Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
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.