Canada: Restrictive covenants constantly under the judicial microscope

Last Updated: September 24 2014
Article by Mark Josselyn

When an employee or contractor leaves a company, they always leave with knowledge and sometimes try to leave with customers and staff.  Restrictive covenants in contracts are meant to resist and limit that, but these covenants have proven increasingly difficult to enforce.

Employers and their counsel need to be aware of the degree of judicial scrutiny that will be brought to the restrictive covenants which they attempt to enforce with their employees. Employee interests are so carefully guarded now by the courts that employer actions to enforce restrictive covenants can be summarily dismissed without a trial, as shown in the recent ThyssenKrupp Elevator (Canada) Limited v. Amos et al., 2014 ONSC 3910 (discussed below). 

It is instructive to review the landscape within which Canadian employment law operates and to consider the often quoted words of Justice Iacobucci of the Supreme Court of Canada inMachtinger v. HOJ Industries Ltd., [1992] 1 SCR 986:

"Work is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society.  A person's employment is an essential component of his or her sense of identity, self-worth and emotional well-being."

When examining the enforceability of restrictive covenants in the employment law context, the starting point is the Supreme Court of Canada decision in Elsley v. J.G. Collins Insurance Agencies, [1978] 2 SCR 916 which held that the reasonableness of any such provisions is to be assessed against three criteria:

1.         Does the employer have a proprietary interest entitled to protection?

2.         Are the temporal and spatial features of the clause too broad?

3.         Is the covenant enforceable as being against competition generally, and not limited to prescribing solicitation of clients of the former employer?

Elsley has been much interpreted in the more than 35 years since 1978.  In 2009, the Supreme Court of Canada in Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157 acknowledged that restrictive covenants give rise to a tension in the common law between the concept of freedom to contract and public policy considerations against restraint of trade.  Justice Rothstein confirmed that in determining reasonableness one must review the geographic coverage of the covenant, the period of time in which it is effective, as well as the extent of the activity sought to be prohibited.  However, there can be no such determination unless the restrictive covenant is unambiguous as the reasonableness of a covenant cannot be determined without first establishing the meaning of the covenant.

This proposition has received further support in the decision of Justice Myers of the Ontario Superior Court of Justice released June 26, 2014 in ThyssenKrupp Elevator (Canada) Limited v. Amos et al., 2014 ONSC 3910.  In this case Justice Myer was presented with a motion for summary judgment by the Defendant and was required to assess the following non-competition and non-solicitation provisions:

"7.l  Amos shall not, during the term of his employment hereunder and for a period of one (1) year from its termination, either directly, or indirectly, individually or in partnership, carry on or be engaged in, or concerned with, or interested in, in any capacity whatsoever (including that of principal, agent, shareholder, employee, lender or surety) any person, firm, association, syndicate, or company engaged in or concerned with or interested in, the conception, designing, development, fabrication, construction, modernisation, maintenance, marketing, distribution, advertising, franchising or sale of products or services similar to those conceived, designed, developed, fabricated, constructed, modernized, maintained, marketed, distributed, advertised, franchised or sold by the Corporation in the course of his employment with the Corporation, within the Province of Ontario.

...

7.3  During the period contemplated by Section 7.1, Amos shall not, directly or indirectly, solicit or attempt to solicit, interfere with or endeavour to entice away any business, client, prospective client or contract of the Corporation then existing or contemplated by the Corporation within 12 months prior to the termination of Amos.  Amos shall perform his services for the Corporation from its offices located in London, Ontario."

Justice Myers concluded that these were not two sophisticated commercial parties of equal bargaining strength and also held that Mr. Amos, in an entry level management post, was in no sense a fiduciary.

The non-competition provision was declared invalid as a "...naked restriction on competition with no apparent rationale for its breadth of scope and geography..."

The court held that while non-solicitation clauses are viewed as being inherently more reasonable, they must still first and foremost be unambiguous and must clearly advise the former employee which customers are off-limits.

There was no way for Mr. Amos to know what business his former employer was contemplating at any time in the past year anywhere in Canada, nor could he have known all of the prospective customers across the country.

As there was no evidence that the Defendant had breached any duty of confidentiality or released any confidential information, the court held that there were no material facts requiring a trial and dismissed the action.

Interestingly the court noted that the Plaintiff had taken no additional steps to obtain documents from the Defendant during a cross-examination or otherwise and had not sought directions to compel documentation or sought to conduct discoveries in advance of the motion.  Justice Myers confirmed the "culture shift" that has occurred as a result of the Supreme Court of Canada's decision in Hryniak v. Mauldin, [2014] 1 S.C.R. 87 and the movement away from the "full trial model" in order to fairly and justly adjudicate disputes by way of a timely, affordable and proportionate procedure.

* * *

To read more about Hryniak v. Mauldin, referred to above, check this 2014 Gowlings newsletter article  Hryniak v. Mauldin: Supreme Court Loosens Restrictions on Summary Judgment Imposed by Combined Air

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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