Canada: Restrictions On Restrictive Covenants

Edited by Jennifer M. Fantini Naomi E. Calla.

Restrictive covenants, such as non-solicitation provisions and non-competition provisions, are a useful tool for employers seeking to limit the ability of former employees to compete against them, after termination of employment. Such covenants can be used by provincially-regulated and federally-regulated employers alike. However, the starting point for courts is that restrictive covenants are void as against public policy in that they restrict an individual's freedom in employment. The courts in Canada are, however, willing to uphold restrictive covenants if they are reasonable as between the parties, and go no further than is necessary to protect the employer's legitimate business interest. When considering whether or not a clause is reasonable, the courts will consider the scope of the clause (in terms of geography, length of restraint, activities covered etc.) as well as additional considerations such as whether or not the clause is clear and unambiguous. All of these considerations are held against the backdrop of an inequality of bargaining power i.e. the courts will start with the assumption that the employee was in a weaker bargaining position than the employer. This makes it all the more difficult for employers to enforce restrictive covenants against former employees.

A recent decision from the Alberta Court of Appeal, Globex Foreign Exchange Corporation v. Kelcher,1 has only served to make it even more difficult for employers to enforce restrictive covenants. The main lesson to take away from Globex is to ensure, even more than ever, that sufficient thought is given to the specific wording of the covenants and that the covenants are tailored to each individual employee.

FACTS OF GLOBEX

In brief, the Globex case involved three former employees of Globex, all of whom had contracts which contained non-competition and non-solicitation clauses. One employee signed the contract before the employment began. The other two signed them during employment, without having been given any specific consideration when they did so.

FINDINGS

It is important to note that the judges in this case were split in their decision. The majority had the following findings:

1. The covenants were too broad, unclear and ambiguous and therefore unenforceable In particular, it was held that:

  • The term "dealings" was ambiguous both in meaning and practical application. The court felt that the employees would find it impossible to predict when they might be breaching the restriction, which meant it would be unfair to enforce the clause;
  • The drafting had a typo which made the clause difficult to understand without some re-writing (which is no longer permissible other than in exceptional circumstances); and
  • The clause was overly broad because it prohibited the former employee from soliciting customers "in any business or activity for any client of Globex". Specifically, the court said:

"...it is difficult to see what legitimate interest the appellant had in preventing its ex-employees from contacting customers as regards other businesses."

2. A wrongfully dismissed employee is no longer bound by restrictive covenants

In failing to provide the employees with the applicable notice of termination, Globex had terminated their employment wrongfully. Such wrongful termination amounted to a breach of the employment agreement by Globex, meaning that Globex could no longer rely on the restrictive covenants contained in that contract. The court stated:

"An employer that wrongfully terminated the contract of employment should not be able to capitalize on its failure to give notice or damages in lieu of notice by enforcing prospective obligations against an innocent employee".

In those situations where the applicable period of notice is determined by common law, it therefore becomes very difficult for an employer to determine whether or not sufficient notice has been given. The risk of the employer making an incorrect determination could render any restrictive covenants void and unenforceable.

3. Continued employment is not consideration

The majority stated that the two employees who were asked to sign the covenants during employment were not bound by those covenants because they were not provided with fresh consideration for agreeing to them. Continued employment was not sufficient consideration. As the court stated:

"[the] restrictive covenants [were] not enforceable because [the employees] received nothing for signing them beyond that to which they were already entitled".

PRACTICAL CONSIDERATIONS

In light of the findings in Globex, employers should bear in mind the following:

  • Make sure that all employment contracts are signed by the employee before the date on which the employee begins work. The morning of the first day of employment is too late.
  • Make sure that the contract contains a valid contractual notice period and a contractual right to pay the employee in lieu of the notice period.
  • If you, as an employer, are looking to introduce new covenants during employment, make sure that you provide clear consideration e.g. link agreement to the new contract to a salary increase, bonus or promotion, for example.
  • Tailor restrictive covenants to each individual and consider what you are trying to protect. Avoid standard clauses.
  • Keep restrictive covenants simple and unambiguous.

Following these rules will increase the likelihood of a restrictive covenant being found enforceable, if challenged.

Footnotes

1. 2011 Carswell Alta 1356 (Alta. C.A.)

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