Canada: The Enforceability Of Non-Competition And Non-Solicitation Clauses

Last Updated: April 5 2016
Article by Terri C. Higdon

The Alberta Court of Queen's Bench recently addressed the enforceability of restrictive covenants: Non-competition and non-solicitation clauses in Specialized Property Evaluation Control Services Ltd. V. Les Evaluations Marc Bourret Appraisals Inc., 2016 ABQB 85 (February 12, 2016).  This decision arose from an injunction application brought by Specialized Property Evaluation Control Services Ltd. ("SPECS") against its former employee, Ross Huartt ("Huartt") and his new employer, Les Evaluations Marc Bourret Appraisals Inc. ("Bourret").  In particular, SPECS sought to enforce the restrictive covenants in Huartt's employment contract and to prevent Bourret from providing any services to SPECS' clients for a six month period.

Background

Huartt was hired by SPECS in March 2014.  The employment contract contained the following restrictive covenants:

6.1 During the term of this Agreement and for a period of three months following the termination of this Agreement (for whatever reason, including an unjustified termination by SPECS) the Employee shall not engage or be involved in, either directly or indirectly, any business which competes with SPECS's Business in the Territory as defined in Schedule "A".

6.2 During the term of this Agreement and for a period of six months following the termination of this Agreement (for whatever reason, including an unjustified termination by SPECS), the Employee shall not, directly or indirectly, solicit or attempt to solicit any customer or client of SPECS to commence or increase doing business with any other organization, or to cease or decrease the business that such client or customer does with SPECS.

On November 12, 2015, a customer contacted SPECS and asked who would be handling Huartt's files upon his departure, however Huartt had not informed SPECS that he would be terminating the employment contract.  SPECS personnel called Huartt to confirm that he had actually been telling clients that he was leaving, and the employment relationship broke down.  SPECS advised Huartt that he could resign or be terminated and immediately locked Huartt out of its information technology systems.  E-mails addressed to him were forwarded to SPECS' management.  One of the forwarded messages included recorded hours worked by Huartt on a non-SPECS project on November 13, 2015.  Management then discovered a progress report dated November 11, 2015 on SPECS letterhead addressed to one of SPECS' client that asked the client to contact competitor, Bourret.  On November 20, 2015, Huartt tendered his resignation.

The evidence at the hearing further showed that Huartt contacted a number of individuals introduced to him by SPECS prior to his departure and solicited them for work, including providing them with gifts.  The evidence showed that SPECS lost at least one contract to Bourret as a result of Huartt's actions.

Decision

The Court pointed out that even where a contract of employment addresses termination "for any reason, including an unjustified termination," wrongfully dismissed employees are excused from compliance with restrictive covenants.  As such, the Court had to first determine whether SPECS could establish a strong prima facie case that it had just cause to terminate Huartt before it could determine the applicability of the non-competition and non-solicitation clauses.

The Court found that SPECS did establish a strong prima facie case that it had just cause to terminate Huartt.  The evidence suggested that Huartt was working with Bourret while employed at SPECS, which was contrary to express terms of SPECS' employment agreement.  In particular, the contract required him to "devote the whole of his attention and ability to his designated responsibilities... and use his best efforts to promote the interests of SPECS."  The agreement also expressly prohibited him from accepting any other "employment, remuneration... which would result in the employee being placed in, or being perceived to be placed in, a conflict of interest with his duties..."  Further, the Employee Handbook warned that behavior "detrimental to the company" could result in "disciplinary action up to and including dismissal."

In assessing the applicability of the restrictive covenants, the Court pointed out that non-competition and non-solicitation clauses are prima facie unenforceable unless they are reasonable.  Reasonableness is assessed in the context of the parties' and the public's interest, with SPECS having the onus of establishing the reasonableness between the parties, and Huartt having the onus of proving that the covenant is contrary to the public interest.  The legal test is as follows:

  1. Does the employer have a proprietary interest entitled to protection?
  2. Are the temporal and geographic elements of the agreement too broad?
  3. Is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee?

The Court pointed out that the restrictive covenants should not be considered in isolation and instead must be examined in the context of the nature of the business and the nature and character of the employment.  The terms must also be unambiguous to be enforceable.

The Court applied the legal test and found that SPECS had a proprietary interest entitled to protection because it trained Huartt when he had little experience and introduced him to clients.  The parties agreed that the applicable durations of the restrictive covenants were reasonable and the Court found that the non-competition clause's geographic scope of 100km beyond Calgary's city limits was clear and reasonable.  

Huartt argued that the non-competition clause was ambiguous because the contract lacked a clear description of SPECS' business in order to determine what would constitute competition, but this argument failed because the Court concluded that Huartt was fully aware of both what his own role was within SPECS and the business that SPECS conducted.  Huartt further argued that the non-solicitation clause was too broad, and was successful in that regard.  The vague prohibition of the solicitation of "business" whether or not the business is in competition with the former employer goes beyond legitimate protections and the Court pointed out that prohibiting solicitation of "any customer or client of SPECS" to do business with "any other organization" could encompass too many possibilities and therefore was viewed as an unjustified restraint of trade.

Huartt was found to be in violation of both the non-competition and the non-solicitation clauses in his employment contract, but was only liable for the former because of the unenforceability of the latter. 

SPECS request for an injunction was not granted because the enforceable non-competition clause expired during the hearing.  Further, the harm caused to SPECS through Huartt's violation could be dealt with through the payment of damages.  The Court pointed out that there was no privity of contract between SPECS and Bourret and concluded that Bourret should not be prohibited from performing services for SPECS' clients, simply because it hired one of SPECS' employees.

Lessons for Employers

In order to be enforceable, non-solicitation and non-competition clauses must be clear and reasonable and the employee cannot be wrongfully dismissed.  Although courts will consider the nature of the employment and business when determining the enforceability of these clauses, the clauses are more likely to be upheld if the temporal and geographic restrictions are very limited in nature.  This is particularly important because those that are overbroad will be deemed unenforceable, instead of interpreted in a narrow, enforceable way. 

Regarding non-solicitation clauses in particular, prohibiting outright the solicitation of any clients to any organization is overly broad, and prohibiting the solicitation of clients for any business that is not in competition with the former employer is considered to be an unjustified restraint on trade. 

Restrictive covenants offer employers important protections, but are frequently litigated.  How they should be drafted varies with the particular circumstances of each employment relationship.  It is therefore recommended that employers seek legal advice if they wish to include these in their employment agreements.

Please click below for a link to the case:
Specialized Property Evaluation Control Services Ltd v Les Evaluations Marc Bourret Appraisals Inc, 2016 ABQB 85 (CanLII)

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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