Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

9. Miscellaneous Issues

(a) Negligent Misrepresentation Connected to a Restrictive Covenant

Despite finding that the purchaser of a fishing business negligently misrepresented to the vendor that there would be a place for him with the business subsequent to the sale, the trial court was found to have erred in refusing the enforce the non-competition agreement negotiated as part of the terms. The Nova Scotia Court of Appeal that that covenant was at the heart of the entire purchase and sale transaction and not considered by the parties to be severable. The court referred back to the trial court an assessment of the defendant’s damages for the plaintiff’s breach of the non-competition agreement as well as the plaintiff’s losses for the negligent misrepresentation.1

  1. Smith v. Union of Icelandic Fish Producers Ltd., 2005 NSCA 145 (CanLII).

(b) Corporate Amalgamations and Restructurings

In an application for an interlocutory injunction, a British Columbia court was prepared to reach a preliminary judgement that a plaintiff company, which had been the product of several amalgamations and one asset transfer from a parent company to a wholly-owned subsidiary, did not lose its right to enforce the terms of its employment contracts, including restrictive covenants, because of the amalgamations.1 In the same decision, the court held it was also “at least strongly arguable”, under the common employer doctrine, that the transfer of assets was a valid assignment of the assets and hence the restrictive covenants.2

  1. Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 28. The Court cited both the effect of British Columbia’s Business Corporations Act and the Alberta case of Pattilo v. Murphy Canada Exploration Ltd., 2001 ABQB 1070.
  2. Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 29, citing Valley First Financial Services Ltd. v. Trach, 2003 BCSC 223.

(c) Termination of Employment Contract Other than through a Wrongful Dismissal

A British Columbia court soundly rejected the proposition put forward by several employees who had departed voluntarily to join a competitor that the plaintiff could not rely on the restrictive covenants set out in their employment agreements on the basis that they did not survive their employment: “Were it the law that upon termination of employment no obligations under the contract of employment survived, there would be no possibility of ever enforcing non-competition or non-solicitation clauses that are intended to govern the immediate post-employment period.”1

  1. Yellow Pages Group v. Anderson, 2006 BCSC 518 (CanLII), at para. 34. While this statement of the law is undoubtedly sound, the case relied on by the court, Raymond Salons Ltd. v. Boucher, 1990 CanLII 1763 (BCSC), is not, it is submitted, good law in Canada. There, the court held that a covenant survived a wrongful dismissal. This decision and proposition was rejected by the Alberta Court of Appeal in Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII), at paras. 44-58.

(d) Effect of Compensation on Enforceability of a Covenant

It has been held that the payment of compensation as part of a covenant not to compete does not render enforceable a covenant that is otherwise void.1

Notably, Canadian courts have not had occasion to opine on the enforceability of “garden leaves”, common in the United Kingdom, under which employees are contractually required to provide lengthy notice of their dismissals and the employer has the right under the contract to excuse the employees from working during the period of notice, while continuing their compensation.

  1. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at para. 55. Medtronic of Canada Ltd. v. Armstrong, [1999] O.J. No. 4860.

(e) Contract Renewals, Former Contracts, Expired Contracts

Where a company inserted a non-competition clause into a renewal agreement with a consultant without drawing it to his attention, the court held it not to be enforceable. Two previous written contracts has been identical and had not contained a non-competition agreement. The individual had not reason to suspect that, just because the company had shifted its contracts to an electronic portal, it was changing terms to insert the non-competition clause. The court held that company should have clearly and unambiguously advised its consultants of that fact.1

In another decision, the employer asserted enforceability of a covenant where the employee resigned to work for a competitor, returned to the employer a few weeks later without a new written agreement, then resigned again a number of years later. The employer’s argument that the restrictive covenant contained within the employment agreement in effect before the first resignation applied. The court soundly rejected this argument, stating:

In my view, an implied restrictive covenant, entered into ten years after the last written contract between the parties expired, and after Mr. Roszkowski left his employment with PointOne to work for a competitor, and then was rehired without complaint about his having done so, is more than ambiguous – it is a fiction. As the Supreme Court of Canada held in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, [2008] 3 S.C.R. 79, citing Imperial Sheet Metal v. Landry, 2017 NBCA 51, courts should not be reading restrictive terms into employment contracts when the parties have not bargained for them. In my view, neither should courts read in or imply a restrictive covenant into an employment contract where the parties have bargained for one, and then allowed it to lapse.2

In another decision, a court held that a consultant’s contract had simply expired, and was not terminated by mutual consent. As the restrictive covenant was only applicable following “termination” of the agreement, not following expiry, it was not called into play.3

  1. S.I. Systems Partnership v. Geng, 2020 ONSC 8086, at para. 70.
  2. PointOne Graphics Inc. v. Roszkowski et. al., 2021 ONSC 629, at para. 25.
  3. Mirage Consulting Ltd. v. 5573344 Manitoba Ltd., 2021 MBQB 186, at para. 32.