Draft Non Comps with Care The SCC refuses to enforce an ambiguous non competition agreement

Legal Update – Miller Thomson LLP Draft non-comps with care! The SCC refuses to enforce an ambiguous non-competition ag...

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Legal Update – Miller Thomson LLP

Draft non-comps with care! The SCC refuses to enforce an ambiguous non-competition agreement.

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n January 23, 2009, the Supreme Court of Canada ruled in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, that the non-competition agreement contained in Mr. Shafron’s employment contract was ambiguous in terms of its geographic scope and was therefore unenforceable.The court also declined to “blue pencil” or amend the parties’ bargain in order to correct the ambiguity. A non-competition agreement is one of several types of restrictive covenants commonly used in employment agreements and in agreements for the purchase and sale of a business. The three components of a non-competition clause are: the type of activity or competition that is prohibited, the period of time during which the activity is prohibited, and the geographic area in which it is prohibited.

Facts In December 2000, Shafron left KRG and shortly thereafter began working as an insurance salesman for another insurance agency in Richmond, British Columbia, a city contiguous to Vancouver. The noncompetition provision in his employment contract provided: Shafron shall not, upon his leaving the employment of [KRG] for any reason, save and except for termination by [KRG] without cause, for a period of three (3) years thereafter, directly or indirectly, carry on, be employed in, or be interested in or permit his name to be used in connection with the business of insurance brokerage which is carried on within the Metropoli-tan City of Vancouver. The trial judge dismissed KRG’s action on the basis that the term “Metropolitan City of Vancouver” was neither clear nor certain and that, in any event, the spatial restriction was unreasonable.

The judge referred to the cross-examination of KRG’s principal, in which he gave three different meanings for the term “Metropolitan City ofVancouver” and testified that the phrase “means different things to different people.” On the basis of this and other evidence, the judge ruled that the language of the restrictive covenant was neither clear nor certain, and for this and other reasons dismissed the claim of KRG. KRG also claimed that, independent of his contractual commitment, Shafron had breached the fiduciary and equitable obligations he owed KRG at common law to refrain from using KRG’s confidential information and soliciting its clients. The trial judge found that Shafron was not a fiduciary and that he did not misuse confidential information belonging to KRG. The Court of Appeal reversed the trial judge and held that the non-competition agreement was enforceable. It acknowledged that the term “Metropolitan City of Vancouver” was ambiguous, but ruled it was possible to apply the doctrine of “notional” severance to construe that phrase to mean “the City of Vancouver and the municipalities contiguous to it” (emphasis added). On that interpretation, the covenant would cover the City of Vancouver, the University of British Columbia Endowment Lands, the City of Richmond and the City of Burnaby. The appeal court concluded that such a spatial restriction was reasonable and therefore enforceable.

KRG argued that if the court was unwilling to agree with the Court of Appeal that “Metropolitan City ofVancouver” should be read to include the municipalities contiguous to the City of Vancouver, the court should apply “blue-pencil severance” and remove the word “Metropolitan.”The court refused to do so because removing the word “Metropolitan” would leave only the “City ofVancouver” as the restricted area. Because the parties had clearly intended a geographic reach that included more than the City of Vancouver, it could not be said that the parties would have “unquestionably” agreed to remove the word “Metropolitan” without adjusting some other term of their bargain. For that reason, blue-pencil severance was not available in law. Referring, ironically, to a B.C. Court of Appeal decision, the Supreme Court stated that the courts will only apply blue-pencil severance to expunge a part of the covenant if the obligation that remains can fairly be said to be a sensible and reasonable obligation in itself, such that the parties would unquestionably have agreed to it.

Conclusion The Shafron case is a reminder to employers and their counsel that care must be taken when drafting non-competition agreements in the employment context. Poorly drafted language may ultimately render the noncompetition restriction unenforceable in circumstances where, but for the ambiguity in the wording, the restriction would have been enforceable.

Supreme Court of Canada The high court affirmed that in order for a non-competition provision to be enforceable, its terms must be unambiguous, and that the onus is on the party seeking to enforce the provision to show this. ÉtÉ 2009

David Rice is a member of the Labour and Employment Group of MillerThomson LLP in Vancouver. He provides advice to clients in employment law, labour relations, human rights and occupational health and safety.

CCCA Canadian Corporate Counsel Association

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