Non-competition clauses: Employers must be reasonable

Non-competition clauses are often included in employment contracts or in agreements for the purchase and sale of a business, serving to prevent a person from working in a particular field within a geographic area. Non-competition clauses or restrictive covenants, are restraints of trade, however, and are considered contrary to public policy.

However, there is a competing tension that parties should be permitted the freedom to contract in their own best interests. Therefore, reasonable restrictive covenants will be upheld by the courts. The reasonableness of a non-competition clause will be determined by its geographic and temporal scope as well as the extent of the activity that is to be prohibited.

The courts have found there is greater freedom to contract between buyer and seller than between employer and employee. In the context of the sale of a business, the courts have found that such clauses are needed to protect the value paid by the purchaser for the goodwill of the business. The operator of a business will normally be properly compensated for the sale of its goodwill; therefore there is consideration for the non-competition clause. Without the protection of a non-compete provision, the purchaser could potentially lose the benefit of the purchase if the vendor chose to open a competing business in close proximity.

In an employment context, the courts will be more reluctant to enforce such clauses which can severely impact an individual’s ability to earn income. Moreover, in an employment situation, there is no consideration for the non-competition clause, and there is a recognized power imbalance between the parties. Therefore, the court will scrutinize a restrictive covenant more closely to ensure its reasonableness.

In a decision released earlier this month (Shafron v. KRG Insurance Brokers (Western), 2009 SCC 6 (CanLII)), the Supreme Court of Canada considered the issue of whether a non-competition clause, which was ambiguous as to its geographic scope, could nonetheless be reasonable. The covenant prevented the former employee from working in the “Metropolitan City of Vancouver”. The employee began working in the City of Richmond, on the outskirts of Vancouver and the employer sued for breach of the covenant. The Court held that the term was ambiguous and without an indication as to what the parties had in mind as to the geographic scope of the covenant, it would not be proper for a court to rewrite the agreement to resolve the ambiguity and render an otherwise unreasonable covenant, reasonable.

Therefore, particularly in the context of an employment contract, a non-competition clause must be carefully drafted to ensure it is both reasonable in scope and not ambiguous in any way.  

Karin Pagé is a member of the Litigation Law Group at Perley-Robertson, Hill and McDougall LLP/s.r.l. She may be reached at (613) 566-2860 or at [email protected].

This article was originally published in the April 28, 2009 edition of the Ottawa Business Journal.