Given the ever-increasing mobility of today's workforce,
employers need to protect themselves from the damage that can be
caused by departing employees. The traditional view of
Canadian courts towards restraints of trade is skeptical. The
characterisation of a contractual provision as being a restraint on
trade is very important in this regard. Once a clause is so
designated, Canadian courts will strictly scrutinize it and will
not hesitate to strike it down should the Court view the clause as
British Columbia Court of Appeal recently endorsed a functional
approach to the interpretation of restraint of trade clauses.
This approach opens up the potential for many more clauses to
be subject to strict judicial scrutiny, and in turn findings of
invalidity. This decision runs contrary to the current approach in
Ontario and could signal a change in the approach of the Canadian
judiciary to this critical question.
The plaintiff employee, a young veterinarian, entered into a
3-year associate's contract with a veterinary clinic primarily
engaged in providing services to several dairy farms around
Creston, British Columbia. There were no other Canadian
veterinary clinics within 100 miles.
The contract included a provision entitled
"Non-Competition." That clause did not prohibit the
employee from competing with the employer. However should the
associate set up a veterinary practice within 25 miles of the
clinic, she would be liable to pay to the clinic a sum of money
calculated on the period of time between the end of the contract
and the creation of the new practice.
The associate left the practice prior to the end of the
contract, and sued for a declaration that the clause was
A key issue was whether or not the clause constituted a
restraint on trade, which would render it subject to more scrutiny
for reasonableness. The employer argued that the clause
contained no prohibition, and was therefore not a restraint of
The Court disagreed.
The effect and size of the penalty (ranging from roughly 1
½ to 2 ½ times the annual salary under the
associate's agreement) effectively stifled the ability of the
employee to compete with her former employer. The Court
embraced English law which provided that clauses that burden
employees with financial consequences that they would not otherwise
have suffered in competing, are a restraint of trade.
Ultimately, the employer succeeded, because despite being a
restraint of trade the clause was reasonable. However, the
Court was clear that this clause was to be evaluated as a restraint
How does this affect the law in Ontario?
In Ontario, the leading authority on what comprises a no-compete
clause is a 1941 decision called Inglis v Great West Life. The clause in
that case ended payments to a departed employee upon that employee
starting business with a competitor. The Court of Appeal
applied what is called the formalist approach. Under that
approach, only clauses that explicitly preclude an employee from
competing against their employer are considered to be restraints on
Inglis is still binding authority in Ontario,
although trial decisions have indicated that some judges may be
more comfortable with the functional analysis employed in this
decision. Given that it has been over 70 years since the last
decision by an Ontario appellate court on what constitutes a
restraint on competition, it could be argued that the approach is
due for refreshment. Of course, Inglis dealt
with a 'carrot' encouraging the employee to abstain from
competing, while Rhebergen dealt with a
Restraint of trade clauses are commonplace, but require a great
deal of care and planning in order to execute properly. The
creativity and careful drafting of this clause enabled it to
survive a substantial shift in the law, and to help protect a
business from being raided for its customers. Have a look at our
previous article on drafting do's and don'ts. It
is critical that employers are aware of the delicacy and
vulnerability of such clauses and work with counsel to maximize
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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