Courts slow to fill void in awarding prejudgment interest in wrongful dismissal, The Law Times (September 9, 2013)

Lawyers representing dismissed employees typically include a claim for prejudgment interest in a wrongful dismissal lawsuit. However, there appears to be no controlling authority governing a method for calculating prejudgment interest and circumstances when the court should deny it. This void renders the rules regarding the propriety and calculation of prejudgment interest on wrongful dismissal damages difficult to grasp fully.

A claim for prejudgment interest isn’t by itself a cause of action. It’s a statutory right set out in s. 128 of the Courts of Justice Act that permits litigants to claim prejudgment interest from the date the cause of action arose to the date of the order. In wrongful dismissal cases, there are two competing methods for calculating prejudgment interest: a lump sum and salary continuance. Under the first method, prejudgment interest accrues on the full value of the awarded damages from the date of dismissal. Under the second method, it accrues on payments as they would have occurred had employment continued during the notice period.

A survey of wrongful dismissal jurisprudence ranging from 1985 to 2013 reveals the absence of consensus with regards to the preferred method of calculation.

In the 1985 decision of Chang v. Simplex Textiles Ltd. and Stevens v. The Globe & Mail in 1996, for example, the Ontario Court of Appeal acknowledged that the lump-sum method had a logical basis and was in general accord with other wrongful dismissal cases.

In the 1997 decision of Janke v. Cenalta Oil Well Servicing Ltd., the Saskatchewan Court of Appeal favoured the salary-continuance method because the damages suffered by a wrongfully dismissed employee accrued throughout the notice period and, therefore, required periodic assessment along the way.

In the 2006 decision in Lowndes v. Summit Ford Sales Ltd., the Ontario Court of Appeal overturned the trial court’s application of the lump-sum method as conferring an “impermissible windfall” on the employee who received notice in the form of a salary continuance. It further rationalized that the lump-sum method compelled the employer to repay interest to the employee on salary-continuance payments before they would have fallen due. People shouldn’t take Lowndes as expressing a conclusive opinion that salary continuance is the preferred method in Ontario because the court declined to determine whether “an award of prejudgment interest on a lump sum basis is generally appropriate in a wrongful dismissal case.”

In the 2011 decision, Chandran v. National Bank, the Ontario Superior Court relied on Lowndes in advancing what appears to be the hybrid method for calculating prejudgment interest: “Therefore, calculating the prejudgment interest on the damage award is calculated as follows: First, the interest owed from the beginning of the notice period to the end must be calculated monthly on the basis of what was owed at that time; second, the interest on the total amount of the award outstanding at the end of the notice period must be calculated from the end of the notice period to the date of judgment.”

Then in the 2012 decision in Olivares v. Canac Kitchens, the Ontario Superior Court was of the view that, in the circumstances of that case, the lump-sum approach was appropriate because the employee received only a payment equal to his statutory entitlements.

While jurisprudence exhibits uncertainty as to which approach applies when calculating prejudgment interest on wrongful dismissal damages, the Ontario Court of Appeal made it clear in Chang and Stevens that it wouldn’t interfere with trial judges’ exercise of discretion in favour of either method.

Damages for wrongful dismissal may include moral and punitive components. This begs a question as to whether the court can award prejudgment interest on these damages. In paragraph 128(4)(a), Courts of Justice Act prohibits an award of prejudgment interest on “exemplary and punitive damages.” The reason for barring prejudgment interest is that these damages penalize an employer for its bad-faith conduct at the time of dismissal rather than compensating an employee for a loss.

Until the Supreme Court of Canada’s 2008 decision in Honda Canada Inc. v. Keays, there was confusion between punitive and moral damages, formally known as aggravated or Wallace damages, because both have to do with the employer’s conduct at the time of dismissal. However, like the two-headed God Janus, these damages aim in opposite directions: Punitive damages aim to penalize the employer’s reprehensible conduct while moral damages aim to compensate the dismissed employee for the psychological injury suffered as a result of the employer’s bad-faith conduct in the manner of the termination.

Lawyers may cite the Supreme Court of Canada’s 1992 decision in Norberg v. Wynrib for the proposition that moral damages are subject to prejudgment interest. Sixteen years later, in Keays, the top court rationalized Wallace and aggravated damages under the single head of moral damages but said nothing about the effect this might have on the applicability of prejudgment interest to them.

People may view the Supreme Court of Canada’s passivity on this point as approval of its earlier principle. This conclusion finds support in the 2013 decision of Capital Pontiac Buick Cadillac GMC Ltd. v. Coppola in which the Saskatchewan Court of Appeal refused to overturn the trial judge’s decision to award prejudgment interest on $20,000 in moral damages. Having regard to the fact that in Keays, the court resolved that moral damages are compensatory and available on the basis that “reflects the actual damages,” the Saskatchewan Court of Appeal’s apt conclusion in Coppola that there is “no reason the practice of awarding prejudgment interest on awards of [moral] damages would not continue” is a welcome clarification on this confusing area of the law.

As is evident, the rules governing the propriety and calculation of prejudgment interest aren’t straightforward. Given that prejudgment interest could form a significant part of damages payable on a tax-free basis, prudent counsel should treat a claim for it as a cause of action and plead the facts necessary to prove entitlement from the earliest arguable date. The delay in prosecuting a wrongful dismissal case, as illustrated by Coppola, may negatively affect the award of prejudgment interest.