Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
The Supreme Court of Canada has held that “notional” severance, which “involves reading down a contractual provision so as to make it legal and enforceable”, is not appropriate to cure a defective restrictive covenant. Further, “blue-pencil” severance, which entails removing part of a contractual provision by crossing it out, may only be resorted to sparingly to remove trivial parts of a contract. Even in the absence of a restrictive covenant, the courts are restrained in applying severance “because of the right of parties to freely contract and to choose the words that determine their obligations and rights.”1
In the case of notional severance, a court reads down a provision that otherwise would be illegal. This mechanism is appropriate where there is a “bright line” test for illegality. In the case of restrictive covenants, however, there is no bright line test for reasonableness. Accordingly the Supreme Court of Canada has held that the application of notional severance to restrictive covenants would amount to the court replacing the covenant with what it considers to be reasonable, creating uncertainty as to what courts may find to be reasonable in each case.2 Further, application of notional severance would invite employers to provide for unreasonable restrictive covenants – whether in terms of time, activity or geography – knowing the court will read down the covenant to what it considers reasonable. That, the Supreme Court said, provides no inducement to the employer to carefully draft a reasonable covenant.3
The court further held that blue pencil severance may only be used sparingly to strike out trivial parts of a covenant where to do so would not affect “the main purport of the restrictive covenant.”4 The court approved of a BC Court of Appeal decision in Canadian American Financial Corp. (Canada) Ltd. v. King, where that court stated:
.…the courts will only [apply blue pencil severance to] sever the covenant and expunge a part of it if the obligation that remains can fairly be said to be a sensible and reasonable obligation in itself and such that the parties would unquestionably have agreed to it without varying any other terms of the contract or otherwise changing the bargain….It is in that context that reference is made in the cases to severing and expunging merely trivial or technical parts of an invalid covenant, which are not part of the main purport of the clause, in order to make it valid….5
Applying this reasoning, the court held that, where there was no legal or judicial definition of the term “Metropolitan City of Vancouver”, it was not appropriate to apply blue pencil severance to strike out the word “Metropolitan”. The evidence indicated the parties intended a restriction that included the City of Vancouver and something more, but there was no evidence the parties “unquestionably” would have agreed to remove the word “Metropolitan” without any other change to the contract had they known there was no such entity.6
Where a two-year non-competition covenant “commencing on January 1, 2007” was clearly unreasonable because, in application, it would have commenced two years after the date of employee’s termination of employment, the Ontario Court of Appeal held that application of blue pencil severance by the trial judge to strike out these words was improper. The trial judge’s decision that severing the words in question would have restored what the parties had intended was not supportable, as the evidence did not indicate the parties would have “unquestionably” agreed to remove the words without other changes to the contract. Nor were the words “trivial”. Rather, they went “to the duration of the restriction and (were) part of the main purport of the clause.7
Nor will the courts act as “de facto arbitrators over clauses that are drawn as alternatives” i.e. where one alternative encompasses another, but on a wider scale. In Canadian American, the BC Court of Appeal stated it would find a clause to be void for uncertainty if it restricted the employee from competing in (a) Canada, (b) British Columbia, and (c) Vancouver, for (i) ten years, (ii) five years, and (iii) one year. In such a case the court would not use the “blue pencil” rule to make an agreement for the parties that they did not make for themselves.8
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at para. 32.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 39
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 40.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 2.
- Canadian American Financial Corp. (Canada) Ltd. v. King, 1989 CanLII 252 (BCCA), at para. 3.
- Shafron v. KRG Insurance Brothers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), para. 50.
- Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173, at paras. 17-29.
- Canadian American Financial Corp. (Canada) Ltd. v. King, 1989 CanLII 252 (BCCA), at para. 6.
(a) Separate Obligations within the Same Clause
The upholding of one restraint while refusing to uphold another in the same clause may be a permissible form of severance, providing they are covenants of a different type, e.g. covenants against competing and soliciting, and not covenants of the same type, e.g. two covenants against competing. However, as noted below, further judicial consideration of the Supreme Court of Canada’s decision in Shafron v. KRG Insurance Brokers is necessary before it can be stated this is definitively the case.
In an Ontario decision, W.R. Grace & Co. of Canada Ltd. v. Sare et al., the court refused to enforce a non-competition covenant because of ambiguity in the use of the word “territory.” However, the non-solicitation restraint, though it prohibited solicitation in the same ambiguous “territory” and was part of the same clause, was upheld. The court held that the geographic prohibition was of no consequence since the covenant restrained solicitation only of actual customers. It further held that the clause contained two separate obligations or restraints, not one.1
In light of the Supreme Court of Canada’s decision in Shafron, it is uncertain whether severance may be applied within the same clause where the covenants are separate obligations and of a different type. The court in Shafron noted that some “cases have accepted that severance might be applied if the severed parts are independent of one another or can be severed without the severance affecting the meaning of the part remaining” (emphasis added), but then went on to suggest these cases were not an appropriate view of the law.2 Notably, however, in the only Canadian decision cited by the court for the proposition that it later rejected (application of severance where the severed parts are independent of one another), the covenants at issue were all forms of non-compete restraints.3 They were not covenants of a different type, i.e. a restraint on competition and a restraint on solicitation, as in the W.R. Grace decision.
Certainly, there are very good policy grounds not to apply severance to save one covenant where the court has refused to enforce a covenant of the same type within the same clause (or in a separate clause, for that matter). Application of severance in such circumstances would encourage employers to draft alternative clauses, hoping the court will enforce one.
However, where the clauses are of a different type, i.e. a non-competition covenant and a separate non-solicitation covenant, it is submitted that the same policy against enforcement of one and not the other does not exist and courts should be prepared to enforce a separate obligation, whether it exists in the same clause (as in W.R. Grace) or a separate clause. Where the obligations exist in the same clause, depending on the wording, they may be more appropriately interpreted as separate clauses in an agreement rather than as one indivisible clause,4 with one enforceable and the other not.
This indeed was the approach that an Alberta Court, after Shafron, was prepared to take in respect of a clause that contained both non-competition and non-solicitation covenants after finding the former was not enforceable. The court held that it “would have been prepared to go so far as to conclude that the Supreme Court of Canada did not intend that different concepts expressed in one paragraph could not independently be enforced because this would then become a criticism of the legal drafting or style of the document rather than its substance.” However, having held the defendant did not solicit the plaintiff’s clients, the court did not have to make that finding.5
- W.R. Grace & Co. of Canada Ltd. v. Sare et al., 1980 CanLII 1568 (ONSC) at pp. 13-14.
- Shafron v. KRG Insurance Brokers (Western) Inc.,  1 SCR 157, 2009 SCC 6 (CanLII), at paras. 35-37.
- T. S. Taylor Machinery Co. v. Biggar (1968), 1968 CanLII 588, 2 D.L.R. (3d) 281 (Man. C.A.), at p. 282.
- Indeed, it is more common to see covenants drawn as separate clauses of an agreement than in the same clause, in which case the courts will more readily view them as severable if one does not survive scrutiny. The practice of including separate clauses each containing covenants of a different kind is not without risk, however. In American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA), Bull J.A., in concurring reasons at p. 534, held that three separate covenants forbidding competition, solicitation and disclosure were each “severable, clear and unambiguous and can be separately and adequately enforced without reference to or affecting the others” but refused to enforce the non-competition covenant on the basis that the restraints on solicitation and disclosure were sufficient and hence the restriction on competition “of necessity must constitute nothing more or less than a covenant to restrain the respondent from business competition.”
- The Travel Company Ltd. v. Keeling, 2009 ABQB 399 (CanLII), at para. 67.
(b) Severance of a Covenant Connected to the Sale of a Business
Since Shafron, there have been some decisions which have questioned its restrictive approach to severance in cases where the covenant is connected to the sale of a business.
In City Wide Towing and Recovery Service Ltd v Poole1, the Alberta Court of Appeal distinguished Shafron on the basis that the covenant at issue there was given in the context of an employment agreement, whereas the covenant in the case before it was given pursuant to an agreement arising from the sale of the business.
The court then proceeded to sever the definition of “Non-Compete Area” as follows to save the restrictive covenant:
“Non-Compete Area” means the Provinces of Alberta, British Columbia and Saskatchewan and any other location within Canada where the Corporation and its Affiliates are carrying on the Business at any time during the Restriction Period. 2
An Ontario Court, on an application for an interlocutory injunction, distinguished Shafron when it applied blue pencil severance to a restrictive covenant arising from the sale of a business. The cautions in Shafron, which arose in the context of an employment contract, were less applicable in the context of the sale of a business. While the court was not prepared to rewrite the parties’ contract for them (notional severance), it held that where individual terms are found to be unreasonable, they can be severed. Accordingly, while the clause originally stated “anywhere within ten kilometres of the Restricted Area” (with the Restricted Area being defined as the Province of Ontario), it struck the phrase “ten kilometres of”, such that the covenant read “within the Restricted Area.3 The court’s decision to apply blue pencil severance clearly went beyond use of blue pencil severance for trivial matters, as contemplated in Shafron.
In another decision, again in an application for an interlocutory injunction to enforce a non-competition clause, an Ontario Court held that the Shafron decision even left “open the question of whether notional severance may be employed in contracts for the sale of a business.” Accordingly, despite finding that the length of the agreement was unreasonable, the court was of the opinion that the plaintiff had met the “low threshold” of a serious issue to be tried as to whether the non-competition agreement could be read down to a length found to be reasonable by the court.4