Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(a) Covenants Arising from Employment Agreements
In its leading decision in Shafron v. KRG Insurance Brokers (Western) Inc., the Supreme Court of Canada held that reasonableness of a restrictive covenant cannot be determined without first establishing its meaning:
The onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms. An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity.1
If the covenant is ambiguous as to activity, time or geography, then the plaintiff cannot establish that it is reasonable. Accordingly, where the parties in Shafron used the term “Metropolitan City of Vancouver” to describe the covenant, the spatial limitation was unclear since no such entity existed and it was inappropriate to apply blue pencil severance to resolve the ambiguity.2[
A difference of opinion on the interpretation of a clause, however, does not automatically lead to an ambiguity. As held by the BC Court of Appeal:
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.3
Accordingly, the court overturned a trial judgment which found that a covenant which addressed what would take place if she were to set “up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of (the plaintiff’s) place of business in Creston, BC” was ambiguous.
The trial judge had held that the words “sets up a veterinary practice” could mean a variety of things related to where the practice was set up. The Court of Appeal, citing the factual matrix in which the agreement was reached, held that “the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley.”4
Applying similar principles, 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.5
Just as a difference of opinion does not automatically lead to a finding of ambiguity, nor does complexity equal ambiguity. As noted by the BC Court of Appeal, the fact that “the contractual arrangements are complicated and the terms often yield only to patient and painstaking analysis” is true of many commercial documents. “It does not follow that a meaning extracted in that way is not a clear and definite meaning.”6
Where an arguably ambiguous term relating to the geographic area of a non-solicitation clause added nothing to the restriction, the court found that the term was “trivial and not part of the main purport of the restrictive covenant” as per Shafron and severed it. The covenant, the court held, clearly restricted the departed investment advisors from clients they had serviced while in the employ of the plaintiff and prospective clients they had solicited. The use of the term “within the geographic area within which s/he provided services to the Employer”, though perhaps ambiguous, added nothing to the clause.7
The importance of specifying with precision the business in respect of which competition is prohibited is exhibited by a series of cases that have held terms such as “business similar to the business carried on by (the company)” or “a business similar thereto” to be ambiguous. In a BC decision, the court held that “the use of the words ‘or a business similar thereto’ introduces a massive breadth of possible interpretations and hence introduces great uncertainty and ambiguity into the clause.”8
Thus, in respect of a covenant that prevented a pharmacist from competing in “any business the same as, similar to or competitive (within a radius) of the business located at 10 Main Street East”, a court held the covenant to be ambiguous. Had the clause prohibited “working as a pharmacist at a pharmacy”, the court would not have found the scope of activities to be ambiguous or overly broad.9
Absolute precision, however, may not be necessary. Where a covenant prohibited competition in the “contract drilling business”, it was argued the clause was vague because it did not specify the oil and natural gas drilling business in which the plaintiff was engaged. The court rejected this argument, noting that since four of the five companies comprising the relevant group were engaged in contract drilling for oil and gas (with the fifth involved in an ancillary business), it was “abundantly clear that the parties clearly understood and agreed that the prohibition related to contract drilling business for oil and natural gas.” The court further rejected an argument that the term “Provinces of Western Canada” was vague. While it may have been preferable to list by name the four provinces, “any grade six student in western Canada would be able to recite the provinces of Western Canada by name and it was certainly no stretch to suggest that the parties to the Non-Competition Agreements knew precisely which provinces were encompassed in that phrase.”10
A covenant restricting competition within a defined distance from the “principal place of businesses of the Corporation” was ambiguous where there was no evidence before the court as to where the employer carried on business.11
An argument that a restriction on competition “within a radius of one hundred miles from the City of Fredericton” was vague because it did not identify the point from which the distance of one hundred miles was to be measured failed. Applying a contextual approach, the court held that the parties intended the location of the business to be the centre of the circle within which competition would be prohibited. The circle extended to the city’s boundary and then a further 100 miles. The court relied on a preamble to the covenant to ascertain the centre point of the radius, i.e. the location of the business.12
A covenant prohibiting the plaintiff from performing “hygiene services” within a defined radius from the “Premises” for a period beginning the “Effective Date” was ambiguous where the term “Premises” was not defined and the evidence showed the plaintiff carried on business in two locations. Nor was “Effective Date” defined. The court further found the term “hygiene services” to be unclear, though it would seem that a reference to the factual matrix should have resolved the court’s concern on the latter point, given the plaintiff worked as a dental hygienist.13
Many covenants will attempt to restrict any type of relationship between an employee and a potential competitor by addressing various forms of relationships such as employee, investor, partner, independent contractors, etc., or forms of activities such as “in connection with”, “directly or indirectly”, etc. One of the dangers in drafting clauses in such a broad manner is the potential for the court to find any one of these terms to be ambiguous and refuse to enforce the clause in its entirety.
The importance of precise drafting as to the relationship with a competitor that is sought to be prohibited was highlighted by a BC Court of Appeal decision which found the terms “in conjunction with” and “concerned with” to be ambiguous. The impugned clause prohibited a departing optometrist from being in partnership with, or to compete “in conjunction with” or employed by any person or company “carrying on, engaged in, interested in or concerned with a business that competes with” the optometric clinic. The BC Court of Appeal held the clause to be ambiguous, asking:
What is the nature of the connection required to compete “in conjunction with” another person? How is one to determine whether an individual is “concerned with” a business that competes with IRIS?14
An Ontario court, though, rejected the argument that the terms “either directly or indirectly, whether as a proprietor, partner, shareholder, employee, associate or otherwise, carry on or be engaged in the practice of dentistry” was incapable of definition. The latter portion of the restriction, “carry on or be engaged in the practice of dentistry” was held to sufficiently qualify the impugned activity. It would prohibit, for example, the subversion of the intention of the non-compete clause through the the dentist being remunerated for his services through shares or partnership revenue.15
In another appellate decision16, the use of the word “dealings” was found to be ambiguous, which was fatal to enforceability of a non-solicitation clause. The clause prohibited the solicitation of “customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time with the twelve (12) months preceding the date upon which the Employee left the employment of Globex.”
The majority held that the clause was ambiguous and refused to enforce it on this ground. In particular, it found that the term “dealings” was ambiguous both in its meaning and practical application. For instance, if a trader was away from his desk and one of his regular clients called and spoke for a brief period of time to a different trader, would this constitute “dealing”? And how would the trader who briefly spoke to that client know he had had “dealings” with that client if he didn’t write down the client’s name or make a particular record – something he might not have any motivation to do if the client was not a regular client of his?
As the majority stated, “If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.”17
Non-solicitation clauses have failed on the basis of prohibiting solicitation of “any” of the employer’s clients, not just those who were served by the employees. The difficulty is that in normal circumstances the defendants will have no way of knowing whether a potential client they wish to solicit is a client of the former employer.18 In one case, where the former employee was a salesperson for a company with worldwide operations and the employee had been there for 17 years, the Ontario Court of Appeal concluded that a covenant prohibiting competition and solicitation from any entities that were customers during his employment could not be enforced. The employee had no way of knowing whether any particular contact he wished to make was a customer over the 17 years of his employment.19
A similar argument, however, was dismissed where the departed employee, who had only ever worked with the US Great Lakes Region, contended that it was impossible for him to have knowledge of all of the employers’ customers in all of its offices across all of its offices for the duration of his tenure. The court was satisfied, based on email evidence filed in connection with the employer’s injunction application that the employee “knew who the relevant clients were in both Canada and the United States, had their contact information, was aware of the products they had purchased and had knowledge of the costs of products, sales performance including pricing.”20
Where it is not clear whether an employee is prohibited from soliciting just the clients he or she served or all the clients of the employer itself, the clause will be found to be ambiguous. Such was the case where the covenant prohibited investment advisors from the solicitation of any clients “we” have directly done business with in the 12 months preceding the end of “our” employment. The court found it was unclear whether the clause applied just to the clients of each individual advisor, the clients of the team as a whole or the bank as a whole.21
Some covenants may attempt to limit competition with respect to a company’s related entities. This proved fatal in an Ontario decision where the court held the covenant to be ambiguous in that the identity and number of affiliates and subsidiaries, much less the types of businesses they engaged in, was unclear. In the same covenant, the employer attempted to reserve the unilateral discretion, at the time of termination of employment, to set the time period of the covenant for a period of up to 12 months. The court found the temporal scope to be ambiguous.22
Similarly, the Saskatchewan Court of Appeal upheld a chambers decision that found as ambiguous a reference to “partner companies” where the covenant did not define that term and the evidence disclosed multiple problems in interpreting the terms. The Court of Appeal distinguished other case law where a covenant relating to “affiliates” was upheld, noting that the term has a defined legal meaning.23
In another decision, a Saskatchewan court accepted the plaintiff’s contention that the terms “prospective customer” and “prospective client”, terms the court found to be “extraordinarily board”, should be read in the context of the entire employment agreement. While the court, applying Elsley, agreed to do so, it nonetheless rejected the defendant’s assertion such an approach should lead the court to limit the application of the terms to only one sector of the employer’s business.24
Care must be taken to avoid ambiguity in respect of covenants that simply seek to protect confidential information. The BC Supreme Court refused an application for in interlocutory injunction respecting confidential information, finding the definition of “confidential information” in the employment agreement to be “dense, broad, and difficult to understand. …I do not think it would be obvious to (the employee), or others, what constitutes confidential information.25
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at p. 170.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at paras. 45-47.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 at para. 24.
- Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, at para. 85. See also 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 (CanLII).
- Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at para. 35.
- Stittgen v. Luetke-Brinkhaus,  B.C.J. No. 972 (CA), at para. 13.
- MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 95-103, affirmed, 2018 ONCA 440 (CanLII), where the Court of Appeal found no ambiguity in the clause.
- Magnetic Marketing Ltd. v. Print Three Franchising Corp., 1991 CanLII 763 (BC SC), Allegra of North America Inc. v. Stevens, 2008 BCSC 1220, at para. 110 and Craig v. CEO Global Network Inc., 2019 ONSC 3589, at para. 55.
- M & P Drug Mart Inc. v. Sydney (Alan) Norton, 2021 ONSC 5211, at pars. 24-35.
- Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 at paras. 114 and 116.
- ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at paras. 50 and 61.
- Steeves v. Capital Safe & Lock Services, 2000 NBCA 1, at paras. 30-32.
- Nicholas v. Dr. Edyta Witulska Dentistry Professional Corporation, 2022 ONSC 2984, at para. 75.
- IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 (CanLII), at para. 63.
- Parekh et al v. Schecter et al, 2022 ONSC 302, at paras. 53-54, though the covenant was assessed as connected to the sale of a business, not in the employment context.
- Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII).
- Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 13-19.
- See, for instance, Benson Kearley & Associates Insurance Brokers Ltd., v. Jeffrey Valerio, 2016 ONSC 4290 (CanLII) at paras. 42-44, in an application for an interlocutory injunction. In this case, though, the court preferred to characterize the clause at issue as a non-competition clause without geographic limit, since not competing would be the only effective way to comply with a clause which prohibited soliciting “any” of the former employer’s clients and the defendants had no way of knowing the identity of all of the clients.
- Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII), at paras. 27-28. The court also refused to enforce the covenant on other grounds.
- Stress-Crete Limited v. Harriman, 2019 ONSC 2773, at para. 43.
- National Bank Financial Inc. v Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at paras. 78-82.
- Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 51-52.
- Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, at paras. 35-43. See also Mann Engineering Ltd. v. Desai, 2021 ONSC 7580, at para. 99, where the court held references to clients or prospective clients of “a member of the Mann Group” to be ambiguous on the evidence.
- Hired Resources Ltd. v. Lomond, 2019 SKQB 195, at para. 38.
- 0777792 B.C. Ltd. v Da Costa, 2019 BCSC 1839, at para. 29.