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