Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(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
- 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.
- 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., [2013] 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, [1983] 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).