The Ontario Superior Court has upheld a repayment clause in an employee contract because it was a “genuine pre-estimate of damages,” and not a restraint of trade.
Ian Graham had signed an employment contract with Ottawa realtors William Renaud and Raymond Otten, known as the Renaud Otten Team. As Graham had no experience, training, or certification in the field, the realtors agreed to train him and pay him a salary for the first three years of the contract.
The contract included two clauses relating to termination of his employment. First, a pre-estimation of potential damages for $3,387.14, the cost for Graham to attend a training conference. The second clause, according to the original Divisional Court ruling, stated “that the employee must return to Renaud-Otten one month of wages, which he has received from Renaud-Otten, for each full month between the date of his termination and the three-year anniversary of his commencement date with Renaud-Otten.”
Prior to Graham’s hiring, the two sides agreed to cap the second clause at $20,000. If Graham went to work with another realtor within one year of leaving Renaud Otten, the clause would be triggered.
“Because they tied it to him competing, to him working in the same profession, all we are saying is the same rules that apply to any clause in restraint of trade apply,” says Graham’s lawyer Christopher Spiteri of Augustine Bater Polowin LLP in Ottawa.
“Those rules are, and this has been set out by the Supreme Court of Canada, if you are going to have a clause in restraint of trade, you have to make it specific in terms of geography and time.”
Spiteri says the contract was concise on the time aspect, stating clearly a one-year time limit. However, the clause did not define a geographical area, therefore it should not be valid.
Both the Divisional Court judge in Renaud v. Graham and the Superior Court disagreed with the argument. The courts pointed to the uniqueness of the contract compared to others in the real estate industry. The repayment clauses were a true estimate of damages incurred by the employer, and as agreed to by the employee, so it did not amount to a restraint of trade.
“So in this case you are saying if you choose to compete this triggers an obligation to us,” says Carol VandenHoek, a partner with Miller Thomson LLP in Guelph, Ont. “We’re not saying you can’t do it, but we are saying we are going to get this remedy through this damage payment, and that is an important distinction because it is not restraining trade.”
VandenHoek says one of the reasons the agreement was upheld was because “it was a clear contract, it was not ambiguous.” She says challenges to clauses in contracts generally come through ambiguity.
“Often you see challenges in interpreting these agreements as to what was the intentions of the parties and the issues of being vague, too general, too far reaching, and going into the area of the intent of the agreement, the entire context of it,” she says.
VandenHoek says employers may benefit from this case because it “signifies the courts’ willingness to uphold appropriately drafted repayment clauses in employment contracts.”
This may also lead in-house counsel to consider repayment clauses in contracts as opposed to the “more onerous and difficult to enforce non-competition clause.”
Spiteri says the ruling creates a backdoor way of creating a restraint-of-trade clause that doesn’t have a geographical area. The decision will not be appealed as the two sides have agreed to settle out of court.