In law, as in life, (i) timing is everything and (ii) more is not always better. These truths have been brought home by the judgment of the Quebec Court of Appeal in Jean vs. Omegachem Inc., 2012 QCCA 232, which should serve as a primer to employers on when and how not to insist on too ambitious restrictive covenants in employment contracts! In this case, the letter offer of employment ("term sheet"), on the basis of which Appellant, a chemist, was hired, specified that he would be required to subscribe to an undisclosed non-compete after hire. He was said, by the employer, to have bound himself, "in principle", to execute a non-compete. The non-compete issue was left dormant for several years after hire. Indeed, the employment contract was amended at least once, when Appellant was promoted, without the signature of such a clause becoming an issue. Three (3) years later it surfaced, for the first time, Appellant becoming the only one of Respondent's executives who refused to execute the non-compete, which, although restricted to the very specialized industrial areas in which the employer was involved, was worldwide in scope. In the face of continued refusal by Appellant to execute the restrictive covenant unless a compensating severance indemnity proportional to the length (12 months) of the non-compete would be provided, Mr. Jean's employment was severed, ostensibly for "cause", to wit refusal to put into effect that condition that was part of his original letter of hire. The employer claimed that his refusal to execute the covenant made it lose confidence in his loyalty and probity. Mr. Jean challenged the alleged just cause and his dismissal.
The Quebec Court of Appeal overturned previous decisions of the Superior Court in judicial review, and of the Quebec Labour Relations Commission on the merits, to the effect that Mr. Jean's refusal constituted just cause, in view of his acceptance in the original offer letter of his obligation to sign a restrictive covenant. The Appeal Court held that the combination of Arts. 2089 and 1373 of the Quebec Civil Code made the reliance upon the original offer letter as the basis for imposing the non-compete, wrong in law. Looking first at Art. 2089 C.C.Q. the Court noted that a non-compete to be valid must be stipulated "in writing" and "in express terms". When read together with Article 1373, providing that the debtor's obligations must be either determined or at least determinable, unless an employee could validly undertake to observe an obligation "at large" without knowing its contours, Mr. Jean's acceptance of the original undertaking, in the letter of hire, was highly problematic. Bouchard J.A. noted that to admit its legality would be "...equivalent to holding that Respondent could, for example, force the Appellant to sign a covenant that is clearly illegal without the latter being able to raise any objection thereto simply because he has subscribed to the principle that he would not compete with his employer. To my mind, it is a position that is unacceptable in law". (This Author's translation)
The first caveat that results, is that hiring an individual based on a "term sheet" which contains the acceptance of "principles", to be later fleshed out in a full blown covenant at some future date may prove problematic! Certainly, if the "principle" is to be fleshed out, it must be done within a reasonably short period of time after the original hire! Waiting any significant period of time before trying to enforce subscription to the covenant is to run the risk of estoppel or time-bar type objections. Insistence thereupon may also raise issues of "constructive dismissal" through unilateral change of status quo if a significant period of time is allowed to elapse! The employer certainly did itself no favour by waiting over three (3) years to seek implementation. On this score, the latin adage vigilantibus non dormientibus lex subvenit - "the law does not help those who sleep on their rights", is one to be remembered and observed!
Are the Court's comments cause for concern in respect of other engagements to execute or adhere to things in the future that are not set out in detail in the term sheet e.g. a generally worded undertaking by new hires in a "term sheet"/letter of offer to abide by and respect all rules and regulations that may, from time to time, be adopted? One fundamental difference between such an undertaking, and one respecting undescribed/uncountoured restrictive covenants is that the obligation to abide by rules as they are promulgated by management is simply the corollary of the subordination of the employee to the employer, the very hallmark and essence of an employment relationship and the recognition that the employee must carry out the work "according to the direction of the employer" (Art. 2085 C.C.Q.). Bouchard J.A.'s comments may nonetheless have opened Pandora's box for a host of other matters, in a manner perhaps not intended! À suivre!
"Term sheets" as originating employment contracts have the advantage of brevity, and may legitimately, provide, for more delicate issues to be "ironed out" because of time delays to get the employee "on board" after hire. This case, on the other hand, puts into question the point when an undertaking to flesh out a "principle", duly adopted in the term sheet or letter of engagement, becomes stale dated and, hence, not easily enforced.
Other parts of the Court's analysis give cause for concern! Bouchard J.A. noted that the covenant required the prospective signatory not to compete in respect of any activities associated with the development, manufacture and sale of products described as being: 1. Monofluoride derivatives or proline diflourides; 2. Proline derivatives; and/or 3. Pyrollidine derivatives. While term of the non-compete was clear – twelve (12) months after termination, the footprint was to be worldwide, according to its terms "in view of the extent of the activities of the company". He noted "...I do not see how one can affirm that a clause is limited with respect to its place if it claims to apply "everywhere in the world" (This Author's translation).
Given his note that such clauses may have, in the past, been seen by the Superior Court as valid even though they had no territorial limit1, does this signal an intent on the part of the Court to revisit the issue, and substantively revise the principles that govern at some point soon? He underlined the difficulty of reconciling the Company's position with the clear and unequivocal terms of Article 2089. As the question had not been argued by the parties, he stated that would abstain from commenting on such jurisprudence. He added, however: "...it is for the employer to prove that the stipulation is valid. On the other hand, I cannot accept that the Commission considered Appellant's refusal to subscribe to a restrictive covenant not to compete whose validity is à priori doubtful as just and sufficient cause for termination". It is that last underlined statement that gives reason for concern! While not deciding the issue conclusively, this panel of the Court of Appeal has sounded alarm bells that makes this management labour attorney take heed!
There are industries where competition is worldwide, and the number of competitors extremely small. How does one provide adequate geographic coverage while not running afoul of this "à priori" doubt? Effectively, restricting the ex-employee from competing unfairly for a limited period is a very circumscribed and specialised area, even worldwide, does not per se impede a professional employee from earning his living in some other area!
The requirements of Art. 2089 C.C.Q. are formal and of public order, but apply specifically to "employment contracts". Can the appropriate covenant be founded in some ancillary contract that is not part of the "employment contract" per se and so avoid the restrictions of Art. 2089 C.C.Q.? Was it the form rather than the substance of the clause that troubled the Court? If so – what to do? All of these are pregnant questions for which there are as yet no definite answers. This latest judgment may require review of all widely contoured restrictive covenants when servicing international clients! In the interim, carefully considered and not overly ambitious drafting should be the rule!
Might the clause have been saved by marginally excluding some geographic areas or by additionally listing the named competitors? The record before the Court of Appeal, the Superior Court or the Quebec Labour Relations Commission does not indicate what proof was offered in support of the legitimacy of a worldwide footprint for the non-compete. The Civil Code while recognising the validity of non-compete in employment contracts or in contracts adjunct thereto, provides at Article 2089:"Nevertheless, the stipulation must be limited, with respect to time, place and type of work, to what is necessary to protect the legitimate interest of the employer. It lies with the employer to prove that the stipulation is valid." Since the geographic and temporal restrictions are linked to what is "necessary to protect the legitimate interests of the employer", such proof, made and considered, would have gone a fair distance to moderate the judgment. One is left to wonder whether a less ambitious footprint for the restrictive covenant and/or cogent proof showing the necessity of its worldwide sweep might have led to a somewhat different result.
Regrettably, some employers are overly ambitious in both the temporal or geographic footprints of their restrictive covenants, forgetting that at some point in time, proof of necessity must be made by them and in that sense the piper paid! At the least, this most recent judgment of the Court of Appeal will require some anxious reconsideration among the management labour bar. Certainly, it proves the dual rules that (a) more is not necessarily better and (b) that procrastination in doing what is necessary is rarely the most efficient business model. To be continued!
1.Central Dynamics Ltd. v. Tremblay, C.S.M. 500-05-005232-903; Tessier J., p. 18;
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