Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
B. Detailed Discussion
1. Legitimate Proprietary Interest
The courts have held that trade secrets, confidential information and customer lists are legitimate proprietary interests.1
Such information may include contact information, the clients’ needs or preferences and the rates the clients are willing to pay.2
Further, the courts have confirmed that while employers have a legitimate proprietary interest in their “trade connections” and their “goodwill”, i.e. in the loyalty of their customers, in the absence of special circumstances they do not have a proprietary interest that entitles them to protection from the competition of former employees per se. In Maguire v. Northland Drug Co. Ltd., the Supreme Court of Canada stated that “competition, as such, is something which will not be restrained.”3
In Winnipeg Livestock Sales Ltd. v. Plewman, the Manitoba Court of Appeal held that the failure of the plaintiff, a livestock auction market, to lead evidence to indicate there was any significant degree of customer loyalty in the business was fatal to the enforceability of a clause that combined non-competition and non-solicitation covenants.4
In a case involving an employee working in the engine parts division, the British Columbia Supreme Court recognized that the employee had an opportunity to establish long-term relationships with and develop knowledge of the employer’s customers.5
An oral surgeon had some proprietary interest in some regular referring dentists, but had no proprietary interest in dentists in the city who had never referred patients to him in the past or who stopped referring patients to him before the defendant’s employment. Accordingly, a non-competition clause was not enforced.6
In the case of a long-standing contract with a large public health body, a court held that the employer had a proprietary interest in its relationship with that body, which “it had built and established over the last 15 years.”7
A covenant extending beyond a business’s own customers to include those either initially brought to the business by the individual or subsequently attracted by the individual while employed may be unenforceable on the basis that, while an employer has a proprietary interest in its own clients, that interest may not extend to clients that are not its own. In a case involving a massage therapy clinic, the court found that an independent contractor who rented space at the clinic had developed her own clientele through word of mouth and her own promotional efforts. The court held that as an independent contractor, the defendant was not bound by fiduciary or employment obligations. The clients she generated were her own and hence the non-competition clause would prevent her from practicing her profession in relation to her own clients. The court concluded that the clinic’s proprietary interests could have been protected by a non-solicitation clause and that the non-competition clause “was little more than an attempt to protect (the clinic) from competition generally.”8
Such concerns about the application of non-competition covenants to clients brought to a business or attracted to a business by a worker have not been limited to independent contractors. Where a legal headhunter was hired by a company that had not previously engaged in the legal recruitment business in Calgary and was dismissed two year later, the court held there was a serious issued to be tried as to whether the company had an exclusively proprietary interest in the clients worthy of protection under restrictive covenants. Most, if not all, of the clients the employee continued to deal with after her termination were ones she had brought to the company at the outset of her employment. The court therefore declined to issue an interlocutory injunction.9
Generally, however, it has been held that “when an employer introduces an employee to customers and facilitates a relationship between its customers and the employee, there is a proprietary interest entitled to protection.”10 Where investment advisors came to the employer with few clients and were essentially handed a book of business and did not subsequently attract on their own a significant number of new clients, the employer had a legitimate proprietary interest in the list of clients.11 Similarly, where a dentist contracted with a management company to obtain the benefits of a “turnkey” dental practice built by others, which included a list of clients, premises and equipment, the management company’s goodwill in its “location, facility and Premises” constituted a legitimate proprietary interest.12
Where a salesperson was solely responsible for maintaining his employer’s customer relations with a major client and, in the space of only four months, had developed a close business relationship with his counterpart at the client, the employer had a legitimate proprietary interest to protect. A trade attachment of this nature is a form of goodwill and business asset vulnerable to competition.13 A courier driver who, because of his seniority, was able to choose his customers, had developed “a special, close relationship” to the 15 or 16 customers he serviced on a regular basis and hence a non-solicitation covenant was reasonable.14 In another case, where the plaintiff paid the defendant insurance adjuster a fixed salary in order to subsidize his income while the business became profitable, it “acquired a proprietary interest in the business as it developed.”15
A court was prepared to accept that an optometry clinic may have “a reasonable economic interest” in its patients that had regular eye exams and new prescription products, but found there was insufficient evidence to establish it had a similar interest in protecting its ability to sell non-prescription reading glasses or sunglasses to the same patients. While the court struck down the covenant on the basis of the scope of activities restricted, an additional basis was the lack of a legitimate proprietary interest, it would seem.16
In drafting a non-competition or non-solicitation clause, counsel must be careful to focus precisely on the legitimate proprietary interest of the employer and not overreach. The danger of drafting a broad covenant without regard to what is actually protectable was well illustrated by a court’s treatment of a covenant that purported to prohibit a software developer from providing service “in any capacity” in any business “competitive with the business carried on by the Company or any of its subsidiaries or affiliates at the time of his termination.” The words “in any capacity” were fatal. The court held that the clause overreached in that the employer did not establish how its legitimate proprietary interests would be threatened if the former employee were to:
• Work as a janitor for the competitor;
• Provide hardware (as opposed to software) support for the competitor, either as an employee or via his own business;
• Develop his own software unrelated to the software at issue in the litigation, sell it to the competitor and provide support to the competitor in its use of it; or
• “Start a band in Mexico and be engaged as an independent contractor by (the competitor) to play at a staff retreat in Cancun.”
The court had no difficulty concluding that the covenant was a “blanket prohibition which unreasonably restricts (the employee’s) economic interests and goes beyond that reasonably necessary to protect (the employer’s) claimed proprietary interest”.17
The clause suffered from other overbreadth issues. The reference to the business of any of the company’s “subsidiaries or affiliates” meant the employee was prohibited from working in the field of providing gas cards and gift cards, which was an affiliated company’s line of business. Here, too, there was no evidence as to how the plaintiff’s legitimate proprietary interest would be threatened. Nor was there evidence as to why a prohibition in the same covenant on holding more than 1% of a publicly traded corporation protected a legitimate proprietary interest.18
A clause also may overreach if the nature of the activities prohibited extends beyond the business of the former employer. That was the case where a clause prohibited doing “business” with the employees’ former clients in the insurance business. The court held the clause was unreasonable because it would purport to prohibit the employees from dealing with their former clients even if they began anew in a different business.19
This reasoning may also be applied within the context of similar, but not same businesses. In one case, a non-solicitation clause which prohibited the employee from soliciting any clients relating “to the business of general insurance and financial services” was too broad, as the employee had only sold group benefits products and the covenant would have prohibited him from soliciting those customers to sell general insurance or financial products.20 To a similar effect was a court’s decision that a clause prohibiting the sale of any competitive product of the employer was unreasonable when the employee was only involved in the sale of engines and engine parts, a subset of the employer’s larger business.21
A covenant that prohibited a departed employee from operating a competing business that provided fire services to his former customers was not enforced, on the bass that it also prohibited him from offering security products and services, an area in which he had not been involved with his former employer.22
In another case, a prohibition on competing against an optometry clinic was too broad when it purported to restrict competition via any entity that dealt with prescription or non-prescription eye glasses or sun glasses. The court held that the prohibition would prevent the defendant from working in a food market, drug store or similar outlet that sold sunglasses or non-prescription reading glasses.23
Not surprisingly, where a non-solicitation agreement purported to prohibit solicitation of the former employer’s customers “in any business or activity”, the court held that the clause was too broad in that the employer had a legitimate proprietary interest in preventing solicitation of its customers in its own line of business, but not from solicitation for other types of businesses.24
And where the covenant purported to prohibit soliciting or accepting business from “an individual or entity with which (the defendant) personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of (his employment)” the court noted that the prohibition would apply even to those with whom the defendant had not contact in connection with his employment duties. In refusing to enforce the covenant, the court noted “As drafted, his drycleaner would qualify.”25
An interesting approach to resisting enforcement of a non-competition clause was illuminated in a BC decision where the defendants, at the outset of an application for an interlocutory injunction, entered into a consent order prohibiting solicitation of clients, the breach or use of confidential information and requiring the destruction of confidential information in the hands of the defendants. The defendants had also entered into an agreement between themselves prohibiting solicitation of the plaintiff’s clients by the employee and regarding confidential information. The court held that the consent order and agreement protected the legitimate proprietary interests of the applicant and hence it was not necessary to restrain the defendant employee from working for the defendant employer.26
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 27 and cases cited therein. See, however, the discussion below in section 2 under “Nature of Activities Prohibited” as to whether a legitimate proprietary interest in confidential information will be sufficient to justify a non-competition covenant.
- Stress-Crete Limited v. Harriman, 2019 ONSC 2773, at para 51. However, an employer may not have a proprietary interest in simple contact lists that contain nothing beyond what is available on the internet: 2909731 Canada Inc. (Pewter Graphics) v. Toews, 2016 BCSC 852, at para. 81.
- Maguire v. Northland Drug Co. Ltd.,  SCR 412, 1935 CanLII 35 (SCC) at p. 416.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at paras. 27-29 and cases cited therein.
- ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at para 43.
- Lyons v. Multari, 2000 CanLII 16851 (ONCA).
- IBM Canada Ltd v. Almond, 2015 ABQB 336 (CanLII),at paras. 60-61, though the application for an interlocutory injunction was denied on other grounds.
- Boxall v. Fonkalsrud, 2014 SKQB 134 (CanLII), at paras. 52-56.
- Human Resource Capital Group Inc. v. Reis, 2009 ABQB 159 (CanLII), at paras. 11-13.
- Specialized Property Evaluation Control Services Ltd v Les Evaluations Marc Bourret Appraisals Inc, 2016 ABQB 85 (CanLII), at para. 41.
- MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 75-80, affirmed, 2018 ONCA 440 (CanLII).
- Smilecorp Inc. v. Pesin, 2012 ONCA 853 (CanLII) at paras. 24, 30.
- Atlantic Business Interiors Limited v. Hipson et al, 2004 NSSC 32 (CanLII), at para. 46, aff’d 2005 NSCA 16 (CanLII). However, the restrictive covenant was not upheld as the non-competition clause went further than what was necessary to protect the interest of the employer. A non-solicitation clause would have been sufficient.
- Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD).
- S.J. Kernaghan Adjusters Limited v. Kemshaw, 1978 CanLII 260 (BCSC), at para. 5, affirmed, 1978 B.C.J. No 573 (CA).
- IRIS The Visual Group Western Canada Inc. v. Park, 2016 B.C.S.C. 2059 (CanLII), at para. 29, aff’d 2017 B.C.C.A. 301 (CanLII).
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 43-44.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 46-47.
- HL Staebler Co. v. Allen, 2008 ONCA. 576 (CanLII), at para. 50.
- Valley First Financial v. Trach, 2004 BCCA. 312 (CanLII), at para. 48.
- ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at para 61.
- 0777792 B.C. Ltd. v. Da Costa, 2019 BCSC 1839, at para. 22.
- IRIS The Visual Group Western Canada v. Park, 2016 B.C.S.C. 2059 (CanLII) at para. 28, aff’d 2017 B.C.C.A. 301 (CanLII).
- Globex Foreign Exchange Corporation v. Kelcher, 2011 A.B.C.A. 240 (CanLII), at para. 21.
- Labrador Recycling Inc. v. Folino, 2021 ONSC 2195, at para. 24.
- Westpac Solutions Ltd. v Morgan, 2018 BCSC 976 (CanLII), at paras. 12, 15-17 and 51.
(a) Confidential Information as a Legitimate Proprietary Interest in Non-Compete or Non-Solicit Clauses
The development of Canadian case law has not addressed whether the need to protect the use or disclosure of trade secrets or confidential information, in and of itself, will justify the imposition of a non-competition or non-solicitation covenant. It is clear that protection of such information is a legitimate propriety interest1 which would justify a confidentiality covenant.2 However, Canadian common law, despite common roots with English law, has not developed in the same manner to address whether this proprietary interest justifies a more onerous non-compete or non-solicit covenant.
In Elsley v. J.G. Collins Ins. Agencies,3 the Supreme Court of Canada adopted the following passage from the House of Lords in Herbert Morris Limited v. Saxelby concerning the circumstances in which non-competition or non-solicitation covenants will be enforceable:
Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.4
The emphasized passages from the Herbert Morris decision clearly contemplated a situation where an employee might become so familiar with the employer’s trade secrets that a non-competition or non-solicitation covenant could be justified to restrict the employee’s use of that confidential information with another employer. Indeed, later in the same decision, the author of this oft-quoted passage, Lord Parker of Waddington, later described the rationale for upholding a non-competition covenant as follows:
In fact, the reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, or the protection of which such a restraint is – having regard to the duties of the employee – reasonably necessary.5
In separate, concurring reasons, Lord Atkinson also stated that a non-competition covenant, in the right circumstances, may be justified by the need to protect trade secrets:
In all cases such as this, one has to ask oneself what are the interest of the employer that are to be protected, and against what is he entitled to have them protected.
He is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use.6
Despite the Supreme Court of Canada’s approval of the Herbert Morris decision in Elsley, subsequent case law in Canada has focused on the need to protect the former employer from the employee’s knowledge of and personal influence over the employer’s clients. To the extent that the employee’s familiarity with confidential information has been considered a legitimate proprietary interest justifying a non-competition or non-solicitation covenant, it most often has been in conjunction with a consideration of the employee’s personal influence over clients, rather than as a stand-alone ground.7
For instance, the court in Woodward v. Stelco found the employer to have a proprietary interest in its marketing strategy, pricing policies and customer base requiring protection and noted that the defendant, after leaving Stelco, maintained knowledge of its pricing policies and practices. At the same time, the court emphasized that the defendant had been “a senior executive with overall responsibility for sales and marketing, and was well acquainted with Stelco’s customers” and that prior to his retirement, he was “in control of Stelco’s trade connection” within the meaning of Elsley”. Thus, while Stelco’s confidential information was a proprietary interest deserving of protection, the court also relied on the defendant’s influence over Stelco’s trade connection.8
In Sunsweet Fundraisers v. Foldenhauer and Theissing,9 the defendant sales representative had executed a covenant prohibiting him from soliciting or performing work for the plaintiff’s customers within his territory for a period of two years from termination of his employment. The defendant sought an interim injunction to enforce the covenant after his resignation.
The court held the plaintiff had a legitimate proprietary interest to protect, given the defendant had been was “privy to confidential information such as customer pricing lists, its policies, selling strategy and promotional material.” At the same time, the court emphasized that the plaintiff had provided the defendant with the benefit and control of its previous trade connection and had put him in control of moving forward. Again, protection of confidential information was coupled with protection of a trade connection in justifying the covenant.10
By contrast, in the United Kingdom, the courts will protect trade secrets or confidential information by upholding a non-competition covenant, provided it goes no further than necessary to achieve that aim. In Littlewoods Organisation v. Harris, Lord Denning, after citing the Herbert Morris decision, summarized the law as follows:
It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.11
Given the express adoption of the Herbert Morris decision by the Supreme Court of Canada in Elsley, it is submitted that in the right circumstances, Canadian courts should also uphold a non-competition covenant on the basis of the need to protect trade secrets or confidential information.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 27 and cases cited therein.
- American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA), at p. 532.
- Elsley v. J.G. Collins Ins. Agencies,  2 S.C.R. 926, 1978 CanLII 7.
- Herbert Morris Limited v. Saxelby,  1 A.C. 688 at p. 709, cited in Elsley v. J.G. Collins Ins. Agencies,  2 S.C.R. 926, 1978 CanLII 7, at p. 927.
- Herbert Morris Limited v. Saxelby,  1 A.C. 688 at p. 710.
- Herbert Morris Limited v. Saxelby,  1 A.C. 688 at pp. 701-702.
- Though in an older decision, the BC Court of Appeal considered whether the appellant company had a legitimate proprietary interest in protecting particular information it had characterized as trade secrets which would justify a non-competition covenant. The court held that the manner in which the appellant carried on its business was not a trade secret and that what it sought to do was to protect its “competitive positon rather than any proprietary rights.” American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA) at pp. 529-531. See also Westpac Solutions Ltd. v Morgan, 2018 BCSC 976 (CanLII), where the court agreed that the plaintiff employer had a legitimate proprietary interest in its information relating to its business, including client lists, employee directories, costing information, equipment list and pricing information, but was not prepared to enforce a non-competition covenant given a consent order and agreement concerning solicitation of clients and confidentiality of documents sufficiently protected those interests.
- Woodward v. Stelco Inc., 1996 CanLII 8180 (ONSC), at para. 44, aff’d 1998 CanLII 17686 (ONCA).
- Sunsweet Fundraisers Inc. v. Moldenhauer and Theissing, 1991 CanLII 7672 (SKQB).
- Sunsweet Fundraisers Inc. v. Moldenhauer and Theissing, 1991 CanLII 7672 (SKQB), at para. 22.
- Littlewoods Organisation v. Harris,  1 W.L.R. 1472 (C.A.) at p. 1479.
2. Reasonableness Between the Parties
In the context of an employment contract, the party relying on the covenant bears the onus of establishing that it is reasonable.1 By contrast, in the commercial context, i.e. the sale of a business, the Supreme Court of Canada held in Payette v. Guay that “a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable.” 2While the decision was rendered under the civil law of Quebec, the principle is equally applicable under common law.
- Shafron v. KRG Insurance Brokers, , 1 S.C.R. at para. 27; Maguire v. Northland Drug Co. Ltd.,  SCR 412, 1935 CanLII 35 (SCC) at p. 416; Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 5.
- Payette v. Guay inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
In a 1970 decision, Cameron v. Canadian Factors Corp. Ltd., the Supreme Court of Canada held that the determination of the reasonableness of a covenant’s length “requires an assessment of what is a reasonable time within which the respondent should be expected to put someone else in (the employee’s) place to deal with clients’ accounts and with prospective clients in order to protect the respondent’s business interests”.1 Subsequent case law has rarely cited this decision for this point2 and instead courts often have simply referred to what other courts have decided as being reasonable, without an underlying analysis. Undoubtedly, however, the court’s direction to consider the length of time it would take to put into place a replacement employee to deal with customers is binding and sound.
In an Alberta decision, the court opined that the general law in Canada is that enforceable restrictions need be “shorter or narrower where the job is less sophisticated or entry level” and further posited a “continuum along the employment spectrum”, with the courts more willing to enforce longer restrictions “as one moves from unskilled and introductory positions into either management or into circumstances where a great amount of proprietary material has been vested in the employee.”3 There is some merit in this characterization of the authorities. To this should be added, however, the observation that, in more recent years, the periods of restraint condoned by the courts have been shorter. Further, shorter periods of restraints for non-competition covenants appear to be necessary for such covenants to be accepted than is the case for non-solicitation covenants. Longer periods, such as 24 months, have been allowed for non-solicitation clauses where the restrictions are limited to soliciting the clientele the employee dealt with.4
In some of the older cases, the courts were prepared to enforce a non-competition covenant of up to 24 months, or even three years5, though in more recent times, 12 months often is the longest period of protection allowed.
In S.J. Kernaghan Adjusters Limited, released not long after Elsley, the BC Supreme Court upheld a clause restricting competition by an insurance adjuster for a period of 24 months.6
In an application for an interlocutory injunction, a court had no hesitation in concluding that covenants which lacked temporal limits rendered them prima facie unreasonable and hence the plaintiff did not meet the “strong prima facie case” burden.7
A 12-month restriction on active solicitation of existing customers in the courier business was reasonable.8 A non-competition covenant of 12 months for a salesperson was reasonable given the time and effort that might be required to rebuild a customer relationship with new sales personnel.9 Similarly, a restriction on soliciting customers in the school photography business for 12 months was reasonable, as it allowed the employer to hire and train a new sales representative in the year of termination and ensure the new employee was in place to service school accounts that year and the next school year.10
By contrast, a 12-month restriction on competition was unreasonable where the employer attempted to protect its proprietary interest in its software, as “the evidence did not establish the duration of the software development lifecycle, or tie this to the duration of the proprietary interest.”11 In another case, a 12-month restriction on accepting business in the aluminum scrap industry was held to be too long, where the evidence indicated deals come together in the aluminum scrap industry within hours and hence the plaintiff would have frequent contact with its vendors and purchasers and would not require a year to solidify relationships.12
Despite the courts’ trend toward tolerating shorter periods of non-competition covenants, they will still uphold longer restraints if there is evidence to show a longer period is necessary to protect a reasonable propriety interest. Thus, a court found that a three-year restriction on competition for an optometrist was reasonable in terms of length (but not reasonable in other respects) based on evidence put forward from an optometric clinic of there being an average of two years between optometric appointments and it taking an average of six to 12 months to recruit and train a new optometrist.13
At the same time, a failure to lead evidence as to the reasonableness of the length of a restrictive covenant has been held to be fatal to its enforceability. A court refused to enforce non-competition clause against a software developer where the evidence did not establish the software development lifecycle.14 In an application for an interlocutory injunction to the enforce non-solicitation clauses against three defendant investment advisors, the plaintiff’s failure to provide any evidence as to why clauses of 12 and 24 months were necessary or to explain why the junior advisor needed to be restricted for the longer period of 24 months while the senior advisors were restricted for only 12 months caused the court to find the clauses arbitrary and hence unenforceable.15In another decision, the employer’s failure to lead evidence as to why two years was necessary for a non-solicitation clause, when the length of a non-competition covenant was 18 months, led the court find the employer had not satisfied its onus to establish the former was no broader than necessary.16
Where there is a fixed-term contract of employment, one factor to consider in assessing reasonableness “is whether it is temporally proportionate to the term of employment.” Thus, where an employee was subject to a two-year fixed term contract, albeit renewable, it was unreasonable to insist on an 18-month non-compete covenant and a 24-month non-solicit covenant.17
In WJ Packaging Solutions Corp. v. Park, the court upheld five year non-competition and non-solicitation obligations under rather unique circumstances. The employer had entered into a non-disclosure, non-competition, and non-solicitation agreement with the employee upon realizing she was resigning. The court was prepared to uphold the clause on the basis that the agreement also provided five years’ compensation.18
Sale of Business
Given that the execution of a non-competition agreement is often a key condition in the sale of a business, the courts are prepared to enforce much longer covenants than in a typical employer-employee relationship. In Payette v. Guay, the Supreme Court of Canada held that the criteria for analyzing restrictive covenants in the context of a sale of assets is less demanding than in the employment context and the basis for finding such covenants to be reasonable much broader.19 While the case was decided in the context of Quebec civil law, the principle has equal applicability in the common law provinces. Further, there is no difference in principle between a sale of assets or sale of shares.20
Where the vendor of a business engaged in the sale and service of locks, alarms and various other building security equipment agreed not to set up a competing business with the purchaser for a period of 10 years, the restriction was held to be reasonable.21 In another case in an application for injunctive relief, the court held the plaintiff had a reasonable prospect of success in upholding a 10-year restriction on competition in the three jurisdictions where it did business, followed by a lifelong restriction on the defendant making and selling jewelry of his own creation.22 A five-year non-competition agreement executed by the vendors as part of a sale of an oil and natural gas contract drilling business was reasonable23, as was a non-competition covenant applying to the vendor of an insurance brokerage business for five years following the termination of his employment with the purchaser.24
- Cameron v. Canadian Factors Corp. Ltd.,  SCR 148, 1970 CanLII 163 (SCC) at pp. 163-164. Though the decision emanated from Quebec and involved a consideration of its Civil Code, the court stated the same principle applies under the common law.
- Though see IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 34-36, aff’d 2017 BCCA 301 (CanLII) (discussed further below), where the court engaged in this type of analysis, without citing the Cameron decision.
- The Travel Company Ltd. v. Keeling, 2009 ABQB 399 (CanLII) at para. 53.
- MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 95-103 and cases cited therein, affirmed, 2018 ONCA 440 (CanLII).
- Lyons v. Multari, 2000 CanLII 16851 (ONCA), at para. 29, though the non-competition clause was not upheld for other reasons; Friesen v. McKague, 1992 CanLII 4023 (MBCA), at p. 9.
- S.J. Kernagahn Adusters Limited v. Kemshaw, 1978 CanLII 260 (BCSC) at para. 5, aff’d, 1978 B.C.J. No 573 (CA), at paras. 8 and 17.
- Benson Kearley & Associates Insurance Brokers Ltd., v. Jeffrey Valerio, 2016 ONSC 4290 (CanLII) at para. 41.
- Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), aff’ing 1997 CanLII 15963 (NLSCTD), at para. 42.
- Atlantic Business Interiors Limited v. Hipson et al, 2004 NSSC 32 (CanLII) at para. 46, affirmed 2005 NSCA 16 (CanLII), at para. 49.
- Jostens Canada Ltd. v. Gendron, 1993 CanLII 5594 (ONSC), at para. 36.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 48.
- Labrador Recycling Inc. v. Folino, 2021 ONSC 2195, at para. 25.
- IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 34-36, aff’d 2017 BCCA 301 (CanLII).
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 48.
- National Bank Financial Inc. v Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at paras. 74-76.
- Quick Pass Master Tutorial School Ltd. v Zhao, 2018 BCSC 683 (CanLII), at para. 39.
- Kerzner v American Iron & Metal Company Inc., 2017 ONSC 4352 (CanLII) at paras. 88-93. The court was also influenced by the fact that the employee worked for the business for 35 years.
- WJ Packaging Solutions Corp. v. Park, 2021 BCSC 316, at para. 63.
- Payette v. Guay inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
- North Rim Pulp and Paper Inc. v. Grenier, 2019 BCSC 1741, at para. 50.
- Steeves v. Capital Safe & Lock Services, 2000 NBCA 1 at para. 37.
- Stittgen v. Luetke-Brinkhaus,  B.C.J. No. 972 (CA).
- Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 (CanLII), at para. 75.
- Dale and Company Ltd. v. Land, 1987 ABCA 197 (CanLII).
(c) Geographic Breadth
While the geographic breadth of a covenant will be assessed for reasonableness in many instances, in cases where a non-solicitation clause is contested, the geographic breadth may not be an issue. Provided other aspects of the covenant are reasonable, the lack of a geographic restriction will not be problematic. Thus, a prohibition relating to “customers of the company” at the time of termination or within a period of 12 months prior to termination was reasonable.1
Indeed, the Supreme Court of Canada has confirmed that, unlike a non-competition clause, a non-solicitation clause does not generally require a territorial limitation to be reasonable. In view of the modern economy and technology, customers are no longer limited geographically, rendering territorial limitations, in general, obsolete.2
A non-competition covenant that covered mainland Nova Scotia was reasonable where a large part of the former employee’s business was transacted in Halifax but he had serviced customers outside of this area as well.3 A clause prohibiting competition by a veterinarian within a radius of 25 miles from Steinbach, Manitoba, was reasonable.4
A prohibition on an insurance adjuster competing within 25 miles of Victoria was reasonable5, whereas a clause which prohibited doing business with former clients of an insurance business was unreasonable because it would purport to restrict such competition not only in the vicinity of where the agency did business, but even if the employees “relocated to the far reaches of Ontario or, for that matter, elsewhere in Canada.”6 Similarly, a clause which prohibited the acceptance of employment where the former employer’s trade secrets or confidential information would be “highly useful” to the new employer and “highly likely” to be disclosed to the competitor was unreasonable, as it could apply to all of Canada and to markets abroad.7
Where a non-competition agreement prohibited the operation of a dental office within a radius of 15 kilometers, the measurement was to be made by a straight line from the former dental office, i.e. “as the crow flies”, not by the distance travelled along existing roadways.8 In another dental case, the term “within a five-kilometer radius of (the dental practice)” was held to be clear and specific, referring to the radius and not driving distance.9
A covenant that prohibited being “associated in any way with any company or business which offers or sells goods or services in North America which compete with any goods or services of the Company” was not enforceable where the company, though Canadian based, did little business in Canada and there was no evidence it did business in Mexico or the Caribbean. The court also criticized the breadth of the covenant in that it would forbid the defendant to “accept a contract position (be associated in any way) as a janitor (or bus driver) in Outer Mongolia for a Chinese Company, if that company sold polyurethane in North America.”10 Similarly, a clause that prohibited competition in North America was overly-broad where the company, at the time the covenant was executed, did business in Canada and the United States but did not establish the covenant should extend to Mexico or the Caribbean.11
A covenant’s use of the words “Brantford Peninsula” in relation to a real estate agent’s employment contract was ambiguous.12
Sale of a Business
As is the case in assessing whether the length of a covenant is reasonable, the courts will give more deference to the agreement of the parties on the geographical breadth of the covenant when it is negotiated in the context of the sale of a business as opposed to a covenant contained in a normal employment relationship.13 Where the business of a natural gas and oil rigging company had been concentrated in certain regions of Saskatchewan and Manitoba, it was nonetheless reasonable to prohibit competition for a period of time in the “Provinces of Western Canada”. The court found that the very nature of the drilling business was designed to be mobile and that the “scene of the action” can and does change.14
- Atlantic Business Interiors Limited v. Hipson et al, 2004 NSSC 32 (CanLII) at para. 46, affirmed 2005 NSCA 16 (CanLII), at para. 49. See also W.R. Grace & Co. of Canada Ltd. v. Sare et al., 1980 CanLII 1568 (ONSC) at pp. 12-13. Though query whether the possibility of soliciting clients in a territory beyond the territory served by the former employer might render a clause too broad. See the approach adopted by the Ontario Court of Appeal in HL Staebler Co. v. Allan, 2008 ONCA 576 at para. 50 regarding a prohibition on “doing business” with customers.
- Payette v. Guay inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at paras. 69 and 73.
- Atlantic Business Interiors Limited v. Scott Hipson et al., 2004 NSSC 32 (CanLII), at para. 49, though the covenant was not upheld on other grounds.
- Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 9.
- S.J. Kernaghan Adjusters Limited v. Kershaw, 1978 CanLII 260 (BCSC).
- HL Staebler Co. v. Allan, 2008 ONCA 576 at para. 50.
- Mercury Marine Ltd. v. Dillon et al., 1986 CanLII 2602 (ONSC) at p. 5 (application for interlocutory injunction).
- Dr. Jack Newton Dentistry Professional Corporation v. Towell, 2005 CanLII 37351 (ONSC) at paras. 16-18 (application for an interim injunction).
- Parekh et al v. Schecter et al, 2022 ONSC 302, at para. 51.
- Madison Chemical Industries Ltd. v. Walker, 2000 CanLII 22606 (ON SC) at paras. 12, 20.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 49.
- Revel Realty Inc. v. Costabile et al, 2022 ONSC 3373, at para 73.
- Payette v. Guay inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
- Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 at para. 96.
(d) Nature of Activities Restricted
In Elsley, the Supreme Court of Canada held that non-competition clauses may be upheld if the employee acquires such a close personal connection over the clients that they would tend to follow him or her to the new employer without solicitation. However, such clauses will only be upheld “in exceptional cases”.1
Lesser relationships between the employee and customers usually will not justify a non-competition covenant. Thus, in Elsley, the court noted that to the customers “Elsley was the business”, since for a 17-year period he dealt with the customers of the agency almost to the exclusion of the plaintiff.2 In Lyons, the Ontario Court of Appeal directly contrasted the defendant in Elsley with that of the junior associate dentist in the case before it and refused to enforce a non-competition covenant, finding that a non-solicitation clause would have been sufficient.3> Indeed, the Ontario Court of Appeal has stated it is “a general principle flowing from Elsley and reiterated in Lyons that a non-solicitation clause – suitably restrained in temporal and spatial terms – is more likely to represent a reasonable balance of the competing interests than is a non-competition clause.4
The Newfoundland Court of Appeal, in upholding a non-solicitation covenant, found it “noteworthy” that the restriction did not prevent the individual from competing generally with the respondent, “but only prohibits active solicitation of existing customers.”5
The Manitoba Court of Appeal, in Friesen v. McKague, has aptly described the situation where a non-competition clause will be enforceable as follows:
It can now be said with confidence that where the nature of the employment will likely cause customers to perceive an individual employee as the personification of the company or employer, the employer has a proprietary interest in the preservation of those customers which merits protection against competition from that individual employee after his termination…6
The same Court, in a later decision, reviewed the circumstances that will “be relevant in determining whether a case is an ‘exceptional’ one so that a general non-competition clause will be found to be reasonable” and summarized them as follows:
- The length of service with the employer.
- The amount of personal service to clients.
- Whether the employee dealt with clients exclusively, or on a sustained or recurring basis.
- Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies.
- Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee.
- If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation.
- The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required.
- The nature of the business with respect to the strength of customer loyalty, how clients are “won” and kept, and whether the clientele is a recurring one.
- The community involved and whether there were clientele yet to be exploited by anyone.7
Applying these factors, the court held that a blanket protection prohibiting the defendant from personally engaging in auctioneering could not be justified, as there was no evidence that “he acted for clients exclusively or that clients requested him and only him to do their auctioneering”. Nor was there evidence that about how clients were acquired and retained or of customer loyalty.8
The presence of a close personal connection with clients will not automatically lead to a finding that a non-competition covenant is valid, however. Thus, a non-competition clause restraining insurance salespersons was not justified where such a connection was the industry norm and other employees of the agency served the clients in different capacities.9
In a case involving legal recruitment firms, a court observed that relationships between clients and recruitment firms are not exclusive and clients can retain more than one firm to fill positions. Thus, the departed employees could not undermine their former employer’s business “the same way they could if client relationships were exclusive.” This was not the type of “exceptional” case that warranted a non-competition clause.10>
A further consideration in assessing whether to enforce a non-competition covenant is the importance of work generally to an individual’s sense of self-worth. In an application for an interlocutory injunction, an Ontario court was “mindful of the devastating impact on an employee if the ability to work and earn a living is restrained”11, citing Dickson J. in Reference re: Public Service Employee Relations Act (Alberta):
Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self‑worth and emotional well‑being.12
In a subsequent decision from a summary trial concerning the enforceability of a non-competition agreement, another Alberta court referenced the same reasoning, finding “that a person’s ability to obtain employment must not be lightly restricted.”13
The existence in an agreement of other covenants deemed to provide sufficient protection of the employer’s legitimate proprietary interests may cause the court to not uphold a non-competition covenant. In Mason v. Chem-Trend Limited Partnership, the Ontario Court of Appeal held that a clause that prohibited the use or disclosure of trade secrets or confidential information contained significant protections for the company and this was a factor in the court deciding not to uphold a non-competition covenant.14
In concurring reasons concerning the enforceability of a non-competition covenant, Bull J.A. of the BC Court of Appeal held it to be unenforceable on the basis of the existence of separate non-disclosure and non-solicitation covenants. As these separate covenants protected legitimate proprietary interests by forbidding disclosure and solicitation, the additional non-competition covenant could only be an attempt to restrain the former employee from competition itself. Bull J.A.’s reasons are worth quoting at length, as they should give pause to the drafter of when considering the imposition of each of a non-disclosure, not-solicitation and non-competition covenant. Doing so may put in peril the non-competition covenant, given the employer may be deemed to have obtained sufficient protection through the less restrictive non-solicitation and confidentiality provisions:
Each of the three covenants in my opinion, is severable, clear and unambiguous, and can be separately and adequately enforced without reference to or affecting the others. It is obvious that to prevent the respondent from engaging at all in a similar business in the appellant’s area likely would be an effective way to discourage or prevent any disclosures and, particularly, any solicitations being made. But they are not in pari materia, because one can still disclose information and solicit regardless of whether or not a like business is being carried on. Therefore, where such a restriction against engaging in business is added to specific covenants clearly forbidding the actions of disclosure and solicitation, that restriction of necessity must constitute nothing more or less than a covenant to restrain the respondent from business competition. The appellant relies on Putsman v. Taylor,  1 K.B. 637, and Herbert Morris, Ltd. v. Saxelby,  1 A.C. 688, to support its position that such “no-competition” clauses have been upheld on the ground that if restraint against the competition were not allowed the former employee could take advantage of his employer’s “trade connections or utilize information confidentially obtained”. But it is to be observed that in both those cases, and I venture to say in others where such clauses have been upheld on such grounds, the only covenant being considered by the Courts was the one preventing the engagement in the competitive business and if there were present any special covenants specifically forbidding those very things which it was alleged that the no-competition clause was aimed to prevent, no mention was made of them. I conclude- that the presence of the “no-competition” clause in the case at bar cannot be based or justified on the hypothesis that its purpose is merely to give reasonable protection to the proprietary rights of the appellant already fully covered by the other two clauses, but, on the contrary, that the clause is directed primarily to the prevention of competition and the use of the personal skills and knowledge acquired by the respondent in the appellant’s business.15
In a more recent decision, a court found that there not to be an “exceptional case” justifying a one year non-competition provision where the parties had also agreed to a one-year non-solicitation provision. The court also was influenced by the fact that the individual who had covenanted not to compete had contracted to serve the company as an independent contractor, “which implies that he would operate independently and that his business would provide service to more than one client.16
In a case where the court appears to have focused on the protection of confidential information only, the court accepted as persuasive the argument that a non-competition covenant was broader than necessary to protect the employer’s legitimate proprietary interest. Ordinarily, it noted, protection from disclosure and use of such information can be accomplished by a non-solicitation clause.17
- Elsley v. J.G. Collins Ins. Agencies,  2 S.C.R. 926 at pp. 926 – 927.
- Elsley v. J.G. Collins Ins. Agencies,  2 S.C.R. 926, at p. 920.
- Lyons v. Multari, 2000 CanLII 16851 (ONCA), at para. 48.
- H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), at para. 42.
- Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), aff’ing 1997 CanLII 15963 (NLSCTD), at para. 40.
- Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 7.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) and cases cited therein at paras. 32-41.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 42.
- H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), at para. 56.
- Human Resource Capital Group Inc. v. Reis, 2009 ABQB 159, at para. 16 (application for interlocutory injunction)
- Kohler Canada Co. v. Porter, 2002 CanLII 49614 (ONSC), at para. 17.
- Reference Re Public Service Employee Relations Act (Alta.),  1 SCR 313, 1987 CanLII 88 (SCC), at para. 91.
- Enerflow Industries Inc. v Surefire Industries Ltd., 2013 ABQB 196 (CanLII), at paras. 39-40.
- Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at para. 24.
- American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA), at p. 534. See also Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 45, where the court held that a non-competition covenant did not appear to have “any legitimate purpose that is not already taken care of by the non-solicitation covenant and the express and implied obligations of confidentiality.”
- Craig v. CEO Global Network Inc., 2019 ONSC 3589
- Mercury Marine Ltd. v. Dillon et al., 1986 CanLII 2602 (ONSC), at p. 6.
(e) Characterization of the Covenant: Non-Compete, Non-Solicit or Hybrid?
Occasionally, the courts may grapple with whether a restrictive covenant amounts to a non-solicitation clause, a non-competition clause or a “hybrid.” A lower court’s characterization as a “hybrid” a clause that prohibited former employees from “conduct(ing) business” with clients or customers they had served while working for the employer, was overturned by the appellate court. The clause, it held, went further than merely restraining employees from soliciting clients and customers and was a non-competition covenant.1 Similarly, a covenant which stated the defendant would not “solicit or accept business from any corporate accounts or customers that are serviced by (the employer)” was held to be a non-competition covenant, given the inclusion of the term “accept business.”2
In other cases, however, the courts have characterized such covenants as non-solicitation clauses. The BC Court of Appeal characterized as a non-solicit clause a provision stating that the defendant would not “solicit business from, contact or have any dealings with any of the (employer’s clients), either directly or indirectly relating to…the business of general insurance and financial services.”3 Another court characterized a clause that prohibited soliciting or doing insurance-related business with the employer’s clients or prospective clients as a non-solicitation clause and proceeded to assess its validity for the purpose of an interlocutory injunction application on that basis.4
It is submitted that in both of these cases, the portion of the clauses prohibiting having “dealings” or doing business with former clients were non-competition covenants and the entirety of the clauses should have been assessed on that basis. That was the conclusion of the Ontario Court of Appeal in Donaldson Travel Inc. v. Murphy on its reading of a similar clause, which stated that the employee:
…agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the appellant], directly, or indirectly.
The court held that the words “or accept business” restrict competition and hence the clause was not merely a non-solicitation clause.5
The Supreme Court of Canada appears to have opened the door, at least in the context of a sale of a business, to a more flexible interpretation of what are, on their face, hybrid clauses. In Payette v. Guay, the sale agreement contained a five-year non-competition covenant in one section and, in another, a five-year non-solicitation covenant. In the latter clause, however, the clause prohibited the vendors not only from soliciting customers of the business, but also stipulated that the vendors could not “do business or attempt to do business” with the customers.
It was argued that the latter clause was actually a hybrid containing both a non-solicitation and non-competition component and it therefore was unreasonable given the absence of a territorial limitation on the non-competition component. The court rejected this argument, finding that the intent of the parties was to agree to two separate clauses, one dealing with competition and the other dealing with solicitation (as opposed to one clause dealing with competition and the second being a hybrid). As such, the failure to include a territorial limitation in the non-solicitation clause did not render it unreasonable.6
Even where a clause clearly has been drafted as a non-solicitation clause, the courts may construe it as a non-competition clause if the only way to comply with the clause is not to compete. That was the conclusion of the Ontario Court of Appeal in Mason v. Chem-Trend Limited Partnership, where the covenant prohibited dealing with any businesses that were customers of the company during the employment of a defendant who had a 17-year tenure with the company:
Effectively, because the appellant cannot know which potential customers are off-limits to him, he is prohibited for one year from dealing with any business that may have been a customer of the company. The restriction is therefore not only ambiguous in its practical implementation, but effectively prohibits the appellant from competing with the respondent for one year.7
- H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), rev’g 2007 O.J. No. 3060 (S.C.J.).
- Donaldson Travel Inc. v. Murphy et al, 2016 ONSC 740 (CanLII), aff’d 2016 ONCA 649 (CanLII).
- Valley First Financial Services Ltd. v. Trach, 2004 BCCA 312 (CanLII), at para. 42.
- Hub International v. Redcliffe, 2012 BCSC 1280 (CanLII), at para. 13.
- Donaldson Travel Inc. v. Murphy, 2016 ONCA 649 (CanLII), at paras. 3-4.
- Payette v. Guay Inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at para. 74.
- Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at para. 30.
- Mann Engineering Ltd. v. Desai, 2021 ONSC 7580 at para. 92.
(f) Confidentiality Covenants
As the least intrusive restraint of trade, restrictions on disclosure of confidential information are often upheld, but even here a clause may overreach if it purports to make confidential a matter which is in the public domain. For instance, an obligation not to “disclose the business” of the former employer and a prohibition from using any information acquired “concerning the operation of” that employer was held, on an application for an interim injunction, likely to be unenforceable. The court found that the clause imposed “an open ended obligation of confidentiality respecting matters which are public knowledge, such as its office hours or its banker’s name (which would be apparent on cheques received from the employer).1
A confidentiality covenant cannot prevent an employee from using the skill and knowledge developed while employed for the benefit of another employer. Here, the distinction between skill and knowledge of a trade or profession as opposed to confidential information or trade secrets is critical. The law was aptly summarized by the House of Lords in Herbert Morris v. Saxelby more than 100 years ago in the following passage which remains fully applicable to this day:
That doctrine does not mean that an employer can prevent his employee from using the skill and knowledge in this trade or profession which he has learnt in the course of his employment by means of directions or instructions from the employer. That information and that additional skill he is entitled to use for the benefit of himself and the benefit of the public who gain the advantage of his having had such admirable instruction. The case in which the Court interferes for the purpose of protection is where use is made, not of the skill which the man may have acquired, but of the secrets of the trade or profession which he had no right to reveal to anyone else – matters which depend to some extent on good faith.2
- Canadian University Press Media Services Ltd. v. Pleasants, 2000 CanLII 22599 (ONSC), at para. 15.
- Herbert Morris Limited v. Saxelby,  1 A.C. 688, at p. 704.
- Voysus Connection Experts Inc. v. Shaikh, 2019 ONSC 6683, at paras. 43-48. While the case concerned allegations of fraud, not employee competition, the court relied on a confidentiality covenant in arriving at its decision.
(g) Restraints of Trade in the Context of the Sale of a Business
The courts will apply a less rigorous approach to the assessment of covenants given in the context of the sale of a business, on the assumption that there is equality of bargaining power between the parties. The reader is referred to section 5 for a more full discussion.
(h) Restraints of Trade that do Not Prohibit Competitive Activity
Some earlier decisions suggested that clauses which do not prohibit competition, but impose financial consequences for competing post-resignation, such as a “claw-back” of exercised stock options or forfeiture of bonuses, are not restraints of trade 1(and this continues to be the view in Ontario – see the discussion below under “Is the Clause in Restraint of Trade?”). More recently, however, the BC Court of Appeal adopted the “functionalist” approach established under English law. Under this approach, clauses that impose financial consequences on employees through payment or forfeiture if they engage in post-employment competition amount to a restraint of trade.2
Given such clauses do not actually restrict competitive activity, the amount to be paid or forfeited may be a significant factor in assessing the overall fairness of such a clause. In Rhebergen, the BC Court of Appeal considered the fairness of a clause that required a veterinarian to pay $150,000 if she were to set up a competing practice within a year of her employment agreement being terminated, $120,000 if within two years and $90,000 within three years. The court held that these amounts, which were calculated based on unrecoverable mentoring, training and equipment costs to the veterinarian clinic as well as the impact of competition on the its goodwill and volume of business, were not extravagant or unconscionable and hence reasonable.3
- See, for example, Nortel Networks Corp. v Jervis, 2002 CanLII 49617 (ONSC).
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at para. 28.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at paras. 51 and 71.
3. Reasonableness With Respect to the Public Interest
If the party relying on the restrictive covenant establishes its reasonableness between the parties, the onus of proving it is contrary to the public interest is on the party attacking it.1
The reasonableness of the restrictive covenant with reference to the public interest is to be determined at the time the covenant was given, including expectations of what might happen in the future.2
The usual inquiry at this state of the analysis entails considering whether the public would suffer by the absence of the defendant’s services for the period of the covenant. If there are a sufficient number of competitors to provide the service or product, the clause will not be struck down on the basis of the public interest. As the Supreme Court of Canada stated in Elsley:
Unless it can be said that any and every restraint upon competition is bad, I do not think that enforcement of the clause could be considered inimical to the public interest. There were twenty to twenty-two general agents in Niagara Falls according to the evidence as of the date of trial, employing eighty to ninety employees. There was nothing to suggest that the people of Niagara Falls would suffer through the loss, for a limited period, of the services of Elsley in the general insurance business.3
In Sherk v. Horwitz4, an Ontario court held as contrary to the public interest a clause which would have prevented a medical specialist in obstetrics and gynecology from practicing medicine or surgery within St. Catharines or within a five mile radius thereof. The defendant had treated thousands of patients who, having confidence in him, were “entitled to the benefit of his continuing care.” It was no answer to say the patients could find another specialist, as “choosing a physician or surgeon is not akin to commercial transactions.”5
The court in Sherk also found that there was a shortage of obstetricians in St. Catharines. While the reasonableness of the covenant had to be determined at the time of making it rather than at the time of the alleged breach, the concerns about a shortage were equally applicable four years earlier at the time the parties entered into the covenant.6
Public policy as expressed via statutes has been held as expressive of the public interest. In Sherk, the court held “public interest is the same as public policy” and that “in ascertaining what public policy is at any time, one guide that Judges are certain to employ whenever it is available is statutory legislation in pari materia.” In the matter before it, the court held that the beneficial purpose of Ontario’s Health Services Insurance Act was:
…to provide the widest medical care for the residents of the Province. Clearly this is in the public good. And I think it follows that the public are entitled to the widest choice in the selection of their medical practitioners.7
The court also found relevant a resolution of the Ontario Medical Association disapproving of the concept of restrictive covenants between physicians.8
The Ontario Court of Appeal engaged in a helpful analysis of how to determine whether the public interest would be injured in Tank Lining Corp. v. Dunlop Industrial Ltd. 9 While the facts of that case entailed two businesses which agreed not to operate in Canada in a particular line of business for two years if their licensing agreement terminated, the court’s analysis has application to covenants given by employees as well.
The court observed that, since 1889, combines in restraint of trade have been prohibited by the criminal law and the Combines Investigation Act (now the Competition Act). Recognizing these enactments as “expressions of Canadian public policy and the public interest in relation to agreements in restraint of trade” the courts have struck down such agreements as “injurious to the public interest even though they might have been reasonable in the interest of the parties…”10
While the covenant in Tank Lining would not have breached the Combines Investigations Act, it did not follow that it could not be regarded as unreasonable with respect to the public interest. The Act preserved rights of civil actions and agreements that did not breach the strict criminal standards of the Act would “still have to face the test of the broader considerations of public interest in civil actions.”11
More importantly for the employment law context, albeit in obiter, the court expressed its view that the public interest need not be expressed in propositions of law. The court had earlier remarked that the doctrine of Lord Macnaghten in Nordenfelt – that all restraints of trade are contrary to the public interest and therefore prima facie void unless justified as reasonable with respect to the interests of the parties and the public – “has proved to be remarkably flexible in its application to the ever-changing economic and social conditions.”12 It then expressed its reservations about the assertion that the public interest must be expressed in propositions of law:
Nevertheless, I cannot refrain from expressing my concern that restricting consideration of the public interest to economic and social effects which in some fashion have acquired the status of legal dogmas, might result in the doctrine losing its utility as a valuable instrument for adjusting this branch of the law to changing economic and social conditions.13
Thus, the court said it could imagine situations where a reciprocal restrictive covenant might deprive the nation or a region of a vital industry, source of employment or technology, which would need to be considered, i.e. the region would have no access to the industry, whereas in normal circumstances propositions of law tend to be concerned with the avoidance of monopoly, freedom to trade and competition. It remains to be seen if Canadian courts will refuse to enforce a restrictive covenant in the employment context on grounds other than the avoidance of monopoly or the promotion of competition, but the door was opened in Tank Lining.
The Supreme Court of Canada has held that the conduct of an employer in operating a business may be grounds to refuse to enforce a restrictive covenant. However, the conduct must have a direct relationship to the restrictive covenant and the behavior must raise “grave issues of public policy.” Thus, in Doerner v. Bliss and Laughlin Industries Inc.14, the court was prepared to consider whether, if proven, the employer’s engagement in monopolistic and anti-competitive pricing was assisted by the restrictive covenant (though on the facts such behavior was not made out). On the other hand, allegations of improper accounting, dumping of
products into the U.S., misuse of government grants and tax avoidance and evasion would not be relevant, as such practices would not be aided or impeded by the covenant.15
- Elsley v. J.G. Collins Ins. Agencies,  2 SCR 916, 1978 CanLII 7 (SCC) at p. 928.
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA), at p. 9.
- Elsley v. J.G. Collins Ins. Agencies,  2 SCR 916, 1978 CanLII 7 (SCC), at pp. 928-929.
- Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), aff’d 1972 CanLII 1190 (ONCA).
- Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), at pp. 4-5.
- Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), at pp. 5-6.
- Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), at pp. 6-7.
- Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), at p. 7.
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA).
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA) at pp. 14-15. See also Sherk et al. v. Horwitz, 1972 CanLII 391 (ONSC), at p. 7, where it was held that: “A further feature to be considered is whether a restrictive covenant between medical people tends to further limit the right of the public to deal with a profession which has a strong monopoly position. I believe that it does and I think that to widen that monopoly would be injurious to the public.”
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA) at p. 19.
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA) at p. 7.
- Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ONCA) at p. 21.
- Doerner v. Bliss and Laughlin Industries Inc.,  2 5CR 865, 1980 CanLII 50.
- Doerner v. Bliss and Laughlin Industries Inc.,  2 5CR 865, 1980 CanLII 50.
4. All Surrounding Circumstances
As noted in the introductory passage to this chapter, the attempt to draft a restrictive covenant that will withstand judicial scrutiny can be a perilous exercise. There are multiple hurdles to overcome to enforce the covenant. A court may refuse to enforce a clause on the basis that it is ambiguous, that it does not seek to protect a legitimate proprietary interest of the employer or that it is unreasonable in length, geographic scope or in the nature of activities restricted. If the clause fails the court’s application of the law in any of these areas, the entire clause falls.
The temptation to focus on a particular element of a covenant, e.g. an arguably ambiguous word or a seeming overreach in the nature of activities restricted, may lead to a quick conclusion that the covenant is unenforceable. Yet if all the surrounding circumstances of the covenant are considered, a different conclusion may be reached.
The Supreme Court of Canada, in Elsley, cautioned against focusing on particular elements of the clause to the exclusion of other parts of the clause or the surrounding circumstances:
“It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found, and all of the surrounding circumstances.”1
The court in Elsley then went on to highlight the distinction between a covenant found in a contract of employment and one connected to the sale of a business. Subsequent case law has routinely drawn the distinction between these types of covenants and the courts have applied a greater degree of scrutiny to covenants arising from employment contracts that are not connected to the sale of a business.2
The importance of this distinction is illustrated by two decisions of BC and Ontario courts in 2016 and 2017. In one case, the BC court rejected the argument that the words “for any purpose” rendered a clause overbroad, whereas in the other, the words “in any capacity” were held by the Ontario court to extend the covenant well beyond what was reasonable.
In the BC case, the covenant arose from the sale of a shareholder’s interest in a business and prohibited the departing shareholder from serving or providing advice to the business’s customers “for any purpose”. The former shareholder argued the term “for any purpose” made the covenant too broad, as it extended the restriction outside the business’s scope of activities, which was selling office furniture and equipment. As such, it argued the covenant went beyond what was necessary to protect a legitimate proprietary interest.3
The court rejected this argument:
…put in context and in consideration of the purpose and objective of the restrictive covenant, that to construe “for any purpose” as any possible hypothetical activity, including activities other than the office furniture and equipment business as the defendant suggests, would result in an absurdity. In other words, it would be contrary to any reasonable interpretation of this covenant to find it unreasonable on the basis of a hypothetical concern that does not arise, even remotely, on the facts of this case.4
The court was heavily influenced by the fact that the various covenants arose in the context of a business transaction.
By contrast, in an employment context, an Ontario court had no hesitation in finding that a clause in which the defendant covenanted not to directly or indirectly provide services, “in any capacity” in a competitive business, was overbroad. The court noted the words “in any capacity” would prevent the defendant from, amongst other things, working as a janitor for a competitor or “start(ing) a band in Mexico and be engaged as an independent contractor by (the competitor) to play at a staff retreat in Cancun.” On this basis, the court held that clause was overbroad in that the employer did not satisfy the need to establish that the covenant protected a legitimate proprietary interest.5
A consideration of all surrounding circumstances may be critical even within the context of covenants given as part of an employment agreement. Factors such as the purpose and object for which the covenant was included and the factual matrix in which the agreement was reached may be relevant to assessing enforceability.
The importance of such an approach was highlighted in a split decision of the BC Court of Appeal in Rhebergen v. Creston Veterinary Clinic Ltd.6 There, the dissenting Justice held as ambiguous a clause requiring payment of certain sums if an employee “sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of (the employer’s) place of business in Creston, BC.” The dissenting Justice stated:
The uncertainty lies in there being no prescribed or understood basis upon which it can be said a professional practice has been established in the circumstances. Once it is accepted Dr. Rhebergen can engage in some measure of practice, however limited, without incurring liability to the clinic, it cannot be said how many animals, on how many occasions, with what frequency, for how long, and over what period of time she could render treatment before she would have crossed the line, so to speak, and become liable to pay the clinic $150,000 because a practice had been set up. The phrase “set up a veterinary practice” is simply not definitive. The meaning is not clear and it renders clause 11, s. 2 ambiguous.7
However, the majority, after considering the purpose of the covenant, the factual matrix and the way in which the matter was pleaded by the defendant, held there was only one reasonable interpretation that could be made on a fair reading of the clause and therefore held it was not ambiguous. Portions of the majority’s reasoning bear quoting at length, as they elaborate on the surrounding circumstances that may be considered in interpreting a covenant:
The contractual intent of parties to an agreement must be objectively determined. This is achieved by construing the plain and ordinary meaning of the impugned words, not in isolation, but in the context of the agreement as a whole and the factual matrix (or surrounding circumstances) in which the agreement was reached. Evidence of the factual matrix includes “circumstances known to both parties that illuminate the meaning a reasonable person would give to the words employed”: Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459 (CanLII) at para. 24, 57 B.C.L.R. (4th) 212. Ambiguity only arises where, “on a fair reading of the agreement as a whole”, the language of a provision is reasonably capable of more than one meaning: Water Street Pictures Ltd. at paras. 23-24, and 26.
A clause is not ambiguous simply because of a difference of opinion as to whether the hypothetical activity triggers the compensable provision. If the clause can be construed by an application of the plain and ordinary meaning of its words and the ordinary rules of grammar, then the clause is not ambiguous. In deciding on the applicability of the contra proferentem doctrine, which is also premised on a finding of ambiguity, Ritchie J., in his concurring reasons in Survey Aircraft Ltd. v. Stevenson, 1962 CanLII 42 (SCC),  S.C.R. 555 at 563, said the following:
In my view the principle was correctly stated by Lord Sumner in London and Lancashire Fire Insurance Company v. Bolands, Limited, [ A.C. 836 at 848], and the following language in my opinion has direct application to the present case:
It is suggested further that there is some ambiguity about the proviso, and that, under the various well-known authorities, upon the principle of reading words contra proferentes, we ought to construe this proviso, which is in favour of the insurance company, adversely to them. That, however, is a principle which depends upon there being some ambiguity–that is to say, some choice of an expression–by those who are responsible for putting forward the clause, which leaves one unable to decide which of two meanings is the right one. In the present case it is a question only of construction. There may be some difficulty, there may be even some difference of opinion, about the construction, but it is a question quite capable of being solved by the ordinary rules of grammar, and it appears to me that there is no ground for saying that there is such an ambiguity as would warrant us in reading the clause otherwise than in accordance with its express terms. (The italics are [Ritchie J.’s].)
The principal consideration in determining the objective meaning of a contractual provision of this nature is the purpose or object for which the provision was included: Turner v. Evans, (1853), 118 E.R. 860 (Q.B.); Hadsley v. Dayer-Smith,  A.C. 979 (H.L.). Here, the purpose of clause 11, s. 2, is clearly set out in clause 11, s. 1: it is to discourage Dr. Rhebergen from using the advantages (the knowledge and close working relationship with the clinic’s “patients and clients”) gained through her employment with the clinic in order to compete for its “patients and clients”. In construing the meaning of “setting up a veterinary practice” the court must ascribe a reasonable meaning to the phrase that is consistent with its purpose.
Of some import is the factual matrix in which the agreement was reached. There are no other established veterinary clinics within a 60-mile radius generally or within a 100-mile radius in Canada. (The geographic coverage of clause 11, s. 2, is limited to a 25-mile radius of the clinic’s place of business in Creston.) In addition, the principal source of the clinic’s business is the eight dairy herds in the Creston Valley, all of which are situated within the geographic scope of the clause. This is also Dr. Rhebergen’s stated area of interest.
The factual matrix for the agreement is also significant. The Creston Valley is a rural and relatively sparsely populated area of the province. In these circumstances, the distinction between “set up in practice” and “to practice” identified in Robertson is a distinction without a difference. It simply has no practical effect. In the absence of any other established clinic in the area, Dr. Rhebergen cannot provide veterinary services in the area without setting up her own practice. Moreover, the backbone of the clinic’s business is the only eight dairy herds in the Creston Valley. Dr. Rhebergen was aware of this circumstance when she accepted the clinic’s offer of employment, as this was her area of interest.
Dr. Rhebergen effectively brings a stated case in the underlying action to determine if a mobile dairy veterinary practice is captured by clause 11, s. 2. The only dairy herds in the Creston Valley are the clinic’s patients and clients. They are the target of her proposed practice and are situated within the 25-mile radius of Creston. I agree with Lowry J.A. that the issue is not where Dr. Rhebergen might open a clinic or base her mobile practice, but where that practice is conducted. In my opinion, the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley. It matters not, in my view, where on the spectrum Dr. Rhebergen proposes to provide veterinary services within the 25-mile radius of Creston. If her intention is to provide those services on a regular or continuous basis they will, in my view, trigger the non-competition clause. That is the only reasonable interpretation that, in my view, could be made on a fair reading of the clause.8
- Elsley v. J.G. Collins Ins. Agencies,  2 SCR 916, 1978 CanLII 7 (SCC), at pp. 923-24.
- See section 5, “Employment Contract or Contract for Sale of a Business.”
- 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII).
- 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 67.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 42-44.
- Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII).
- Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII), at para. 64.
- Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII), at paras. 73-76, 84-85
- Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at para. 35.
5. Employment Contract Attached to Sale of a Business
The courts will apply a less rigorous approach to covenants attached to a sale of a business than one given in a pure employment context, on the assumption that in the former case there is more freedom to contact than in the latter.
This distinction is long-standing. In Shafron v. KRG Insurance Brokers (Western) Inc.1, the Supreme Court of Canada cited with approval the 1894 House of Lords decision in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., where Lord Macnaghten wrote:
To a certain extent, different considerations must apply in cases of apprenticeship and cases of that sort, on the one hand, and cases of the sale of a business or dissolution of partnership on the other. A man is bound an apprentice because he wishes to learn a trade and to practice it. A man may sell because he is getting too old for the strain and worry of business, or because he wishes for some other reason to retire from business altogether. Then there is obviously more freedom of contract between buyer and seller than between master and servant or between an employer and a person seeking employment.2
The court noted that while this passage focuses on apprenticeship, “the same concept has been extended and applied to contracts between employers and employees.”3 The court then continued4:
 In the House of Lords’ decision of Herbert Morris, Ltd. v. Saxelby,  1 A.C. 688, Lord Atkinson made some observations on the difference between contracts of employment and those for sale of a business. He cited with approval Leather Cloth Co. v. Lorsont (1869), L.R. 9 Eq. 345, at p. 354, quoting James V.C. in that case:
The principle is this: Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labour, skill, or talent, by any contract that he enters into. On the other hand, public policy requires that when a man has by skill or by any other means obtained something which he wants to sell, he should be at liberty to sell it in the most advantageous way in the market; and in order to enable him to sell it advantageously in the market it is necessary that he should be able to preclude himself from entering into competition with the purchaser.
Lord Atkinson then stated that “[t]hese considerations in themselves differentiate, in my opinion, the case of the sale of goodwill from the case of master and servant or employer and employee” (p. 701).
The sale of a business often involves a payment to the vendor for goodwill. In consideration of the goodwill payment, the custom of the business being sold is intended to remain and reside with the purchaser. As Lord Ashbourne observed at p. 555 of Nordenfelt:
I think it is quite clear that the covenant must be taken as entered into in connection with the sale of the goodwill of the appellant’s business, and that it was entered into with the plain and bona fide object of protecting that business.
And as stated by Dickson J. (as he then was) in Elsley v. J. G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC),  2 S.C.R. 916, at p. 924:
A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser that he, the vendor, would not later enter into competition.
See also Burgess v. Industrial Frictions & Supply Co. (1987), 1987 CanLII 2722 (BC CA), 12 B.C.L.R. (2d) 85 (C.A.), per McLachlin J.A. (as she then was), at p. 95.5
More recently, the Supreme Court of Canada again confirmed a “less demanding” approach to assessing the reasonableness of restrictive covenants connected to the sale of a business. Its decision in Payette v. Guay inc, while decided under Quebec civil law, is equally applicable under the common law. The court held that:
…the criteria for analyzing restrictive covenants in a contract for the sale of assets will be less demanding and that the basis for finding such covenants to be reasonable will be much broader in the commercial context than in the context of a contract of employment. I am therefore of the opinion that, in the commercial context, a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable.6
At the same time, the court opened the door to a consideration, even within the context of a business transaction, of just how much freedom to contract really existed between the parties when they negotiated the restrictive covenant. It held that, in the commercial context, the circumstances in which the contract containing the restrictive covenant was entered into are relevant to enforceability. These include “the sale price, the nature of the business’s activities, the parties’ experience and expertise and the fact that the parties had access to the services of legal counsel or other professionals. Each case must be considered in light of its specific circumstances.” The court went on to state it is also necessary to consider the background to the parties’ negotiations, including their level of expertise and experience and the extent of the resources to which they had access at the time of the negotiations.
So far, it appears that the courts have not seized on this passage to create some sort of hybrid test, i.e. a standard falling somewhere between the rigorous standard applied to a covenant in an employment contract as opposed to the more relaxed standard applied to the sale of a business. Rather, the circumstances leading to the business transaction will tip the balance to one approach or the other. Thus, where a covenant purported to restrict the activities of an optometrist, a court rejected the suggestion that because of the relationship between a medical practitioner and her patients, the covenant should be interpreted more like one contained in a purchase-sale agreement and less like one in an employment agreement, finding that there are no “hybrid tests.”7
In a case involving the sale by the son in a father-son dental practice, the court held that the resulting associate agreement in which the father carried on with the practice and covenanted not to compete for a period thereafter should be interpreted within the context of a sale of the business. The father was directly involved in negotiations around his agreement and many, if not most of his demands were accepted. The purchase agreement expressly required him to sign an associate agreement and much of the goodwill in the practice was associated with him.8
In a BC case, a defendant that sold its shares in a business and agreed to a stipulation that it would not “serve or provide advice to” the plaintiff’s customers “for any purpose” argued these terms were ambiguous and also attacked the clause on grounds of overbreadth.
The departing shareholder argued that the term “for any purpose” made the covenant too broad, as it extended the restriction outside the business’s scope of activities, which was selling office furniture and equipment. As such, it was argued the covenant went beyond what was necessary to protect a legitimate proprietary interest.9
The court rejected this argument, finding that:
…put in context and in consideration of the purpose and objective of the restrictive covenant, that to construe “for any purpose” as any possible hypothetical activity, including activities other than the office furniture and equipment business as the defendant suggests, would result in an absurdity. In other words, it would be contrary to any reasonable interpretation of this covenant to find it unreasonable on the basis of a hypothetical concern that does not arise, even remotely, on the facts of this case.10
The court also rejected the other arguments advanced by the defendant and was heavily influenced by the fact that the various covenants arose in the context of a business transaction.
While the existence of a covenant as part of a business transaction will cause the court to apply a less rigorous approach to its enforceability, the covenant nonetheless be unenforceable if the vendor has not fulfilled other aspects of the bargain, such as a promise to employ the vendor.
In a case involving the sale of a refrigeration, air conditioning and furnace repair company, the vendor promised, under the purchase and sale agreement, to offer employment to the owner of the business (and all other employees). The purchaser subsequently reduced the hours of the former owner significantly. The court accepted the vendor’s evidence that he would not have entered into an agreement to work for the purchaser for only part-time work and found that the non-competition agreement became unreasonable when the purchaser failed to provide the vendor with sufficient work.11
In a decision concerning a pharmacist who had retained an employment lawyer to advise on his restrictive covenant with the new owner of the pharmacy, the court noted the evidence showed he had significant bargaining power in his negotiations and used it to his advantage. The court nonetheless held the clause to be ambiguous and unenforceable.12
- Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII) at para. 19.
- Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co.,  A.C. 535 at p. 565
- Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII) at para. 19.
- Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII) at para. 20-21.
- Burgess v. Indust. Frictions & Supply Co., 1987 CanLII 2722 (BCCA), at para. 25.
- Payette v. Guay inc.,  3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
- IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 23-24, aff’d 2017 BCCA 301 (CanLII). Note, however, that the court did not address Payette, but instead cited the older Elsley decision. Another Justice of BC Supreme Court, however, contemplated there being a spectrum, and that “cases of commercial agreements between parties of equal bargaining power generally fall at the lower scrutiny end of the spectrum.” 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 36. In another decision involving a small business, the court found that the “inequality of bargaining power” between a small business and a “licensed real estate agent with extensive experience in business marketing” was “less than usually presumed in an employment relationship” which was relevant to the “applicable level of scrutiny” of a non-competition clause. Quick Pass Master Tutorial School Ltd. v Zhao, 2018 BCSC 683 (CanLII) at paras. 35 and 42.
- Parekh et al v. Schecter et al, 2022 ONSC 302, at para. 61.
- 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII).
- 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 67.
- Powell River Industrial Sheet Metal Contracting Inc. (P.R.I.S.M.) v. Kramchynski, 2016 BCSC 883 (CanLII). Contrast, Smith v. Union of Icelandic Fish Producers Ltd., 2005 NSCA 145 (CanLII), where 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 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. There does not appear to have been a consideration of whether the covenant remained reasonable in light of the purchaser’s actions after sale.
- M & P Drug Mart Inc. v. Sydney (Alan) Norton, 2021 ONSC 5211, at paras. 16-20.
(a) Restraints of Trade Connected to Arrangements Other than Employment or the Sale of a Business
Some restrictive covenants may be attached to other types of arrangements, such as independent contractor, franchise, agency, partnership or shareholder agreements. The particular circumstances will need to be examined to determine which interpretation should be applied to enforceability, i.e. the Shafron approach to employment contracts or the Payette approach to contracts for the sale of a business.
In a decision concerning an optometric services agreement, the BC Court of Appeal, citing Shafron, held that the threshold question is whether “the agreement contains the elements that support the close scrutiny required of an employment contract, namely, the absence of payment for goodwill and the power imbalance normally present between employee and employer.”1
The court noted that when the optometrist joined the corporation, which sold eye care services and eyewear products, she had been practicing optometry for only four years, had just moved to the community and had no existing patient base. By contrast, the corporation was a large national organization which had been in business for more than 25 years.2 The court went on as follows:
One of the practical indications of a power imbalance is the use of standard form contracts drafted by one of the parties and presented to the other party without any negotiations. The evidence before the trial judge was that “non-competition, non-solicitation and non-disclosure provisions are included in all OSAs” by IRIS. There was no negotiation of these clauses in either agreement between the parties.
The 2010 OSA set the minimum hours of work required of Dr. Park, specified that her weekly schedule had to be approved by IRIS, set vacation days which required approval of IRIS, set the fees that must be charged, and required that upon termination of the agreement all patient files had to be turned over to another IRIS optometrist.
None of the features of a sale of business agreement that supports a more benign scrutiny of a restrictive covenant are present in the circumstances of this case.3
In an earlier decision, the Newfoundland Court of Appeal noted that a courier driver faced an imbalance of bargaining power, despite the parties characterizing him as an independent contractor. Accordingly, application of a high degree of scrutiny to a covenant was justified.4 Similarly, the Manitoba Court of Appeal applied the “rigorous” test as to reasonableness to an auctioneer who worked under an independent contractor agreement.5
In the case of an agency agreement for home heating fuel delivery, the Newfoundland Supreme Court noted that while the restrictive covenant was given in the context of a commercial arrangement, it was a “contract of adhesion” involving no negotiation, i.e. a “take it or leave it” agreement. The court held that the party granting the agency clearly had the upper hand in negotiations, which influenced its interpretation of the covenant. The court further distinguished the facts before it from the authorities dealing with agreements of a commercial nature, which, it found, almost exclusively deal with vendor/purchaser agreements which involve negotiations between equals.6
In arriving at this conclusion, the court noted that the contra proferentem principle applies to contracts of adhesion, i.e. take it or leave it contracts. From here, the court held that in the facts before it, there was no negotiation between the parties as the agent had “no choice but to take it or leave it. In these circumstances the existence of an imbalance in negotiating power…is significant.”7
The courts’ approach to assessing covenants agreed to by employees who buy into the business via a shareholders agreement has not been consistent. Where an employee was offered an opportunity to buy into the business on the basis of executing a shareholders agreement that contained a non-competition clause, the court was not persuaded that the clause should be subjected “to the more rigorous standards traditionally applied to employment agreements.” The court noted that the power imbalances between employer and employee were largely absent in the case.8 However, in a more recent decision, an Alberta court applied a more rigorous analysis to such a covenant, despite coming to the conclusion that the evidence did not strongly support an imbalance of bargaining power between the employer and the employee who purchased the shares. Rather, the court, relying on the Supreme Court of Canada’s decision in Payette v. Guay, concluded that the approach applicable to employment contracts applies because of the imbalance that generally exists in all employment relationships.9
Where a new partner in a large national accounting practice agreed to a one-year non-competition clause in the partnership agreement, the court found the parties did not have equal bargaining power. The new party had no ability to influence the provisions of the partnership agreement and had to accept them in order to become a partner.10
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 46.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 48.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at paras. 49-51.
- Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD), at para. 38.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII), at paras. 22-24.
- Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at para. 94.
- Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at para. 75.
- Audience Communication Inc. v. Sguassero, 2008 CanLII 17306 (ONSC), at para. 34, aff’d Audience Communication Inc. v. Sguassero, 2010 ONCA 510 (CanLII). See also Reservoir Group Partnership v. 1304613 Ontario Ltd., 2007 CanLII 921 (ON SC), at para. 56, where the circumstances of a covenant connected to a partnership agreement were held to more closely resemble those involved in the sale of a business.
- 961945 Alberta Ltd (Servicemaster of Edmonton Disaster Restoration) v Meyer, 2018 ABQB 564 (CanLII), at para. 19. The decision may be defensible – and distinguishable – on the basis of the court accepting the employee’s evidence that his decision to executive the shareholder’s agreement was motivated by a concern for his
employment. However, to the extent the court’s decision suggests that all covenants signed by employees who purchase equity in their employer should attract the more rigorous approach, it is questionable. Payette does not invite the courts to treat all such arrangements as covenants related to employment status. That decision and earlier decisions of the Supreme Court, including Elsley v. J.G. Collins Ins. Agencies, explicitly focused on the power imbalance that is presumed to exist. Where the facts demonstrate an absence of a power imbalance, such as in a decision to purchase shares in an employer, the Courts should not assume the imbalance exists.
- Ernst v. Stuart, 1993 CanLII 2069 (BCSC) at pp. 14-15, aff’d 1994 CanLII 2426 (BCCA).
6. Lack of Ambiguity
(a) Covenants Arising from Employment Agreements
In its leading decision in Shafron v. KRG Insurance Brokers (Western) Inc., the Supreme Court of Canada held that reasonableness of a restrictive covenant cannot be determined without first establishing its meaning:
The onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms. An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity.1
If the covenant is ambiguous as to activity, time or geography, then the plaintiff cannot establish that it is reasonable. Accordingly, where the parties in Shafron used the term “Metropolitan City of Vancouver” to describe the covenant, the spatial limitation was unclear since no such entity existed and it was inappropriate to apply blue pencil severance to resolve the ambiguity.2[
A difference of opinion on the interpretation of a clause, however, does not automatically lead to an ambiguity. As held by the BC Court of Appeal:
A clause is not ambiguous simply because of a difference of opinion as to whether the hypothetical activity triggers the compensable provision. If the clause can be construed by an application of the plain and ordinary meaning of its words and the ordinary rules of grammar, then the clause is not ambiguous.3
Accordingly, the court overturned a trial judgment which found that a covenant which addressed what would take place if she were to set “up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of (the plaintiff’s) place of business in Creston, BC” was ambiguous.
The trial judge had held that the words “sets up a veterinary practice” could mean a variety of things related to where the practice was set up. The Court of Appeal, citing the factual matrix in which the agreement was reached, held that “the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley.”4
Applying similar principles, the Saskatchewan Court of Appeal suggested that a chambers judge’s failure to consider the factual context before declaring an ambiguity in a covenant “begins to rise to an error reviewable by this Court.” There, the chambers judge held as ambiguous a non-solicitation clause that tied the restriction on solicitation to clients in respect of whom the employees had received “confidential information”, which was not defined. However, the Court of Appeal did not have to decide the point, as it upheld the lower court’s finding that another term was ambiguous.5
Just as a difference of opinion does not automatically lead to a finding of ambiguity, nor does complexity equal ambiguity. As noted by the BC Court of Appeal, the fact that “the contractual arrangements are complicated and the terms often yield only to patient and painstaking analysis” is true of many commercial documents. “It does not follow that a meaning extracted in that way is not a clear and definite meaning.”6
Where an arguably ambiguous term relating to the geographic area of a non-solicitation clause added nothing to the restriction, the court found that the term was “trivial and not part of the main purport of the restrictive covenant” as per Shafron and severed it. The covenant, the court held, clearly restricted the departed investment advisors from clients they had serviced while in the employ of the plaintiff and prospective clients they had solicited. The use of the term “within the geographic area within which s/he provided services to the Employer”, though perhaps ambiguous, added nothing to the clause.7
The importance of specifying with precision the business in respect of which competition is prohibited is exhibited by a series of cases that have held terms such as “business similar to the business carried on by (the company)” or “a business similar thereto” to be ambiguous. In a BC decision, the court held that “the use of the words ‘or a business similar thereto’ introduces a massive breadth of possible interpretations and hence introduces great uncertainty and ambiguity into the clause.”8
Thus, in respect of a covenant that prevented a pharmacist from competing in “any business the same as, similar to or competitive (within a radius) of the business located at 10 Main Street East”, a court held the covenant to be ambiguous. Had the clause prohibited “working as a pharmacist at a pharmacy”, the court would not have found the scope of activities to be ambiguous or overly broad.9
Absolute precision, however, may not be necessary. Where a covenant prohibited competition in the “contract drilling business”, it was argued the clause was vague because it did not specify the oil and natural gas drilling business in which the plaintiff was engaged. The court rejected this argument, noting that since four of the five companies comprising the relevant group were engaged in contract drilling for oil and gas (with the fifth involved in an ancillary business), it was “abundantly clear that the parties clearly understood and agreed that the prohibition related to contract drilling business for oil and natural gas.” The court further rejected an argument that the term “Provinces of Western Canada” was vague. While it may have been preferable to list by name the four provinces, “any grade six student in western Canada would be able to recite the provinces of Western Canada by name and it was certainly no stretch to suggest that the parties to the Non-Competition Agreements knew precisely which provinces were encompassed in that phrase.”10
A covenant restricting competition within a defined distance from the “principal place of businesses of the Corporation” was ambiguous where there was no evidence before the court as to where the employer carried on business.11
An argument that a restriction on competition “within a radius of one hundred miles from the City of Fredericton” was vague because it did not identify the point from which the distance of one hundred miles was to be measured failed. Applying a contextual approach, the court held that the parties intended the location of the business to be the centre of the circle within which competition would be prohibited. The circle extended to the city’s boundary and then a further 100 miles. The court relied on a preamble to the covenant to ascertain the centre point of the radius, i.e. the location of the business.12
A covenant prohibiting the plaintiff from performing “hygiene services” within a defined radius from the “Premises” for a period beginning the “Effective Date” was ambiguous where the term “Premises” was not defined and the evidence showed the plaintiff carried on business in two locations. Nor was “Effective Date” defined. The court further found the term “hygiene services” to be unclear, though it would seem that a reference to the factual matrix should have resolved the court’s concern on the latter point, given the plaintiff worked as a dental hygienist.13
Many covenants will attempt to restrict any type of relationship between an employee and a potential competitor by addressing various forms of relationships such as employee, investor, partner, independent contractors, etc., or forms of activities such as “in connection with”, “directly or indirectly”, etc. One of the dangers in drafting clauses in such a broad manner is the potential for the court to find any one of these terms to be ambiguous and refuse to enforce the clause in its entirety.
The importance of precise drafting as to the relationship with a competitor that is sought to be prohibited was highlighted by a BC Court of Appeal decision which found the terms “in conjunction with” and “concerned with” to be ambiguous. The impugned clause prohibited a departing optometrist from being in partnership with, or to compete “in conjunction with” or employed by any person or company “carrying on, engaged in, interested in or concerned with a business that competes with” the optometric clinic. The BC Court of Appeal held the clause to be ambiguous, asking:
What is the nature of the connection required to compete “in conjunction with” another person? How is one to determine whether an individual is “concerned with” a business that competes with IRIS?14
An Ontario court, though, rejected the argument that the terms “either directly or indirectly, whether as a proprietor, partner, shareholder, employee, associate or otherwise, carry on or be engaged in the practice of dentistry” was incapable of definition. The latter portion of the restriction, “carry on or be engaged in the practice of dentistry” was held to sufficiently qualify the impugned activity. It would prohibit, for example, the subversion of the intention of the non-compete clause through the the dentist being remunerated for his services through shares or partnership revenue.15
In another appellate decision16, the use of the word “dealings” was found to be ambiguous, which was fatal to enforceability of a non-solicitation clause. The clause prohibited the solicitation of “customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time with the twelve (12) months preceding the date upon which the Employee left the employment of Globex.”
The majority held that the clause was ambiguous and refused to enforce it on this ground. In particular, it found that the term “dealings” was ambiguous both in its meaning and practical application. For instance, if a trader was away from his desk and one of his regular clients called and spoke for a brief period of time to a different trader, would this constitute “dealing”? And how would the trader who briefly spoke to that client know he had had “dealings” with that client if he didn’t write down the client’s name or make a particular record – something he might not have any motivation to do if the client was not a regular client of his?
As the majority stated, “If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.”17
Non-solicitation clauses have failed on the basis of prohibiting solicitation of “any” of the employer’s clients, not just those who were served by the employees. The difficulty is that in normal circumstances the defendants will have no way of knowing whether a potential client they wish to solicit is a client of the former employer.18 In one case, where the former employee was a salesperson for a company with worldwide operations and the employee had been there for 17 years, the Ontario Court of Appeal concluded that a covenant prohibiting competition and solicitation from any entities that were customers during his employment could not be enforced. The employee had no way of knowing whether any particular contact he wished to make was a customer over the 17 years of his employment.19
A similar argument, however, was dismissed where the departed employee, who had only ever worked with the US Great Lakes Region, contended that it was impossible for him to have knowledge of all of the employers’ customers in all of its offices across all of its offices for the duration of his tenure. The court was satisfied, based on email evidence filed in connection with the employer’s injunction application that the employee “knew who the relevant clients were in both Canada and the United States, had their contact information, was aware of the products they had purchased and had knowledge of the costs of products, sales performance including pricing.”20
Where it is not clear whether an employee is prohibited from soliciting just the clients he or she served or all the clients of the employer itself, the clause will be found to be ambiguous. Such was the case where the covenant prohibited investment advisors from the solicitation of any clients “we” have directly done business with in the 12 months preceding the end of “our” employment. The court found it was unclear whether the clause applied just to the clients of each individual advisor, the clients of the team as a whole or the bank as a whole.21
Some covenants may attempt to limit competition with respect to a company’s related entities. This proved fatal in an Ontario decision where the court held the covenant to be ambiguous in that the identity and number of affiliates and subsidiaries, much less the types of businesses they engaged in, was unclear. In the same covenant, the employer attempted to reserve the unilateral discretion, at the time of termination of employment, to set the time period of the covenant for a period of up to 12 months. The court found the temporal scope to be ambiguous.22
Similarly, the Saskatchewan Court of Appeal upheld a chambers decision that found as ambiguous a reference to “partner companies” where the covenant did not define that term and the evidence disclosed multiple problems in interpreting the terms. The Court of Appeal distinguished other case law where a covenant relating to “affiliates” was upheld, noting that the term has a defined legal meaning.23
In another decision, a Saskatchewan court accepted the plaintiff’s contention that the terms “prospective customer” and “prospective client”, terms the court found to be “extraordinarily board”, should be read in the context of the entire employment agreement. While the court, applying Elsley, agreed to do so, it nonetheless rejected the defendant’s assertion such an approach should lead the court to limit the application of the terms to only one sector of the employer’s business.24
Care must be taken to avoid ambiguity in respect of covenants that simply seek to protect confidential information. The BC Supreme Court refused an application for in interlocutory injunction respecting confidential information, finding the definition of “confidential information” in the employment agreement to be “dense, broad, and difficult to understand. …I do not think it would be obvious to (the employee), or others, what constitutes confidential information.25
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at p. 170.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at paras. 45-47.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 at para. 24.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, at para. 85. See also 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII).
- Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at para. 35.
- Stittgen v. Luetke-Brinkhaus,  B.C.J. No. 972 (CA), at para. 13.
- MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 95-103, affirmed, 2018 ONCA 440 (CanLII), where the Court of Appeal found no ambiguity in the clause.
- Magnetic Marketing Ltd. v. Print Three Franchising Corp., 1991 CanLII 763 (BC SC), Allegra of North America Inc. v. Stevens, 2008 BCSC 1220, at para. 110 and Craig v. CEO Global Network Inc., 2019 ONSC 3589, at para. 55.
- M & P Drug Mart Inc. v. Sydney (Alan) Norton, 2021 ONSC 5211, at pars. 24-35.
- Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 at paras. 114 and 116.
- ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at paras. 50 and 61.
- Steeves v. Capital Safe & Lock Services, 2000 NBCA 1, at paras. 30-32.
- Nicholas v. Dr. Edyta Witulska Dentistry Professional Corporation, 2022 ONSC 2984, at para. 75.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 63.
- Parekh et al v. Schecter et al, 2022 ONSC 302, at paras. 53-54, though the covenant was assessed as connected to the sale of a business, not in the employment context.
- Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII).
- Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 13-19.
- See, for instance, Benson Kearley & Associates Insurance Brokers Ltd., v. Jeffrey Valerio, 2016 ONSC 4290 (CanLII) at paras. 42-44, in an application for an interlocutory injunction. In this case, though, the court preferred to characterize the clause at issue as a non-competition clause without geographic limit, since not competing would be the only effective way to comply with a clause which prohibited soliciting “any” of the former employer’s clients and the defendants had no way of knowing the identity of all of the clients.
- Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at paras. 27-28. The court also refused to enforce the covenant on other grounds.
- Stress-Crete Limited v. Harriman, 2019 ONSC 2773, at para. 43.
- National Bank Financial Inc. v Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at paras. 78-82.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 51-52.
- Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at paras. 35-43. See also Mann Engineering Ltd. v. Desai, 2021 ONSC 7580, at para. 99, where the court held references to clients or prospective clients of “a member of the Mann Group” to be ambiguous on the evidence.
- Hired Resources Ltd. v. Lomond, 2019 SKQB 195, at para. 38.
- 0777792 B.C. Ltd. v Da Costa, 2019 BCSC 1839, at para. 29.
(b) Covenants Arising from the Sale of a Business
The Supreme Court of Canada, in Payette v. Guay, held that the criteria for analyzing the enforceability of restrictive covenants in the context of the sale of assets is less demanding than in the employment context and the basis for finding such covenants reasonable is “much broader.”1 The courts are less inclined to find an ambiguity in such covenants than they are in the context of employment agreements.2