of the customer relationships in the industry.  Contracts were made for individual “piece-work” tasks and any long-term interaction was informal and not contractual. Young and his business partner, through Bullet Energy, were simply willing to compete with ADM and did so in an aggressive manner. The Court further accepted that while a new employer may be liable for damages caused by interfering with an employee/employer relationship of a competitor, such liability would not be found without extensive evidence. More must be proven than employee migration from the old company to the new one; instead, the old company must prove that the employee migration was due to inappropriate solicitation of former employees. ADM failed to supply any evidence to support such an argument.

The Court further dismissed ADM’s argument that ADM’s shrinking revenues were directly caused by Bullet Energy taking its business. Rather, the Court found that while ADM’s revenue was clearly shrinking, Bullet Energy’s success was most likely caused by Bullet Energy “out hustling” ADM rather than “stealing work” from ADM.

In the result, Young and his new company, Bullet Energy, were entitled to freely compete with ADM.

ADM Measurements Ltd. v. Bullet Electric Ltd.: http://canlii.ca/t/fqhgj


Oilfield Employee Free to Compete with Former Employer

Court Disqualifies Plaintiff’s Wrongful Dismissal Lawyer who Previously Represented Defendant

In Robert Day v. Norwood Foundry Limited (2012 ABQB 186), the plaintiff sued his former employer, Norwood, for wrongful dismissal. Norwood brought an application seeking to prohibit the plaintiff’s lawyer from representing him, since that lawyer had previously represented Norwood in a similar action involving another former employee.

The Court held that the lawyer could be disqualified from representing the plaintiff if: (a) he received confidential information which would be relevant to the current action while he was in a solicitor-client relationship with Norwood because of the previous action; and (b) such information would be used to the prejudice of Norwood.  The lawyer argued that any information provided in the previous matter was not confidential as the plaintiff was the chief instructing officer for Norwood in the previous matter. Thus any information held by the lawyer would be equally held by the plaintiff and there would be no privilege attaching to the plaintiff’s information.

The court rejected this argument as it was impossible to say that the plaintiff would have known all of the material information held by the lawyer regarding the previous action. Accordingly, the Court found that the lawyer did possess confidential information, such as Norwood’s preferred approach to litigation and settlement. Regarding whether this confidential information would be used to the prejudice of Norwood, the Court held that where the same lawyer who acted for a client, later acts against them, disqualification is automatic. Therefore, whether or not the information would prejudice Norwood was irrelevant because a lawyer “cannot compartmentalize his or her mind”.  As a result, the lawyer was disqualified and the dismissed employee was forced to seek new counsel.

Robert Day v. Norwood Foundry Limited, http://canlii.ca/t/fqq5v


Court Disqualifies Plaintiff’s Wrongful Dismissal Lawyer who Previously Represented Defendant