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Ambiguity makes non-compete clause invalid: SCC

|Written By Kelly Harris

A recent Supreme Court of Canada ruling highlights the dangers of non-compete covenants in employment agreements, leading some lawyers to say they should be completely disregarded.

In Shafron v. KRG Insurance Brokers (Western) Inc. the court ruled the company’s non-compete clause in a former employee’s contract was ambiguous because it referred to a geographical area not legally recognized. The term “Metropolitan City of Vancouver” as part of a non-compete clause made the agreement invalid, said the court.

“The original restrictive covenant was drafted by a Toronto lawyer who apparently did not know that ‘Metropolitan City of Vancouver’ was not a legally defined term,” wrote Justice Marshall Rothstein in Shafron.

As a result the court overturned a British Columbia Court of Appeal decision. The appeal court had found insurance broker Morley Shafron breached his contract when he left Vancouver-based KRG in 2001, and began working for a Richmond, B.C.-based insurance broker shortly thereafter. The clause stated Shafron could not work as an insurance broker in the defined geographical area for three years after leaving KRG.

The Appeal Court overturned the trial judge’s ruling that found the geographical description to be “neither clear, nor certain.” The appeal court found the geographical location referred to in the agreement as the “Metropolitan City of Vancouver” to include Vancouver, the University of British Columbia endowment lands, Burnaby, and Richmond.

The Supreme Court refused to accept the appeal court’s definition or to amend, or “blue pencil,” the agreement by simply removing “metropolitan” from the geographical name.

“Rectification is used to restore what the parties’ agreement actually was, were it not for the error in the written agreement,” says the Supreme Court ruling. “In the present case, there is no indication that the parties agreed on something and then mistakenly included something else in the written contract. Rather, they used an ambiguous term in the written contract.”

At issue is the whole notion of non-compete clauses in employment contracts, says David Rice, an associate counsel in the Vancouver office of Miller Thomson LLP.

“You get into these problems with non-competitive clauses,” he says. “They have to be carefully drawn, everybody is nervous about them, are they going to be deemed enforceable, are they going to be thought to be ambiguous, reasonable, all of that stuff.”

Rice says he prefers to draft non-solicitation clauses, seeking to prohibit former employees from poaching clients of the company they are departing, “nine times out of 10 that is what you really want.”

The key, he says, is companies want to protect their clients and former employees can “do all the cold calling they want” so long as a former employer’s client base is untouched.

Another issue is companies may go too far in their non-compete clauses. In an effort to combat ambiguity, companies may include more information than they need, or cover a larger area than is warranted. For Stephen Gleave, a partner at Hicks Morley Hamilton Stewart Storie LLP in Toronto, the key is having a business case for restrictive covenants.

“I think you should always err on the side of doing a thorough business analysis with the business side by saying, ‘what do you need and don’t go beyond that,’” says Gleave.

He points to a recent Ontario Appeal Court case, H.L. Staebler Co. Ltd. v. Allan, in which he acted for the appellants. In that case, the appeal court tossed the restrictive covenant because it was too broad in limiting the former employees contact with customers of their former employer.

Gleave says Canadian law on restrictive covenants, the origins of which date back to the 1800s, allow for four key protections. Protect confidential information, protect trade secrets, protect clients, and protect the taking of employees.

Even in an employers’ market, Gleave says companies going overboard with restrictions on departing employees could find themselves with no protection at all.

“If an employer tries to take advantage of his bargaining power and tries to get something that he doesn’t need, do you know what he has got? He’s got nothing, because the court is just going to throw it out,” says Gleave.

What he is hearing from corporate counsel is a willingness to pull back on agreements in an effort to make sure they can be enforced.

“I’m seeing in-house counsel calling up saying ‘get me something that works, that sticks,’” he says.