Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

4. All Surrounding Circumstances

As noted in the introductory passage to this chapter, the attempt to draft a restrictive covenant that will withstand judicial scrutiny can be a perilous exercise.  There are multiple hurdles to overcome to enforce the covenant.  A court may refuse to enforce a clause on the basis that it is ambiguous, that it does not seek to protect a legitimate proprietary interest of the employer or that it is unreasonable in length, geographic scope or in the nature of activities restricted. If the clause fails the court’s application of the law in any of these areas, the entire clause falls.

The temptation to focus on a particular element of a covenant, e.g. an arguably ambiguous word or a seeming overreach in the nature of activities restricted, may lead to a quick conclusion that the covenant is unenforceable.  Yet if all the surrounding circumstances of the covenant are considered, a different conclusion may be reached.

The Supreme Court of Canada, in Elsley, cautioned against focusing on particular elements of the clause to the exclusion of other parts of the clause or the surrounding circumstances:

“It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found, and all of the surrounding circumstances.”1

The court in Elsley then went on to highlight the distinction between a covenant found in a contract of employment and one connected to the sale of a business.  Subsequent case law has routinely drawn the distinction between these types of covenants and the courts have applied a greater degree of scrutiny to covenants arising from employment contracts that are not connected to the sale of a business.2

The importance of this distinction is illustrated by two decisions of BC and Ontario courts in 2016 and 2017.  In one case, the BC court rejected the argument that the words “for any purpose” rendered a clause overbroad, whereas in the other, the words “in any capacity” were held by the Ontario court to extend the covenant well beyond what was reasonable.

In the BC case, the covenant arose from the sale of a shareholder’s interest in a business and prohibited the departing shareholder from serving or providing advice to the business’s customers “for any purpose”.  The former shareholder argued the term “for any purpose” made the covenant too broad, as it extended the restriction outside the business’s scope of activities, which was selling office furniture and equipment.  As such, it argued the covenant went beyond what was necessary to protect a legitimate proprietary interest.3

The court rejected this argument:

…put in context and in consideration of the purpose and objective of the restrictive covenant, that to construe “for any purpose” as any possible hypothetical activity, including activities other than the office furniture and equipment business as the defendant suggests, would result in an absurdity. In other words, it would be contrary to any reasonable interpretation of this covenant to find it unreasonable on the basis of a hypothetical concern that does not arise, even remotely, on the facts of this case.4

The court was heavily influenced by the fact that the various covenants arose in the context of a business transaction.

By contrast, in an employment context, an Ontario court had no hesitation in finding that a clause in which the defendant covenanted not to directly or indirectly provide services, “in any capacity” in a competitive business, was overbroad. The court noted the words “in any capacity” would prevent the defendant from, amongst other things, working as a janitor for a competitor or “start(ing) a band in Mexico and be engaged as an independent contractor by (the competitor) to play at a staff retreat in Cancun.” On this basis, the court held that clause was overbroad in that the employer did not satisfy the need to establish that the covenant protected a legitimate proprietary interest.5

A consideration of all surrounding circumstances may be critical even within the context of covenants given as part of an employment agreement. Factors such as the purpose and object for which the covenant was included and the factual matrix in which the agreement was reached may be relevant to assessing enforceability.

The importance of such an approach was highlighted in a split decision of the BC Court of Appeal in Rhebergen v. Creston Veterinary Clinic Ltd.6 There, the dissenting Justice held as ambiguous a clause requiring payment of certain sums if an employee “sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of (the employer’s) place of business in Creston, BC.” The dissenting Justice stated:

The uncertainty lies in there being no prescribed or understood basis upon which it can be said a professional practice has been established in the circumstances.  Once it is accepted Dr. Rhebergen can engage in some measure of practice, however limited, without incurring liability to the clinic, it cannot be said how many animals, on how many occasions, with what frequency, for how long, and over what period of time she could render treatment before she would have crossed the line, so to speak, and become liable to pay the clinic $150,000 because a practice had been set up.  The phrase “set up a veterinary practice” is simply not definitive.  The meaning is not clear and it renders clause 11, s. 2 ambiguous.7

However, the majority, after considering the purpose of the covenant, the factual matrix and the way in which the matter was pleaded by the defendant, held there was only one reasonable interpretation that could be made on a fair reading of the clause and therefore held it was not ambiguous.  Portions of the majority’s reasoning bear quoting at length, as they elaborate on the surrounding circumstances that may be considered in interpreting a covenant:

The contractual intent of parties to an agreement must be objectively determined.  This is achieved by construing the plain and ordinary meaning of the impugned words, not in isolation, but in the context of the agreement as a whole and the factual matrix (or surrounding circumstances) in which the agreement was reached.  Evidence of the factual matrix includes “circumstances known to both parties that illuminate the meaning a reasonable person would give to the words employed”: Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459 (CanLII) at para. 24, 57 B.C.L.R. (4th) 212.  Ambiguity only arises where, “on a fair reading of the agreement as a whole”, the language of a provision is reasonably capable of more than one meaning: Water Street Pictures Ltd. at paras. 23-24, and 26.

A clause is not ambiguous simply because of a difference of opinion as to whether the hypothetical activity triggers the compensable provision.  If the clause can be construed by an application of the plain and ordinary meaning of its words and the ordinary rules of grammar, then the clause is not ambiguous.  In deciding on the applicability of the contra proferentem doctrine, which is also premised on a finding of ambiguity, Ritchie J., in his concurring reasons in Survey Aircraft Ltd. v. Stevenson, 1962 CanLII 42 (SCC), [1962] S.C.R. 555 at 563, said the following:

In my view the principle was correctly stated by Lord Sumner in London and Lancashire Fire Insurance Company v. Bolands, Limited, [[1924] A.C. 836 at 848], and the following language in my opinion has direct application to the present case:

It is suggested further that there is some ambiguity about the proviso, and that, under the various well-known authorities, upon the principle of reading words contra proferentes, we ought to construe this proviso, which is in favour of the insurance company, adversely to them.  That, however, is a principle which depends upon there being some ambiguity–that is to say, some choice of an expression–by those who are responsible for putting forward the clause, which leaves one unable to decide which of two meanings is the right one.  In the present case it is a question only of construction.  There may be some difficulty, there may be even some difference of opinion, about the construction, but it is a question quite capable of being solved by the ordinary rules of grammar, and it appears to me that there is no ground for saying that there is such an ambiguity as would warrant us in reading the clause otherwise than in accordance with its express terms. (The italics are [Ritchie J.’s].)

The principal consideration in determining the objective meaning of a contractual provision of this nature is the purpose or object for which the provision was included: Turner v. Evans, (1853), 118 E.R. 860 (Q.B.); Hadsley v. Dayer-Smith, [1914] A.C. 979 (H.L.).  Here, the purpose of clause 11, s. 2, is clearly set out in clause 11, s. 1: it is to discourage Dr. Rhebergen from using the advantages (the knowledge and close working relationship with the clinic’s “patients and clients”) gained through her employment with the clinic in order to compete for its “patients and clients”.  In construing the meaning of “setting up a veterinary practice” the court must ascribe a reasonable meaning to the phrase that is consistent with its purpose.

Of some import is the factual matrix in which the agreement was reached.  There are no other established veterinary clinics within a 60-mile radius generally or within a 100-mile radius in Canada.  (The geographic coverage of clause 11, s. 2, is limited to a 25-mile radius of the clinic’s place of business in Creston.)  In addition, the principal source of the clinic’s business is the eight dairy herds in the Creston Valley, all of which are situated within the geographic scope of the clause.  This is also Dr. Rhebergen’s stated area of interest.

…

The factual matrix for the agreement is also significant.  The Creston Valley is a rural and relatively sparsely populated area of the province.  In these circumstances, the distinction between “set up in practice” and “to practice” identified in Robertson is a distinction without a difference.  It simply has no practical effect.  In the absence of any other established clinic in the area, Dr. Rhebergen cannot provide veterinary services in the area without setting up her own practice. Moreover, the backbone of the clinic’s business is the only eight dairy herds in the Creston Valley.  Dr. Rhebergen was aware of this circumstance when she accepted the clinic’s offer of employment, as this was her area of interest.

Dr. Rhebergen effectively brings a stated case in the underlying action to determine if a mobile dairy veterinary practice is captured by clause 11, s. 2.  The only dairy herds in the Creston Valley are the clinic’s patients and clients.  They are the target of her proposed practice and are situated within the 25-mile radius of Creston.  I agree with Lowry J.A. that the issue is not where Dr. Rhebergen might open a clinic or base her mobile practice, but where that practice is conducted.  In my opinion, the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley.  It matters not, in my view, where on the spectrum Dr. Rhebergen proposes to provide veterinary services within the 25-mile radius of Creston.  If her intention is to provide those services on a regular or continuous basis they will, in my view, trigger the non-competition clause.  That is the only reasonable interpretation that, in my view, could be made on a fair reading of the clause.8

The Saskatchewan Court of Appeal suggested that a chambers judge’s failure to consider the factual context before declaring an ambiguity in a covenant “begins to rise to an error reviewable by this Court.” There, the chambers judge held as ambiguous a non-solicitation clause that tied the restriction on solicitation to clients in respect of whom the employees had received “confidential information”, which was not defined. However, the Court of Appeal did not have to decide the point, as it upheld the lower court’s finding that another term was ambiguous.9
  1. Elsley v. J.G. Collins Ins. Agencies, [1978] 2 SCR 916, 1978 CanLII 7 (SCC), at pp. 923-24.
  2. See section 5, “Employment Contract or Contract for Sale of a Business.”
  3. 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII).
  4. 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII), at para. 67.
  5. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 42-44.
  6. Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII).
  7. Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII), at para. 64.
  8. Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII), at paras.  73-76, 84-85
  9. Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at para. 35.