Employers must be clear in restrictive covenants

The Supreme Court of Canada has held that employers should not draft overly broad restrictive covenants in the hope that a court will sever any part of it that is unreasonable or "rewrite" the covenant to what the courts may consider reasonable. The Court held that doing this would change the risks assumed by the parties and unduly increase the risk that an employee will be forced to abide by an unreasonable covenant. The Court held that restrictive covenants contained in employment contracts should be scrutinized more carefully than restrictive covenants in the sale of a business because there is often an imbalance in power between employers and employees and because the sale of a business often involves a payment for goodwill, whereas no similar payment is made to an employee who leaves his or her employment.

In the recent case of Shafron v. KRG Insurance Brokers, the Court held that a restrictive covenant prohibiting an employee of an insurance brokerage firm from working within "the Metropolitan City of Vancouver" was unenforceable because the term "Metropolitan City of Vancouver" was uncertain and ambiguous.

There was nothing contained in the evidence of the case that demonstrated a mutual understanding of the parties at the time they entered into the employment contract as to what geographic area the restrictive covenant covered. Accordingly, it was inappropriate for the British Columbia Court of Appeal to rewrite the covenant.

The Court held that restrictive covenants generally are restraints of trade and therefore contrary to public policy. Freedom to contract, however, requires an exception for reasonable restrictive covenants. Normally, the reasonableness of a covenant will be determined by its geographic and temporal scope as well as the extent of the activities sought to be prohibited. Reasonableness cannot be determined if a covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time or geography.

The court held that an ambiguous restrictive covenant is by definition on its face unreasonable and unenforceable. The onus is on the party seeking to enforce the covenant to show that it is reasonable. A party seeking to enforce an ambiguous covenant will be unable to demonstrate reasonableness.

If you have any questions, please don't hesitate to email me.

Regards,

Blair