Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(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.