Table of Contents
(Note: Table of Contents and Material for Parts A and B, “Introduction and Overview” and “Detailed Discussion”, Appear in the Chapter on Restrictive Covenants, Part 1)
(Last Update: December 2018)
C. Other Issues of Importance to Restrictive Covenants
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 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 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.3
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.”4
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.5
The act of simply responding to a public request for proposals, without more does not constitute solicitation.6
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.”7
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.8
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.”9
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.10 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.11
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.”12 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….13
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.14
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.15
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.16
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.17
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.18 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.19 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,20 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.21
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.
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.22 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.23
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.”24 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.25
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.26
Despite the foregoing, there have been cases where the courts have been prepared to apply rectification to a restrictive covenant. In Dynamex v. Miller,27 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.”28
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.29
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.30
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.
A decision by the Ontario Superior Court in Levinsky v. The Toronto-Dominion Bank 31suggests 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.32
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.33
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,34 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.35
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.36 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.,37 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.38 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.
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.
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.”
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.39 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.40 It may also assess the enforceability of the financial consequence if that is necessary to the case.
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.41
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.”42
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.43
The court explained the lingering different treatment of penalty clauses as opposed to forfeiture clauses that have penal consequences:
 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.
 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),  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.
 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,  1 All E.R. 630,  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.”44
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),  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.”45
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.”46
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:
 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.47
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.48
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.49
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.”50
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.
Canadian courts routinely have applied the English House of Lords decision in General Billposting Co ltd. v. Atkinson,51 to the effect that a wrongful termination renders restrictive covenants in employment agreements unenforceable.52
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.53
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.”54
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.55
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.”56 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.57
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.”58
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.59
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 it is a subsidiary of the corporation that obtained the covenant.60
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.61
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.62 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.63
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.”64
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.65
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.
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”.”66
“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. 67
“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”.68
• “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”).”69
• 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.”70
D. Table of Cases
As noted throughout this chapter, case law has drawn a significant distinction between a restrictive covenant which is given as part of the sale of a business by the vendor as opposed to a restrictive covenant existing in a normal employer and employee relationship. Accordingly, the following tables are divided, firstly, into decisions where the covenants at issue were not provided in connection with the sale of a business, and, secondly, those decisions where the covenants were linked to a sale of a business.
Occasionally, a covenant will be connected to a an arrangement other than employment or the sale of a business, such as independent contractor, franchise, agency, partnership or shareholder agreements. The particular circumstances of the relationship between the parties and their transactions will need to be examined to determine whether the close scrutiny of a covenant connected to an employment contract should be applied or the less rigorous approach associated with covenants connected with the sale of a business. See Section 5(a) of Part I of this chapter for a discussion.
My thanks to Megan Tweedie, my colleague at Pulver Crawford Munroe, for her review and summary of the cases cited in these tables.
1. Covenants Provided Outside the Sale of a Business
|Canadian University Press Media Services Ltd. v. Pleasants, 2000 CanLII 22599 (ONSC)|
Student Newspaper Cooperative
|Non-compete prohibiting, as employee or in partnership, engagement in business that “may” be competitive, anywhere in Canada, for two years.||Length and geographic scope reasonable, but use of “may” too broad in application to possible future events.|
|947535 Ontario Ltd. (c.o.b.) H & R Block v. Jex,  O.J. No. 3290 (S.C.)|
|Non-compete prohibited filing income tax return for employer’s customers within 25 miles and for two years. Non-solicit within 25 miles for two years.||Unenforceable. 25 miles too broad as it captured other urban centres. Two years too long.|
|Maxwell v. Gibsons Drugs Ltd., 1979 Canlii 702 (BCSC)|
|Prohibition on pharmacist-manager operating or managing any other drug store within radius of 25 miles, for two years.||Enforceable. Employee not prohibited from acting as a pharmacist. Public had ready access to other drug stores.|
|Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC)|
|Covenant prohibiting gynaecologist from engaging in practicing medicine within city or 5 mile radius thereof for five years.||Unenforceable. Too broad and against public interest as people have right to continuing care from medical practitioner.|
|H.L. Staebler Company Limited v. Allan, 2008 ONCA 576 (CanLII)|
|Non-compete prohibiting doing business with any clients or customers employee had serviced, for two years.||Unenforceable due to absence of geographical limit combined with blanket prohibition on conducting business.|
|Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII)|
|Covenant imposing one-year prohibition on engaging in competition by providing service or soliciting business from, any customer of employer.||Unenforceable. Complete prohibition on competition rendered clause overly broad.|
|MacMillan Tucker MacKay v. Pyper, 2009 BCSC 694 (CanLII)|
|Non-compete prohibiting practice of law within five miles of firm in Surrey.||Overly broad and unreasonable. Complete prohibition on practice of law not necessary to protect firm’s legitimate proprietary interests.|
|The Travel Company Ltd. v. Keeling, 2009 ABQB 399 (CanLII)|
|Non-compete prohibiting employee from working in travel agency within Lethbridge or 100 mile radius for eight months, asserting $60,000 as pre-estimate of damages.||Overly broad in terms of length and territory. Actual losses of employer assessed at $15,000 max.|
|Raymond Salons Ltd. v. Boucher, 1990 CanLII 1763 (BCSC)|
|Non-compete prohibiting employee from having any interest in similar business within two miles, for one year.||Enforceable. Reasonable as to time and geographic scope.|
|Community Credit Union Ltd. v. Ast, 2007 ABQB 46 (CanLII)|
|Non-compete prohibiting involvement in competing business. Clause provided series of scenarios where failure of one scenario dropped enforcement to the next lesser term (prohibited area ranging from 100 mile radius to 5 mile radius; prohibited period ranging from 5 years to 1 year.)||Court held that the lesser covenant in clause could apply. One year and 20 mile radius reasonable and enforceable.|
|Arctec Alloys v. Payne and Alloy Sales, 2001 MBQB 1 (CanLII)|
|Non-compete for 18 months within “Manitoba Region” consisting of several “sales areas”. Clause said court could reduce to 12 months and only certain sales areas if considered unreasonable.||Unreasonable and unenforceable. No evidence of proprietary interest in customer base.|
|Jardine Lloyd Thompson v. Fogal et al., 2007 BCSC 271 (CanLII)|
|Non-solicit preventing employee from soliciting clients he had contact with, or offering employment to company’s employees, for 12 months after termination.||Prima facie enforceable (employer obtained injunction until disposition) Clear, fair and reasonable.|
|Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NLSCTD)|
Home heating fuel delivery
|Non-compete prohibiting engagement in business of petroleum products for 12 months within metro St. John’s area.||Unenforceable. Spatial and temporal aspects reasonable but scope of activity too broad.|
|Sunsweet Fundraisers Inc. v. Moldenhauer and Theissing, 1991 CanLII 7672 (SKQB)|
|Covenant prohibiting soliciting or performing services for employer’s customers in Northeast Saskatchewan sales district for two years.||Reasonable and enforceable.|
|Cantelo (Drillers Tattoos) v Paton, 2011 SKPC 186 (CanLII)|
|Non-compete prohibiting engagement in tattooing business within 200 mile (320 km) radius of City of Yorkton for three years.||Unenforceable. Covenant aimed at eliminating competition as opposed to protection of genuine proprietary interest and therefore against public policy.|
|Napier Environmental Technologies Inc. v. Vitomir, 2002 BCSC 716 (CanLII)|
Paint equipment products (design, distribution, manufacturing)
|Non-compete prohibiting involvement in similar business for one to two years, in area ranging from worldwide to province of BC. Clause stated court to apply severance to obtain appropriate time and area.||Unreasonably broad and unenforceable. Court held it was not acceptable to change provision to make it reasonable.|
|Jordon v. Pacific Sign Group Inc. et al, 2007 BCSC 574 (CanLII)|
Sign design and manufacture
|Covenant prohibiting engagement in similar business, and soliciting clients with whom employee had dealt, for one year. Applied throughout Canada and USA and any local geographic area where company sold products.||Overly broad, unenforceable.|
|BMR Bath Master Reglazing Ltd. v. Watson, 2010 BCSC 1170 (CanLII)|
National Franchisor of “BMR System” of bath remodeling
|Covenants prohibiting solicitation and competition for a period of two years, in any area in province with existing BMR franchise.||Overly broad, unenforceable. Would prevent former employee from engaging in his trade/calling.|
|See Thru Window Cleaners Inc. v. Mahood, 2016 BCSC 2134 (CanLII)|
|Non-compete stating employee will not attempt to start own business in window cleaning, gutter cleaning or pressure cleaning in the City of Kamloops.||Overly broad and ultimately unreasonable.|
|Friesen v. McKague, 1992 CanLII 4023 (MBCA)|
|Non-compete prohibiting employee veterinarian from being concerned or engaged in veterinary practice within 25 mile radius of Steinbach, Manitoba, for three years.||Enforceable. Reasonable in terms of time and scope. No suggestion that public interest adversely affected by enforcement of clause.|
|Donaldson Travel Inc. v. Murphy et al, 2016 ONSC 740 (CanLII)|
|Non-compete prohibiting employee from soliciting or accepting business from any corporate accounts or customers serviced by employer.||Unenforceable. No temporal or geographic restriction, overly broad.|
|Specialized Property Evaluation Control Services Ltd v. Les Evaluations Marc Bourret Appraisals Inc., 2016 ABQB 85 (CanLII)|
|Non-compete prohibiting employee from being engaged in any competing business in Calgary and 100 km from city limits for 3 months. Non-solicit prohibiting employee from soliciting employer's clients to do business with "any other organization" for 6 months.||Non-compete reasonable and enforceable. Non-solicit unenforceable as "any other organization" too broad.|
|Shalimar Physiotherapy Ltd. v. Deans, 1989 CanLII 3207 (ABQB)|
|Non-compete prohibiting employee from providing physiotherapy services to any patient or former patient of employer for 4 years.||Enforceable. Reasonable and not against public interest.|
|Target Marketing & Communications Inc. v. MacDonald, 1998 CanLII 13323 (NLSCTD)|
|Non-compete prohibiting engagement in any business providing similar services as employer, with an office in City or 50 miles from City, for six months.||Unenforceable. Unreasonable and too broad in scope.|
|Lyons v. Multari, 2000 CanLII 16851 (ONCA)|
|"Protective Covenant. 3 yrs. -- 5 mi."||Unenforceable. Overly broad.|
|Promotional Wearhouse Inc. v. Campbell, 2002 ABQB 502 (CanLII)|
|Non-compete prohibiting selling of competitive goods for 12 months.||Unenforceable due to lack of geographic restriction.|
|Business Consultants v. Kindret, 2002 MBQB 124 (CanLII)|
|Covenants prohibiting competition for 60 days, solicitation of employer clients for two years, and solicitation of any "members" with whom employee had dealt with in employment for one year.||Enforceable. Terms reasonable and not against public policy; many alternatives for tax services in area.|
|Reed Shaw Osier Limited v. Wilson, 1981 ABCA 317 (CanLII)|
|Non-compete prohibiting engagement in insurance business for three years within 100 mile radius, and prohibiting involvement in any entity catering to customers of employer in area of insurance.||Unenforceable. Overly broad; would purport to preclude employee from engaging in any aspect of insurance field, which covers a wide range of functions.|
|Direct Integrated Transportation Inc. v. Haryett, 2005 SKQB 55 (CanLII)|
|Non-compete prohibiting employee from providing any courier services for 12 months.||Unreasonable; no geographic limitation.|
|Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII)|
|Covenant prohibiting independent contractor from soliciting business from or providing auctioneering services to any person in Manitoba who is "likely to be in competition with" the business, for 18 months.||Unenforceable. No evidence that business required protection of covenant.|
|Rawlco Radio Ltd v Lozinski, 2012 SKQB 460 (CanLII)|
|Covenant prohibiting employee from competing in Saskatoon or 100 kilometre radius of Saskatoon for six months.||Reasonable and enforceable.|
|Salloum v. Thomas, 1986 CanLII 1238 (BCSC)|
|Partnership agreement with covenant restricting partner from being interested in practice of law within 20 mile radius of Kelowna for two years.||Unenforceable. Contrary to public policy; precluded former partner from earning livelihood.|
|E. P. Chester Ltd. v. Mastorkis et al., 1968 CanLII 747 (NSCA)|
Babywear and hosiery sales
|Covenant prohibiting employee from being interested in competitive business in Atlantic provinces for two years.||Enforceable when province of Newfoundland severed. (Query whether the same result would apply today in light of Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII).|
|Towers, Perrin, Forster & Crosby, Inc v. Cantin, 1999 CanLII 15100 (ON SC)|
|Non-compete prohibiting employee from performing similar services for, soliciting business from, or participating in client relationship management activities with respect to any client of company for two years.||Enforceable. Reasonable as between parties and with reference to public interest. Not a blanket restraint on freedom to compete.|
|Kerzner v American Iron & Metal Company Inc., 2017 ONSC 4352 (CanLII)|
Metal and steel sales
|Non-compete and non-solicit effective for two years in Québec and Ontario. Contained in two year fixed-term employment contract.||Unenforceable. Unreasonable in context of short, fixed-term contract with broad geographic restriction.|
|Steinke o/a Muscle Mechanics Massage Therapy v. Barrett et al., 2012 MBQB 49 (CanLII)|
|Non-compete prohibiting carrying out massage therapy services within 5 km of Muscle Mechanics Massage Therapy for two year period.||Covenants unreasonable. Scant evidence of harm to plaintiff from breach of covenants.|
|Yellowhead Petroleum Products Ltd. v. United Farmers of Alberta Co- Operative Limited, 2004 ABQB 665 (CanLII)|
Contract for Yellowhead to act as sales agent for United Farmers
|Covenant prohibiting Yellowhead from involvement in competing business within defined territories or 30 kilometres of boundary of territories for three years after termination.||Reasonable, enforceable. Required to afford adequate protection to legitimate interest in goodwill.|
|Carrick v. Glover, 2006 BCSC 1329 (CanLII)|
|Settlement agreement after dissolution of partnership had covenant prohibiting involvement in business of training athletes or teams within boundaries of Surrey, White Rock or Langley for seven years.||Enforceable. Reasonable in duration, geographic reach and business objectives. Not injurious to public interest.|
|Mercer v. Barrett, 2000 BCSC 1035 (CanLII)|
|Non-compete prohibiting ownership of dental practice in city of Trail, Rossland, and/or within eight km of business (in Trail) for two years. Non-compete prohibiting practice of dentistry in same area for 3 years, and practice of dentistry in extended care facility within eight km of business for two years.||Injunction application. Court upheld covenant restricting owning/operating dental office within Trail, Rossland, and eight km of business. Evidence of irreparable harm, covenant enforced until its expiry or court decision/order.|
|Dream Weavers v. Astley, 2000 PESCTD 32 (CanLII)|
Industry not stated, but presumably wedding planning
|Non-compete prohibiting involvement in similar or competitive business/venture, for two years.||Unenforceable. Overly broad as no geographic limit.|
|Dent Wizard v. Catastrophe Solutions, 2011 ONSC 1456 (CanLII)|
Car dent repair services
|Non-compete prohibiting engagement in “automotive related business or activities engaged in by Employer”, for two years, in Canada and USA.|
Non-solicit prohibiting soliciting or accepting business from any client or prospective client for two years.
|Non-compete overly broad and unenforceable. Temporal over-reach but geographic scope would have been reasonable.
Non-solicit overly broad and unenforceable. No geographic limit.
|Co-operators General Insurance Co. et al. v. Stoyles et al., 2000 CanLII 28793 (NLSCTD)|
|Non-compete prohibiting soliciting, contracting or “otherwise dealing” with customer of agency for purpose of offering similar or competitive products or services, for one year.||Overly broad, unreasonable restraint of trade, contrary to public policy.|
|Terra Engineering Ltd.v. Stewart, 1994 CanLII 590 (BCSC)|
|Non-compete prohibiting shareholder/employee from involvement with any person or entity interested in any business carried on by the company, within 150 km from any office or place of business of company. In force for 20 months after ceasing to be a shareholder.||Overly broad in prohibited activity and geographic scope. Would prevent former shareholder from working in his profession. Court stated more akin to employer/employee relationship.|
|F & G Delivery Ltd. v. MacKenzie, 2010 BCSC 195 (CanLII)|
Equipment delivery and crane servicing
|Non-solicit prohibiting soliciting any client/customer or potential client/customer of company, within Restricted Area, for two years. Covenant prohibiting causing hiring or taking away of any employee of company employed during three years preceding termination, for three years following termination.||Both clauses much broader than necessary to protect any legitimate proprietary interest of company.|
|Chen v. Kiss, 1995 CanLII 7326 (ONSC)|
Dental Surgeon Associate agreement
|Covenant prohibiting engagement in practice of general dentistry within three mile radius of practice (“Restricted Area”) for three years following termination of agreement. Covenant prohibiting lending money or guaranteeing debts of any individual, firm or corporation engaged in practice of general dentistry within Restricted Area for three years following termination of agreement.||Reasonable in the interests of parties. No evidence showing not reasonable in terms of public interest.|
|Cantol Ltd. v. Brodi Chemicals Ltd. et al., 1978 CanLII 1377 (ONSC)|
|Covenant prohibiting soliciting or endeavoring to take away customers of company for one year following termination.||Injunction application denied. Employee had brought clientele to company when hired; unreasonable that he would be cut off from them.|
|W-K Trucking Inc. v. Bidulock Oilfield Service Ltd., 1998 ABQB 959 (CanLII)|
Independent contractor agreement for trucking services
|Covenant prohibiting trucking company from transporting crude oil or water intended to be used for oil and gas production, to or from a point within Village of Hairy Hill, or within 100 miles from boundary thereof, for three years after termination of agreement.||Injunction granted. Terms reasonable and evidence of legitimate proprietary interests requiring protection.|
|Craig Agency of Ontario Ltd. et al. v. Bennett et al., 1977 CanLII 1145 (ONSC)|
|Non-solicit prohibiting employee from contacting or soliciting any clients of agency for one year following termination. Non-compete prohibiting engagement in employment agency business within 25 miles of agency, for three months following termination.||Injunction application dismissed. Agency could not make out case that employees had intimate or confidential relationship with clients such that they could appropriate agency’s goodwill.|
|AllWest Insurance Services Ltd. v. Meredith Phendler, 2009 BCSC 2 (CanLII)|
|Non-solicit prohibiting employee from approaching or soliciting any clients of agency with a view to conducting insurance-related business, for one year following termination. Non-compete prohibiting employee from conducting insurance-related business with any person/entity that was client of agency during employment, for one year following termination.||Injunction application granted. Sufficiently clear, reasonable and no evidence of being contrary to public interest. Would not prevent former employee from earning a living.|
|Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA)|
Railway tank car lining
|Covenant prohibiting either party from engaging in business of tank lining in Canada for two years following termination of agreement.||Valid and enforceable. Restraint reasonable in terms of interests of parties and public.|
|Evans v The Sports Corporation, 2013 ABCA 14 (CanLII)|
|Covenant prohibiting, for two years following termination of employment, soliciting or attempting to solicit any client of company which has been a client of company or any other company to whom employee provided services related to the company’s business.||Ambiguous and unenforceable. Clause could be read as prohibiting solicitation of past clients which had left company, and had no geographic limitation.|
|2909731 Canada Inc. (Pewter Graphics) v. Toews, 2016 BCSC 852 (CanLII)|
|Covenant prohibiting seeking employment or working in similar field for competitive entity for 12 months following termination.||Unenforceable. Ambiguous, broad and sweeping, no geographic limitation.|
|Hub International v. Redcliffe, 2012 BCSC 1280 (CanLII)|
|Covenant prohibiting soliciting (for 12 months) or doing insurance-related business (for 24 months) with clients or prospective clients of company.||Strong prima facie case that covenant enforceable. Only restricted former employee from dealing with company’s clients.|
|Tal Global Asset Management Inc. v. Wai-Ping, 2003 CanLII 5056 (ONSC)|
|Non-compete prohibiting involvement/connection with any person or company soliciting or serving clients of company, CIBC or its affiliates, for one year. Non-solicit prohibiting soliciting employment or association with any employee/officer/agent of company, CIBC or its affiliates, for one year.||Unreasonable as to scope of activities and no geographic limit. Injunction application dismissed.|
2. Covenants Connected to the Sale of a Business
|Restauronics Services Ltd. v. Forster, 2001 BCSC 922 (CanLII)|
Sale of food service business
|Covenant prohibiting vendors from providing food services to similar clients, for five years within BC, Alberta and 100 mile radius of any operations of purchaser.||Enforceable. Reasonable, once geographic limitation severed.|
|Sterling Fence Co. v. Steelguard Fence Ltd., 1992 CanLII 1804 (BCSC)|
Chain link fencing business
|Covenant prohibiting vendor from engaging in fencing business in BC, Alberta, Saskatchewan, Manitoba and Washington state, for three years.||Enforceable, once geographical area severed to include only BC and Washington state.|
|Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA)|
|Covenant preventing vendor from soliciting customers of business for three years.||Enforceable. Restrictions reasonable.|
|Doerner v. Bliss & Laughlin Industries Inc.,  2 SCR 865, 1980 CanLII 50 (SCC)|
|Covenant prohibiting vendors from carrying on or associating with a like business for five years.||Enforceable. Unambiguous and reasonable.|
|Brouwer Claims Canada & Co. Ltd. v. Doge, 2002 BCSC 988 (CanLII)|
|Contract of employment and purchase of assets including goodwill. Covenant prohibiting carrying on business as insurance adjuster for 12 months within 50 km of head office in Vancouver.||Reasonable and enforceable.|
|Simoni v. Sugarman, 2000 CanLII 20388 (NLSCTD)|
|Covenant prohibiting interest in business/entity in city of St. John's, which solicits or competes for patients of clinic, for two years. Non-compete prohibiting carrying out podiatric care in St. John's for two years.||Covenant on soliciting patients reasonable and enforceable. Covenant prohibiting podiatric care unreasonable, unenforceable.|
|1598631 Ontario Inc. v Imvescor Restaurant Group Inc., 2015 ONSC 1888 (CanLII)|
|Covenant restricting franchisee, for five years, within 10 km of any Baton Rouge Restaurant in Canada, from being engaged or interested in any substantially similar business "selling generally all the products listed in Section 21" (of manual).||Enforceable. Limited covenant that applied only if former franchisee operated competing business using recipes contained in Baton Rouge Manual.|
|Aquifer Distribution Ltd. v. McMurtry, 2008 SKQB 456 (CanLII)|
Plumbing and Heating
|Non-compete prohibiting employee from engagement in business in direct competition with company, for one year, in Saskatchewan. Non-solicit prohibiting, for one year, soliciting or accepting business from client or potential client of company served by employee within one year preceding termination. Non-solicit prohibiting, for one year, hiring or inducing any other employee to leave employ of Company.||Unenforceable. Went beyond protecting company's legitimate client base. Too broad, against public interest.|
|IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII)|
|Non-compete prohibiting involvement in "a business that competes with IRIS" within 5 km of Vernon location, and from soliciting for 3 years. Non-solicitation prohibiting any client in habit of dealing with IRIS.||Unenforceable. Overbroad, unreasonable between parties.|
|Syntax Systems Ltd. v. Mid-Range Computer Group Inc., 2003 CanLII 29363 (ONSC)|
|Restrictive covenant prohibiting employee from soliciting or dealing with clients of Syntax, for two years||Unenforceable. Too broad in relation to legitimate interests of Syntax.|
|MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168 (CanLII)|
Medical equipment sales, agreement for purchase of Peterborough franchise
|Covenant prohibiting engagement in “similar” business within 30 miles of MEDIchair store, for 18 months from termination of agreement.||Term “similar business” not ambiguous for purposes of employer. Temporal or territorial boundaries not unreasonably broad. However, covenant unreasonable as between parties in the circumstances of the particular Peterborough franchise because MEDIchair did not have legitimate/proprietary interest to protect within territorial scope.|
|1059028 Alberta Ltd v Capio Oilfield Services Ltd, 2016 ABQB 234 (CanLII)|
Share purchase agreement, oilfield tubular supply business
|Non-compete prohibiting vendor from involvement in “same business” anywhere that company “now operates”, for five years from closing date.|
Non-solicit prohibiting soliciting business from “present customer” for five years.
|Enforceable. Scope of activities, duration and geographic boundaries ascertainable and reasonable.|
|853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII)|
Office furniture sales
Share purchase agreement
|Non-compete prohibiting shareholders from serving or providing advice to any customers of company within 100 mile radius of Kamloops, or any suppliers of company, for two years after ceasing to hold interest in company.||Injunction application granted. Clause not ambiguous, reasonable between parties and with regard to public interest. Restraint applied only to customers of company, not business at large.|
|GDL Solutions Inc. v. Walker et al., 2012 ONSC 4378 (CanLII)|
|Non-compete prohibiting direct or indirect involvement with similar or competitive business, within 10 km of Province of Ontario, for 3 years following sale.||Reasonable and enforceable, but for 10 km “ring” surrounding Ontario, which was severed from clause, leaving restricted area to Ontario alone.|
|Wong v. Cook, 1979 CanLII 462 (BCSC) (CanLII)|
Pick-up and delivery services
|Non-compete prohibiting vendor, for 5 years from date of agreement, from directly or indirectly engaging of being interested in any similar business in BC.||Valid and enforceable. Purchaser made a payment for “goodwill” – a proprietary interest he was entitled to protect.|
|Anderson v. Berry-Heldt, et al, 2005 BCSC 1825 (CanLII)|
|Non-compete prohibiting shareholder from directly or indirectly being interested in similar or competitive business in BC, Alberta, Saskatchewan, Manitoba or Ontario .|
Non-solicit prohibiting accepting or attempting to divert any customer or supplier, or potential customer or supplier, during term of agreement and for one year after shareholder ceases to hold shares.
|Enforceable. Reasonable in terms of geographic scope and restricted period.|
|Kent Building Supplies v. Magasin du Ridge Ltée, 2004 NBQB 152 (CanLII)|
Home renovation business
|Non-compete prohibiting vendor from directly or indirectly being interested in, for 5 years following the closing date, any competitive undertaking, within 200 km of City of Campbellton, NB.|
Non-solicit prohibiting soliciting any suppliers, customers or employees of business, for 5 years following closing date.
|Enforceable. Reasonable restraint of trade.|
- 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.
- 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.
- Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at paras. 58-60.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at para. 32.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 39
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 40.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 2.
- Canadian American Financial Corp. (Canada) Ltd. v. King, 1989 CanLII 252 (BCCA), at para. 3.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 50.
- Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173, at paras. 17-29.
- Canadian American Financial Corp. (Canada) Ltd. v. King, 1989 CanLII 252 (BCCA), at para. 6.
- 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.,  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.
- 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.
- Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co.,  2 Q.B. 450 (C.A.), cited with approval in Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at para. 52.
- Shafron v. KRG Insurance Brokers (Western) Inc.,  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.
- 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).
- 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.,  SCR 148, 1970 CanLII 163 (SCC)
- Burgess v. Indust. Frictions & Supply Co., 1987 CanLII 2722 (BCCA), at para. 24.
- See, for example, Inglis v. The Great West Life Assurance Co., 1941 CanLII 85 (ONCA).
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97.
- 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.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at paras. 50-51.
- IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 57-59, aff’d 2017 BCCA 301 (CanLII).
- Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at paras. 40-41.
- General Billposting Co ltd. v. Atkinson,  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.
- Maguire v. Northland Drug Co. Ltd.,  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.
- Groupe Restaurants Imvescor Inc. v. Zliv Creations Inc., 2017 NSSC 31 (CanLII), at para. 67.
- IBM Canada Ltd v Almond, 2015 ABQB 336 (CanLII), at paras. 23-24.
- Smith v. Union of Icelandic Fish Producers Ltd., 2005 NSCA 145 (CanLII).
- 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.
- 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.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 55. Medtronic of Canada Ltd. v. Armstrong,  O.J. No. 4860.
- 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.[note]853947 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).