RESTRICTIVE COVENANTS IN EMPLOYMENT ... - Gowlings

I. INTRODUCTION
RESTRICTIVE COVENANTS IN EMPLOYMENT
RELATIONSHIPS – HOW TO PROTECT YOUR BUSINESS
FROM DEPARTING EMPLOYEES
Karen A. Hamway and Heather A. Wilson 1
It is generally undisputed that in order for employers to minimize unfair
competition by departing and former employees, it is necessary that the employees’
post-employment activities be subject to certain restrictions. However, for the most
part, it is also recognized that former employees still need to be able to earn a living.
Therefore, they need to be as free as possible to compete with their former employers
in order to cultivate new employment opportunities. The Supreme Court of Canada
recognized, as early as 1935, that, “public policy…requires on the one hand that
employers be free to protect from violation their property rights in business, and on the
other hand, that every man be left free to use to his advantage his skill and knowledge
in the trade.” 2
The delicate balance of these two positions takes its shape in the
continuing debate over the enforceability of restrictive covenants in employment
agreements.
It has been repeatedly stated by judges that restrictive covenants are considered
to be generally undesirable because they restrict democratic principles of free trade,
that is, they are in restraint of trade. The question then arises as to how an employer
1 Karen A. Hamway is a partner practising in employment law in the Gowlings’ Ottawa office. Heather A.
Wilson is an associate also practising in the employment law group.
2 Maguire v. Northland Drug Co., [1935] S.C.R. 412 at 3.
1

can protect his or her proprietary interests in the secret client lists, pricing and profit
margins and client relationships, among other unique assets, from being used to unfairly
compete by a former employee. The purpose of this paper is to provide an overview of
restrictive covenants in the employment context, address the challenges with respect to
enforceability, and illustrate how to overcome these challenges in order to draft a
restrictive covenant that is most likely to be found enforceable in the event that it must
brought before the Courts for examination.
II.
WHAT IS A RESTRICTIVE COVENANT
A restrictive covenant is generally found in an employment agreement. They
may also be a term in a contract for the sale of a business but the law treats these latter
restrictive covenants somewhat differently so they will not be the subject of this
discussion. The covenant is an express term between an employer and employee
which attempts to limit the competitive activities of the employee during or after the
employment relationship ends for a specific period of time in a specific geographic area.
The purpose of the covenant is to protect the good will and proprietary interests of the
employer from exploitation by the former employee. Proprietary interests include, but
are not limited to: client lists, customer and employee relationships, confidential
information and trade secrets of the employer. In the case of employees, the courts
guard carefully an employee’s right to be able to use his or her acquired skills and
general business knowledge to continue to earn a livelihood especially in view of the
imbalance of power between employee and employer. On the other hand, employees
often must be trusted with information and client relationships that are so essential to
2

the employer’s business that appropriate restrictive covenants are essential to the
longevity of the employer’s business.
III.
TYPES OF RESTRICTIVE COVENANTS
There are three primary types of restrictive covenants: non-competition; nonsolicitation;
and confidentiality/non-disclosure clauses. Each of these three covenants
are drafted with the intent of restricting a different type of competition, activity, or
behaviour.
1. Non-Competition Clause
A non-competition clause attempts to prohibit a former employee from starting up
his or her own business, or from accepting employment, in competition with the former
employer for a specific period of time in a specific geographic location.
A
non-competition clause is considered to be the most onerous of the three restrictive
covenants and, accordingly, is the least likely restrictive covenant to be enforced by the
Courts.
2. Non-Solicitation Clause
A non-solicitation clause provides that a departing employee may not solicit
employees, suppliers, or customers of the former employer, within a specific area, for a
specific period of time after the employment relationship ends. The purpose of the
non-solicitation agreement is to prevent a former employee from taking advantage of
the intimate and influential relationships he or she developed with employees and
3

customers, in the course of their employment. The concern is that these pre-existing
relationships obtained in the service of the business will then be used by departing
employees to solicit employees and customers away from the business. The nonsolicitation
clause is designed to provide the employer with sufficient time to put a new
employee in place to connect and build relationships with remaining employees and
customers. 3
3. Confidentiality Clause
A confidentiality or non-disclosure clause is drafted to prevent a former employee
from disclosing, or using, confidential information, such as the manner in which the
business is carried out, the identity of suppliers, pricing structure, market plans, product
development, manufacturing processes, or customer lists, for their own purposes or
those of a competitor. Although employers are generally protected at common law
against the disclosure of confidential information, a confidentiality or non-disclosure
clause included in an employment agreement provides additional assurances that the
information will remain confidential.
IV.
ENFORCEABILITY
As a general rule, restrictive covenants in the employment context are
considered to be a restraint on trade and, therefore, contrary to public policy. As a
result, restrictive covenants in employment agreements are deemed to be prima facie
void and unenforceable. However, as with most rules, there are exceptions made by
3 Phytoderm Inc. v. Urwin, [1999] O.J. No. 383 at para 14 (O.C.J. (Gen.Div.)).
4

the Courts to protect businesses from unfair competition by departing employees. The
leading case in Canada, with respect to restrictive covenants is Elsley v. J.G. Collins
Insurance Agencies Ltd., 4
which sets out the principles to be considered when
determining if a covenant is enforceable:
The principles to be applied in considering restrictive
covenants of employment are well established…A covenant
in restraint of trade is enforceable only if it is reasonable
between the parties and with reference to pubic interest. As
in many of the cases which come before the courts,
competing demands must be weighed. There is an
important public interest in discouraging restraints on trade,
and maintaining free and open competition unencumbered
by the fetters of restrictive covenants. On the other hand,
the courts have been disinclined to restrict the right to
contract, particularly when that right has been exercised by
knowledgeable persons of equal bargaining power. 5
The Supreme Court went on to say that when conducting an assessment of
these conflicting principles, to determine if a restrictive covenant should be enforced,
the assessment is whether the terms of the covenant are reasonable in the
circumstances. Reasonableness, the Court opined, could only be determined upon an
overall assessment, of the clause, the agreement within which it is found, and all of the
surrounding circumstances.
In order to determine if a covenant is reasonable, the Supreme Court set out
three important questions to be asked within the facts of each case:
4
Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916 [“Elsley”].
5
Ibid at 5.
5

1. Does the employer have a proprietary interest entitled
to protection as opposed to something that is
generally available in the industry
2. Are the territorial boundaries or temporal features of
the clause unnecessarily broad as to be considered
unreasonable for the purpose of protecting the
proprietary interest
3. Does the covenant attempt to restrict competition
generally or is it reasonable to achieve protecting the
proprietary interest in the particular business
context 6
4. Is the covenant contrary to public policy
1. Proprietary Interests
According to the Supreme Court’s analysis in Elsley, one of the first factors to
consider when determining if a covenant is reasonable is whether or not the employer
has a legitimate proprietary interest, which he or she is entitled to protect. Proprietary
rights include confidential or secret information with respect to manufacturing
processes, merchandising, and customer information, such as customers’ names,
addresses, tastes and desires. However, the general business information and training,
which an employer imparts to his or her employee, is not considered to be proprietary
information, particularly if it is generally available in the industry. This skill and
knowledge becomes a part of the employee and is beyond the reach of a restrictive
covenant since the employer can have no proprietary interest in it. 7
6
Ibid at 5 and 6.
7
Supra note 1 at 3.
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2. Temporal and Spatial Limits
a) Spatial /Geographic
Another important factor, in determining if a restrictive covenant is reasonable, is
the spatial/geographic restriction contained in the covenant. The geographic restriction
prohibits a former employee from accepting similar employment, establishing a
competitive business, or soliciting former customers, within a specific geographic area.
If the geographic region is wider than reasonably necessary to protect the employer’s
legitimate proprietary interests, the covenant will not be enforceable. The restriction
should reflect the geographic areas in which the employee had involvement during the
course of his or her employment. It would be unreasonable to have a geographic
restriction that extends beyond the area where the employee did business. When
determining what the permissible geographic scope of a restraint should be, the Court
will look to the reasonable and mutual expectations of the parties at the time of making
the contract 8 . Regardless or the breadth of the geographic area, the area must be
clearly defined in the agreement, in other words, it cannot be global to be enforceable.
b) Temporal
The purpose of a temporal restriction, in a restrictive covenant, is to allow a
reasonable time for the employer to adjust to the employee’s departure and take the
necessary steps to ensure that employee and customer relationships are re-established
8
Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 68 C.P.R. (2d) 162 (Ont.C.A.).
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y a new employee. At the same time this affords the employer time for the bonds
between the former employee, colleagues, and clients to diminish reducing the risk that
the former employee will be able to leverage these relationships to the employer’s
detriment. Should this period of time be longer in duration than is reasonably necessary
for the employer to accomplish these goals, the Courts will not enforce the covenant.
While the duration of the restrictive covenant may vary based on the circumstances,
most covenants specify a period of about one year from the date the employment
ended.
3. Non-competition versus Non-solicitation Clauses
The Supreme Court in Elsley, also stated that when determining if a restrictive
covenant is reasonable there should be an examination as to whether it is necessary to
utilize the more onerous non-competition clause, or whether a non-solicitation clause
would be sufficient to protect the employer’s proprietary interests.
As stated previously, since non-competition clauses are the most onerous type of
restrictive covenant, they tend to be the most difficult to enforce. There is a common law
presumption that non-competition clauses are unenforceable and the onus to prove that
the covenant is reasonable, and therefore enforceable, rests upon the employer. A
non-competition clause will only be upheld if the employer can prove that the nature of
the employment was such that customers will have either learned to rely upon the skill
or judgment of the former employee or dealt with him or her directly and personally to
the virtual exclusion of the employer. When such an employee has become “key” to all
8

or part of the business, he or she will probably readily gain their customers, if he or she
sets up their own business or changes employment to a competitor. 9
Such unfair advantage gained through the trust relationship with the former
employer is the proper subject on non-competition and non-solicitation clauses.
The Ontario Court of Appeal, in Lyons v. Multari, 10 stated that Courts would not
enforce a non-competition clause where a non-solicitation clause would adequately
protect the employer’s legitimate business interests. A non-competition clause may be
considered overly broad as it does more than just protect the employer’s customer
base; it attempts to keep the former employee out of business. In order to determine if
a non-solicitation clause is sufficient there must be a consideration of the nature of the
employer’s business and the nature of the former employee’s role in the business. Only
in exceptional circumstances will the nature of the employment justify a covenant
restricting an employee, not only from soliciting customers, but also from working for a
competitor or establishing his or her own business in the geographical vicinity.
More recently, the Ontario Court of Appeal, in IT/NET v. Cameron, 11 has further
established that where a non-solicitation clause is unreasonable it will not be
enforceable. In this matter, the Plaintiff, IT/NET, offered information management
services to various departments of the federal government. The plaintiff had a contract
to provide services to the Department of National Defence and contracted with the
9
Supra note 3 at 7.
10
Lyons v. Multari, [2001] 50 O.R. (3d) 526 (C.A.).
11
IT/NET v. Cameron, [2006] O.J. 156 (C.A.).
9

defendant, Cameron, to provide those services. The contract included a noncompetition,
non-solicitation, and confidentiality clause. When the position was reposted,
the defendant allowed a competitor of the plaintiff to submit a bid for the
contract that included his resume. The competitor was successful, the plaintiff lost the
bid, and the defendant remained in the position. The plaintiff then sued for breach of
contract.
The Court of Appeal found the provisions were unenforceable. The nonsolicitation
clause prevented the defendant from soliciting business from any IT/NET
client or prospect, not just from the client where the defendant was placed. As a result
of this decision, restrictive covenants that prohibit former employees from soliciting all
customers of the employer, rather than just those with whom the former employee had
relationships, will be found unenforceable. The restriction ought to be limited to
customers with whom the employee has had direct contact.
4. Additional Factors: Public Interest and Balance of Power
Once the party relying on the restrictive covenants has established that it is
reasonable as between the parties, the onus on proving that it is contrary to public
interest shifts to the person attacking the validity of the covenant. For example, a
restrictive covenant, which barred an obstetrician from practicing any form of medicine
or surgery within five miles of St. Catharines, Ontario was found to be enforceable.
However, the obstetrician was able to demonstrate that, although the covenant was
reasonable, it was contrary to public interest. The evidence showed there was a
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shortage of obstetricians in that area and as many doctors as possible should be made
available. As a result, the restrictive covenant was struck down. 12
a) Power Imbalance
The Courts will consider the balance of power between the parties when the
restrictive covenant was negotiated. The Courts recognize that an employee has a
disproportionate amount of power when entering into agreements with their employer.
Frequently, if the employee does not agree to the restrictive covenant they will not be
hired for a particular position or their employment may be terminated. As a result, the
greater the disparity in bargaining power, the less likely the Court will be to uphold the
covenant. 13
However, generally speaking, although employees are at the less powerful
end of the spectrum, they can develop the power to destroy an employer’s business
upon departure and the Courts have been sympathetic to employers in those
circumstances.
V. SHIFTING OBLIGATIONS
A recent decision by the British Columbia Court of Appeal has suggested a
potential shift in how the Courts will view a businesses’ claim of confidentiality over
client lists and information. Diverging from the case law, in early 2007, the Court of
Appeal, in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., held that there is
no obligation on a departing employee to refrain from competing with their former
12
Sherk v. Horwitz, [1972] 2 O.R. 451 (H.C.).
13
Supra note 7.
11

employer and there is no breach of confidence when an employee takes with him or her
lists of names, addresses, telephone numbers, and his or her “book of business”.
The issue arose when a group of investment advisors, assistants, and the branch
manager left their employment with RBC and joined Merrill Lynch, without any notice of
the move to RBC. Prior to their departure, the group took confidential client information
to Merrill Lynch to be copied for their use once they left RBC. As a result, they were
able to continue their business with clients they met while at RBC. The trial judge held
that the planned departure, lack of notice of departure, and the use of confidential
information resulted in award of lost profits in the amount of 1.7 million dollars over the
five years since the departure and punitive damages the amount of $300,000.00.
Surprisingly, the Court of Appeal reduced the award for lost profits to $40,000.00,
representing only the two and a half week period of notice the employees should have
provided to RBC. The punitive damage award remained the same. The majority held
that while advisors do owe a duty of confidentiality not to misuse client information, the
best interests of the clients must be considered when determining what client
information is confidential. Due to the confidential nature of the relationship between a
client and their advisor, clients should be able to be made immediately aware of an
advisor’s departure in order to decide if they would like to follow the advisor to their new
place of business. The Court found that a rule preventing advisors from taking client
lists with them is not in the “public interest” because of the detrimental effect on
investors It was critical to this decision that RBC, a sophisticated client, chose not to
obtain non-competition, non-solicitation agreements from their advisors. However, it is
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a real possibility that even if non-competition or non-solicitation agreements had been
included in the employment agreement, the Court may have found the restriction
contrary to “public interest” and, therefore, unenforceable in any event.
There has been some suggestion that the decision may be limited in application
to brokerages and investment advisors as the Court of Appeal specifically stated that
the brokerage industry was different from many other industries in that advisors develop
a special relationship of confidence and trust with their clients and that it can be of the
utmost importance to clients that there is no break in service from the advice provided to
them by their advisors. While this case may represent an unsettling shift in law, the
impact remains to be seen, as leave to appeal to the Supreme Court of Canada has
been sought in this case.
VI. ENFORCEABILITY OF A RESTRICTIVE COVENANT IN THE EVENT OF AN
EMPLOYER’S BREACH OF CONTRACT
Employers frequently inquire as to the enforceability of a restrictive covenant
where an employee has claimed that the employer breached the contract by way of a
constructive or wrongful dismissal. Generally, if an employer is found to have
constructively or wrongfully dismissed the employee, thereby, breaching the
employment agreement, the employer will be prohibited from relying upon a restrictive
covenant in the agreement.
The earliest case in this regard appears to be General Billposting Co. v.
13

Atkinson. 14 The plaintiff’s employment agreement provided that he was to receive 12
months notice of termination. However, despite the agreement, the plaintiff was
terminated without notice. The plaintiff took the position that the restrictive covenant
was not enforceable. The Court stated that:
Where… a servant is wrongfully discharged without notice,
he may elect to treat the contract as completely at an end,
retaining his right to bring an action for the breach, and is no
longer bound by a clause in the contract restrictive of his
right to trade on the termination of his engagement. 15
The decision in Billposting was upheld nearly 100 years later in the matter of
Gerrard v. Century 21 Armour Real Estate Inc. 16
The plaintiff, Ms. Gerrard, was
employed as a sales manager for the defendant, Century 21. Upon hire, Ms. Gerrard
had signed an employment agreement, which contained a non-competition and nonsolicitation
clause. After some time, Century 21 requested that Ms. Gerrard accept a
reduction in salary, which she refused. Ms Gerrard then commenced an action for
constructive dismissal and a declaration that her employment agreement and restrictive
covenants were no longer in force. Ms. Gerrard also proceeded to open a new office in
competition with Century 21 and hired four of their employees.
Century 21 brought a motion for an interlocutory injunction to enforce the
restrictive covenants. Justice Feldman stated that the question was whether the
conduct of Century 21 demonstrated an intention to no longer be bound by the contract,
14
General Billposting Co. v. Atkinson, [1909] A.C. 118 (H.L.) [“Billposting”].
15
Ibid at .
16
Gerrard v. Century 21 Armour Real Estate Inc. (1991), 4 O.R. (3d) 191 (Gen.Div.).
14

as once it is established that an employment agreement has been rescinded, any
restrictive covenant contained within it will fall. On that basis, Justice Feldman held that
it would be unjust at an interlocutory stage (as it was not yet clear if the agreement had
been rescinded) to enforce the terms of the agreement against Ms. Gerrard when
Century 21 was not prepared to continue to be bound by the terms of the agreement.
In a series of similar cases Psenica v. Dee-Zee Construction Ltd., 17 MacDonald
Ohm Insurance Brokers Ltd. v. Gilmore, 18 and Telehop Communications v. Abbott, 19 the
Courts continued to conclude that:
More specifically that:
It has been held that if the employer has breached the terms
of the contract by wrongfully dismissing the employee, the
employer is not entitled to enforce the restrictive
covenant…if the employer breaches the agreement he can
no longer expect the employee to be bound by the very
agreement which he has breached. 20
…constructive dismissal amounts to a repudiation of an
employment contract, discharging the employee from future
obligations under the contract. 21
The 2006 decision of Mick v. Boulder City Climbing School Inc. 22 , once again,
followed the reasoning of the above-noted decisions. In Mick, the plaintiff was the
director of operations, president, and sole directing mind of the defendant’s rock
climbing company. The plaintiff’s employment agreement contained a non-competition
17
Psenica v. Dee-Zee Construction Ltd., [1999] S.J. No. 749 (Sask.Q.B.).
18
MacDonald Ohm Insurance Brokers Ltd. v. Gilmore, [2000] O.J. No. 2745 (O.S.C.J.).
19
Telehop Communications v. Abbott, [2002] O.J. No. 1780 (O.S.C.J.).
20
Supra note 16 at para. 23.
21
Supra note 18 at para. 8.
22
Mick v. Boulder City Climbing School Inc., [2006] O.J. No. 2528 (O.S.C.J.) [“Mick”].
15

and non-solicitation clause. The defendant failed to pay the plaintiff’s salary for two pay
periods and the plaintiff advised the defendant that he considered the agreement to
have been breached and the restrictive covenants no longer enforceable. The plaintiff
then decided to open his own rock climbing business.
The Court agreed with the
plaintiff and held that the plaintiff’s position was “both reasonable and legally sound” and
he was no longer bound by the restrictive covenants in his employment agreement.
There are cases where an employer has attempted to draft restrictive covenants,
which state that the covenant is to remain enforceable even in the event of a wrongful
dismissal. Such a claim was made in Raymond Salons Ltd. v. Boucher. 23 Surprisingly,
the Court found in favour of the employer. The Court stated that based upon the
wording of the covenant, it was enforceable even though the employer had breached
the employment agreement. However, it has been noted that the employee’s counter
claim, alleging the wrongful dismissal, had not yet been decided and the decision made
no reference to General Billposting or any other relevant cases. 24
More in line with the Court’s usual position on these issues is the decision in
Jostens Canada Ltd. v. Zbieranek . 25
The employment agreement in this case stated:
…during the term of this Agreement and for a full and
continuous period of one year after this Contract is breached
or terminated by either party, regardless of the reasons,
he or she will not directly or indirectly, for himself or herself
23
Raymond Salons Ltd. v. Boucher (1990), 29 C.P.R. (3d) 58 (B.C.S.C.).
24
G.K. Steele & K. Thornicroft, Employment Contracts and Confidential Information (Markham:
Butterworths Canada Ltd., 2002) at 133.
25
Jostens Canada Ltd. v. Zbieranek (1992), 42 C.P.R. (3d) 519 (Ont.Gen.Div).
16

or for any other person…solicit, sell, promote or assist on the
solicitation…of school photography [emphasis added] 26
The Court refused to accept the validity of a restrictive covenant that expressly
provided that in the event of a wrongful dismissal an employee would remain bound by
the decision. The Judge stated:
In my view, there is some doubt as to the efficacy of a term
in the employment contract contemplating a ban on post
employment competition when it purports to be effective no
matter what reason the contract is terminated. 27
As a result, it is unlikely that, even if an employer does draft a restrictive
covenant with language intended to protect the covenant’s enforceability in the event of
a wrongful or constructive dismissal, the Courts will permit the covenant to stand.
VII.
DRAFTING
Drafting a valid and enforceable restrictive covenant requires an understanding
of the legal principles and the employer’s business context. If the restrictive covenant is
unreasonably broad, it will not be enforceable. On the other hand, if the covenant is not
broad enough, it will not provide any significant protection for the employer.
Furthermore, the covenant must be drafted using clear and precise language, as any
ambiguity in the drafting will be interpreted against the employer.
26
Ibid at para. 4.
27
Ibid at para. 35.
17

1. Reading Down
It is not uncommon, in both the employment and business context, that in an
attempt to avoid having their restrictive covenants found to be overly broad, that
employers or purchasers will draft clauses that set out decreasingly restrictive
geographic zones or time periods. The covenant specifies that if the more restrictive
geographic zone or time period is struck down, the less restrictive place or time should
stand. While the Court has the power to interpret an otherwise valid restrictive
covenant, the Court will not “read down” an overbroad covenant in order to render it
enforceable. 28
This principle was stated by the Court in Canadian Financial Corp.
(Can.) v. King:
It is no function of the courts to act as de facto arbitrators
over clauses that are drawn as alternatives. If the covenant
says that the employee will not compete in (a) Canada, (b)
British Columbia, and (c) Vancouver, for (i) ten years, (ii) five
years, and (iii) one year, for example, the courts ought not to
use the ‘blue pencil’ rule to make an agreement for the
parties that they have been unable to make for themselves.
Such a clause, where one alternative encompasses another,
but on a wider scale, is, in my opinion, void for uncertainty
and should not be made valid by severance. The only point
on which the terms of the covenant are clear is that the
covenant is to cover at least Vancouver for at least one year.
The parties could have said that if they failed then they will
risk losing the whole clause. 29
Consequently, employers should be sure to draft covenants that precisely and
accurately reflect the group of employees or customers that may not be solicited, as
28
Canadian Financial Corp. (Can.) v. King (1989), 23 B.C.L.R. (2d) 257 at 268 (C.A. ).
29
Ibid at 11.
18

well as the length of time necessary for them to re-establish relationships with
customers, as the Court will not, in an “either/or” situation, make decisions to create an
agreement that the parties could not reach to themselves.
2. Severability
Should a portion of a restrictive covenant be found unenforceable, the Courts can
decide to sever the offending portion. In order to sever a portion of the restrictive
covenant, the offending clauses that are to be removed must not affect the meaning of
the remaining contractual promise. The offending portions must only affect the extent of
the promise. Furthermore, the remaining severed obligations must be a sensible and
reasonable restriction and one that the parties would have unquestionably agreed to
themselves without changing the terms of their initial agreement. Finally, and perhaps
most importantly, the clause to be severed must be a separate and independent
covenant. 30
The importance of having specific restrictions drafted independently of one
another was demonstrated in Orlan Karigan & Associates Ltd. v. Hoffman. 31
In Orlan,
Justice Juriansz was faced with a situation where the non-competition and nonsolicitation
covenants were both part of the same paragraph. The former employee,
Hoffman, argued that since the non-competition and non-solicitation provisions were
contained in the same paragraph, it was not possible for the non-competition portion of
30
Supra note 32 at 10.
31
Orlan Karigan & Associates Ltd. v. Hoffman, [2001] O.J. 442 at para 28 (S.C.J.) [“Orlan”].
19

the paragraph to be found void and the remainder of the paragraph, the non-solicitation
clause, to be enforceable. The plaintiff argued that the non-solicitation clause was
enforceable as the agreement between the parties stated, “the invalidity of any provision
in whole or in part shall not affect the validity of any other provision.” Nonetheless, the
Court agreed with the defendant and held that the remaining non-solicitation clause was
unclear and, moreover, since it was not contained in a separate paragraph which could
be severed intact from the offensive non-competition covenants, the entire paragraph
was unenforceable.
VIII.
IMPLEMENTATION OF RESTRICTIVE COVENANTS
1. Implementing Restrictive Covenants Post Hire
Restrictive covenants should be implemented into the employment agreement at
the time the agreement is first being negotiated, in which case the consideration
necessary for the restrictive covenant is the employment itself. Should an employer
attempt to implement a restrictive covenant post-hire, the employer must offer an
additional form of consideration, such as a lump sum payment, increase in salary or
promotion, in order for there to be proper consideration for the new covenant in the
employment agreement. Despite a lump sum payment or salary increase, this
additional consideration may still not provide any real incentive for an employee to
agree to be bound by a restrictive covenant.
In the event the employee elects not to agree to the terms of the restrictive
covenant post-hire, the employer is limited in his or her options. Upon refusal, the
20

employer may continue the employment relationship under the current agreement and
not pursue the matter any further. Alternatively, the employer may continue to request
that the employee agree to a restrictive covenant and increase the amount of
consideration. As a last resort, the employer may require that the employee agree to be
bound by a restrictive covenant, and if they will not, the employer may terminate the
employee’s employment and provide him or her with proper notice of termination. 32
The latter approach is unlikely to be practical or an effective business tool for obvious
reasons.
2. Hiring Employees Subject to Restrictive Covenants
Employers need to make inquiries to determine whether a potential employee is
subject to a restrictive covenant that could potentially limit the functions he or she could
perform for the new employer. An employer who knowingly hires an employee who is
subject to a restrictive covenant and induces the employee to breach the pre-existing
covenant, could be found liable for damages to the former employer.
By way of example, the matter of MacDonald (C.O.B. P&L Services) v. Klein, 33
deals with the former employer, MacDonald’s, claim for intentional interference with
contractual relations and conspiracy. The defendant, Klein, entered into a working
relationship with MacDonald in the informatics consulting field. After a period of time,
completely unknown to MacDonald, Klein entered into employment negotiations with
32
Supra note 23 at 97-99.
33
MacDonald (C.O.B. P&L Services v. Klein, [1998] O.J. No. 4922 (Gen.Div.).
21

Sysnovators. Although aware of Klein’s obligations to MacDonald, Sysnovators worked
with Klein to divert business away from MacDonald to Sysnovators. Klein also took
copies of various business records, telephone lists, and consultants’ resumes. It was
not until Klein had sufficient business in place with Sysnovators that he advised
MacDonald he was leaving his employment. Klein did not provide MacDonald with any
notice of his departure. As a result, it took MacDonald years to recover from the loss of
Klein’s services.
The Court stated that in order for MacDonald’s claim for damages to be
successful, he had to prove that there was a valid and enforceable contract between
MacDonald and Klein of which Sysnovators was aware, a breach of the contract was
procured by Sysnovators, the breach of contract was effected through wrongful
interference by Sysnovators and that MacDonald suffered damages as a result. To
“procure” the breach of contract it was unnecessary for Sysnovators to specifically
induce the breach. It would be sufficient if they disrupted or interfered with the
contractual agreements between MacDonald and Klein.
The Court found that all of these facts had been proved. Sysnovators and Klein
were jointly and severally liable to pay MacDonald damages in the amount of
$68,069.00.
It would be prudent for employers to include a clause in the employment
agreement stating that the employee has disclosed any and all restrictive covenants,
and the details of the same, by which they are bound. The employer may also consider
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adding a clause which states that the employee agrees not to use any of his or her
former employer’s proprietary information, in the course of their employment. In the
event the employee is subject to a restrictive covenant, the employer should review the
covenant to determine if the employee’s new position will be in violation of the
covenant’s terms. If so, the new employer may consider approaching the former
employer in an attempt to negotiate mutually agreeable parameters with respect to the
employee’s new duties.
3. Negotiating Restrictive Covenants Upon Termination of Employment
Restrictive covenants may be included in a Release Agreement should a
situation arise where a covenant was not implemented at the time of hire or during the
course of employment. This is also an appropriate time for employers to review any
existing restrictive covenants as they may also attempt to negotiate a new restrictive
covenant into the Release Agreement should they recognize that the covenant currently
in place is not enforceable. However, employers must be aware that there is no
obligation for an employee to agree to a restrictive covenant upon termination. As with
restrictive covenants proposed during the employment relationship, the employee does
not have the same incentive to agree to the terms as they did at the time of hire.
Consequently, an employer may decide to offer, in exchange for including the restrictive
covenant in the Release Agreement, additional severance pay, outplacement
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counseling, or administrative support, to assist with the employee’s job search. 34
IX.
REMEDIES
Once an employee or former employee breaches a restrictive covenant, the
employer must decide what course of action to take. If the covenant does not expressly
provide for a remedy in the event the covenant is breached, the employer or purchaser
may make a claim for damages or injunctive relief.
1. Damages
Generally, when an employee or former employee breaches a restrictive
covenant, the employer will be entitled to compensation by way of damages or an
accounting of the offender’s profits. The employer or purchaser is not required to
choose between a claim for damages or an accounting of profits, they are permitted to
lead evidence with respect to both. At trial, it is the Judge who will determine what he or
she believes is the appropriate amount of compensation to make the aggrieved party
whole. 35 According to the Court in Moore International (Can.) Inc. Carter: 36
…if their profit is greater than the loss by the former
employer, an accounting is a better standard of
compensation than damages. But, conversely, the employer
should not be penalized for any business ineptitude of the
fiduciary or his accomplice. So, if the loss by the employer is
greater than the profit of the fiduciary, damages would be the
better standard of compensation. It follows that, where the
evidence will support a sound assessment based on an
accounting of profits and also a sound assessment based on
34
Supra note 23 at 100-101.
35
Supra note 23 at 151.
36
Moore International (Can.) Inc. Carter (1984), 56 B.C.L.R. 207 (C.A.).
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a calculation of loss, and where, in the particular
circumstances, both remedies are available and both are
supported by the pleadings and the evidence, the
compensation awarded should be the higher of the two. 37
A claim for damages, rather than an accounting of profits, is based on the breach
of contract. The assessment is, for the most part, based upon what the former
employer has lost as a result of the breach of contract, rather than what the former
employee has gained. In circumstances where it is not possible to identify the business
opportunities that have been diverted, damages can be assessed by reference to the
length of time intended by the restrictive covenant. 38
Alternatively, an accounting of profits will occur when the former employee has
diverted business away, either for his or her own benefit or that of his or her new
employer. Any profits resulting from this diversion will be awarded to the former
employer or purchaser. 39
In J. & P. Gourmet House Ltd. v. Li 40 the Court decided to
award damages based upon an accounting of profits. In this case, the defendant sold
the majority of the shares in his company to the Plaintiff and remained on as a director
and employee. Rather than working as directed, he started another company to
compete with the purchaser of his shares and as a result, the plaintiff was awarded
$95,000 for the profits recognized by the defendant.
2. Injunctions
37
.Ibid at para. 23.
38
Supra note 23 at 151.
39
Ibid.
40
J. & P. Gourmet House Ltd. v. Li (1991), 39 C.P.R. (3d) 519, (B.C.S.C.).
25

While a monetary award resulting from a breach of a restrictive covenant may
compensate an employer financially, this award may not prevent ongoing harm if the
offenders are free to continue to utilize confidential information or compete contrary to
the restrictive covenant. As a result, employers can attempt to obtain an injunction.
a) Interim Injunctions
An interim injunction is an injunction that is issued by the Court prior to trial to
prevent the former employee or his or her new employer, from continuing with their
offending activity. The Court in Mark Anthony Group Inc. v. Vincor International Inc. 41 ,
clearly sets out the purpose of the interim injunction:
The purpose of an interlocutory injunction is not to prevent
competition but to provide an equitable remedy designed to
protect the parties pending a financial determination of a
serious question. It is designed to prevent irreparable harm.
It is a discretionary remedy. Whether it is granted or not is to
be determined on a case by case basis with a view to
providing a just and convenient result. 42
The test as to whether or not an interim injunction should be granted was set out
in RJR-MacDonald Inc. v. Canada (Attorney General) 43 as follows:
• the applicant must demonstrate a serious question to be tried;
41
Mark Anthony Group Inc. v. Vincor International Inc., [1998] B.C.J. No. 2475 (C.A.).
42 Ibid at para. 32.
43
RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311.
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• the applicant is required to demonstrate that irreparable harm will result if the
relief is not granted; and
• the balance of convenience favours the applicant.
While an interim injunction can usually be obtained quickly without conducting a
full hearing on the merits of the claim, an employer or purchaser may be required to
give an undertaking as to any damages that are sustained by the restrained party, if it
turns out at a later date the injunction should not have been granted. 44
b) Permanent Injunctions
In circumstances where the former employee or vendor would not have been
able to develop a new product or business without using confidential information which
required them to breach a non-competition or non-solicitation clause, a former employer
or purchaser may seek a permanent injunction. A permanent injunction will be granted
on the basis that there is an ongoing obligation to a former employer or purchaser to
refrain from competing using confidential information such as customer lists for the
purpose of solicitation. The permanent injunction will only be granted if it is necessary
to protect a legitimate business interest of the employer or purchaser. 45
Permanent injunctions do not prohibit the former employee from ever competing
with the former employer or purchaser. The injunction will only be in effect for as long
as there is something to protect. The injunction may be limited to the amount of time it
44
Supra note 23.
45
Supra note 23 at 148-150.
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would have taken the former employee to develop the knowledge on his or her own,
until the confidential information becomes public knowledge, or until the former
employer has no interest in keeping the information confidential. 46
In Compro Communications Inc. v. Communications Promo-Phone LT Inc., 47 the
defendants, Communications Promo-Phone Ltd., contracted to sell their shares to the
plaintiff. The sale agreement included a non-competition clause. Upon the sale of the
shares, the defendant formed a new business to act in competition with the plaintiff and
began preparing customer lists and using confidential information from the plaintiff in
order to solicit the plaintiff's customers. As a result, the plaintiff sought a permanent
injunction to restrain the unfair competition. The injunction was granted because the
court found that the defendants were in breach of the agreement and of their fiduciary
duty.
X. CONCLUSION
The delicate balance between an employer’s proprietary rights and a former
employee’s right to compete and obtain new employment is very specific to each
employment relationship and business context. Based upon the case law, restrictive
covenants should be negotiated and entered into at the time the agreement is made,
the restraint should be reasonable based upon the nature of the employee’s duties and
relationships, and the geographic and temporal restrictions should be no broader than
are absolutely necessary to protect the proprietary interests of the business. Restrictive
46
Supra note 23 at 148-150.
47
Compro Communications Inc. v. Communications Promo-Phone LT Inc. (1991), 41 C.P.R. (3d) 260 (Que. S.C.).
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covenants should be drafted using separate paragraphs to ensure that, should one
provision be found unenforceable, it may be severed while keeping the remaining
restrictions in force. Keeping in mind the following information and drafting clear,
precise, reasonable covenants, there is an increased chance that the restrictive
covenant will be found enforceable should it be reviewed by the Court.
XI.
PRACTICE TIPS
When dealing with restrictive covenants, please keep in mind the following: 48
• In the event that an employee signs an agreement containing a restrictive
covenant after the employee accepts the offer of employment or commences
work, ensure that adequate consideration is provided (e.g., salary increase,
promotion, stock option, etc.).
• Before hiring an employee, have the employee acknowledge that he or she is not
subject to any restrictive covenants in favour of former employers. This may
operate to limit the liability on claims by former employers alleging inducement of
breach of contract or interference with contractual relations.
• Ensure that the employment contract is kept current by responding to the
passage of time as well as to any changes to the circumstances of the company
or the employees.
• Limit the scope, time, and geographic coverage of non-competition clauses to
what is necessary and reasonable in the circumstances.
• Ensure that non-disclosure, non-solicitation, and non-competition clauses are
severable; that is, they appear in separate clauses and the employment contract
contains a severability clause.
• Use a non-solicitation clause instead of a non-competition clause if, as is usually
the case, the former is sufficient to protect the company's interests.
48
W. Cascadden, C. Small, and H. Christie, Employment Issues Concerning Senior Managers and
Executives (Gowlings, 2005).
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• When drafting a confidentiality or non-disclosure clause, expressly identify the
information to be protected. This provides proof as to the type of information that
the parties consider to be confidential.
• Remember that Courts will review inequalities in bargaining power, the
knowledge of the employee, the nature of employment, and the availability of
other employment opportunities, as well as traditional factors such as the
existence of independent legal advice.
• Consider including contractual clauses setting out the methodology for
calculating any damages claimed, or include a liquidated damages clause (that
is, a clause naming a specific minimum dollar figure for which the employee will
be liable in the event of a breach of the agreement).
• In any clause dealing with the availability of injunctive relief, in addition to a
statement to the effect that the employer will suffer irreparable harm,
acknowledge that an injunction will not prevent the employee from earning a
living.
• Ensure that all restrictive covenants, damages clauses and injunctive relief
clauses survive the termination of the employment contract and are enforceable
notwithstanding the existence of any other claims of the employee.
It is recommended that restrictive covenants in employment agreements be
reviewed by legal counsel with expertise in employment law to avoid the potentially
serious harm that can be done by departing employees.
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