THE EMPLOYERS' EDGE
Court of Appeal Provides Direction on the Enforceability of Restrictive Covenants
In a recent decision, the Ontario Court of Appeal held that non-competition and non-solicitation covenants were unreasonable and went beyond the scope required to protect business interests.
As a general rule, covenants that restrain trade are contrary to public policy because they interfere with individual liberty and the exercise of trade. Therefore, they are prima facie unenforceable. A covenant will only enforceable if the parties seeking to enforce the covenant can demonstrate that it is reasonable. Reasonableness would be determined in light of the circumstances that existed when the covenant was made. If a covenant is ambiguous as to activity, time or geography, it will be found to be unreasonable and therefore unenforceable.
In Martin v. ConCreate USL Limited Partnership the plaintiff was a 20-year employee who also owned an interest in the employer’s business. While the business was being sold, Martin signed an agreement containing Canada-wide restrictive covenants that would end 24 months after he disposed of his interest in the company, that would restrict competition and solicitation of employees, customers, dealers, agents or distributors, and that would prohibit the use of any non-pubic information concerning the company. Martin agreed to the restrictive covenants and acknowledged in writing that he received independent legal advice and negotiated the covenants on equal footing.
While the Court of Appeal found that the geographical scope of the restrictive covenants was reasonable, it found the time limitation to be unreasonable. Martin could not sell his interest in the company without the consent of certain third parties, who may have an interest in Martin being unable to sell his interest. As such, the duration of the restriction was indeterminate and therefore unreasonable.
Furthermore, the Court found that the non-solicitation clause purported to include persons and activities which were not known to Martin, making it unreasonable and unenforceable.
The Court of Appeal’s decision is troubling for employers since the Court found the covenants to be unreasonable, notwithstanding the fact that Martin had the benefit of independent legal advice and acknowledged the reasonableness of the covenants in writing. The Court reasoned that “while these are important factors, they do not entirely immunize the clause from scrutiny”. In light of this decision, even where an employee agrees to the restrictive covenants and had the benefit of independent legal advice, it is important for employers to ensure that the geographical scope and time limitation are clear and that the persons and activities covered are such that would reasonably be expected to be within the knowledge of the employee.
The lawyers at CCP can assist employers in drafting clear, enforceable restrictive covenants.
Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.