The purpose of including restrictive covenants in employment contracts is usually to prevent an employee from competing or soliciting business from their original employer for a period of time after they have left the original employer. The law is generally concerned with the reasonableness of these clauses in employment contracts. What constitutes reasonableness depends on the activity, time and geographical area that the employee is prohibited from engaging in. This concern was echoed in the decision of Shafron v. KRG, which the Supreme Court of Canada released earlier in 2009. In this decision, the SCC explained that a restrictive covenant, whether it be a "non-solicitation clause" or a "non-competition clause," is unenforceable at law unless it is shown to be reasonable. However, what happens if the clause is unclear? How is reasonableness of the clause then determined? Shafron v. KRG addressed the question of how a restrictive covenant is treated in the event it is found to be ambiguous.
Morley Shafron sold his insurance agency to KRG in 1987. Shafron was employed by KRG from 1987 to 2001 by a series of employment contracts that contained a restrictive covenant in which, for three years after leaving KRG, he would not be employed by another insurance brokerage in the "Metropolitan City of Vancouver." After leaving KRG, Shafron began working for another insurance brokerage in Richmond, starting in January 2001. Shortly thereafter, KRG initiated an action to enforce the non-competition clause.
At trial, the judge found the term "Metropolitan City of Vancouver" to have no legal definition. Accordingly, he dismissed the claim by KRG to enforce the restrictive covenant as the geographical area it covered was not clear nor certain. However, the B.C. Court of Appeal overturned the trial judge's decision even though it also found the term "Metropolitan City of Vancouver" to be ambiguous. The Court found the parties intended to prevent Shafron from being employed in an area "beyond the City." In doing so, the Court applied notional severance, a legal tool used to "read down" provisions in contracts, to resolve the ambiguity of the term "Metropolitan City of Vancouver." As such, it substituted the phrase "City of Vancouver, the University of British Columbia endowment lands, Richmond, and Burnaby" and found the restrictive covenant to be enforceable.
The SCC disagreed with the Court of Appeal and restored the decision of the trial judge. In doing so, the Court explained that in making a determination of the reasonableness of the restrictive covenant, it must first be unambiguous as to its meaning. The Court stated the meaning of "Metropolitan City of Vancouver" was not clear. The Court ruled the legal tool of notional severance should never be applied to restrictive covenants in employment contracts for two reasons. First, it invites courts to rewrite restrictive covenants in their own view of what constitutes reasonableness. Second, it increases the power imbalance between employers and employees typically assumed under restrictive covenants. As for the doctrine of blue-pencil severance, the Court explained that it can be applied to restrictive covenants in employment contracts, but only in rarest cases where the term is trivial and clearly severable. The Court found that was not the case with removing the term "Metropolitan" from the covenant in Shafron's employment contract.
This decision serves as a reminder to employers that they should not rely on the courts to rewrite restrictive covenants that are overly broad or not precise. In addition, employers should ensure that any restrictive covenant in an employment contract is specific to their needs and also the particular employee who is subject to such a clause. In the wake of KRG, restrictive covenants in employment contracts are likely to be scrutinized more rigorously than similar clauses found in other types of contracts.