Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

7. Consideration

Where a restrictive covenant was executed mid-employment, the Supreme Court of Canada held that, despite no additional compensation passing to the employee, there was “ample consideration”, given that “the employee was given to understand, and did understand, that his refusal to execute the covenant would lead to an early termination of his employment, and that the employer tacitly promised that if the bond were signed, the employment would not soon be terminated.”1

In considering whether continued employment is sufficient consideration for a restrictive covenant, the question is whether there was a mutual understanding between employer and employee that the employer would forebear from dismissal if the covenant is signed.

In Globex Foreign Exchange v. Kelcher, the Alberta Court of Appeal held that where two employees did not receive anything beyond that to which they were already entitled when, during their employment, they accepted restrictive covenants, there was lack of consideration and hence the covenants were not enforceable (though this comment was made in obiter, since the decision rested on other grounds.)

The court held that mere forbearance to dismiss is not adequate consideration. Rather, there must also be a mutual understanding on the part of the employer and employee when the restrictive covenant is entered that there will be such forbearance. In the case before it, there had been no promise made or implied by the company that employment would continue as a result of signing the covenant.2

Attempts to impose restrictive covenants on employees via agreements to comply with employee handbooks or policies after employment already has commenced have failed for want of consideration. In National Bank Financial Inc. v. Canaccord Genuity Corp., the B.C. Supreme Court refused to enforce such a clause, holding that “more was required to be done by the plaintiff if it wished to bind the individual defendants to the non-solicitation provision embedded in the bowels of its Code of Conduct.”3  Similarly, in another decision, the court stated:

A contract which would restrict mobility of employment and restrict trade by limiting the right of persons to place or continue their business with a person of their choice, must be apparent in the clearest of terms and not arise under the subtrafuge of a consent required for an internal Corporate Policy Manual and Working Code of Conduct.4

Where a share purchase agreement also entailed the execution of five-year non-competition agreements by the defendants, it was argued that since no portion of the sale price was allocated to goodwill, there was no consideration for the non-competition agreements. The court rejected this argument, finding that the non-competition agreements “were an integral part of the entire transaction.”5

The British Columbia Court of Appeal radically altered the law of consideration in that province in Rosas v. Toca. The Court held that, absent duress, unconscionability or other public policy concerns, a mid-contract varision will be enforceable as along as the parties agreed to the variation.6

Against Rosas stand judicial presumptions of an inequality of bargaining power between employers and employees and public policy favouring employee mobility. It is argued here that these presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants entered into without fresh consideration.

Indeed, in Quach v. Mitrux Services Ltd., the same court stated, in obiter, that the effect of Rosas upon prior case law “may not change the authority of (the prior case law) in the nuanced world of employer and employee contractual relationships.”7

  1. Maguire v. Northland Drug Co. Ltd., [1935] SCR 412, 1935 CanLII 35 (SCC) at p. 415.
  2. Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 73-91. Though see MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at para. 68, where the court applied a 1996 decision holding that continued employment is consideration, without apparently considering whether there was a mutual understanding about forbearance of termination.
  3. National Bank Financial Inc. v. Canaccord Genuity Corp., 2018 BCSC 857 (CanLII), at para. 68.
  4. R.T. Investment Counsel Inc. v. Werry, 1999 CanLII 5886 (BCSC).
  5. Ensign Drilling Inc. v. Lundle, 2007 ABQB 357 (CanLII), at paras. 60-61.
  6. Rosas v. Toca, 2018 BCCA 191.
  7. Quach v. Mitrux Services Ltd., 2020 BCCA 25, at para. 13.