Canada: Alberta Court Upholds Distinction Between Enforceability Of Restrictive Covenants In Commercial Vs Employment Context

In 1059028 Alberta Ltd v Capio Oilfield Services Ltd, 2016 ABQB 234 (the "Capio Case"), the Alberta Court of Queen's Bench recently considered issues surrounding restrictive covenants (non-competition and non-solicitation clauses). In particular, the court considered the standards of interpretation thatwould apply to restrictive covenants in an employment context as opposed to a commercial context.

Summary

In the Capio Case, the plaintiff brought an action based on a non-competition and non-solicitation clause contained in a share purchase agreement for the shares of Command Energy Services Ltd ("Command Energy"), an oilfield tubular supply business. In response, the defendant brought an application for summary dismissal, alleging that the non-competition and non-solicitation clause was unenforceable.

The Court dismissed the defendant's application and held the non-competition and non-solicitation clause to be enforceable. In doing so, the Court followed the reasoning of the Supreme Court in its 2013 decision Payette v Guay inc, [2013] 3 SCR 95 which distinguished between the standards of interpretation applied to restrictive covenants in an employment context versus the less restrictive commercial context.

Background

The subject matter of this case was a non-competition and non-solicitation clause contained in a share purchase agreement in which all shares owned by Capio Oilfield Services Ltd ("Capio") in Command Energy were sold to 1059028 Alberta Ltd ("105"). The non-competition and non-solicitation clause prohibited the two parties to the agreement, Capio and Capio's principal shareholder Russell Messer, from engaging in the oilfield and tubular supply business in the geographic area in which Command Energy operated at the time of sale, for a period of five years.

The main issue in the summary dismissal application was whether, as the defendant contended, the non-competition and non-solicitation clause was unenforceable for being ambiguous, vague, unascertainable or overly broad.

Decision

The Alberta Court of Queen's Bench decided that the non-competition and non-solicitation clause was enforceable. Although the defendant highlighted several features of the clause that, on their face, could be ambiguous or confusing, the Court found that by reading the clause so as to avoid nonsensical interpretations, and giving contractual efficacy to the clause in the context of the objective intent of the parties, it was able to come to an interpretation that was not ambiguous, vague, unascertainable or overly broad. Key in the Court's analysis was recognition that the rules for interpreting the enforceability for restrictive covenants are less restrictive in the context of a commercial contract than in the context of an employment contract.

The Court of Queen's Bench cited eight principles of interpretation of the enforceability of a restrictive covenant from the 2010 Alberta Court of Queen's Bench decision Senos v Pacesetter Performance Drilling Ltd. These principles are:

1. Restrictive covenants and non-competition agreements areprima facieunenforceable as being in restraint of trade and are thus contrary to public policy;
2. The onus is on the party seeking to enforce such agreements to prove, on a balance of probabilities, that the agreement is reasonable between the parties and not contrary to the public interest;
3. Restrictive covenants and non-competition agreements in contract of employment are less likely to be found reasonable than are similar provisions in commercial arrangements such as shareholders' agreements or business or share purchase and sale agreements;
4. Reasonableness is generally determined by looking at a combinations of:
   1. the scope of activities being restricted or prohibited;
   2. the duration of the restrictions or prohibitions; and
   3. the geographic scope of the restrictions or prohibitions;
5. Freedom of contract and equality of bargaining power are also important considerations. Relative bargaining power is a consideration as to whethercontra proferentummight apply to interpretation disputes;
6. Interpretation of such contractual provisions follows normal principles of interpretation, that is, it is a matter of discerning the parties' objectively manifested intentions at the time of contracting by reference to the words they have used and the context in which they have used them;
7. Ambiguities may be resolved by looking at prior drafts and negotiations showing pertinent circumstances other than the parties' subjective intentions; and
8. The enforceability of such clauses rests on the wording contained in such clauses. The courts will not "read down" such clauses, or essentially redraft the clauses for the parties, unless the power to do so is contained in the underlying contract between the parties. Any "blue-pencilling" must therefore be done in accordance with the contract.

The Court then made a point to clarify that in the context of a commercial contract, the presumption in principle 1 is reversed such that "a restrictive covenant in a commercial context is presumed to be lawful unless it can be established on a balance of probabilities that its scope is unreasonable." In relation to principle 3, the Court noted that "the interpretation of reasonableness in a commercial context is more generous than in employment contracts."

Applying these principles, the Court was able to ascertain the scope and meaning of the non-competition and non-solicitation clauses despite what it noted to be a number of concerns in the drafting. After arriving at its interpretation of the scope and meaning of the clauses, it held that they were reasonable and not overly broad, and therefore were enforceable.

Implications

As the Supreme Court stated in Payette v Guay inc.:

The Capio case furthers and respects the policy reasons behind this distinction between enforceability of restrictive covenants in an employment context versus a commercial context. The first policy reason is the power imbalance that generally exists in the employer-employee relationship which requires added protection for the employee who may not have other options for an area of employment other than that covered by a non-competition clause. A power imbalance is not presumed in a vendor-purchaser relationship, and thus those parties have greater freedom of contract. Second, as a practical matter, the value of a business may be heavily reliant on a restrictive covenant that assures the purchaser that the vendor will not immediately enter into competition with the business. The presence of an enforceable restrictive covenant both allows the vendor to fetch a higher price for their business, and incentivizes the purchaser by increasing the chance of viability of the purchased business.

The holding in this case confirms a willingness of the Alberta courts to respect freedom of contract in the context of a commercial agreement between parties with relatively similar bargaining power. It signals that the presumption of lawfulness of restrictive covenants in commercial context is not easily rebutted; if it is possible to give reasonable meaning to a non-competition and non-solicitation clause, the Court will do so.

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