On January 23, 2009, the Supreme Court of Canada, in Shafron v. KRG Insurance Brokers (Western) Inc., rendered an important decision on the enforcement of non-competition clauses contained in employment contracts.
In 1987, Mr. Shafron sold his business, an insurance agency, to KRG Insurance Brokers Inc. which, after the sale, named the business KRG Insurance Brokers (Western) Inc. ("KRG Western"). Mr. Shafron worked for KRG Western from 1987 to 2001 under a series of employment contracts. Each employment contract contained a non-competition clause whereby Mr. Shafron undertook not to accept a job with an insurance brokerage for a period of three years throughout the "Metropolitan City of Vancouver". In January 2001, after resigning from KRG Western, Mr. Shafron started a new job with another insurance brokerage located near the City of Vancouver, in Richmond, British Columbia. In view of the non-competition clause contained in Mr. Shafron’s employment contract, KRG Western instituted legal proceedings to have it enforced.
The trial judge dismissed KRG Western’s claim, finding primarily that the term "Metropolitan City of Vancouver" was neither clear, certain nor reasonable. The British Columbia Court of Appeal set aside that decision. Finding nevertheless that the term "Metropolitan City of Vancouver" was ambiguous, the Court of Appeal applied the doctrine of notional severance to interpret the non-competition clause and, more specifically, its geographical aspects. It found that the clause referred to the City of Vancouver and neighbouring municipalities.
The Supreme Court overturned the Court of Appeal’s decision, affirming that an ambiguous non-competition clause is invalid and unenforceable. The Supreme Court underlined that it is not possible to use the doctrine of notional severance, that is, reading down a contractual provision so as to make it legal and enforceable. Indeed, to apply that doctrine to non-competition clauses would amount to asking the Court to rewrite the contractual provision based on what the Court subjectively considered reasonable. According to the Supreme Court, if such a mechanism were sanctioned, employers would be invited to draft overly broad non-competition clauses with the prospect that the Courts would read them down.
Moreover, the Supreme Court held that it is not possible, except in certain circumstances, to apply the doctrine of blue-pencil severance, also known as severability pure and simple, which consists in removing part of a contractual provision to make it legal and enforceable. This doctrine must be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the non-competition clause. Applied to the case at hand, that doctrine would consist in removing the word "Metropolitan" from the geographical part of the non-competition clause, retaining only the words "City of Vancouver". However, because this part of the covenant was not merely trivial, the Supreme Court found that severability pure and simple with the blue-pencil severance was not applicable.
KRG Western also invited the Supreme Court to apply the doctrine of rectification, which doctrine implies, in substance, a demonstration that the parties were in agreement about the stipulations of the contract, but that a mistake had occurred when they were set down in the contract. However, the Supreme Court found that there was no indication that the parties had agreed on something, but mistakenly written something else in the contract.
The non-competition clause was ambiguous and therefore void and unenforceable. A non-competition clause being an important restraint of trade, the Supreme Court affirmed that it must necessarily be drafted with great care and without ambiguity if it is to be enforced, and that no Court can intervene to fill in any gaps that may exist.