The Supreme Court of Canada has ruled that non-competition
clauses and other restrictive covenants in employment contracts
will be unenforceable if any of their key terms are ambiguous. In
Shafron v. KRG Insurance Brokers (Western) Inc., released
January 23, 2009, the Supreme Court stated that, as a matter of
policy, the courts should not come to the aid of employers who use
unclear contractual language to define the scope of their
employees' post-employment obligation not to compete.
The Shafron case involved a senior employee at an
insurance brokerage who signed an employment agreement containing a
post-employment non-competition covenant. The covenant provided
that during the three-year period following the end of employment,
the employee was prohibited from being employed in the business of
insurance brokerage within the Metropolitan City of Vancouver. One
month after the employee left his job, he began working for another
insurance brokerage in Richmond, British Columbia – a
suburb of the City of Vancouver. The employer sued to enforce the
The trial judge found that the non-competition covenant was
unenforceable because the geographic area covered by
"Metropolitan City of Vancouver" was unclear, and the
covenant's three-year term was unreasonably long. The British
Columbia Court of Appeal reversed the trial decision, and found
that the three-year term was reasonable. The Court of Appeal also
found that, although ambiguous, the term "Metropolitan City of
Vancouver" could be construed to refer to the cities of
Vancouver, Richmond and Burnaby as well as the University of
British Columbia Endowment Lands.
Supreme Court's Decision
The Supreme Court unanimously overruled the Court of Appeal
decision and reinstated the trial judgment. In its decision, the
Supreme Court clearly stated the circumstances in which a
restrictive covenant in the employment context will be
unenforceable. The Supreme Court confirmed that these covenants are
presumptively unenforceable unless their scope is reasonably
limited in duration, in geographic coverage and in the nature of
the prohibited business activity. Moreover, in the employment
context these three limitations must be expressed in clear,
unambiguous language, or a court will decline to enforce the
covenant, without assessing its reasonableness.
The Supreme Court declined to apply traditional contractual
interpretation principles to clarify the ambiguous phrase
Metropolitan City of Vancouver in order to render the
non-competition covenant reasonable and enforceable. The Supreme
Court was concerned that applying those interpretation principles
would invite employers to impose unreasonable or unclear terms on
their employees. There would be no sanction for the employers other
than a narrow judicial construction of the covenants, while
employees would be subject to an increased risk of having to abide
by unreasonable covenants. The Supreme Court concluded that the
best way to compel employers to draft clear and reasonable
non-competition covenants was not to enforce a covenant drafted in
unclear or unreasonable terms. This is consistent with Canadian
courts' traditional refusal to rewrite (or
"blue-pencil") restrictive covenants.
The Supreme Court confirmed that courts should accord a more
relaxed treatment to non-competition covenants found in agreements
for the sale of a business. Where a business is being sold, courts
will defer to the parties to the agreement and apply less rigorous
scrutiny to the agreed-upon non-competition terms, for two reasons.
First, parties to a business sale agreement generally benefit from
greater equality of bargaining power; second, the purpose of the
sale transaction is generally to transfer the business's
goodwill along with its other assets. More onerous non-competition
covenants are permitted in this context because the existence of
competition reduces the value of the goodwill.
Canadian courts have generally been reluctant to enforce lengthy
post-employment non-competition clauses, particularly covenants
lasting more than two years following the end of employment. The
Court of Appeal's enforcement of a three-year non-competition
covenant in this case was a significant relaxation of the
reasonable duration requirement in favour of employers. Although
the Supreme Court restored the trial judge's finding that the
non-competition agreement was unenforceable because of its
ambiguity, the Supreme Court did not consider the question whether
the three-year term was reasonable. Whether the Court of
Appeal's decision on this issue is the start of a new trend in
employment law remains to be seen.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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