C. Other Issues of Importance to Restrictive Covenants

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Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

C. Other Issues of Importance to Restrictive Covenants

1. Has there Been a Breach?

Assuming the covenant is enforceable, occasionally the dispute before the court includes a question as to whether there has been a breach, i.e. impermissible competition, solicitation or disclosure of confidential information.

Such dispute may arise over the wording of the clause in question. In a case concerning a non-competition covenant attached to the sale of a business, the court was called upon to interpret a definition that read: “The ‘Seniors Care Business is defined to be any intermediate care, extended care or long term care facility of any kind.”

The plaintiffs argued the phrase “care” should be interpreted in its broadest sense, whereas the defendants argued, and the court agreed, that the context of the business being sold had to be considered:

In the absence of clear language to the contrary in the agreement, the language employed in the agreement must be understood in the context of the business which was the subject of the transaction and not the broader meaning of “care” in common usage.

Although I have no doubt that the word “care” admits of a myriad of meanings in general conversation, in the context of the particular business which was the subject of the Asset Purchase Agreement, I find that “long term care” must refer to care provided in the five stages of care from personal care through extended care.¹

In a Nova Scotia case, the court was called on to assess whether the vendor of a Halifax pharmacy breached a seven-year non-competition clause by virtue of continuing to have his Dartmouth pharmacy, which he retained, deliver prescription products to residents in the area subject to the covenant. The clause prohibited competition for seven years within “the geographic confines of the Halifax peninsula.” At the time of the sale, the vendor’s Dartmouth pharmacy had customers in the Halifax area to whom it sold pharmaceutical products via its prescription delivery service and it continued to sell products to these customers after the sale of the Halifax pharmacy.

Reviewing the factual matrix that led to the covenant, the lower court found that the purchaser knew, or ought to have known, that the Dartmouth pharmacy could have prescription-delivery customers in the Halifax peninsula and if he intended to prevent the vendor from continuing to sell products to them, he should have negotiated language to that effect. The court found the covenant had not been breached, also noting that the vendor had not actively solicited Halifax peninsula clients and that requiring the vendor to drop such clients would be impractical. ²

The Nova Scotia Court of Appeal overturned the decision, however, finding that the trial judge had failed to take into account many of the surrounding circumstances of the transaction. The restrictive covenant was a critical component of the purchase and sale of the pharmacy.

The Court of Appeal held that the contract should be interpreted “so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.”³ It continued:

…The judge’s determination that a business could escape the confines of a restrictive covenant simply because it is pre-existing is directly contrary to those principles and good business sense. It would mean that:

(a) A purchaser is deemed to know of the existence of the vendor’s other business interests, although it is only the vendor who can know of them and their extent;

(b) A broadly worded, all-inclusive restrictive covenant would not capture an existing business;

(c) A vendor is free from any obligation to disclose their other business interests and any burden from ensuring that their activities are excluded from the restrictive covenant; and

(d) Had a vendor started a new business contrary to a restrictive covenant, they would be in breach; yet they would be free to compete with their former business if they did so with their existing business.

[49] Restrictive covenants are intended to provide a material benefit to both the owner of a business and to the purchaser of that business. They enable the owner to sell his business by giving the purchaser the assurance of non-competition. They provide the purchaser with protection from competition by a former owner who knew the business and its customers while it establishes itself.

[50] Exempting a pre-existing business from a restrictive covenant makes no business sense.⁴

The question of a breach may arise in the context of an advertisement placed by a former employee who is subject to a non-solicitation agreement. The BC Court of Appeal stated, in a case concerning a group of dentists subject to a non-solicitation clause, that “something more than a general information advertisement to the public” was required to constitute a breach and accordingly held that an advertisement in a newspaper announcing the opening of a practice and the placing of a weekly “business card” in the same newspaper for several months did not breach the covenant.⁵

More closer to the line, perhaps, was an advertisement taken out by an optometrist after leaving her employer, which announced the opening of her new clinic and stated that she “looks forward to seeing familiar faces and welcoming new patients.” The court found that the invitation to “familiar faces” might include those customers she came to know through contact at her former clinic, but could also include anyone she had become familiar with in her nearly nine years of residence in the city. The court held it was possible to construe the advertisement as targeted at repeat customers at the former clinic whose faces had become familiar to the defendant, but found “such an interpretation is so unlikely…as to be fanciful.”⁶

Verbal attempts to notify past clientele as to a departing employee’s new place of business, as opposed to carefully-crafted written communications, run the danger of going over the line. The courts have been dubious that phone calls of such nature are merely efforts to notify clients of a new location and nothing more. In the case of an investment advisor who moved from one bank to another and then telephoned his clients, the court stated:

In this context it is safe to conclude that Mr. D’Souza wished to retain his clients, and TD wished him to retain his clients. It is safe to conclude that BMO wished to retain those same clients. Obviously, of course, someone had to tell the clients that Mr. D’Souza was changing firms. Obviously, of course, those clients would be free to make their own choice of investment advisor in the future. In this context, can it be argued seriously that calls placed by Mr. D’Souza prior to and after departure to his clients, telling them of his move, were not solicitations? This is sophistry, and will just lead to ridiculous litigation demarcating the precise words that may and may not be used by advisors when they approach clients to secure their business.⁷

The act of simply responding to a public request for proposals, without more does not constitute solicitation.⁸

In the case of clauses prohibiting the use or disclosure of confidential information or trade secrets, the courts have held that “committing to memory the names of clients, their contacts, the clients’ needs or preferences, and the rates that the clients were willing to pay, is confidential information and exploiting such information to solicit former clients ‘is tantamount to the physical asportation of a client list’ and its use is prohibited.”⁹

Woodgrove Manor Ltd. v. Kem Enterprises Inc., 2000 BCSC 718 (CanLII) at paras. 20-21.
Jorna & Craig Inc. v Chiasson, 2018 NSSC 220 (CanLII), at paras. 71-76.
Jorna & Craig Inc. v. Chiasson, 2020 NSCA 42, at para. 48, quoting from Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, at para. 16
Jorna & Craig Inc. v. Chiasson, 2020 NSCA 42, at paras. 48-50.
Dr. P. Andreou Inc. v. McCaig, 2007 BCCA 159 (CanLII), at paras. 22, 35.
IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 10, 44-46, aff’d 2017 BCCA 301 (CanLII).
BMO Nesbitt Burns Inc. v. TD Waterhouse Investor Services, 2006 CanLII 17338 (ONSC), at para. 14 (though the statement was made in the context of alleged common law duties, not in the context of a non-solicitation covenant). See also MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at para. 111, which adopted this take on claims that such communications were not solicitations in the context of an enforceable non-solicitation covenant.
IBM Canada Ltd v Almond, 2015 ABQB 336 (CanLII), at para. 79. See also Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173 (CanLII) at para. 44. However, see IT/Net Ottawa Inc. v. Berthiaume, 2002 CanLII 42541 (ONSC), where a defendant’s actions in taking steps to ensure his future employer would be invited to bid on a RFP that was not opened up to the general public was found to be in breach of a non-solicitation clause (the clause was not upheld on other grounds, however.)
2158124 Ontario Inc. v Pitton, 2017 ONSC 411 (CanLII) and cases cited therein, at para. 43.

(a) Declaratory Relief Prior to a Breach

Occasionally, a party may seek a declaration as to the enforceability of a restrictive covenant to which it is currently subject. The decision whether to entertain such an application is at the court’s discretion. In a Nova Scotia decision, the court was prepared to determine the application for declaratory relief where there was an alleged factual foundation for the declaration sought, there had been difficulties in the relationship between the parties for some time, one of the parties had considered termination as a possible resolution to the impasse between them and dealing with the application would resolve the issue of who held the balance of power between them.¹

Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at paras. 58-60.

10. Judicial Interpretation of Certain Words or Phrases Used in Covenants

“Account”

In a covenant which prohibited an employee from “solicit(ing) any account within employee’s territory”, the court held that “when the word “account” is used and if it is used in the usual business or commercial sense, it simply means “customer”.”¹

“Lower Mainland of British Columbia”

A non-compete clause purporting to restrict an employee from selling products in the “Lower Mainland of British Columbia” was not enforced, due, amongst other things, to its ambiguity. The term “lower mainland”, while often used, is not a term of art and may mean different things to different people. ³

“Solicit” or “Solicitation”

• “On the evidence presented in the case at bar and in light of these authorities illuminating the meaning of the word “solicit”, I struggle to see how fielding inquiries, answering questions, providing quotes to persons or companies who initiate contact with Source voluntarily, or the presence of a Source van that “appears to be delivering items” in Kamloops, could come within the meaning of “solicit”.⁴

• “I cannot see how any general advertisement in a newspaper that consists of a photo and information about the location of an office can come within either expression. (“soliciting” or “communicating for the purposes of soliciting”).”⁵

• A departed optometrist ran a weekly advertisement in the local newspaper for three weeks that announced the opening of her new clinic and stated that she “looks forward to seeing familiar faces and welcoming new patients.” The court was not persuaded that the advertisement “solicits or endeavours to entice away any (of the plaintiff’s) patients.”⁶

• “A finding of solicitation would require her to have affirmatively approached a patient with a view of enticing the customer to cease doing business with the defendant…”⁷

W. R. Grace & Co. of Canada Ltd. v. Sare et al., 1980 CanLII 1568 (ONSC), at p. 12.
Progressive Automations Inc. v Jahromi, 2018 BCSC 1015 (CanLII), at para. 47.[/note]

“Serve or Provide Advice to”

The phrase “serve or provide advice to” was used in a covenant restricting a departing shareholder from certain activities regarding the plaintiff’s customers. The word “serve” included the act of both selling goods and providing services, distinct from “provide advice”, which meant to guide or make recommendations.²853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 56.
853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 87.
Dr. P. Andreou Inc. v. McCaig, 2007 BCCA 159 (CanLII) at para. 36, and see list of authorities considered at paras. 23-35.
IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 10, 44-46, aff’d IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII).
Nicholas v. Dr. Edyta Witulska Dentistry Professional Corporation, 2022 ONSC 2984, at para. 86.

2. Severance

The Supreme Court of Canada has held that “notional” severance, which “involves reading down a contractual provision so as to make it legal and enforceable”, is not appropriate to cure a defective restrictive covenant. Further, “blue-pencil” severance, which entails removing part of a contractual provision by crossing it out, may only be resorted to sparingly to remove trivial parts of a contract. Even in the absence of a restrictive covenant, the courts are restrained in applying severance “because of the right of parties to freely contract and to choose the words that determine their obligations and rights.”¹

In the case of notional severance, a court reads down a provision that otherwise would be illegal. This mechanism is appropriate where there is a “bright line” test for illegality. In the case of restrictive covenants, however, there is no bright line test for reasonableness. Accordingly the Supreme Court of Canada has held that the application of notional severance to restrictive covenants would amount to the court replacing the covenant with what it considers to be reasonable, creating uncertainty as to what courts may find to be reasonable in each case.² Further, application of notional severance would invite employers to provide for unreasonable restrictive covenants – whether in terms of time, activity or geography – knowing the court will read down the covenant to what it considers reasonable. That, the Supreme Court said, provides no inducement to the employer to carefully draft a reasonable covenant.³

The court further held that blue pencil severance may only be used sparingly to strike out trivial parts of a covenant where to do so would not affect “the main purport of the restrictive covenant.”⁴ The court approved of a BC Court of Appeal decision in Canadian American Financial Corp. (Canada) Ltd. v. King, where that court stated:

.…the courts will only [apply blue pencil severance to] sever the covenant and expunge a part of it if the obligation that remains can fairly be said to be a sensible and reasonable obligation in itself and such that the parties would unquestionably have agreed to it without varying any other terms of the contract or otherwise changing the bargain….It is in that context that reference is made in the cases to severing and expunging merely trivial or technical parts of an invalid covenant, which are not part of the main purport of the clause, in order to make it valid….⁵

Applying this reasoning, the court held that, where there was no legal or judicial definition of the term “Metropolitan City of Vancouver”, it was not appropriate to apply blue pencil severance to strike out the word “Metropolitan”. The evidence indicated the parties intended a restriction that included the City of Vancouver and something more, but there was no evidence the parties “unquestionably” would have agreed to remove the word “Metropolitan” without any other change to the contract had they known there was no such entity.⁶

Where a two-year non-competition covenant “commencing on January 1, 2007” was clearly unreasonable because, in application, it would have commenced two years after the date of employee’s termination of employment, the Ontario Court of Appeal held that application of blue pencil severance by the trial judge to strike out these words was improper. The trial judge’s decision that severing the words in question would have restored what the parties had intended was not supportable, as the evidence did not indicate the parties would have “unquestionably” agreed to remove the words without other changes to the contract. Nor were the words “trivial”. Rather, they went “to the duration of the restriction and (were) part of the main purport of the clause.⁷

Nor will the courts act as “de facto arbitrators over clauses that are drawn as alternatives” i.e. where one alternative encompasses another, but on a wider scale. In Canadian American, the BC Court of Appeal stated it would find a clause to be void for uncertainty if it restricted the employee from competing in (a) Canada, (b) British Columbia, and (c) Vancouver, for (i) ten years, (ii) five years, and (iii) one year. In such a case the court would not use the “blue pencil” rule to make an agreement for the parties that they did not make for themselves.⁸

(a) Separate Obligations within the Same Clause

The upholding of one restraint while refusing to uphold another in the same clause may be a permissible form of severance, providing they are covenants of a different type, e.g. covenants against competing and soliciting, and not covenants of the same type, e.g. two covenants against competing. However, as noted below, further judicial consideration of the Supreme Court of Canada’s decision in Shafron v. KRG Insurance Brokers is necessary before it can be stated this is definitively the case.

In an Ontario decision, W.R. Grace & Co. of Canada Ltd. v. Sare et al., the court refused to enforce a non-competition covenant because of ambiguity in the use of the word “territory.” However, the non-solicitation restraint, though it prohibited solicitation in the same ambiguous “territory” and was part of the same clause, was upheld. The court held that the geographic prohibition was of no consequence since the covenant restrained solicitation only of actual customers. It further held that the clause contained two separate obligations or restraints, not one.¹

In light of the Supreme Court of Canada’s decision in Shafron, it is uncertain whether severance may be applied within the same clause where the covenants are separate obligations and of a different type. The court in Shafron noted that some “cases have accepted that severance might be applied if the severed parts are independent of one another or can be severed without the severance affecting the meaning of the part remaining” (emphasis added), but then went on to suggest these cases were not an appropriate view of the law.² Notably, however, in the only Canadian decision cited by the court for the proposition that it later rejected (application of severance where the severed parts are independent of one another), the covenants at issue were all forms of non-compete restraints.³ They were not covenants of a different type, i.e. a restraint on competition and a restraint on solicitation, as in the W.R. Grace decision.

Certainly, there are very good policy grounds not to apply severance to save one covenant where the court has refused to enforce a covenant of the same type within the same clause (or in a separate clause, for that matter). Application of severance in such circumstances would encourage employers to draft alternative clauses, hoping the court will enforce one.

However, where the clauses are of a different type, i.e. a non-competition covenant and a separate non-solicitation covenant, it is submitted that the same policy against enforcement of one and not the other does not exist and courts should be prepared to enforce a separate obligation, whether it exists in the same clause (as in W.R. Grace) or a separate clause. Where the obligations exist in the same clause, depending on the wording, they may be more appropriately interpreted as separate clauses in an agreement rather than as one indivisible clause,⁴ with one enforceable and the other not.

This indeed was the approach that an Alberta Court, after Shafron, was prepared to take in respect of a clause that contained both non-competition and non-solicitation covenants after finding the former was not enforceable. The court held that it “would have been prepared to go so far as to conclude that the Supreme Court of Canada did not intend that different concepts expressed in one paragraph could not independently be enforced because this would then become a criticism of the legal drafting or style of the document rather than its substance.” However, having held the defendant did not solicit the plaintiff’s clients, the court did not have to make that finding.⁵

W.R. Grace & Co. of Canada Ltd. v. Sare et al., 1980 CanLII 1568 (ONSC) at pp. 13-14.
Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, 2009 SCC 6 (CanLII), at paras. 35-37.
T. S. Taylor Machinery Co. v. Biggar (1968), 1968 CanLII 588, 2 D.L.R. (3d) 281 (Man. C.A.), at p. 282.
Indeed, it is more common to see covenants drawn as separate clauses of an agreement than in the same clause, in which case the courts will more readily view them as severable if one does not survive scrutiny. The practice of including separate clauses each containing covenants of a different kind is not without risk, however. In American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA), Bull J.A., in concurring reasons at p. 534, held that three separate covenants forbidding competition, solicitation and disclosure were each “severable, clear and unambiguous and can be separately and adequately enforced without reference to or affecting the others” but refused to enforce the non-competition covenant on the basis that the restraints on solicitation and disclosure were sufficient and hence the restriction on competition “of necessity must constitute nothing more or less than a covenant to restrain the respondent from business competition.”
The Travel Company Ltd. v. Keeling, 2009 ABQB 399 (CanLII), at para. 67.

(b) Severance of a Covenant Connected to the Sale of a Business

Since Shafron, there have been some decisions which have questioned its restrictive approach to severance in cases where the covenant is connected to the sale of a business.

In City Wide Towing and Recovery Service Ltd v Poole¹, the Alberta Court of Appeal distinguished Shafron on the basis that the covenant at issue there was given in the context of an employment agreement, whereas the covenant in the case before it was given pursuant to an agreement arising from the sale of the business.

The court then proceeded to sever the definition of “Non-Compete Area” as follows to save the restrictive covenant:

“Non-Compete Area” means the Provinces of Alberta, British Columbia and Saskatchewan and any other location within Canada where the Corporation and its Affiliates are carrying on the Business at any time during the Restriction Period. ²

An Ontario Court, on an application for an interlocutory injunction, distinguished Shafron when it applied blue pencil severance to a restrictive covenant arising from the sale of a business. The cautions in Shafron, which arose in the context of an employment contract, were less applicable in the context of the sale of a business. While the court was not prepared to rewrite the parties’ contract for them (notional severance), it held that where individual terms are found to be unreasonable, they can be severed. Accordingly, while the clause originally stated “anywhere within ten kilometres of the Restricted Area” (with the Restricted Area being defined as the Province of Ontario), it struck the phrase “ten kilometres of”, such that the covenant read “within the Restricted Area.³ The court’s decision to apply blue pencil severance clearly went beyond use of blue pencil severance for trivial matters, as contemplated in Shafron.

In another decision, again in an application for an interlocutory injunction to enforce a non-competition clause, an Ontario Court held that the Shafron decision even left “open the question of whether notional severance may be employed in contracts for the sale of a business.” Accordingly, despite finding that the length of the agreement was unreasonable, the court was of the opinion that the plaintiff had met the “low threshold” of a serious issue to be tried as to whether the non-competition agreement could be read down to a length found to be reasonable by the court.⁴

City Wide Towing and Recovery Service Ltd v Poole, 2020 ABCA 305.
City Wide Towing and Recovery Service Ltd v Poole, 2020 ABCA 305, at para. 52.
GDL Solutions Inc. v. Walker et al., 2012 ONSC 4378 (CanLII), at paras. 74-80.
Gauvreau v Pelton, 2016 ONSC 2583 (CanLII), at pars. 28-32.

3. Rectification

In order to obtain rectification of a contract, “it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly.”¹ Thus, in Shafron, there was no evidence of a prior agreement that explained the term “Metropolitan City of Vancouver” and hence the doctrine of rectification could not be applied.²

In another case, the Alberta Court of Appeal likened the construction of restraints of trade to the construction of exception clauses and, in refusing to rectify an ambiguous covenant, cited the following from Cheshire and Fifoot’s Law of Contract (8th edition) at p. 140:

A party to a contract who inserts a term designed for his protection, must make his meaning clear; and if he fails to do so, his words will be read against him. This is a readily intelligible canon of construction, without as well as within the law, and requires neither to be excused nor classified.³

Despite the foregoing, there have been cases where the courts have been prepared to apply rectification to a restrictive covenant. In Dynamex v. Miller,⁴ the Newfoundland Court of Appeal upheld a decision rectifying a non-solicitation clause. The parties had omitted the actual words of restriction in the agreement. However, evidence led at trial suggested that the individual, a courier driver, had attended a meeting where it had been explained to drivers that under new independent contractor agreements, they would be prohibited from soliciting the customers of the company for 12 months if they left the company for any reason. There was also evidence that, subsequent to leaving the company, the driver admitted to one of those customers that he was not supposed to solicit former customers, as he had signed an agreement to that effect. Based on this uncontradicted evidence, the trial judge found that “it was believed to be, by both parties, an agreement binding upon them to restrict the defendant from soliciting customers of the plaintiff.”⁵

Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450 (C.A.), cited with approval in Shafron v. KRG Insurance Brothers (Western) Inc., [2009] 1 SCR 157, 2009 SCC 6 (CanLII), at para. 52.
Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, 2009 SCC 6, at para. 52.
cited in Reed Shaw Osier Limited v. Wilson, 1981 ABCA 317 (CanLII) at para. 35.
Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD).
Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD), para. 12.

4. Is the Clause in Restraint of Trade?

A threshold issue may arise as to whether a clause is properly characterized as a restraint of trade and therefore subject to the usual analysis. This issue often arises where a clause requires an employee to forfeit an economic benefit such as a stock option or repay a bonus if the employee competes with the employer, but does not outright prohibit such activity.

The BC and Ontario courts have diverged as to whether to adopt the “functionalist approach” as opposed to the “formalist” approach to such clauses, with the BC Court of Appeal characterizing the two approaches as follows:

…there appears to be essentially two strands of authority in the employment context: first, what one may call a ‘functional’ approach, which asks whether the clause at issue attempts to, or effectively does, restrain trade, in which case it will be captured by the doctrine and subjected to reasonableness scrutiny; and second, a more ‘formalist’ approach, in which the clause must be structured as a prohibition against competition to constitute a ‘restraint’. On the latter approach, mere disincentives to post-employment competition are not sufficient to trigger the doctrine, even if those disincentives operate as effectively at dissuading competitive conduct and participation in the marketplace as a prohibition.¹

The BC Court of Appeal adopted the functionalist approach in Rhebergen. There, a clause which required a veterinarian to make a payment to her employer “in consideration of the investment in her training and the transfer of goodwill (by her employer)” if she set up a veterinary practice within a certain distance after termination of the contract was held to be a restraint of trade, even though it did not outright prohibit competition. The court stated that the payment “compromises the opportunity to compete with the clinic” that the defendant otherwise would have had.²

The court’s decision to adopt the functionalist approach means that, in British Columbia, clauses that impose financial consequences for competing post-resignation, such as a “claw-back” of exercised stock options, will only be enforceable if they can be said to be reasonable.

Alberta courts, applying Rhebergen, have applied the functionalist approach. In one decision, a court found a covenant essentially constituted a “license fee to compete”, rejecting the argument that the clause permitted the Defendants to freely compete. This argument, it held, “fails the ‘duck test’: ‘If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck’. Here, the paragraph in question looks, swims and quacks like a restrictive covenant.”³

A decision by the Ontario Superior Court in Levinsky v. The Toronto-Dominion Bank ⁴suggests Ontario may move toward the functionalist approach, but for now the prevailing law follows the formalist approach.

In Levinsky, a managing director of TD Securities received restricted share units as part of his compensation, which cliff-vested after three years, i.e. they did not mature until three years after grant, as opposed to other plans under which RSUs vest on a three-year rolling basis. The plan also provided for immediate forfeiture of unvested RSUs upon resignation. Levinsky resigned and contended that the forfeiture provisions amounted to a restraint of trade, as their intent was to discourage employees from working for a competitor.

The court rejected that argument, finding, based on the terms of the plan and other evidence, that the plan was designed to incent employee loyalty. As forfeiture was not tied to working for a competitor, the clause at issue did not operate as a restraint of trade.

In arriving at this conclusion, the court summarized the law as follows:

I conclude that in examining a clause in an employment contract which operates to forfeit deferred compensation upon or following the cessation of the contract, a court must assess whether the clause, on its face or in its practical operation, ties the forfeiture of compensation to the event of termination or whether it ties it to the employee’s conduct following the end of his employment. If the forfeiture results simply from the cessation of the employee’s service, without more, the clause does not operate in restraint of trade because it does not fetter the employee’s ability to choose where he or she wants to work next.⁵

Notably, the court did not go the next step and hold that if the forfeiture arises because of competitive activity post termination, it does operate as a restraint of trade. It is submitted it could not do so because of binding authority from a 1946 decision of the Ontario Court of Appeal, Inglis v. The Great West Life Assurance Co.⁶

In Inglis, the contract between an insurer and insurance sales agent stated that, on termination, the company would continue to pay the agent commissions on policies written during the agreement to which the agent would have become entitled if the agreement was still in force. However, if the agent, after termination of the contract, did business directly or indirectly for any other life insurance company, he would forfeit and waive any claim to such commissions.

The court held that, as the employee was not precluded from working anywhere else (such as in a non-competition covenant), there was no restraint of trade.

Ontario’s formalist approach is also evident in a decision of the Ontario Superior Court, Nortel Networks Corp. v Jervis,⁷ where the departing employee was sued under a “claw-back clause” which required re-payment of market gains from exercised stock options if he went to work for a competitor within 12 months of exercising the options. The Ontario court held that as Jervis “was not precluded from going elsewhere or from doing whatever he chose to do”, the clause was not a restraint of trade. In another earlier decision, the same court held that the payment of a monthly retirement benefit which would cease if the retired employee competed also was not in restraint of trade, though the court also went on to assess whether the clause was unreasonable or contrary to the public interest.⁸

The court in Levinsky focused its decision on the fact that the employee’s forfeiture of compensation was not tied to post-employment competition, and hence there was no restraint of trade. The logical extension of such a finding is that if the forfeiture had been tied to competition, it would have been considered a restraint of trade. To say so, however, would have conflicted with binding authority of the Court of Appeal in Inglis.

It does appear, however, that the Court in Levinsky, after an extensive review of authorities from around the globe, preferred the functionalist view, a point recognized by the BC Court of Appeal in Rhebergen.⁹ One hopes that the Ontario Court of Appeal will soon have an opportunity to decide whether the functionalist approach is to become the law in that jurisdiction or whether it will maintain the formalist approach set out in Inglis.

In an older case, Cameron v. Canadian Factors Corp.,¹⁰ the Supreme Court of Canada considered the enforceability of clauses under which the defendant agreed not to solicit or compete for five years and to pay $10,000 if he did. The court held the clauses were unreasonable, applying a restraint of trade analysis under Quebec civil law (and citing similar common law authority). Unfortunately, the court did not consider the formalist vs. functionalist approach to interpreting such clauses.

Where a clause made annual payments to a former business partner for his shares contingent on him continuing to act as a fiduciary, the BC Court of Appeal was prepared to apply the doctrine of restraint of trade as it did not matter to the outcome, but left often the question as to whether the clause actually was a restraint of trade.¹¹ In light of Rhebergen, it is suggested that if the same question came before the court today, it would find such a clause to be a restraint of trade.

Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, at para. 28.
Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 at para. 43. Earlier authority at the BC Supreme Court level had followed the formalist approach. See Canaccord Capital Corp. v. Clough, 1999 CanLII 5286 (BCSC).
Jones v Gerosa, 2016 ABQB 207, at paras. 178-194. See also MHK Insurance Inc v Wass, 2021 ABQB 721, though, curiously, the court there stated the covenant “does not restrain trade but permits it at a price” at para. 3. It nonetheless then considered enforceability based on the functionalist approach.
Levinsky v. The Toronto-Dominion Bank, 2013 ONSC 5657.
Levinsky v. The Toronto-Dominion Bank, 2013 ONSC 5657, at para. 81.
Inglis v. The Great West Life Assurance Co., 1941 CanLII 85 (ONCA).
Nortel Networks v. Jervis, 2002 CanLII 49617 (ONSC).
Woodward v. Stelco Inc., 1996 CanLII 8180 (ONSC), at para. 60, aff’d 1998 CanLII 17686 (ONCA), though the Court of Appeal found it unnecessary to consider whether the clause was in restraint of trade, since the trial judge’s finding that it was neither unreasonable nor against the public interest was well supported by the evidence.
Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 at para. 38.
Cameron v. Canadian Factors Corp. Ltd., [1971] SCR 148, 1970 CanLII 163 (SCC)
Burgess v. Indust. Frictions & Supply Co., 1987 CanLII 2722 (BCCA), at para. 24.

5. Enforceability of Financial Consequences for Competitive Activity

Where a clause imposes a financial consequence for competitive activity, whether by way of a required payment or forfeiture of a benefit, the court may be called upon to determine whether that consequence, also known as a stipulated remedy, is enforceable. The initial question is whether the financial consequence arises by reason of a breach of a covenant, i.e. a prohibition on competitive activity, or instead amounts to a forfeiture of a benefit caused by the occurrence of competitive activity which is not prohibited but that attracts financial consequences.

(a) Breach of a Covenant that Attracts Financial Consequences

Where the financial consequence arises by reason of a breach of a covenant, i.e. a prohibition on some form of competitive activity, the court, regardless of whether it is in a jurisdiction that follows the formalist or functionalist approach, may be called upon to determine whether that consequence is a penalty and, if so, whether it is enforceable. The word “may” is used because the court may first decide that the prohibition on competitive activity is not enforceable under the usual tests and determine it therefore need not assess the enforceability of the financial consequence.

If it is determined the prohibition on competitive activity is reasonable, then the court often will be asked by the litigants to assess the enforceability of the financial consequence. See the further discussion below in this section under “Judicial Approach to Stipulated Remedy Clauses.”

(b) Competitive Activity Which is Not Prohibited but Attracts Financial Consequences

Where there is a forfeiture of a benefit cause by the occurrence of competitive activity which is not prohibited but which attracts financial consequences, it must be determined whether the courts in that jurisdiction follow the formalist approach as opposed to the functionalist approach (see Section 5 above, “Is the Clause in Restraint of Trade?”). Where they follow the formalist approach (such as in Ontario), the courts will not apply the tests applicable to restrictive covenants, since there is no actual restriction on competitive activity.¹ Rather, the court will only consider whether the clause imposing the financial consequence is enforceable.

On the other hand, where the forfeiture of a benefit takes place in a jurisdiction that follows the functionalist approach (such as in British Columbia), then the court will assess the clause as a restrictive covenant, as the law in those jurisdictions views such clauses as having the effect of restricting competition.² It may also assess the enforceability of the financial consequence if that is necessary to the case.

(c) Judicial Approach to Stipulated Remedy Clauses

As is seen in the discussion above, a court may need to determine the enforceability of a financial consequence arising from a breach of prohibition on competitive activity if it finds that the prohibition itself is reasonable as a restraint of trade.

In the case of a financial consequence arising from competitive activity that is not actually prohibited, the courts in jurisdictions following the formalist approach (such as Ontario) will necessarily assess whether the clause is enforceable, since they do not deem such clauses as in restraint of trade and therefore do not apply the tests applicable to restrictive covenants. Courts following the functionalist approach (such as British Columbia), may also assess whether the financial consequence is enforceable, but may not if they determine first that the clause – which they view as being in restraint of trade – is not enforceable based on the tests applicable to restrictive covenants.¹

Once the court determines it needs to address the enforceability of the financial consequence, also known as a stipulated remedy clause, then the approach used in Canadian common law jurisdictions is quite similar.

Where the clause at issue provides for payment in the event of a breach of a prohibition on some form of competition (a non-compete or non-solicit clause), the inquiry will turn to whether the clause amounts to a penalty and, if so, whether it should nonetheless be enforced. If the clause requires the withholding of a payment or a “clawback” of equity or a bonus already paid, it may be seen as a “forfeiture clause” because it involves “the loss, by reason of some specified conduct, of a right, property, or money.” Such clauses may also have “penal consequences as the right or property forfeited by the defaulting party may bear no relation to the loss suffered by the innocent party.”²

The Ontario Court of Appeal reviewed the historical treatment of stipulated remedy clauses in Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., noting that attempts to enforce payment of sums for breach of contract historically were dealt with by the common law, which decided whether the sum at issue amounted to a penalty, while courts of equity addressed whether a forfeiture clause had penal consequences. The court noted that we are still dealing today with issues arising from these differing streams, but articulated an approach to bring the law with respect to stipulated remedy clauses more in line with the approach adopted by equity as opposed to the common law.³

The court explained the lingering different treatment of penalty clauses as opposed to forfeiture clauses that have penal consequences:

[23] There is a venerable common law rule to the effect that the courts will not require a party to pay a genuine or true penalty on grounds of public policy. The parallel, but distinctive, equitable rule is to the effect that penal forfeitures will be relieved against where their enforcement would be inequitable and unconscionable.

[24] While both doctrines have the effect of relieving the breaching party of the penal consequences of stipulated remedy clauses, in their traditional formulations they bear significant differences. The common law penalty rule involves an assessment of the stipulated remedy clause only at the time the contract is formed. If the stipulated remedy represents a genuine attempt to estimate the damages the innocent party would suffer in the event of a breach, it will be enforced. On the other hand, again to quote Lord Dunedin from Dunlop, supra, “[i]t will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably be proved to have followed from the breach”. Laskin C.J.C. adopted a virtually identical formulation (taken from Snell’s Principles of Equity, 27th ed. (London: Sweet & Maxwell, 1973) at p. 535) in H.F. Clarke Ltd. v. Thermidore Corp. Ltd., 1974 CanLII 30 (SCC), [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385, at p. 338 S.C.R. Although the common law defined penalties in terms of unconscionability, that assessment is to be made at the time the contract was formed. The common law doctrine did not include any discretion to be exercised in the light of circumstances that may exist at the time of breach.

[25] Equity, on the other hand, considers the enforceability of forfeitures at the time of breach rather than at the time the contract was entered. Equity also looks beyond the question of whether or not the stipulated remedy has penal consequences to consider whether it is unconscionable for the innocent party to retain the right, property, or money forfeited. As explained by Denning L.J. in Stockloser v. Johnson, [1954] 1 All E.R. 630, [1954] 1 Q.B. 476 (C.A.), at p. 638 All E.R.: “Two things are necessary: first, the forfeiture clause must be of a penal nature, in the sense that the sum forfeited must be out of all proportion to the damage; and, secondly, it must be unconscionable for the seller to retain the money.”⁴

Despite these historical differences, the court endorsed an approach which, as far as possible, assimilates the assessment of both types of clauses under unconscionability and does not extend the strict rule of common law that refuses to enforce penalty clauses. While not explicitly stated, one presumes the assessment of unconscionability in the case of both types of clauses is to be made at the time of invocation of the clause. That has always been equity’s approach to forfeiture clauses and the court seems to be suggesting it should be the approach with clauses that may amount to a penalty. (That was the approach articulated by the BC Court of Appeal in Maxam Opportunities Fund v. Greenscape Capital Group Inc., as discussed further below.)

The court in Peachtree noted that:

Unconscionability is also the direction suggested by the dictum of Dickson J. in Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, at p. 937 S.C.R.: “It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum.”⁵

The court also noted that section 98 of Ontario’s Courts of Justice Act appears to direct an inquiry to unconscionability, given it provides courts discretion to relieve “against penalties and forfeitures, on such terms as to compensation or otherwise, as are considered just.”⁶

Relying on section 21 of British Columbia’s Law and Equity Act, the courts in that province have developed a similar approach to determining whether relief should be granted against penalties. The analysis also turns, ultimately, on unconscionability, to be assessed as of the date of the invocation of the clause. The BC Court of Appeal, in Maxam Opportunities Fund v. Greenscape Capital Group Inc., described the approach as follows:

[53] This court has ruled that the following approach is to be taken to payments that are stipulated to be payable on a breach of contract: … where the issue is whether a contractual clause is for liquidated damages or is a penalty: 1. The question of “penalty” or “liquidated damages” is to be answered as at the date of the making of the agreement; 2. If the answer is “liquidated damages”, that is the end of the matter, but, if the answer is “penalty”; then, 3. There arises the next question: should relief be granted against the penalty? 4. The answer to that question depends upon whether to enforce the penalty would be unconscionable, and that unconscionability has to be determined at the date of the invocation of the clause. 5. Sec. 21 [now s. 24] of The Law and Equity Act only applies if and when stage 3 has been reached.⁷

In Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, the majority upheld the clause at issue, which required payment of an amount in the event of competition, both on the basis that the clause was reasonable and on the basis that the amount to be paid could not be said to be “extravagant and unconscionable.” See para. 50.
Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ONCA), at para. 22.
Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ONCA).
Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ONCA), at paras. 23-25.
Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ONCA), at paras. 29, 31.
Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ONCA), at paras. 32.
Maxam Opportunities Fund v. Greenscape Capital Group Inc., 2013 BCCA 460, at para. 54.

(d) Application of Judicial Approach to Stipulated Remedy Clauses in the Context of Departing Employees

The BC Court of Appeal held that a clause which required payment of $150,000 if a veterinarian set up a practice within 25 miles of her employer’s place of business could not be said to be “extravagant and unconscionable” as the amount represented her employer’s calculations of its unrecoverable mentoring, training and equipment costs if she were to leave within a certain period of time and the impact on the clinic’s goodwill and volume of business if she was to compete within a year of leaving.¹

An optometrist who departed a clinic to establish her own clinic had signed an agreement under which she was obligated to transfer patient files to her employer and was subject to a $100 fine for each patient file she did not transfer. She was also subject to a payment of up to $250,000 in liquidated damages for breach of non-competition or non-solicitation covenants or for breach of the requirement to transfer patient files. The court found it “extravagant and unconscionable” that a single breach of the requirement to transfer patient files would result in a $100 payment but also expose the optometrist to a claim for $250,000 in damages. It concluded that the latter provided for a penalty and not liquidated damages. The court held that it had not been presented with enough evidence, however, to determine whether relief should be granted against the penalty.²

The question of whether relief should be granted against a penalty clause attached to a restraint of trade, it is suggested, is put in doubt by the Supreme Court of Canada’s decision in Shafron.

The Court in Shafron refused to apply the doctrine of notional severance to a restrictive covenant, as its application would:

Invite the employer to impose an unreasonable restrictive covenant on the employee with the only sanction being that if the covenant is found to be unreasonable, the court will still enforce it to the extent of what might validly have been agreed to.

Not only would the use of notional severance change the terms of the covenant from the parties’ initial agreement to what the court thinks they should have agreed to, it would also change the risks assumed by the parties. The restrictive covenant is sought by the employer. The obligation is on the employee. Having regard to the generally accepted imbalance of power between employers and employees, to introduce the doctrine of notional severance to read down an unreasonable restrictive covenant to what is reasonable provides no inducement to an employer to ensure the reasonableness of the covenant and inappropriately increases the risk that the employee will be forced to abide by an unreasonable covenant.”³

Similarly, it is submitted that if a financial consequence attached to a restraint of trade is found to be a penalty, the courts should not impose a lesser financial consequence in accordance with what the evidence shows would be appropriate or reasonable. Doing so would engage all of the dangers the court in Shafron warned against in that employers would be invited to draft clauses imposing significant penalties in an effort to dissuade competition.

6. Is the Restrictive Covenant Unenforceable Due to a Wrongful Dismissal?

Canadian courts routinely have applied the English House of Lords decision in General Billposting Co ltd. v. Atkinson,¹ to the effect that a wrongful termination renders restrictive covenants in employment agreements unenforceable.²

In Globex Foreign Exchange Corporation v. Kelcher, the Alberta Court of Appeal rejected the proposition that a restrictive covenant survives a wrongful dismissal where the language of the covenant states that it applies after the termination of employment “for whatever reason”, i.e. including after a dismissal without cause. The court held there is long-standing authority for the proposition that restrictive covenants do not bind an employee once the employer has repudiated the contract through a wrongful dismissal.³

However, this proposition does not extend to confidentiality obligations, which survive a wrongful dismissal.⁴

General Billposting Co ltd. v. Atkinson, [1909] AC 118.
Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, Poole v. Tomenson Saunders Whitehead Ltd., 1987 CanLII 2647 (BCCA).
Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 44-58.
Singh v. Punjabi Community Health Services, 2021 ONSC 991, at para. 27, though query whether express confidentiality agreements survive as opposed to common law obligations that exist independently of such agreements. The Alberta Court of Appeal in Globex v. Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, which was cited by the Court in Singh, was concerned with common law duties of confidentiality.

7. Consideration

Where a restrictive covenant was executed mid-employment, the Supreme Court of Canada held that, despite no additional compensation passing to the employee, there was “ample consideration”, given that “the employee was given to understand, and did understand, that his refusal to execute the covenant would lead to an early termination of his employment, and that the employer tacitly promised that if the bond were signed, the employment would not soon be terminated.”¹

In considering whether continued employment is sufficient consideration for a restrictive covenant, the question is whether there was a mutual understanding between employer and employee that the employer would forebear from dismissal if the covenant is signed.

In Globex Foreign Exchange v. Kelcher, the Alberta Court of Appeal held that where two employees did not receive anything beyond that to which they were already entitled when, during their employment, they accepted restrictive covenants, there was lack of consideration and hence the covenants were not enforceable (though this comment was made in obiter, since the decision rested on other grounds.)

The court held that mere forbearance to dismiss is not adequate consideration. Rather, there must also be a mutual understanding on the part of the employer and employee when the restrictive covenant is entered that there will be such forbearance. In the case before it, there had been no promise made or implied by the company that employment would continue as a result of signing the covenant.²

Attempts to impose restrictive covenants on employees via agreements to comply with employee handbooks or policies after employment already has commenced have failed for want of consideration. In National Bank Financial Inc. v. Canaccord Genuity Corp., the B.C. Supreme Court refused to enforce such a clause, holding that “more was required to be done by the plaintiff if it wished to bind the individual defendants to the non-solicitation provision embedded in the bowels of its Code of Conduct.”³ Similarly, in another decision, the court stated:

A contract which would restrict mobility of employment and restrict trade by limiting the right of persons to place or continue their business with a person of their choice, must be apparent in the clearest of terms and not arise under the subtrafuge of a consent required for an internal Corporate Policy Manual and Working Code of Conduct.⁴

Where a share purchase agreement also entailed the execution of five-year non-competition agreements by the defendants, it was argued that since no portion of the sale price was allocated to goodwill, there was no consideration for the non-competition agreements. The court rejected this argument, finding that the non-competition agreements “were an integral part of the entire transaction.”⁵

The British Columbia Court of Appeal radically altered the law of consideration in that province in Rosas v. Toca. The Court held that, absent duress, unconscionability or other public policy concerns, a mid-contract varision will be enforceable as along as the parties agreed to the variation.⁶

Against Rosas stand judicial presumptions of an inequality of bargaining power between employers and employees and public policy favouring employee mobility. It is argued here that these presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants entered into without fresh consideration.

Indeed, in Quach v. Mitrux Services Ltd., the same court stated, in obiter, that the effect of Rosas upon prior case law “may not change the authority of (the prior case law) in the nuanced world of employer and employee contractual relationships.”⁷

Maguire v. Northland Drug Co. Ltd., [1935] SCR 412, 1935 CanLII 35 (SCC) at p. 415.
Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 73-91. Though see MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at para. 68, where the court applied a 1996 decision holding that continued employment is consideration, without apparently considering whether there was a mutual understanding about forbearance of termination.
National Bank Financial Inc. v. Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at para. 68.
R.T. Investment Counsel Inc. v. Werry, 1999 CanLII 5886 (BCSC).
Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 (CanLII), at paras. 60-61.
Rosas v. Toca, 2018 BCCA 191.
Quach v. Mitrux Services Ltd., 2020 BCCA 25, at para. 13.

8. Can Third Parties be Subject to the Covenant or Obtain the Benefit of It?

As strangers to the contract between the individual and business that agreed to a restrictive covenant, a third party normally cannot be prohibited, itself, from engaging in the type of activity from which the individual agreed to refrain. A competitor to the business cannot be compelled to cease competing with the other business or stop soliciting its employees because of the covenant given by its new employee, though the employee himself or herself may be ordered to cease engaging in the restricted activity.

However, the courts may entertain broadening the application of the restrictive covenant to a third party where it is a corporate vehicle for the individual who gave the covenant. In a Nova Scotia decision, a franchisee breached the restrictive covenant in a franchise agreement by directly involving himself in the ownership of a competing pizza restaurant set to open 20 metres away from the franchisor’s pizza restaurant. Indeed, at one point, the franchisee had been a shareholder and president of the company which owned the competitor, though no longer was a shareholder or president at the time of the application for an injunction. The franchisor argued that the company which owned the competing establishment was essentially a proxy for the franchisor and should be prohibited from opening its restaurant pending a trial.

While there was substantial evidence that the individual was involved in the start-up of the competitor, the evidence was that his business partner did not know of his restrictions. On the application for an interlocutory injunction, the court held that the evidence did not support a strong inference that the business partner and other company were proxies or vehicles for the franchisee and refused to grant the injunction against them.¹

In an application for an interlocutory injunction, a court held that a third party that is not a party to a covenant cannot itself obtain relief on the covenant, even if it is a subsidiary of the corporation that obtained the covenant.²

9. Miscellaneous Issues

(a) Negligent Misrepresentation Connected to a Restrictive Covenant

Despite finding that the purchaser of a fishing business negligently misrepresented to the vendor that there would be a place for him with the business subsequent to the sale, the trial court was found to have erred in refusing the enforce the non-competition agreement negotiated as part of the terms. The Nova Scotia Court of Appeal that that covenant was at the heart of the entire purchase and sale transaction and not considered by the parties to be severable. The court referred back to the trial court an assessment of the defendant’s damages for the plaintiff’s breach of the non-competition agreement as well as the plaintiff’s losses for the negligent misrepresentation.¹

Smith v. Union of Icelandic Fish Producers Ltd., 2005 NSCA 145 (CanLII).

(b) Corporate Amalgamations and Restructurings

In an application for an interlocutory injunction, a British Columbia court was prepared to reach a preliminary judgement that a plaintiff company, which had been the product of several amalgamations and one asset transfer from a parent company to a wholly-owned subsidiary, did not lose its right to enforce the terms of its employment contracts, including restrictive covenants, because of the amalgamations.¹ In the same decision, the court held it was also “at least strongly arguable”, under the common employer doctrine, that the transfer of assets was a valid assignment of the assets and hence the restrictive covenants.²

Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 28. The Court cited both the effect of British Columbia’s Business Corporations Act and the Alberta case of Pattilo v. Murphy Canada Exploration Ltd., 2001 ABQB 1070.
Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 29, citing Valley First Financial Services Ltd. v. Trach, 2003 BCSC 223.

(c) Termination of Employment Contract Other than through a Wrongful Dismissal

A British Columbia court soundly rejected the proposition put forward by several employees who had departed voluntarily to join a competitor that the plaintiff could not rely on the restrictive covenants set out in their employment agreements on the basis that they did not survive their employment: “Were it the law that upon termination of employment no obligations under the contract of employment survived, there would be no possibility of ever enforcing non-competition or non-solicitation clauses that are intended to govern the immediate post-employment period.”¹

Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 34. While this statement of the law is undoubtedly sound, the case relied on by the court, Raymond Salons Ltd. v. Boucher, 1990 CanLII 1763 (BCSC), is not, it is submitted, good law in Canada. There, the court held that a covenant survived a wrongful dismissal. This decision and proposition was rejected by the Alberta Court of Appeal in Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 44-58.

(d) Effect of Compensation on Enforceability of a Covenant

It has been held that the payment of compensation as part of a covenant not to compete does not render enforceable a covenant that is otherwise void.¹

Notably, Canadian courts have not had occasion to opine on the enforceability of “garden leaves”, common in the United Kingdom, under which employees are contractually required to provide lengthy notice of their dismissals and the employer has the right under the contract to excuse the employees from working during the period of notice, while continuing their compensation.

Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 55. Medtronic of Canada Ltd. v. Armstrong, [1999] O.J. No. 4860.

(e) Contract Renewals, Former Contracts, Expired Contracts

Where a company inserted a non-competition clause into a renewal agreement with a consultant without drawing it to his attention, the court held it not to be enforceable. Two previous written contracts has been identical and had not contained a non-competition agreement. The individual had not reason to suspect that, just because the company had shifted its contracts to an electronic portal, it was changing terms to insert the non-competition clause. The court held that company should have clearly and unambiguously advised its consultants of that fact.¹

In another decision, the employer asserted enforceability of a covenant where the employee resigned to work for a competitor, returned to the employer a few weeks later without a new written agreement, then resigned again a number of years later. The employer’s argument that the restrictive covenant contained within the employment agreement in effect before the first resignation applied. The court soundly rejected this argument, stating:

In my view, an implied restrictive covenant, entered into ten years after the last written contract between the parties expired, and after Mr. Roszkowski left his employment with PointOne to work for a competitor, and then was rehired without complaint about his having done so, is more than ambiguous – it is a fiction. As the Supreme Court of Canada held in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, [2008] 3 S.C.R. 79, citing Imperial Sheet Metal v. Landry, 2017 NBCA 51, courts should not be reading restrictive terms into employment contracts when the parties have not bargained for them. In my view, neither should courts read in or imply a restrictive covenant into an employment contract where the parties have bargained for one, and then allowed it to lapse.²

In another decision, a court held that a consultant’s contract had simply expired, and was not terminated by mutual consent. As the restrictive covenant was only applicable following “termination” of the agreement, not following expiry, it was not called into play.³

S.I. Systems Partnership v. Geng, 2020 ONSC 8086, at para. 70.
PointOne Graphics Inc. v. Roszkowski et. al., 2021 ONSC 629, at para. 25.
Mirage Consulting Ltd. v. 5573344 Manitoba Ltd., 2021 MBQB 186, at para. 32.

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Restrictive Covenants - Detailed Analysis