The Court of Appeal for Ontario has ruled that a non-competition and non-solicitation agreement used by a construction company was unenforceable because the applicable time limit was not concrete.
In Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 (CanLII), released February 5, 2013 the Court of Appeal reversed an earlier Application decision, 2012 ONSC 1840, of the Honourable Justice Paul Perell, who had found the agreements enforceable.
Facts of the Case
The facts of the case are rather complex and involve a complicated transaction in which the employee, Derek Martin, sold his interest in a concrete company to his eventual employer, ConCreate USL. An oversimplification of the material facts is as follows:
When Mr. Martin sold his interest in his company to ConCreate and joined them as an employee he signed an employment agreement containing, amongst other things, a non-completion agreement and a non-solicitation agreement.
The agreement provided that Mr. Martin’s covenants not to compete with ConCreate or solicit its customers or staff would run for a period ending twenty-four months after his disposition of his direct or indirect ownership interest in the company.
The agreement further provided that third parties, including lenders, had to provide consent to Mr. Martin’s disposition of his interest in the company.
The latter two points were the points fatal to the agreement.
Decision
In finding that the agreements were unenforceable for want of a specific time limitation the Honourable Justice Alexandra Hoy wrote the following, textbook overview of the law concerning non-solicitation and non-competition agreements:
[49] Covenants in restraint of trade are contrary to public policy because they interfere with individual liberty and the exercise of trade: see Elsley v. J.G. Collins Ins. Agencies Ltd., [1978] 2 S.C.R. 916, at p. 923. They are prima facie unenforceable. A covenant will only be upheld if it is reasonable in reference to the interests of the parties concerned and the interests of the public in discouraging restraints on trade: see Elsley, at p. 923.
[50] The party that seeks to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties. The party seeking to avoid enforcement of the covenant bears the onus of demonstrating that it is not reasonable with respect to the public interest: see Stephens v. Gulf Oil Canada Ltd. (1975), 11 O.R. (2d) 129 (C.A.), at p. 141.
[51] If a covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable: see Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 at paras. 27, 43; Mason [2011 ONCA 344] at para. 14. It is therefore unreasonable and unenforceable.
[52] The law distinguishes between a restrictive covenant in connection with the sale of a business, and one between an employer and an employee: see Elsley, at p. 924. The former may be required to protect the goodwill sold to the purchaser, and does not usually involve the imbalance of power that exists between employer and employee. Accordingly, a less rigorous test is applied in determining the reasonableness of a restrictive covenant given in connection with the sale of a business: see Shafron, at para. 23; Elsley, at p. 924.
[53] Greater deference is given to the freedom of contract of “knowledgeable persons of equal bargaining power”: Elsley, at p. 923. Nevertheless, the broader restraints on trade justifiable in the context of a sale of a business must be reasonable within such a context. There is a strong public interest “in discouraging restraints on trade and, maintaining free and open competition unencumbered by the fetters of restrictive covenants”: Elsley, at p. 923; see also H.L. Staebler Co. v. Allan, 2008 ONCA 576 at para. 34.
[54] The factors relevant in determining whether a restrictive covenant is reasonable are the same in the contexts of the sale of a business and an employment agreement: the geographic coverage of the covenant, the period of time that it is in effect and the extent of the activity prohibited: see Shafron, at para. 43. And, as the application judge noted, reasonableness is determined in light of the circumstances existing at the time that the covenant was made. Those circumstances include the reasonable expectations of the parties about the future activities and marketplace of the business: see Tank Lining Co. v. Dunlop Industrial Ltd. (1982), 40 O.R. (2d) 219 (C.A.), p. 226. [Emphasis added. Some citations truncated.]
In finding the specific agreement unenforceable Justice Hoy held:
In my view, the duration is unreasonable because it depends on any required consents of third parties, is therefore for an indeterminate period, and there is no fixed, outside limit. Notably, the required consents are not limited to third parties whose consent was required at the time that the covenants were entered into. (Para. 59)
In the result the court found the non-solicitation and non-competition covenants unreasonable and therefore unenforceable.
Takeaways
It is easy to appreciate why businesses want non-competition and non-solicitation agreements with their employees: the business has invested considerable resources in establishing their business and in establishing their relationships with clients and staff; hiring someone new exposes the business to the risk that the new person will steal all that all away. The only way to protect those interests is by restraining that person from competing in the future.
However, as Justice Hoy’s decision makes plain those agreements will only be enforceable and therefore worth more than the paper on which they are written, if they are clear, unambiguous and reasonable.
The agreement used by a Whitby, Ontario dental business, canvassed in this blog in ONCA puts Dent in Dentist’s Business provides a very good example of a reasonable non-solicitation agreement and, as I recently advised the Law Times in an interview concerning the Smilecorp decision, sets what I think will be the standard for non-solicitations agreements in Ontario in the future.
Therefore, if you are an Ontario employer and wish to make use of such agreements, cases such as Martin should demonstrate that it pays to get professional, experienced advice - and I do not wish to suggest that ConCreate USL did not. These agreements cannot be simply cut and paste from templates on the internet (and I am not suggesting that such was the case in ConCreate’s case either), but rather must be the product of careful consideration of the employer’s actual interests.
If you are an Ontario employer and are looking for a non-competition or non-solicitation agreement, the employment lawyers at Kelly Santini LLP in Ottawa would be happy to be of service to you.
For more posts on non-competition agreements click this link.
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As always, everyone’s situation is different. The above is not intended to be legal advice
for any particular situation and it is always prudent to seek professional
legal advice before taking any decisions on one’s own case.
Sean P. Bawden
is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer
practicing with Kelly Santini LLP.
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