THE CANADIAN EMPLOYEE COMPETITION BLOG

Word out of Alberta that the plaintiff company in Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, will not be appealing the Alberta Court of Appeal decision to the Supreme Court of Canada. That’s too bad for those of us who had hoped for some clarification from the nation’s top court on some fundamental employment law issues raised by Globex.

In addition to deciding the issue of whether a restrictive covenant continues to apply to a wrongfully dismissed employee – the issue which has attracted the most attention in legal press – the Court of Appeal also grappled with the question of what, if any, form of consideration is required for introducing a non-compete or non-solicit clause once an employee has commenced employment. Other parts of the decision are good reminders about the importance of careful drafting when it comes to restrictive covenants.

The Background

The case concerned three employees who either, at the commencement of or during the course of their employment with Globex Foreign Exchange Corporation, accepted post-employment restrictions on competing with their former employer or soliciting its clients.

MacLean accepted the restrictions as a term of his initial employment and was wrongfully dismissed. Kelcher and Oliverio agreed to the restrictions during employment but did not receive any new benefits, i.e. “consideration”, for the restrictions. Kelcher and Oliverio left their employment when Globex aske them to accept more onerous restrictions.

The three employees entered into competition against Globex, a foreign currency exchange company. At the Court of Appeal, all three judges agreed that the non-competition clauses were overly broad and hence unenforceable.

The Court sharply differed, however, on the enforceability of the non-solictiation clauses and in doing so raised a number of issues fundamental to the law concerning lawful competition by former employees.

General Billposting Applied – Wrongfully Dismissed Employees Not Subject to Restrictive Covenants

Hunt J.A., writing on behalf of the majority, himself and Martin J.A., applied the English House of Lords decision in General Billposting Co ltd. v. Atkinson, [1909] AC 118, to the effect that a wrongful termination renders restrictive covenants in employment agreements unenforceable. Accordingly, MacLean, who had been wrongfully dismissed, was not bound by his non-solicitation clause.

The majority would also have found that the clause was both ambiguous and overly broad and would have refused to enforce the clause on those grounds alone.

The majority reviewed prior Alberta decisions and held that General Billposting is still good law in Alberta. The judges also noted that other Canadian appellate courts, including the B.C. Court of Appeal in Poole v. Tomenson Saunders Whitehead Ltd (1987), 16 BCLR (2d) 349 have also followed General Billposting.

The majority declined to deviate from  the General Billposting principle. Amongst other reasons, doing so, it wrote, would reward employers for mistreating employees. For example, an employer could hire a potential competitor, thereafter impose a restrictive coventant, then wrongfully dismiss the employee a short time later but enforce the restrictive covenant.

The court was also concerned that upholding a non-compete or non-solicit clause in respect of a wrongfully dismissed employee would severely constrain that employee’s duty to mitigate his or her damages.

Slatter J.A. in dissent would not have applied the General Billposting principle. First, he noted that a breach of contract does not automatically terminate the contract. If one party to the contract commits a breach serious enough to evince an intention “not to be bound by the contract”, the other party can accept the repudiation of the contract and terminate it. Such terminatation ends the obligation of either party to perform the substantive or primary covenants, but it does not bring to an end all collateral covenants, e.g. a non-compete clause.

“The argument that a party in breach cannot enforce any other covenant of the agreement is an over extension of the general principle that “the innocent party can accept the repudiation and terminate the contract”. That is true as it relates to the obligation for future performance. But it should not be extended so as to suggest that all the collateral covenants in the agreement have disappeared.”

(at para. 149)

Slatter J.A. also noted that, unlike General Billposting, in Globex the restrictive covenant stipulated that it was to apply for 12 months from the date of termination of employment “for whatever reason” and  hence a dismissal without notice should not affect the enforceability of the clause. 

Finally, Slatter J.A. noted the consequences of a strict application of the General Billposting principle. Suppose an employer misculates the appropriate length of notice by one month and is found at trial to owe one month’s severance. Strictly speaking, a wrongful dismissal has taken place, yet under General Billposting any breach of a restrictive covenant after the dismissal would be excused by virtue of the minor miscalculation.

This aspect of Slatter’s decision has considerable merit to it  – an employer that genuinely attempts to provide reasonable working notice but is slightly off the mark should not lose the benefit of an otherwise valid non-compete or non-solicit clause.

Perhaps the answer lies in the approach followed by the courts in British Columbia when determining whether an employee provided inadequate notice of dismissal is obligated to continue in the position to mitigate damages. The B.C. approach is to determine whether the notice provided was so far off the range of reasonable notice as to signal an intention to no longer be bound by the contract. If the notice provided is far out of the range, a court is more inclined to hold that the employee can repudiate the contract, terminate it and no longer work, without any affect on the duty to mitigate. See, for instance, Giza v. Sechelt School Bus Service Ltd., 2012 BCCA 18.

Adopting the approach of the B.C. courts, an employer that was slightly off the mark in the amount of working notice would not be signalling an intention to no longer by bound by the contract and hence the non-compete or non-solicit clause would still be effective.

Dissenting Judge Questions Requirement of Consideration for Changes to Employment Contracts 

The court also split on whether fresh consideration was required for the enforcement of non-solicit clause introduced during the course of employment. Hunt J.A., for the majority, applied longstanding jurisprudence in Canada that forebearance to dismiss is insufficient consideration. Rather, there must also be a mutual understanding when the restrictive convenant is entered that there will be such forebearance.

Given that Kelcher and Oliviero were already employed and received nothing in return when they accepted the non-solicitation clause, the majority held the clauses were not enforceable. Globex had not made any promise or implied that their employment would continue as a result of their signing.

The concept that some sort of fresh consideration is required to enforce the introduction of a restrictive covenant raises a number of questions. Why are restrictive convenants and some other forms of new employment terms – notably, notice periods – singled out for this treatment while other forms of contract changes are not?

Employers routinely change employment terms throughout the employment relationship, introducing new policies, e.g. restrictions on the use of social media at work, or changing benefit plans or compensation. In the case of some changes, i.e. a change in compensation or a benefit plan, if the employee says nothing and works on under the new circumstances, she is said to condone the change and it becomes part of the employment agreement.

In the case of a non-compete or non-solicit introduced mid-employment, however, an employee may sign the new agreement and work for several years, yet the concept of condonation or agreement to the change is not applied years later when the employer attempts to enforce the clause.

In a sharp dissent, Slatter J.A. focussed squarely on these issues, stating  “invoking the law of consideration after the fact is the invocation of a legal fiction in aid of a particular result.” (at p. 35)

Slatter J.A. reviewed the Supreme Court of Canada decision in Maguire v. Northland Drug Co., [1935] S.C.R. 412, a decision about the enforceability of a non-compete clause that the employee was asked to sign 11 months after the commencement of employment. The court in Maguire was of the view that the covenant was unenforceable because it was too wide, but otherwise would have held there was adquate consideration given that the “employer tacitly promised that if the bond were signed, the employment would not soon be terminated.” (from Maguire, pp. 415-6, 419)

For Slatter, “Maguire stands, at least, for the proposition that a “tacit promise” that the employment would “not soon be terminated”, followed by an “indefinite refraining” from exercising the right to terminate the employment agreement is sufficient consideration for the covenant.” (at para. 119) “Further, since many of the key terms of employment agreements are implied by law, it is not unreasonable for the law also to imply the “tacit agreement” metioned in Maguire.” (at para. 129)

The majority, by contrast, would require at least a “mutual understanding” that there will be forebearance rather than simply a one-sided “tacit promise.”

Slatter J.A. continued:

“There is nothing unreasonable about either side seeking variations to the terms of an employment agreement from time to time. The employee may seek a raise in pay, or promotion, or transfer, or a different work schedule, or other changes. The employer may feel the need to change the arrangement to respond to competitive pressures or changing business conditions. It is unrealistic to establish a rule of law that prevents the parties to a long-term employment relationship from restating and reducing to writing, from time to time, the terms of employment. Both parties rely on the enforceability of the terms of employment, and should not have their expectations disappointed by an artifical rule of law which makes their covenants unenforceable after they have been relied on for years.”

(at para. 129)

Slatter J.A. also criticized the Ontario Court of Appeal decision in  Braiden v. La‑Z‑Boy Canada Ltd., 2008 ONCA 464 (CanLII), where the court refused to enforce the notice provision on the basis that it was introduced without consideration, whereas it did enforce a myriad of other changes that hade been made to the employment agreement over its 22-year lifespan. Given this lengthy period, it was not surprising that there were many variations in the employment agreement. However, “of all the changes that were made, the court appears to have found that one (relating to the notice provision) was not enforceable, while many or all of the others (such as those relating to the employee’s duties, his method of pay, the rights to his commissions, and so forth) were implicityly found to be enforceabile. How could there be consideration for some of these changes,m but not others.” (at para. 132)

In my view, the dissent’s reference to promotions, increases in pay or changes in work schedules does not really advance the argument. Where the change is to the benefit of the employee (e.g. a pay raise), that in itself is consideration. Where the change affects the employee immediately (e.g. a change in work schedule) and the employee continues to work, she has condoned the change. And with respect to promotions, an employee very rarely refuses the promotion and hence the change to the contract is not unilateral.

But there may also be instances where changes have been made that are to the detriment of the employee, with no consideration, yet the changes are enforced. A pay cut or a demotion come to mind. Unless the employee, within a reasonable period of time, accepts the repudiation of contract and resigns, he is taken to have condoned the changes. Yet the courts do not apply this same concept to the introduction, mid-employment, of restrictive covenants or defined notice/severance clauses if there has not been consideraton. Why?

I believe the the proper justification for the difference lies in the application of the doctrine of condonation, albeit in a more nuanced manner than is it is traditionally applied. In particular, the focus should be on the ability of the employee to effectively condone a change.

For instance, an employee feels the affect of a unilateral demotion immediately and if the employee continues in the changed position for a resonable period of time, he is taken to have condoned the change. Other unilateral changes that the employee feels immediately would include the loss of a car allowance, a pay cut or a geographic relocation. In all instances, if the employee continues in the position for a reasonable period of time, he has condoned the change.

That is not the case in the instance of the introduction of a restrictive covenant or a defined notice or severance clause. In these instances, the employee does not “feel” the affect of these change until the employment is terminated – perhaps several years later. Hence, it cannot really be said the employee has condoned the change because the change has had no impact on him at the time.

Thus, I would propose a two-part test to determine whether a unilateral change to the employment agreement should be enforced. First, has their been consideration? Second, if not, has the employee effectively condoned the change, i.e. felt the affect of the change soon after its implementation and nonetheless continued to work?

Application of this approach may well lead to other changes to the employment contract being held to be unenforceable years later. For instance, an employer unilaterally cancels its long-term disability program and an affected employee continues to work. Years later, the employee becomes disabled but is not covered by a plan. Under the test I propose, the employee would have a claim against the employer for the lost disability plan, given she did not effectively condone its elimination, since she did not immediately feel the affect of it.

Careful Drafting of Covenants Continues to be of Critical Importance

Other aspects of the Globex decision serve as a stark reminder of the importance of precise, careful drafting when it comes to restrictive covenants. Kelcher’s non-solicitation clause stated:

2. That for a period of twelve (12) months from the date of termination of the Employee’s employment with Globex, for whatever reason, he/she will not, for any reason directly of indirectly as principal, agent, owner, partner, employee, consultant, advisor, shareholder, director or officer or otherwise howsoever, own, operate, be engaged in or connected with or interested in, the operation of or in any way guarantee the debts or obligations of, or have any financial interest in or advance, lend money to, or permit his/her name or any part thereof to be used, or employed in any operation whether a proprietorship, partnership, joint venture, corporation, or other entity, or otherwise carry on, engage in, solicit customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time within the twelve (12) months preceding the date upon which the Employee left the employment of Globex.

(para. 14, with emphasis)

The majority held that the clause was ambiguous and refused to enforce it on this ground. In particular, it found that the term “dealings” was ambiguous both in its meaning and practical application. For instance, if a trader was away from his desk and one of his regular clients called and spoke for a brief period of time to a different trader, would this constitute a “dealing”? And how would the trader who briefly spoke to that client know he had had “dealings” with that client if he didn’t write down the client’s name or make a particular record – something he might not have any motiviation to do if the client was not a regular client of his?

As the majority stated (para. 19), ” If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.”

Slatter, J.A., in dissent, did not have the same difficulty with the wording as did the majority:

Just because the word “dealings” might mean different things to different people does not justify the conclusion that it is too vague to mean anything. On that test, no restrictive covenant would ever be enforceable, because any word used will engage conduct at the fringes of its meaning.

(at para. 168)

The majority also found the clause to be over broad because it would prohibit the employee from soliciting in the clients of Globex in any business or activity, even those in which Globex is not involved.

1. See, for instance, Edward Jones v. Voldeng, 2012 BCSC 497, at para. 15.
2. R. v. Canadian Broadcasting Corp., 2018 SCC 5, [2018] 1 S.C.R. 196, at para. 17.
3. RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311, at pp. 337-338.
4. Holland v. Hostopia Inc., 2015 ONCA 762, at paras. 47-55.
5. See, for instance, Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, at para. 16