Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

(b) Competitive Activity Which is Not Prohibited but Attracts Financial Consequences

Where there is a forfeiture of a benefit cause by the occurrence of competitive activity which is not prohibited but which attracts financial consequences, it must be determined whether the courts in that jurisdiction follow the formalist approach as opposed to the functionalist approach (see Section 5 above, “Is the Clause in Restraint of Trade?”). Where they follow the formalist approach (such as in Ontario), the courts will not apply the tests applicable to restrictive covenants, since there is no actual restriction on competitive activity.1 Rather, the court will only consider whether the clause imposing the financial consequence is enforceable.

On the other hand, where the forfeiture of a benefit takes place in a jurisdiction that follows the functionalist approach (such as in British Columbia), then the court will assess the clause as a restrictive covenant, as the law in those jurisdictions views such clauses as having the effect of restricting competition.2 It may also assess the enforceability of the financial consequence if that is necessary to the case.

  1. See, for example, Inglis v. The Great West Life Assurance Co., 1941 CanLII 85 (ONCA).
  2. Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97.