Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

(d) Application of Judicial Approach to Stipulated Remedy Clauses in the Context of Departing Employees

The BC Court of Appeal held that a clause which required payment of $150,000 if a veterinarian set up a practice within 25 miles of her employer’s place of business could not be said to be “extravagant and unconscionable” as the amount represented her employer’s calculations of its unrecoverable mentoring, training and equipment costs if she were to leave within a certain period of time and the impact on the clinic’s goodwill and volume of business if she was to compete within a year of leaving.1

An optometrist who departed a clinic to establish her own clinic had signed an agreement under which she was obligated to transfer patient files to her employer and was subject to a $100 fine for each patient file she did not transfer. She was also subject to a payment of up to $250,000 in liquidated damages for breach of non-competition or non-solicitation covenants or for breach of the requirement to transfer patient files. The court found it “extravagant and unconscionable” that a single breach of the requirement to transfer patient files would result in a $100 payment but also expose the optometrist to a claim for $250,000 in damages. It concluded that the latter provided for a penalty and not liquidated damages. The court held that it had not been presented with enough evidence, however, to determine whether relief should be granted against the penalty.2

The question of whether relief should be granted against a penalty clause attached to a restraint of trade, it is suggested, is put in doubt by the Supreme Court of Canada’s decision in Shafron.

The Court in Shafron refused to apply the doctrine of notional severance to a restrictive covenant, as its application would:

Invite the employer to impose an unreasonable restrictive covenant on the employee with the only sanction being that if the covenant is found to be unreasonable, the court will still enforce it to the extent of what might validly have been agreed to.

Not only would the use of notional severance change the terms of the covenant from the parties’ initial agreement to what the court thinks they should have agreed to, it would also change the risks assumed by the parties. The restrictive covenant is sought by the employer. The obligation is on the employee. Having regard to the generally accepted imbalance of power between employers and employees, to introduce the doctrine of notional severance to read down an unreasonable restrictive covenant to what is reasonable provides no inducement to an employer to ensure the reasonableness of the covenant and inappropriately increases the risk that the employee will be forced to abide by an unreasonable covenant.”3

Similarly, it is submitted that if a financial consequence attached to a restraint of trade is found to be a penalty, the courts should not impose a lesser financial consequence in accordance with what the evidence shows would be appropriate or reasonable. Doing so would engage all of the dangers the court in Shafron warned against in that employers would be invited to draft clauses imposing significant penalties in an effort to dissuade competition.

  1. Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97 (CanLII), at paras. 50-51.
  2. IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 57-59, aff’d 2017 BCCA 301 (CanLII).
  3. Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, 2009 SCC 6 (CanLII), at paras. 40-41.