Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(a) Restraints of Trade Connected to Arrangements Other than Employment or the Sale of a Business
Some restrictive covenants may be attached to other types of arrangements, such as independent contractor, franchise, agency, partnership or shareholder agreements. The particular circumstances will need to be examined to determine which interpretation should be applied to enforceability, i.e. the Shafron approach to employment contracts or the Payette approach to contracts for the sale of a business.
In a decision concerning an optometric services agreement, the BC Court of Appeal, citing Shafron, held that the threshold question is whether “the agreement contains the elements that support the close scrutiny required of an employment contract, namely, the absence of payment for goodwill and the power imbalance normally present between employee and employer.”1
The court noted that when the optometrist joined the corporation, which sold eye care services and eyewear products, she had been practicing optometry for only four years, had just moved to the community and had no existing patient base. By contrast, the corporation was a large national organization which had been in business for more than 25 years.2 The court went on as follows:
One of the practical indications of a power imbalance is the use of standard form contracts drafted by one of the parties and presented to the other party without any negotiations. The evidence before the trial judge was that “non-competition, non-solicitation and non-disclosure provisions are included in all OSAs” by IRIS. There was no negotiation of these clauses in either agreement between the parties.
The 2010 OSA set the minimum hours of work required of Dr. Park, specified that her weekly schedule had to be approved by IRIS, set vacation days which required approval of IRIS, set the fees that must be charged, and required that upon termination of the agreement all patient files had to be turned over to another IRIS optometrist.
None of the features of a sale of business agreement that supports a more benign scrutiny of a restrictive covenant are present in the circumstances of this case.3
In an earlier decision, the Newfoundland Court of Appeal noted that a courier driver faced an imbalance of bargaining power, despite the parties characterizing him as an independent contractor. Accordingly, application of a high degree of scrutiny to a covenant was justified.4 Similarly, the Manitoba Court of Appeal applied the “rigorous” test as to reasonableness to an auctioneer who worked under an independent contractor agreement.5
In the case of an agency agreement for home heating fuel delivery, the Newfoundland Supreme Court noted that while the restrictive covenant was given in the context of a commercial arrangement, it was a “contract of adhesion” involving no negotiation, i.e. a “take it or leave it” agreement. The court held that the party granting the agency clearly had the upper hand in negotiations, which influenced its interpretation of the covenant. The court further distinguished the facts before it from the authorities dealing with agreements of a commercial nature, which, it found, almost exclusively deal with vendor/purchaser agreements which involve negotiations between equals.6
In arriving at this conclusion, the court noted that the contra proferentem principle applies to contracts of adhesion, i.e. take it or leave it contracts. From here, the court held that in the facts before it, there was no negotiation between the parties as the agent had “no choice but to take it or leave it. In these circumstances the existence of an imbalance in negotiating power…is significant.”7
The courts’ approach to assessing covenants agreed to by employees who buy into the business via a shareholders agreement has not been consistent. Where an employee was offered an opportunity to buy into the business on the basis of executing a shareholders agreement that contained a non-competition clause, the court was not persuaded that the clause should be subjected “to the more rigorous standards traditionally applied to employment agreements.” The court noted that the power imbalances between employer and employee were largely absent in the case.8 However, in a more recent decision, an Alberta court applied a more rigorous analysis to such a covenant, despite coming to the conclusion that the evidence did not strongly support an imbalance of bargaining power between the employer and the employee who purchased the shares. Rather, the court, relying on the Supreme Court of Canada’s decision in Payette v. Guay, concluded that the approach applicable to employment contracts applies because of the imbalance that generally exists in all employment relationships.9
Where a new partner in a large national accounting practice agreed to a one-year non-competition clause in the partnership agreement, the court found the parties did not have equal bargaining power. The new party had no ability to influence the provisions of the partnership agreement and had to accept them in order to become a partner.10
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 46.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 48.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at paras. 49-51.
- Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD), at para. 38.
- Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII), at paras. 22-24.
- Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at para. 94.
- Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at para. 75.
- Audience Communication Inc. v. Sguassero, 2008 CanLII 17306 (ONSC), at para. 34, aff’d Audience Communication Inc. v. Sguassero, 2010 ONCA 510 (CanLII). See also Reservoir Group Partnership v. 1304613 Ontario Ltd., 2007 CanLII 921 (ON SC), at para. 56, where the circumstances of a covenant connected to a partnership agreement were held to more closely resemble those involved in the sale of a business.
- 961945 Alberta Ltd (Servicemaster of Edmonton Disaster Restoration) v Meyer, 2018 ABQB 564 (CanLII), at para. 19. The decision may be defensible – and distinguishable – on the basis of the court accepting the employee’s evidence that his decision to executive the shareholder’s agreement was motivated by a concern for his
employment. However, to the extent the court’s decision suggests that all covenants signed by employees who purchase equity in their employer should attract the more rigorous approach, it is questionable. Payette does not invite the courts to treat all such arrangements as covenants related to employment status. That decision and earlier decisions of the Supreme Court, including Elsley v. J.G. Collins Ins. Agencies, explicitly focused on the power imbalance that is presumed to exist. Where the facts demonstrate an absence of a power imbalance, such as in a decision to purchase shares in an employer, the Courts should not assume the imbalance exists.
- Ernst v. Stuart, 1993 CanLII 2069 (BCSC) at pp. 14-15, aff’d 1994 CanLII 2426 (BCCA).