The recent Canadian case of Gentech Insurance Ltd v Martina (2012) ONCA 605 highlights the importance of using restrictive covenants in employee contracts and the potential causes of action available if such provisions are unenforceable. It also indicates that an insurance broker may be liable for taking clients to a new employer, even if they are not subject to a non-competition or non-solicitation clause.

Facts

Gentech Insurance Ltd (Gentech), a small insurance broker, commenced proceedings against two of its former independent contractors, Martina (M) and Diamantouros (D), after they left to join a competing broking firm and began soliciting their previous clients.

M’s situation

M joined Gentech’s sales team in 2005 as an independent contractor. At that time, M had no book of business. Gentech and M orally agreed that it would share commissions and the equity associated with any of M’s future clients on 50/50 basis. It was also agreed that if either party terminated the relationship, the other would be required to purchase the 50% interest in such clients at “fair market value” or refrain from soliciting those clients for 2 years. Gentech presented M with a services agreement outlining this arrangement. It included a non-competition and non-solicitation clause. However, the services agreement was never signed.

D’s situation

D joined Gentech’s sales team in 2006 also as an independent contractor. D had developed his own book of business beforehand. D agreed to split commissions earned from his clients (while he was engaged by Gentech) but did not agree to Gentech having 50% ownership of his book.

In Jan 2009, both M and D left Gentech on the same day without giving notice, taking their books of business with them. Shortly after, they joined a competing broker and began soliciting their former clients. While Gentech attempted to retain these clients, most of them chose to transfer their accounts to the competing broker, which caused financial loss to Gentech. Both M and D denied owing any compensation to Gentech for its purported interest in their respective books of business.

Gentech sought damages from M and D on various grounds, including (among others): (1) breach of contract; (2) the torts of conspiracy and interference with economic relations; and (3) wrongful resignation.

Decision

  1. Breach of Contract

The Ontario Court of Appeal upheld the trial judge’s decision in respect of both M and D.

It was held that D was free to take his book of business to the competing broker without making any payment to Gentech. This reflected the fact that D had never agreed to share the equity in his book of business. As such, Gentech had no cause of action against D for breach of contract.

In contrast, M had orally agreed to buy out Gentech’s interest in his book if he terminated his contract. He was ordered to pay damages for breach of contract amounting to 50% of the market value of the book.

However, M was not bound by a non-competition or non-solicitation agreement (ie a restrictive covenant) as he had never signed the service agreement proposed by Gentech.

  1. Economic torts

The Court upheld the trial judge’s conclusion that M was liable for the torts of conspiracy and intentional interference with economic relations.

In doing so, it clarified the requirements for the tort of conspiracy, finding that:

  • each conspirator must engage in either unlawful conduct (ie actionable at law) or conduct intended to harm the complainant; and
  • such conduct must cause economic loss to the complainant.

However, the Court rejected the trial judge’s view that D was liable for the tort of conspiracy. It was concluded that D’s conduct was not unlawful, as he had full ownership of his book of business and was entitled to leave without giving notice. In addition, there was no evidence that D’s intended purpose in leaving was to cause harm to Gentech.

  1. Wrongful resignation

The Court approved of the trial judge’s decision to dismiss the wrongful resignation claims. This reflected the fact that neither M nor D had entered into a contract requiring a specified period of notice of resignation. While the services agreement provided to M required notice of termination to be given, this obligation was unenforceable as he had never signed the document.

This aspect of the decision is of limited relevance to other common law jurisdictions, as each will have their own statutory rules on this issue. For example, Hong Kong’s Employment Ordinance (Cap 57) imposes a minimum statutory notice period for the termination of employment.

The Key Lessons

  1. The importance of a written agreement and properly drafted restrictive covenants

This case highlights the importance of having a properly drafted agreement when engaging insurance brokers or similar sales staff. This applies whether the broker is appointed as an employee or as a contractor. In the absence of a signed agreement, the employees/contractors are unlikely to be restricted by any of the company’s written policies or long standing practices.

If the broking firm wishes to restrict an employee/contractor from joining a competitor or soliciting clients, it is important that the relevant agreement includes a properly drafted restrictive covenant. The decision in Gentech demonstrates that, in the absence of an enforceable restrictive covenant, an employee/contractor may be free to take his book of business to a competitor without any consequences (eg as occurred in D’s case).

For present purposes, it is relevant to note that any restrictive covenant must be drafted narrowly and be sufficiently clear as to the duration and subject of the restraint. This issue is discussed in more detail in our previous article regarding the High Court of Hong Kong’s decision in Cantor Fitzgerald Europe v Jason Jon Boyer (HCA11/60 2011). In that case, it was held that Court must be “satisfied on the totality of evidence that the covenants are no more than what is reasonably required to protect the legitimate interests of any employer”. A copy of our article is available here.

  1. An oral agreement may be enforceable

While a written agreement is always preferable, a company may be able to enforce any oral agreement made with an employee/contractor. The inherent risk of relying on an oral agreement is that clear evidence must be adduced to prove that an agreement had been reached. This can be particularly difficult where there is no contemporaneous documents that confirm the existence of the agreement or the particular terms agreed. In the present case, Gentech was able to establish that an oral contract existed by reference to the unsigned services agreement that was provided to M.

  1. Other causes of actions may be available

Finally, if no agreement is made between the parties, it may be possible for a company to rely on common law or equitable causes of action to recover losses caused by the solicitation of its clients by a former employee/contractor.

The relevant common law causes of action may include the economic torts of:

  • conspiracy;
  • interference with economic relations; and/or
  • inducing or procuring a breach of contract (aka – interference with contract).

Such equitable actions may include:

  • breach of confidence;
  • unjust enrichment or restitution; and/or
  • estoppel by representation or common understanding.

The application of these causes of action will depend greatly on the facts of each case. However, the range of possible actions demonstrates the potential for litigation to be taken against an individual that causes loss to his/her former company by poaching its business.