



COURT OF APPEAL FOR ONTARIO

CITATION: Tim Ludwig Professional Corporation v. BDO Canada
    LLP,

2017 ONCA 292

DATE: 20170412

DOCKET: C62017

Strathy C.J.O., Weiler and Benotto JJ.A.

BETWEEN

Tim Ludwig Professional Corporation and Tim
    Ludwig

Plaintiffs (Respondents)

and

BDO Canada LLP

Defendant (Appellant)

Peter H. Griffin and Sam Johansen, for the appellant

Jonathan G. Bell and Louis M.H. Belzil, Q.C., for the
    respondents

Heard: January 27, 2017

On appeal from the judgment of Justice Graeme Mew of the Superior
    Court of Justice, dated March 31, 2016.

Benotto J.A.:

A.

Introduction

[1]

The appellant BDO Canada LLP (BDO) is a
    national accounting and advisory firm with offices across Canada. The
    respondents Tim Ludwig and Tim Ludwig Professional Corporation (collectively, Ludwig)
    are, for the purposes of this action, one and the same. Ludwig was a partner of
    BDO for 22 years until, in 2014, he was called into a meeting and told to
    retire. He brought an action against BDO claiming that BDO breached the terms
    of their partnership agreement. Ludwig was granted summary judgment and awarded
    damages. BDO appeals the findings of liability and the damages awarded.

[2]

For the reasons that follow, I would dismiss the
    appeal.

B.

Background

[3]

Ludwig is a chartered accountant and a licensed
    trustee in bankruptcy. From 1992 to 2014, through his company, the respondent
    Tim Ludwig Professional Corporation, Ludwig was a partner of BDO and its
    predecessor firms. Ludwig worked in BDOs insolvency group in Edmonton,
    Alberta.

[4]

The BDO Canada LLP Agreement (the Partnership
    Agreement) set out the terms of the partnership for all partners, including
    Ludwig. The Partnership Agreement was governed by the laws of Ontario.

[5]

The Partnership Agreement provided for the
    timing and the terms of departure for each partner. For Ludwig, his compulsory
    retirement date, as set out in Article 15.1, was January 1, 2019. The Partnership
    Agreement also provided a process for the Requested Resignation of a partner
    before the compulsory retirement date. Pursuant to Article 17.4, the Policy Board
     consisting of seven members elected for three-year terms  having determined
    that it was not in the best interest of the partnership for the partner to
    remain, was to give notice to the partner of the decision and the partner was
    deemed to have resigned. Article 17.4 stated:

If the Policy Board unanimously determines
    that it is not in the best interest of the Partnership for a particular Partner
    to remain a Partner in the Partnership, the Policy Board shall give notice in
    writing to the affected Partner requesting such Partner to resign and shall
    give notice to that effect to all the Partners and Designated Persons. Upon
    delivery of such notice by the Policy Board, the affected Partner shall be
    deemed to have resigned from the Partnership. The affected Partner shall be
    entitled to receive his/her Entitlement (to the extent applicable) in
    accordance with Article 11 as though s/he was a retired Partner at the date on
    which s/he is deemed to have resigned from the Partnership.

[6]

Ludwig planned to work until January 1, 2019,
    his compulsory retirement date.

[7]

On July 8, 2014, Ludwig, then age 60, had been
    with BDO for 22 years. He was called into a meeting with two other partners,
    Blair Davidson and Darren Crocker (the July meeting). In this meeting,
    Davidson told Ludwig that:

·

He would have to retire.

·

The CEO (Keith Farlinger) had the absolute right to require a
    partner to retire and he requires that you retire at the end of this year. This
    is not a negotiation.

·

The firm was over partnered and the decision to require him to
    retire had nothing to do with his performance or conduct.

·

The decision to require his retirement was between you or the guy
    with nine kids at home, which Ludwig thought was a reference to Jordan Day.

·

The non-competition clause in the Partnership Agreement would be
    invoked against him following his retirement. (This was apparently a reference
    to the restrictive covenant provision applicable to retired or expelled
    partners in Article 19.1 of the Partnership Agreement.)

[8]

BDOs legal counsel deposes that, around the
    time of the July meeting, BDO was restructuring its insolvency practice and
    reducing its complement of partners in light of the decrease in insolvency work
    in Edmonton. Ludwigs departure was requested based on: (i) the Edmonton Offices
    poor performance; (ii) the economic challenges facing the Edmonton Office and
    the Edmonton economy more generally; and (iii) Ludwigs underperformance,
    including but not limited to substandard levels of business development
    activities. BDO did not provide Ludwig with any particulars relating to his
    alleged underperformance.

[9]

Following the July meeting, BDO announced Ludwigs
    retirement to the Edmonton Financial Recovery Services (FRS) group within the
    firm.

[10]

Sometime between July 8 and August 4, 2014, BDO
    invoked Article 17.4 of the Partnership Agreement as a ground to justify
    requiring Ludwig to retire early. Between August and September of 2014, there
    were inconclusive negotiations between the parties concerning possible
    retirement terms for Ludwig. Ludwig made a settlement proposal on September 4,
    2014. He received a response from BDO stating:

In the case that you do not sign the [proposal
    by BDO] by Oct 3 the policy board will respond to you under 17.4 Requested
    Resignation of the partnership agreement.

[11]

On September 25, 2014, Ludwigs counsel wrote to
    the CEO indicating that BDO was not following the process set out in the Partnership
    Agreement. Specifically, BDO did not allege any grounds for expulsion
    particular to Ludwig.

[12]

On October 8, 2014, three months after the
    appellant was told that the CEO expected him to retire, the Policy Board
    unanimously voted to request Ludwig to resign under Article 17.4 (the October
    meeting). The minutes of the Policy Boards meeting read as follows, under the
    heading Request for Partner Resignation:

The CEO noted that the FRS practice had been
    impacted significantly by a decline in the economic market. Changes were
    required to reduce the impact of the decline.

The
    Policy Board unanimously agreed
that it was in the best
    interest of the firm that the Policy Board requests the resignation of Tim
    Ludwig Professional Corporation pursuant to Section 17.4 of the BDO Partnership
    Agreement.

[13]

On October 9, 2014, BDO provided notice of the
    retirement request to Ludwigs lawyer, using the same language.

C.

Proceedings in
    the Court below

[14]

Ludwig brought a claim against BDO alleging that
    his expulsion breached the terms of the Partnership Agreement and entitled him
    to damages in contract. He obtained summary judgment on his claim pursuant to
    r. 20 of the
Rules of Civil Procedure
, R.R.O. 1990, Reg. 194.

[15]

The motion judge granted summary judgment for two overarching reasons:


i.

Ludwigs expulsion did not comply with the language of Article 17.4 of
    the Partnership Agreement; and


ii.

Common law principles governing partnerships require that a partners
    expulsion must be reasonable and made in good faith, rather than arbitrary or
    capricious. BDO did not advance any evidence that the Policy Board
    independently decided that to expel Ludwig was in the best interest of the
    partnership, and it did not act in good faith because it did not give Ludwig an
    opportunity to explain why he should not be expelled.

[16]

The motion judge then awarded Ludwig both expectation and aggravated
    damages.

[17]

In granting summary judgment, the motion judge interpreted Article 17.4
    as requiring the Policy Board to make a determination that Ludwigs
    retirement was in the best interest of the firm. He concluded that this did not
    happen because: (i) Ludwig was told at the July meeting that the CEO required
    his retirement and had an absolute right to demand it; (ii) Ludwig was told
    that the July meeting was not a negotiation; (iii) there was no evidence that
    the Policy Board undertook any deliberations prior to the October meeting  it
    merely formalized the CEOs prior decision; and (iv) BDO invoked Article 17.4
    after Ludwigs refusal to accept the prior decision of the CEO to expel him,
    indicating that the Policy Board simply rubber stamped the prior decision.

[18]

Although, in the motion judges view, this disposed of the case, he went
    on to consider common law principles applicable to partnerships. In doing so,
    he rejected BDOs submission that the Policy Board could rely on a subjective
    standard of assessment to require Ludwig to retire under Article 17.4.

[19]

Relying on
Blisset v. Daniel
(1853), 68 E.R. 1022 (Eng. Ch.), the
    motion judge concluded that the Partnership Agreement should be construed
    strictly against partners exercising a power of expulsion, and if cause for the
    expulsion is not claimed or proven, the exercise of the power to expel must be
    made in good faith. He noted that in
Lindley & Banks on Partnership
,
the text states that although it is
    theoretically possible to frame a ground of expulsion which requires a degree
    of subjective judgment by the other partners  this is not generally to be
    commended, and courts will almost inevitably scrutinise the ground relied on
    and may conclude that the partners are obliged to take a reasonable view of
    the expelled partners conduct: Roderick IAnson Banks,
Lindley &
    Banks on Partnership
, 19th ed. (London: Thomson Reuters, 2010), at para.
    10-120.

[20]

Therefore, even if Article 17.4 only required a subjective standard of
    assessment by the Policy Board, such a standard still had to be controlled by
    some criteria and required some evidence that would allow a court to inspect
    the propriety of the decision. To recognize a purely subjective standard with
    no supporting evidence would be contrary to the principle that an expulsion
    power must be interpreted strictly. It would allow BDO to have virtually
    unfettered discretion. It would also be contrary to the principle that, in
    making a determination about the best interest of the partnership under Article
    17.4, BDO had to exercise its discretion to expel a partner rationally and in
    good faith, not arbitrarily or capriciously.

[21]

Ludwigs expulsion was contrary to Article 17.4 because BDO gave no
    evidence in support of its bald assertions about Ludwigs performance and that of
    the Edmonton office. A mere vote to confirm a decision that was already made is
    not a determination in the sense required by Article 17.4. There was also no
    evidence that the Policy Board made its decision in the best interest of the
    firm, in good faith.

[22]

The motion judge noted that damages are not generally available as a
    remedy for a wrongfully expelled partner. This principle is articulated in
Lindley
    & Banks
, at para. 10-131: since service of an invalid notice of
    expulsion does not affect the recipients status as a partner, he cannot claim
    damages against his co-partners for wrongful expulsion. The motion judge held,
    however, that this was an extremely formalistic view and was unrealistic
    given the facts of this case.

[23]

The principle that a wrongful expulsion does not affect a partners
    status as a partner is premised on the assumption that the expelled partner
    can simply resume work at his or her firm and carry on as before. The motion
    judge held that this assumption does not follow in Ludwigs case. In
    particular, the motion judge pointed out that Ludwig was 62 years old and
    reaching the end of his career; had been unceremoniously ejected from the
    partnership; and his practice had been absorbed by other partners in the firm.

[24]

Thus, the motion judge awarded Ludwig expectation damages:
Western
    Larch Ltd. v. Di Poce Management Ltd.
, 2013 ONCA 722, 117 O.R. (3d) 561,
    at para. 73, leave to appeal refused, [2014] S.C.C.A. No. 32. He stated that it
    was not open to Ludwig to mitigate his losses as a result of his expulsion
    because he was told that the non-competition clause in Article 19.1 of the Partnership
    Agreement would be invoked against him, preventing him from seeking alternative
    work and making a living in his profession. Thus, Ludwigs lack of mitigation
    did not reduce the quantum of damages.

[25]

The motion judge concluded that Ludwig was entitled to $1,233,739 in
    damages for loss of profits under BDOs profit-sharing agreement, which he
    would have received if he had worked to his compulsory retirement date (January
    1, 2019). He was also entitled to receive $61,198, reflecting the additional
    retirement benefit that he would have received if he retired on that date.

[26]

The motion judge also awarded $100,000 in aggravated damages for the harm
    to Ludwigs reputation that his expulsion caused. The motion judge relied on
Plester
    v. Wawanesa Mutual Insurance Co
. (2006), 213 O.A.C. 241 (C.A.), leave to
    appeal refused, [2006] S.C.C.A. No. 315, for the principle that aggravated
    damages are appropriate where the defendants reckless or intentional conduct
    causes the plaintiff intangible harm. In particular, the motion judge noted
    that the manner in which Ludwig was expelled, which included being told his
    expulsion was non-negotiable, that Article 19.1 (the non-competition clause) applied,
    and BDOs unilateral announcement of Ludwigs retirement to the firm, warranted
    an award of aggravated damages.

D.

Issues

[27]

The issues to be determined are:

1.

What is the standard of review?

2.

Did the motion judge correctly interpret the agreement?

3.

Did the motion judge err in awarding expectation and aggravated damages?

E.

Analysis

(1)

Standard of review

[28]

Ludwig submits that the standard of review is deferential, namely that
    there must be a palpable and overriding error for this court to intervene. He
    says this because, in his submission, the judgment was based on the motion
    judges factual findings.

[29]

I do not agree with this submission. In my view, the correctness
    standard of review applies to the motion judges interpretation of the Partnership
    Agreement and to his decision on the applicable measure of damages. The errors
    BDO alleges are errors of law, not findings of fact. As the motion judge
    indicated, The facts of this case are straightforward and, for the most part,
    not in dispute. The motion judge was not called upon to consider a factual
    matrix. Nor was there any evidence of negotiations between the parties at the
    time the Agreement was signed:
Sattva Capital Corp. v. Creston Moly Corp.
,
    2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 51-53.

[30]

The motion judges findings of fact underlying his assessment of
    damages, however, are entitled to deference: see
de Montigny v. Brossard
    (Succession)
, 2010 SCC 51, [2010] 3 S.C.R. 64, at para. 27.

(2)

Interpretation of the
    agreement

[31]

I begin by considering the legislative and common law framework against
    which the Partnership Agreement should be interpreted. I then apply these
    principles to the Agreement.

(a)

The relevant legislative and common law framework

[32]

The
Ontario
Partnerships Act
,

R.S.O.
    1990, c. P.5, sets out the requirements for the expulsion of a partner. The
    relevant provisions of the
Partnerships Act
are:

·

Section
    25: No majority of the partners can expel any partner unless a power to do so
    has been conferred by express agreement between the partners.

·

Section
    28: Partners are bound to render true accounts and full information of all
    things affecting the partnership to any partner or the partners legal
    representatives.

·

Section
    45: The rules of equity and of common law applicable to partnership continue
    in force, except so far as they are inconsistent with the express provisions of
    this Act.

[33]

BDO submits that the motion judge erred in relying too heavily on the
    common law of partnerships, rather than solely on general principles of contractual
    interpretation. I do not agree with this submission. In my view, s. 45 of the
Partnerships
    Act
imports the common law rules into the analysis of a partnership
    agreement, except to the extent they have been varied by the agreement or the
Act
.
    The relevant common law principles, which inform the construction of a
    partnership agreement, are explained in
Lindley & Banks
as
    follows:

·

Because
    an expulsion from a partnership is expropriatory in nature, depriving the
    partner of future profits, an expulsion provision in a partnership agreement
    will be construed strictly: para. 10-123.

·

Partners
    are fiduciaries
among themselves

and
    the utmost good faith is owed from every member of a partnership towards every
    other member: para. 16-01.

·

Where
    a discretion is conferred on the management of the firm or on a majority of
    partners, a partner will normally be entitled to expect that it will be
    exercised rationally and in good faith and not arbitrarily or capriciously: at
    para. 16-09.

[34]

This court considered the interplay between the
Partnerships Act
and the common law in
Rochwerg v. Truster
(2002), 58 O.R. (3d) 687
    (C.A.).
Rochwerg
involved a partner in an accounting partnership who
    disclosed to his partners that he was a director of a corporate client of the
    firm and remitted his directors fees to the firm, but did not disclose that he
    was entitled as director to shares and stock options in the company. When he
    left the partnership, an issue arose as to whether he was required to account
    to his partners for his shares and stock options.

[35]

Cronk J.A. held that both the common law of partnerships and the
Partnerships
    Act
imposed an obligation on the partner to disclose his shares and options.
    Cronk J.A. wrote, at para. 36:

It has long been established that partners owe a fiduciary duty
    to each other, and that equitable principles hold fiduciaries to a strict
    standard of conduct, encompassing
duties of loyalty,
    utmost good faith

and avoidance of conflict of duty and self-interest. These
    are well recognized, core principles of the law of partnership. [Emphasis added.]

[36]

And, at paras. 62-63:

The fiduciary duty between partners thus arises not only from
    the reciprocal agency relationship between them but, also, from the duty of utmost
    good faith which each partner owes to the other. Fundamental to this
    overarching fiduciary duty is the requirement that each partner place the
    interests of the partnership, and the avoidance of situations which create, or
    could create, a conflict between fiduciary duty and the interests of the
    partnership, ahead of a partner's private interests. Accordingly, partners are
    required to prefer the interests of the partnership over their own personal
    interests. The scope of the fiduciary duty in partnerships is of the broadest
    nature. As stated by Vice-Chancellor Bacon in
Helmore v. Smith (No. 1)
(at p. 444):

[I]f fiduciary relation means anything I cannot conceive a
    stronger case of fiduciary relation than that which exists between partners.
    Their mutual confidence is the life blood of the concern. It is because they
    trust one another that they are partners in the first instance; it is because
    they continue to trust each other that the business goes on.

Mutual trust, confidence and good faith are the cornerstones of
    the modern professional services partnership. Without them, the very essence of
    the partnership arrangement is eroded and, ultimately, destroyed. In my view,
    the equitable principles developed over the last century concerning the
    fiduciary obligations of partners continue to control contemporary
    partnerships. They may require, however, flexible application to respond to
    changing partnership structures, activities and settings. [Citations omitted.]

[37]

In the result, partners owe each other a duty of utmost good faith at
    common law and the traditional rules governing partnerships discussed in
Lindley
    & Banks
continue to apply in Ontario: see
DiPoce v. DeCicco
,
    2013 ONSC 6409, [2013] O.J. No. 4741, at para. 18; and
Springer v. Aird
    & Berlis LLP
(2009), 96 O.R. (3d) 325 (S.C.), at paras. 167-168,
    affd, 2010 ONCA 287, 100 O.R. (3d) 575.

[38]

In summary, Article 17.4 of the Partnership Agreement must be
    interpreted in light of the partners duty of utmost good faith towards each
    other. The expropriatory nature of expulsion and the loss of profits that it
    entails requires that the provision be construed strictly in favour of the
    expelled partner.

[39]

I now turn to consider whether BDO breached Article 17.4.

(b)

Application of the principles

[40]

The wording of Article 17.4 is consistent with the intent of
    the common law with respect to the expectation of good faith on the part of the
    partners and strict construction of an expulsion clause.  The wording of
    Article 17.4 authorizes the Policy Board to request a partners resignation if it


unanimously determines that it is not in the best
    interest of the Partnership for a particular Partner to remain
.

[41]

For the reasons that follow,
I conclude that BDO breached Article 17.4 of the Partnership
    Agreement.

[42]

First,
to trigger Article 17.4, there
    must be some evidence put before and considered by the Policy Board that shows
    it was reasonable for the Policy Board to conclude that it is not in the
    partnerships best interest for a particular partner to remain. The point of
    the obligation to consider some evidence that provides a basis in fact for a
    partners expulsion under Article 17.4 is to ensure that the Policy Boards
    decision is made in good faith in the partnerships best interest and does not
    arbitrarily or capriciously expropriate the expelled partners profits. This
    approach is consistent with the case law the motion judge referenced, namely
    the decision of the Court of Exchequer in
Wood v. Woad
(1873)
, L.R. 9 Ex. 190 (Eng. Exch.), as
    described by Lord Jessel in
Russell v. Russell
(1880)
, 14 Ch. D. 471 (Eng. Ch. Div.),
    at p. 479.

[43]

To say that the Policy Boards expulsion decision under Article 17.4
    should be reasonably based on some evidence, rather than arbitrary or
    capricious, is not to interpret the provision without regard to its purpose of
    providing a lower standard for expulsion as compared to Article 17.1. Article
    17.1 sets out a list of specific grounds justifying a partners expulsion (for
    example, if a partners conduct is likely to damage the partnership, or if a
    partner is convicted of a criminal offence).

[44]

The obligation to provide evidence is to ensure that the Policy Boards decision
    is reasonably referable to the best interest requirement stipulated in Article
    17.4 and imported by the common law duty of good faith. It is not an obligation
    to consider
some particular ground
that would make
    it in the best interest of the partnership for a partner to not remain with it.
    A more onerous requirement of this kind is imposed by Article 17.1s
    enumerated, pre-designated grounds of misconduct. The focus under Article 17.4
    is
not on the nature, substance or merits of a ground
on which the Policy Board relies to request a partners retirement; it is
    whether
there was a ground
that, on the record,
    could reasonably justify a partners expulsion in the partnerships best
    interest. This is what the language of Article 17.4 requires.

[45]

The Policy Boards reasons, as reflected in the minutes of the October meeting,
    relate to the economic climate in Edmonton and the firms economic
    circumstances. In the July meeting, Ludwig was told that his underperformance
    was also a factor. I agree with the motion judge that these were bald
    assertions. It is significant that neither the CEO nor any member of the Policy
    Board gave evidence on the summary judgment motion. There was no evidentiary
    basis on which to reasonably conclude that it was in the best interest of the
    partnership to request Ludwigs retirement.

[46]

Second, it is clear from the evidence that the decision to expel Ludwig
    was not made by the Policy Board, as required by Article 17.4. It was made by
    the CEO. Ludwig was informed of such in the July meeting when he was told: (i)
    the CEO required his retirement; (ii) the CEO had the absolute right to demand Ludwigs
    resignation; and (iii) this was not a negotiation. This uncontradicted evidence
    supports the inference that the Policy Boards decision in October was
    pre-determined.

[47]

The language of Article 17.4 requires the Policy Board to determine the
    best interest of the partnership. There is no evidence that it did so. The
    motion judge, at para. 52, stated:

[A]s BDOs written argument acknowledges, this decision [to
    reduce the number of partners in the Edmonton] (sic)
was
    made
by BDO and, after negotiations with the Plaintiffs failed, was
ultimately carried out
by the Policy Board etc. This
    assertion serves to confirm that the Policy Board, in its meeting on 8 October,
    merely formalised a decision that had been made previously and by someone other
    than the Policy Board itself. There is no evidence as to what deliberations, if
    any, the Policy Board undertook at, or in advance of the 8 October meeting.
    [Emphasis in original.]

[48]

In summary, I conclude that the motion judge was correct in his
    interpretation of Article 17.4 and did not err in holding that BDO did not
    comply with the provision in purporting to expel Ludwig from the partnership.

(3)

Damages

[49]

The motion judge awarded both expectation damages and
    aggravated damages. For the reasons that follow, I would not interfere with
    either award.

(a)

Expectation damages

[50]

The motion judge noted that although damages are generally not available
    to a partner who has been wrongfully expelled, in this case reinstatement was
    unrealistic. He therefore awarded damages on an expectation basis.

[51]

BDO submits that the motion judge erred in awarding damages that reflect
    the profits that Ludwig would have received had the contract not been breached.
    The motion judge acknowledged that Ludwig could have been expelled without
    cause had BDO properly followed the directives of Article 17.4. In other words,
    the Policy Board could have forced Ludwig out if it acted in good faith and relied
    on sufficient evidence in making an independent determination that it was in
    the best interest of the partnership for Ludwig to retire. BDO argues that, in
    terms of damages, Ludwig was only entitled to be put in the position he would
    have been in had the contract been performed. That is, if the Policy Board had properly
    executed its power to expel him from the partnership.

[52]

BDO also alleges that the motion judge erred by failing to reduce Ludwigs
    damages for failing to mitigate. Although Article 19.1 is a non-competition
    clause, BDO submits that the clause was limited to a 40 kilometre radius from
    the Edmonton office and expired two years from the date of Ludwigs expulsion.
    In any event, BDO argues, there were other options available to Ludwig to
    mitigate his losses.

[53]

These submissions by BDO were made for the first time on appeal without
    supporting evidence. Before the motion judge, BDO did not contest Ludwigs
    analysis with respect to damages, and there was no evidence before the motion
    judge to contradict any element of Ludwigs claim for damages. Neither party
    raised the issue of mitigation in the proceedings below.

[54]

The evidentiary obligation on a summary judgment motion is well
    established. Each side must put its best foot forward: see
Transamerica
    Life Insurance Co. v. Canada Life Assurance Co.
(1996), 28 O.R. (3d) 423, at p. 434, affd [1997] O.J. No. 3754 (Ont.
    C.A.)
. The motion judge is entitled to presume that the evidentiary
    record is complete and there will be nothing further if the issue were to go to
    trial: see
Dawson et al. v. Rexcraft Storage and Warehouse Inc. et al.
(1998), 111 O.A.C. 201 (C.A.)
, at para.
    17.

[55]

In these particular circumstances, it was open to the motion judge to
    accept Ludwigs uncontradicted evidence, and I would not interfere with his
    conclusion.

[56]

I note that the availability of damages arises from the particular facts
    of this case and the motion judges finding that Ludwig cannot feasibly return
    to the firm. The general principle  articulated in
Lindley & Banks

    that a wrongful expulsion does not affect the status of the expellee, still governs.

[57]

Likewise, although in this case the motion judge found that the Partnership
    Agreements non-compete clause effectively prevented Ludwig from mitigating his
    losses, this will depend upon the particulars of the case.

(b)

Aggravated Damages

[58]

The motion judge awarded aggravated damages for intangible
    harms that Ludwig suffered, particularly embarrassment and reputational harm. BDO
    submits that such damages cannot be awarded for a breach of contract arising
    out of a partnership.


[59]

I begin with a review of the jurisprudence
    regarding aggravated damages for intangible harm. Then I review the facts
    before the motion judge and apply the principles arising out of the jurisprudence
    to those facts.

[60]

Contract damages for intangible harm may be
    awarded under the principle established in
Hadley v. Baxendale
(1854), 156 E.R. 145 (Eng. Exch.),
where
    the intangible harm was in the reasonable contemplation of the parties when
    they entered into the agreement. In
Fidler v. Sun Life Assurance Co. of
    Canada
, 2006 SCC 30, [2006] 2 S.C.R. 3 at paras. 44-45, the Supreme Court
    stated that
all types
of
    damages for breach of contract are awarded on the basis of the reasonable
    foreseeability principle: damages are meant to compensate the victim of the
    breach by reference to what was in the reasonable contemplation of the parties
    at the time the contract was made.

[61]

In
Fidler
, at para. 52, the court
    distinguished contract damages for intangible harm from damages for intangible
    harm arising out of circumstances that aggravate the breach of contract,
    referring to the latter as true aggravated damages:

[These damages] are not awarded under the
    general principle of
Hadley v. Baxendale
, but
    rest on a separate cause of action  usually in tort  like defamation,
    oppression or fraud. The idea that damages for mental distress for breach of
    contract may be awarded where an object of a contract was to secure a
    particular psychological benefit has no effect on the availability of such
    damages. If a plaintiff can establish mental distress as a result of the breach
    of an independent cause of action, then he or she may be able to recover
    accordingly. The award of damages in such a case arises from the separate cause
    of action. It does not arise out of the contractual breach itself, and it has
    nothing to do with contractual damages under the rule in
Hadley v.
    Baxendale.

[62]

In the employment context, damages for intangible
    harm arising out of the manner of termination may be awarded pursuant to the
Hadley
    v. Baxendale
principle. In
Keays v. Honda Canada Inc.
, 2008 SCC
    39, [2008] 2 S.C.R. 362, the Supreme Court confirmed the rule established in
Wallace
    v. United Grain Growers Ltd.
, [1997] 3 S.C.R. 701, that employers owe an
    obligation of good faith and fair dealing in the manner of dismissing an
    employee, such that an employment contract creates an expectation that the
    employer will be candid, reasonable, honest and forthright with its employees:
Keays
, at para. 58. Breach of this obligation
    therefore gives rise to damages for intangible harm, which is reasonably
    foreseeable and in the contemplation of the parties as a consequence of the
    breach. In
Keays
the Supreme Court stated, at para. 58:

Fidler
provides that as long as the
    promise in relation to state of mind is a part of the bargain in the reasonable
    contemplation of the contracting parties, mental distress damages arising from
    its breach are recoverable. In
Wallace
, the
    Court held employers to an obligation of good faith and fair dealing in the
    manner of dismissal and created the expectation that, in the course of
    dismissal, employers would be candid, reasonable, honest and forthright with
    their employees. At least since that time, then, there has been expectation by
    both parties to the contract that employers will act in good faith in the
    manner of dismissal. Failure to do so can lead to foreseeable, compensable
    damages. [Citations omitted.]

[63]

Intangible damages for bad faith in the manner
    of dismissal of employment are therefore not awarded for an independently
    actionable wrong and are not true aggravated damages, as defined in
Fidler
.
    They arise from the breach of the employment contract  specifically, the employers
    implied contractual obligation to act in good faith when dismissing an
    employee.

[64]

The decision in
Keays
overturned that
    in
Vorvis v. Insurance Corp. of British Columbia
, [1989] 1 S.C.R.
    1085, in which the court held that damages for intangible harm in the
    employment context were only available if the employer committed an
    independently actionable wrong.
Keays
also
    overturned the proposition established in
Wallace
that bad faith in
    the manner of dismissal entitles the employee to an increase in damages in lieu
    of proper notice of termination. As the court wrote in
Keays
, at para.
    59:

[T]here is no reason to retain the distinction
    between true aggravated damages resulting from a separate cause of action and
    moral damages resulting from conduct in the manner of termination. Damages
    attributable to conduct in the manner of dismissal are always to be awarded
    under the
Hadley
principle. Moreover, in cases
    where damages are awarded, no extension of the notice period is to be used to
    determine the proper amount to be paid. The amount is to be fixed according to
    the same principles and in the same way as in all other cases dealing with
    moral damages. Thus, if the employee can prove that the manner of dismissal
    caused mental distress that was in the contemplation of the parties, those
    damages will be awarded not through an arbitrary extension of the notice
    period, but through an award that reflects the actual damages.

[65]

More recently, this court summarized the
    availability of intangible damages for breach of employment contracts, along
    the same lines as those presented above, in
Strudwick v. Applied Consumer
    & Clinical Evaluations Inc.
, 2016 ONCA 520, 349 O.A.C. 360, at paras.
    90-91.

[66]

I pause to note that caution must be exercised
    when directly applying the rules governing intangible damages in the employment
    context to partners. Courts have held that partners are typically not employees
    and are governed by a separate legal regime at common law and have specialized
    legislation, particularly the
Partnerships Act
: see
SMI Sales Inc.
    v. Ontario (Minister of Finance)
, 2007 ONCA 451, 226 O.A.C. 169;
Weibe
    Door Services Ltd. v. Minister of National Revenue
, [1986] 3 F.C. 553 (C.A.);
    and
McCormick v. Fasken Martineau DuMoulin LLP
, 2014 SCC 39, [2014] 2
    S.C.R. 108.

[67]

However,
the reasoning of the court in
Keays
,
    in combination with the principles of partnerships law discussed above,
    suggests that damages for intangible harm are available in the partnerships
    context on the
Hadley v. Baxendale
principle where the harm was in the
    reasonable contemplation of the parties when they made their contract.

[68]

Keays
holds that, because employers have an implied contractual
    obligation of good faith in the manner of dismissal, damages for bad faith in the
    manner of dismissal are within the contemplation of the parties when they enter
    into the contract. Given the duty of utmost good faith owed between partners,
    confirmed in
Rochwerg
, the reasoning in
Keays
should apply in
    the partnerships context: damages flowing from bad faith in the manner of a
    partners expulsion are within the reasonable contemplation of the parties when
    they enter into the partnership agreement. Such damages can be awarded on the
Hadley
    v. Baxendale
principle.

[69]

In other words, part of what the parties agree to when they enter into
    the partnership agreement is that they must treat each other with utmost good
    faith. The intangible harm resulting from a bad faith expulsion is reasonably
    foreseeable and flows from the breach of the duty of good faith, which is an
    implied term of the partnership agreement.

[70]

The motion judge awarded aggravated damages on the basis of BDOs
    conduct and the humiliation it caused. He said, at para. 93:

[T]he circumstances of Mr. Ludwigs removal, including the
    negotiation that was not, in fact, a negotiation (at least
vis-à-vis
the
    fundamental issue of the termination of Mr. Ludwigs partnership), the unilateral
    announcement of his retirement by BDO, his subsequent ejection (deemed
    resignation) from the partnership and BDOs invocation of the non-competition
    clause in the Partnership Agreement, warrant an award of aggravated damages
    reflecting the embarrassment and reputational harm which he experienced. I fix
    those damages at $100,000.

[71]

I see no error in the motion judges award of aggravated damages.

F.

Disposition

[72]

I would dismiss the appeal with costs payable to the respondent in the
    agreed upon amount of $25,000 inclusive of disbursements and HST.

Released: April 12, 2017

M.L. Benotto J.A.

I agree G.R. Strathy
    C.J.O.

I agree K.M. Weiler
    J.A.


