Canada: The HR Space: Blue-Pencil Correction Of Non-Compete Gets Red Light

Last Updated: April 16 2012
Article by Marisa E. Victor

The HR Space is edited by Louise Béchamp, Karen M. Sargeant and Brian P. Smeenk.

Non-competition clauses in employment contracts are difficult to enforce in Canada. Courts tend to regard them as unreasonable restraints on trade. They will not enforce them if they are ambiguous. Nor will they generally use a "blue pencil" to sever ambiguous words. This was made clear in the recent appeal court decision in Veolia ES Industrial Services Inc. v. Brulé (PDF).

The Facts

Mr. Brulé was the President of Veolia ES Industrial Services Inc. ("Veolia"). His three-year employment agreement dated January 1, 2004 allowed him to resign on 180 days' notice. It had a non-competition clause that applied following Brulé's departure, "for two years commencing on January 1, 2007". Brulé terminated the agreement early on July, 7, 2004. The Company paid his salary until January 3, 2005. Later in 2005, Brulé competed against Veolia for a public tender. He won. Veolia sued him. They claimed that Brulé violated the non-competition agreement. They sought damages equal to the profits that Veolia lost under the tender.

The Trial Decision

The trial judge found in favour of Veolia. He decided that the intention of the parties was to create a two-year non-competition obligation that applied whenever the agreement was terminated. The words "commencing on January 1, 2007" were found to be a drafting error. The trial judge therefore severed these problematic words from the agreement, following the Supreme Court of Canada's test for "blue-pencil severance" as set out in Shafron v. KRG Insurance Brokers (Western) Inc. (2009) ("Shafron"). By severing this phrase, the relevant time period for the non-competition clause was broadened to catch Brulé's actions.

The Law on Blue-Pencil Severance

The Supreme Court in Shafron had ruled that restrictive agreements like non-competes are assumed to be unreasonable for being in restraint of trade. Courts should only uphold them where they are demonstrated to be reasonable. Enforceability will be especially limited in the employment context because of the power imbalance inherent in these contracts.

To resolve ambiguity in a non-competition clause, a court may remove an ambiguous term. One way this is done is through "blue-pencil severance", where the court erases the ambiguous words. This can only be done so long as the meaning of the clause is not altered, and only where the removed words are clearly trivial and not part of the main agreement. Canadian courts should only apply blue-pencil severance if the evidence shows that the parties would have unquestionably agreed to the contract without those words.

The use of this technique was at the heart of this case.

The Appeal

The Ontario Court of Appeal overturned the trial judge's ruling. It ruled that blue-pencil severance could not be used to save the non-competition clause.

The appeal court found that without deleting the words, "commencing on January 2007," the clause as originally drafted was unreasonable and unenforceable. Blue-pencil severance could not be used to remove the words in question, since the evidence showed that neither party would have agreed to the same contract with those words removed. The words were therefore not trivial and the meaning of the original clause would have been altered. Therefore, the clause could not be corrected in the manner the trial judge had seen fit. Moreover, as the clause would have become effective only two years after Brulé ceased his employment in 2005, it was therefore demonstrably unreasonable and unenforceable.

To summarize, neither party would unquestionably have agreed to the amended clause without varying other areas of the contract, and the clause as drafted would come into effect only two years after Brulé actually quit. Therefore, blue-pencil severance could not apply to minimize the scope of the clause as the employer argued.

Take-Away for Employers

Non-competition clauses in employment agreements remain difficult to enforce. Problematic wording in these clauses cannot generally be corrected using blue-pencil severance, except in the rarest of occasions. Only when the words at issue are truly ambiguous, their removal would not alter the meaning of the clause and the parties would unquestionably have agreed to the amended clause when forming the contract.

The blue-pencil technique won't be used to sever aspects of an unreasonable non-competition clause, in order to render it reasonable.

The lesson for employers from Veolia v. Brulé is that non-competition clauses need be drafted with utmost care, considering the courts' continued preference for narrowing their application.

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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