Restrictions placed on former employees by way of restrictive covenants, such as non-solicitation and non-competition agreements, may be imposed only if there is a genuine need to protect the employer’s interests and will be subject to close judicial scrutiny.  Whether or not such restrictions are reasonable will be determined by the courts on a case-by-case basis having regard to the nature of the business and the employee’s duties.

The Supreme Court of Canada

The leading Supreme Court of Canada case on restrictive covenants, particularly non-competition clauses, is Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916.   In Elsley, the Court stated that “imbalance of bargaining power” is one of the reasons for distinguishing restrictive covenants in the sale of a business from restrictive covenants in an employment agreement.  In employment agreements, this imbalance of power “may lead to oppression and the denial of the right of the employee to exploit, following his termination of employment, in the public interest and in his own interest, knowledge and skills gained during employment”.  Thus, restrictive covenants in employment agreements must stand up to more “rigorous” tests.

In Elsley, the Supreme Court of Canada identified three questions that should be answered when considering the reasonableness of a restrictive covenant;

  1.  Did the employer have a proprietary interest entitled to protection?
  2. Are the temporal or geographic features of the covenant too broad?
  3. Is the covenant contrary to the public interest for restricting competition generally


In Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, a unanimous Court held that, in  determining the reasonableness, the restrictive covenant “must be unambiguous”.  If the covenant is ambiguous, it will be prima facie unenforceable.  Courts will not re-draft or “read down” an ambiguous restrictive covenant.

Factors and Principles Applicable to Interpreting Restrictive Covenants

With respect to whether or not a restrictive covenant is “ambiguous”, the Alberta Court of Queen’s Bench in Senos v. Pacesetter Performance Drilling Ltd., 2010 ABQB 533 held that “when determining whether there is an ambiguity, the court must consider whether there are two or more reasonable interpretations that are possible”.  The Court also set out the following principles with respect to the interpretation of restrictive covenants:

  • The onus falls on the party seeking to enforce a restrictive covenant to prove, on a balance of probabilities, that the agreement is reasonable and not contrary to public interest;
  • The interpretation of contractual provisions including restrictive covenants follows normal principles of interpretation; and
  • Although ambiguities may be resolved by looking at prior drafts and negotiations, the enforceability of negative covenants rests on the wording in the clauses; the courts will not “read down” such clauses, or essentially redraft the clauses for the parties.

Takeaway

In order for restrictive covenants to be enforceable, they must be clear and as narrowly construed as possible to serve the employers objective.  Specifically, the scope and duration of the restrictive covenant need to consistent with one another and logically connected to the interest the employer is protecting. The covenant must then be customized specifically to the employee, their position, their knowledge and their responsibilities.  Accordingly, the terms may need to be revised over time as these factors change.

While there is no doubt creating enforceable restrictive covenants in the employment context is a challenging and time consuming task, employers unwilling to put in the effort required are going to be unable to enforce their restrictive covenants.  If the employer’s interest is sufficiently important, the effort up front will be well worth it in the end. 

This post was contributed by Shelagh Burrowes, Associate, Norton Rose Fulbright Canada LLP (Calgary)