Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

2. Reasonableness Between the Parties

(a) Onus

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.

  1. Shafron v. KRG Insurance Brokers, [2009], 1 S.C.R. at para. 27; Maguire v. Northland Drug Co. Ltd., [1935] SCR 412, 1935 CanLII 35 (SCC) at p. 416; Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 5.
  2. Payette v. Guay inc., [2013] 3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.

(b) Length

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

  1. Cameron v. Canadian Factors Corp. Ltd., [1971] 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.
  2. 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.
  3. The Travel Company Ltd. v. Keeling, 2009 ABQB 399 (CanLII) at para. 53.
  4. MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 95-103 and cases cited therein,  affirmed, 2018 ONCA 440 (CanLII).
  5. 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.
  6. 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.
  7. Benson Kearley & Associates Insurance Brokers Ltd., v. Jeffrey Valerio, 2016 ONSC 4290 (CanLII) at para. 41.
  8. Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), aff’ing 1997 CanLII 15963 (NLSCTD), at para. 42.
  9. Atlantic Business Interiors Limited v. Hipson et al, 2004 NSSC 32 (CanLII) at para. 46, affirmed 2005 NSCA 16 (CanLII), at para. 49.
  10. Jostens Canada Ltd. v. Gendron, 1993 CanLII 5594 (ONSC), at para. 36.
  11. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 48.
  12. Labrador Recycling Inc. v. Folino, 2021 ONSC 2195, at para. 25.
  13. IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 34-36, aff’d 2017 BCCA 301 (CanLII).
  14. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 48.
  15. National Bank Financial Inc. v Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at paras. 74-76.
  16. Quick Pass Master Tutorial School Ltd. v Zhao, 2018 BCSC 683 (CanLII), at para. 39.
  17. 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.
  18. WJ Packaging Solutions Corp. v. Park, 2021 BCSC 316, at para. 63.
  19. Payette v. Guay inc., [2013] 3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
  20. North Rim Pulp and Paper Inc. v. Grenier, 2019 BCSC 1741, at para. 50.
  21. Steeves v. Capital Safe & Lock Services, 2000 NBCA 1 at para. 37.
  22. Stittgen v. Luetke-Brinkhaus, [1983] B.C.J. No. 972 (CA).
  23. Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 (CanLII), at para. 75.
  24. 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

  1. 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.
  2. Payette v. Guay inc., [2013] 3 SCR 95, 2013 SCC 45 (CanLII), at paras. 69 and 73.
  3. 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.
  4. Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 9.
  5. S.J. Kernaghan Adjusters Limited v. Kershaw, 1978 CanLII 260 (BCSC).
  6. HL Staebler Co. v. Allan, 2008 ONCA 576 at para. 50.
  7. Mercury Marine Ltd. v. Dillon et al., 1986 CanLII 2602 (ONSC) at p. 5 (application for interlocutory injunction).
  8. Dr. Jack Newton Dentistry Professional Corporation v. Towell, 2005 CanLII 37351 (ONSC) at paras. 16-18 (application for an interim injunction).
  9. Parekh et al v. Schecter et al, 2022 ONSC 302, at para. 51.
  10. Madison Chemical Industries Ltd. v. Walker, 2000 CanLII 22606 (ON SC) at paras. 12, 20.
  11. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 49.
  12. Revel Realty Inc. v. Costabile et al, 2022 ONSC 3373, at para 73.
  13. Payette v. Guay inc., [2013] 3 SCR 95, 2013 SCC 45 (CanLII), at para. 58.
  14. 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:

  1. The length of service with the employer.
  1. The amount of personal service to clients.
  1. Whether the employee dealt with clients exclusively, or on a sustained or recurring basis.
  1. 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.
  1. 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.
  1. If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation.
  1. The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required.
  1. 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.
  1. 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, [1927] 1 K.B. 637, and Herbert Morris, Ltd. v. Saxelby, [1916] 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

  1. Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 926 at pp. 926 – 927.
  2. Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 926, at p. 920.
  3. Lyons v. Multari, 2000 CanLII 16851 (ONCA), at para. 48.
  4. H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), at para. 42.
  5. Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), aff’ing 1997 CanLII 15963 (NLSCTD), at para. 40.
  6. Friesen v. McKague, 1992 CanLII 4023 (MBCA) at p. 7.
  7. Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) and cases cited therein at paras. 32-41.
  8. Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 42.
  9. H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), at para. 56.
  10. Human Resource Capital Group Inc. v. Reis, 2009 ABQB 159, at para. 16 (application for interlocutory injunction)
  11. Kohler Canada Co. v. Porter, 2002 CanLII 49614 (ONSC), at para. 17.
  12. Reference Re Public Service Employee Relations Act (Alta.), [1987] 1 SCR 313, 1987 CanLII 88 (SCC), at para. 91.
  13.  Enerflow Industries Inc. v Surefire Industries Ltd., 2013 ABQB 196 (CanLII), at paras. 39-40.
  14. Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at para. 24.
  15. 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.”
  16. Craig v. CEO Global Network Inc., 2019 ONSC 3589
  17. 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

Where a clause prohibited all communications “with any client or prospective client of (employer and group of companies) with a view to…providing services”, the court held it to be a non-competition clause. The clause prohibited communications “no matter who approached who” and had the effect of preventing the defendants from conducting business with any clients or prospective clients.8
  1. H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), rev’g 2007 O.J. No. 3060 (S.C.J.).
  2. Donaldson Travel Inc. v. Murphy et al, 2016 ONSC 740 (CanLII), aff’d 2016 ONCA 649 (CanLII).
  3. Valley First Financial Services Ltd. v. Trach, 2004 BCCA 312 (CanLII), at para. 42.
  4. Hub International v. Redcliffe, 2012 BCSC 1280 (CanLII), at para. 13.
  5. Donaldson Travel Inc. v. Murphy, 2016 ONCA 649 (CanLII), at paras. 3-4.
  6. Payette v. Guay Inc., [2013] 3 SCR 95, 2013 SCC 45 (CanLII), at para. 74.
  7. Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at para. 30.
  8. 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

It is not uncommon, in employee competition litigation, for a departed employee to be in unlawful possession of confidential documents of the former employer. The question then arises as to the disposition of the documents, given their relevance to the employer’s claim for breach of confidence. In an Ontario case where the defendants produced confidential documents of the plaintiff, some of which they relied on in response to a Mareva motion, the court declined to order the return of the confidential information, as there was no suggestion the defendants intended to use the documents other than in the proceeding. The court instead ordered the defendants keep, without deleting, any of the documents and to maintain their confidentiality.3
  1. Canadian University Press Media Services Ltd. v. Pleasants, 2000 CanLII 22599 (ONSC), at para. 15.
  2. Herbert Morris Limited v. Saxelby, [1916] 1 A.C. 688, at p. 704.
  3. 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

  1. See, for example, Nortel Networks Corp. v Jervis, 2002 CanLII 49617 (ONSC).
  2. Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at para. 28.
  3. Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at paras. 51 and 71.