Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(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