Canada: Alberta Court Of Appeal Affirms And Clarifies The Law Of Restrictive Covenants In Employment Relationships

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Labour & Employment, November 2011

In Globex Foreign Exchange Corporation v. Kelcher, the Alberta Court of Appeal affirmed and clarified several aspects of the law concerning the enforceability of restrictive covenants in employment relationships. The majority of the court held that:

  • A restrictive covenant will not be enforced unless it is supported by consideration;
  • Wrongful dismissal of an employee is a repudiation of an employment contract by an employer that renders the restrictive covenants contained within that contract unenforceable; and
  • A restrictive covenant that goes beyond what is reasonably required to protect a business will not be enforced as it unreasonably restricts the post-termination activities of an employee.

Background

Three employees, David Kelcher (Kelcher), Mark MacLean (MacLean) and Luciano Oliverio (Oliverio), were employed by Globex Foreign Exchange Corporation (Globex), whose business was foreign currency exchange. In 2003, each employee signed a non-competition and non-solicitation agreement containing restrictive covenants. Kelcher had been employed for two years with Globex when he signed the agreement, and both MacLean and Oliverio signed the agreement as a condition to beginning their employment. In early March 2005, the employees were presented with a new agreement containing more onerous non-competition and non-solicitation restrictive covenants. Refusing to sign the new form of agreement, Kelcher resigned and MacLean was terminated. Oliverio signed the new agreement but resigned shortly thereafter. The employees joined a competing foreign exchange company in early April 2005, and Globex sued, alleging damages from loss of clients.

Alberta Court of Queen's Bench

Justice Hawco found that MacLean had been wrongfully terminated and was therefore relieved of the restrictive covenants he had agreed to. The agreement signed by Kelcher in 2003 and the agreement signed by Oliverio in 2005 were both signed during the course of employment and, having received nothing new in return for signing their respective agreements, were unenforceable due to lack of consideration. While Hawco J. affirmed that consideration could be found where there is a mutual understanding between employer and employee that the employer will forebear its right to lawfully terminate employment for a reasonable time if that employee agrees to the restrictive covenant, no mutual understanding was present between Globex or the employees.

If consideration was present, Hawco J. ruled that only Kelcher's non-solicitation covenant was enforceable. The non-solicitation clause contained in Oliverio's agreement was overbroad and unreasonable as it prohibited solicitation of any client of Globex, regardless if Oliverio had previous contact with them and regardless if that client moved to a location where Globex did not conduct business. The non-competition covenants contained in both agreements were unenforceable as they prohibited any competition in any manner with Globex.

Alberta Court of Appeal

Justice Hunt (Martin J.A. concurring, Slatter J.A. dissenting in part) found that Kelcher's non-solicitation covenant was unenforceable as it was both ambiguous and overbroad. Practically speaking, the non-solicitation covenant prohibited contact with all clients that Kelcher ever had "dealings" with and Kelcher would be unable to predict whether he may be in breach of the covenant which rendered the covenant unreasonable. Furthermore, the non-solicitation covenant was found overbroad and unreasonable due to the prohibition against soliciting any client of Globex for any reason whatsoever.

Finding that Hawco J. made no further reviewable errors, the majority discussed, and affirmed, that wrongful dismissal of an employee renders that employee's restrictive covenants unenforceable.

Enforcing Restrictive Covenants in an Employment Relationship

The case is important for employers and employees alike as it illustrates the process that the courts may use when assessing the enforceability of a restrictive covenant. For a restrictive covenant to be enforceable, the Alberta Court of Appeal found that there are three requirements.

  • There must be consideration to support the addition or amendment of the restrictive covenant. Examples of such consideration include:
    1. an employer providing an employee with some form of benefit; or
    2. an employer informing an employee that the employer will exercise its right to lawfully terminate the employment relationship by providing reasonable notice or pay in lieu thereof unless the employee agrees to adopt the restrictive covenant.
  • Lawful termination of the employment relationship must have occurred. "Lawful termination" includes:
    1. an employee's resignation;
    2. just cause for dismissal; or
    3. provision of reasonable notice of termination or pay in lieu thereof.
  • The restrictive covenant must be reasonable. The "reasonableness" of the restrictive covenant is enhanced if:
    1. the employer has a proprietary interest entitled to protection;
    2. if there is a non-competition covenant, it is used only because a non-solicitation covenant will not provide adequate protection to the employer;
    3. the prohibited activities and their geographic and temporal scope of the restrictive covenant are no broader than necessary to ensure the protection of the employer;
    4. the employee is capable of knowing the terms, and when they are in breach, of the restrictive covenant; and
    5. the restraint on trade is in the public interest.

The Globex decision represents the clearest articulation of the law regarding restrictive covenants by the highest court in Alberta. It is therefore an excellent guide for organizations to consider as they enter into restrictive covenants with their employees. It also clearly outlines the considerations the courts will follow when a former employer seeks to enforce such restrictive covenants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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