A Corporate David and Goliath Story
David 1:Goliath 0 – So read the headline in the Cobourg Daily Star, Reg Ward’s hometown newspaper. This epic battle, which pitted a small town insurance agent against one of Canada’s largest insurance companies, demonstrates how corporate power run rampant can significantly affect the life of one individual.
A Business is Born
In 1967, after 15 years as a hydro linesman, Reg Ward decided to become an insurance agent and was affiliated with Monarch Life. Reg’s clients were mostly salaried employees and farmers living in and around Cobourg. The relationship between Reg and Monarch was governed by a written personal agency agreement. With persistence and hard work, Reg built up a solid reputation with the company and became one of Monarch’s top salespeople. In 1983, Reg became associated with North America Life when it purchased Monarch.
In the early 1980’s, the insurance industry developed a product called an offset premium policy. The idea behind this policy was that the insured would pay premiums for a restricted period of time, after which the accumulated dividends plus the future dividends would be sufficient to pay all subsequent premiums. This type of policy became the product of choice well into the 1990’s. Insurance agents, including Reg, were strongly encouraged to sell this policy. Reg recognized that the premium offset was dependent on dividends and was therefore not guaranteed. But based on what the insurer was claiming, he believed it was almost a sure thing and promoted it as such.
In 1991, Reg entered into an agreement with North American Life to be paid 5% commissions on all policies he had sold from 1967 onwards. These commissions represented his retirement fund and the right to receive them had vested.
In 1996, North America Life and Manulife merged their operations and continued operating under the Manulife name. Following the merger, Reg was presented with a new agreement, entitled the Producer’s Agreement, on a take it or leave it basis. Although it was a complicated agreement, it was not explained to Reg. Reg ultimately signed the agreement since he was required to have a contract with an insurer in order to keep his insurance. He was also assured that the vested premiums would continue.
Reg was devoted to all three insurers and he had always trusted them to act in his best interests.
The Investigation
A year after the merger, things turned sour for Reg. Without any notice, Manulife commenced an internal investigation of Reg’s son, Steve Ward, who worked at the Ward agency. The investigation soon included Reg as well. Several months later, for no reason, Manulife gave Reg a 30-day notice terminating the Producer’s Agreement. The insurer then assigned five agents to Reg’s block of business.
In an attempt to salvage his livelihood, Reg wrote to his clients explaining that he was no longer with Manulife and asking them to sign an “agent of record” letter. Reg’s clients rallied around him. This did not go over well with Manulife who sent out its own letter to Reg’s clients as well as a cease and desist letter to Reg.
In March 1998, Manulife filed complaints with the Ontario Insurance Commission against Reg and Steve without notice them. At one point Manulife even sent a letter to Reg’s lawyer indicating that they were considering contacting the RCMP’s Commercial Fraud Unit.
The Class Action
A year after terminating Reg’s contract, Manulife poured further salt on the wound when it froze Reg’s commission account. Manulife claimed a set off for unproven claims of negligence. The claims were in connection with a 1996 class action commenced against it by disgruntled customers who had purchased an offset premium policy.
Manulife eventually settled the class action and set up a Policy Review Process as part of the settlement. Reg had not been named in the lawsuit and he was not informed about the Policy Review Process. Despite these facts, Manulife wanted Reg to reimburse it for the monies, more than $440,000, it had paid out to Reg’s clients pursuant to the settlement. Although it was fully aware and encouraging of Reg’s activities and selling practices in connection with the offset premium policies, Manulife was now making Reg the scapegoat.
Reg was not a young man and Manulife’s actions began to take a toll on his health. Instead of looking forward to his retirement, Reg was now forced to continue working to support he and his wife.
The Trial
This David and Goliath battle came to a head in May 2005 when the parties were able to present their respective stories and evidence to Justice Power of the Ontario Superior Court of Justice.
Reg accused Manulife of a number of wrongdoings, including that Manulife
o acted in a high-handed manner with disregard for his rights prior to and following termination of the Producer’s Agreement;
o breached their contract;
o breached the fiduciary duty owed to him;
o provided false information to his clientele about him; and
o wrongfully attempted to effect a suspension of his insurance licence.
For its part, Manulife argued that it had acted within its contractual rights to terminate the agreement as it did and that pursuant to the Producer’s Agreement, it had the right to freeze the payment of commissions owing to Reg. Manulife also brought a counterclaim against Reg for the monies paid out to Reg’s clients in settlement of the class action.
The Decision
Justice Power’s decision was a complete vindication of Reg Ward. He sided with Reg on all the major issues raised at trial.
Duty of Good Faith 1 and Fiduciary Duty 2
Justice Power concluded that Manulife owed a fiduciary duty to Reg and it had breached that duty. Although the Producer’s Agreement was a commercial contract, Justice Power found that this was not a situation where there were two parties dealing with each other possessing equal bargaining power.
In addition, the trial judge found that Manulife had acted in bad faith toward Reg and that it had breached its duty of good faith in the administration, execution, termination and post-termination of the Producer’s Agreement.
The reasons supporting these breaches of duty included:
o the inequality of bargaining power between the parties;
o the manner in which Manulife presented the Producer’s Agreement to Reg for signature;
o the degree of reliance placed on Manulife by Reg;
o the near exclusive nature of the relationship;
o Manulife’s published corporate value that “all of our dealings are characterized by the highest levels of honesty and fairness. We develop trust by maintaining the highest ethical principles”;
o Manulife’s ability to unilaterally exercise its power in such a manner as to affect Reg’s legal or practical interest, thereunder; and
o the vulnerability of Reg under the agreement.
Manulife’s Counterclaim
Justice Power recognized that the insurance companies, including Manulife, had encouraged and condoned the sales approach to the offset premium policies. In finding no merit in Manulife’s counterclaim, the trial judge indicated that Manulife could not now cry foul. Justice Power went on to find that the Policy Review Process was unfair and discriminatory as far as Reg was concerned. He concluded that Manulife had not acted fairly in respect of Reg in the determination of the various claims against him.
Punitive Damages3
“It is my view that the Defendant’s conduct in this matter was self-serving, malicious, arbitrary and high-handed. As I mentioned earlier, the Wards became scapegoats for Manulife. Manulife’s conduct towards the Wards was designed to punish them. Therefore, it seems to me, its conduct is deserving of punishment through an award of punitive damages. In my opinion, Manulife’s conduct is indefensible. It is characterized by malice and deliberateness.”
These were just some of Justice Power’s comments about Manulife’s conduct towards Reg. The actions by Manulife that supported the award of punitive damages included:
o Manulife’s vigorous pursuit of the complaints it had filed with the Ontario Insurance Commission;
o Manulife’s threat to involve the RCMP;
o Manulife’s decision to terminate the Producer’s Agreement on a without cause basis and its subsequent tactical decision to argue that it had in fact had cause;
o Manulife’s methodical and deliberate course of action to destroy Reg’s reputation.
The Award
Justice Power concluded that Reg was entitled to a judgement of $267,000 representing past earned commission income. In addition, Manulife was ordered to provide for payment of commissions in the future as per the parties’ agreement. Reg was awarded damages in the amount of $150,000 for Manulife’s breach of its fiduciary duty. He was also awarded punitive damages in the amount of $250,000, one of the higher amounts ever awarded for punitive damages in Canada.
Epilogue
Manulife has appealed this decision to the Ontario Court of Appeal. Reg’s lawyer has moved to have the stay4 with respect to the commission monies set aside on the grounds of financial hardship to Reg and that Manulife has wrongfully withheld Reg’s assets as security for an unproven claim.
The Lessons
It is wise to review all contracts carefully before signing them. Even if you are not in a position to negotiate changes to the contract it is important that you understand what you are agreeing to.
If there is a power imbalance between the parties to a contract, even in a commercial context, the stronger party will generally have an obligation to act fairly and to put the interests of the weaker party ahead of his own.
The general rule is that an agent owes a fiduciary duty to his or her principal. However, if the principal is in the stronger position, the principal may find him or herself in the role of fiduciary along with the attendant obligations. 1
1. Duty of Good Faith: In contract law a doctrine has emerged which the Canadian courts refer to as the duty of good faith. This duty states that parties to a contract will perform their respective obligations in good faith and will not act in a way that defeats the objectives of the agreement. This duty of good faith will most often arise, even in a commercial context, where there is an inherent vulnerability or power imbalance between the contracting parties.
2. Fiduciary Duty: A fiduciary relationship is a relationship wherein one person holds a position of trust, power or responsibility vis a vis the rights, property or interests of another person. Examples of a fiduciary relationship include:
Trustee – Beneficiary
Lawyer – Client
Agent – Principal
Parent – Child
The fiduciary will often possess a great deal of power. As a result the fiduciary has an obligation to act in the best interest of the other party. The fiduciary must disregard any contrary interest including the fiduciary’s own interest.
3. Punitive Damages: When a plaintiff sues another he or she is most often suing for a monetary award that will attempt to put the plaintiff into the position he or she would have been in, but for the wrong. This award is referred to as damages. Damages fall under different headings and provide compensation for different things.
Punitive damages are different in that they are primarily intended to punish the defendant rather than compensate the plaintiff. Punitive damages will be awarded when the defendant has behaved with arrogance, high handedness and with callous disregard for the plaintiff and his rights. Punitive damage awards are reasonably rare in Canada and are generally modest sums, at least as compared to similar awards south of the border.
4. Stay: When a party appeals a final order, the trial decision will be stayed/suspended until the disposition of the appeal, this includes any provision for the payment of money.
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