Supreme Court of Canada: Restrictive Employment Covenants in Quebec are Enforceable When Linked to an Asset Sale

The Supreme Court of Canada has released a decision (Payette vs. Guay Inc. 2013, SCC 45),  upholding a decision of the Quebec Court of Appeal which granted a permanent injunction to enforce a restrictive employment covenant.

Guay Inc. acquired assets belonging to corporations controlled by Mr. Payette. The agreement for the sale of the assets contain non-competition and non-solicitation clauses. To ensure a smooth transition after the sale, the parties agreed that Mr. Payette would work full-time for Guay as a consultant. At the end of the transition period the parties entered into a contract of employment originally for a fixed term and then for an indefinite term. A few years later Guay fired Mr. Payette without a "serious reason".  Mr. Payette then started a new job with a company that was a competitor of Guay.

The Quebec Superior Court dismissed Guay's motion for an injunction compelling Mr. Payette to comply with the restrictive covenants in the agreement for the sale of assets. The Quebec Court of Appeal set aside that judgment and ordered a permanent injunction (for the duration of the period of the non-competition).

Mr. Justice Wagner wrote the decision for the Supreme Court.  He held that the permanent injunction should be enforced. The rules applicable to restrictive covenants related to an employment differ depending on whether the covenants were linked to a contract for the sale of a business or to a contract of employment. The employer-employee rules have no equivalent in the commercial context since those rules were a response to the imbalance of power that generally characterizes the employment relationship. In the commercial context an imbalance of power is not presumed to exist.

Parties negotiating the sale of assets have greater freedom of contract than do parties negotiating contracts of employment, both at common law and in the civil law of Quebec. To ameliorate the imbalance that often characterizes the employer-employee relationship, the Quebec legislature enacted rules that apply only to contracts of employment and are intended to protect employees. Accordingly where an employer has fired the employee without a serious reason, the employer may not avail himself of a non-competition covenant.

To determine whether a restrictive covenant is linked to a contract for the sale of assets or a contract of employment it is important to clearly identify the reason why the covenant was entered into. In this case, the non-competition and non-solicitation clauses could not be disassociated from the contract for the sale of assets. As a result, the scope of these clauses had to be interpreted on the basis of commercial law rules and the protection provided the employees by the Civil Code of Quebec did not apply.

In the commercial context a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable having regard to the context in which it was negotiated. A non-competition covenant will be reasonable and lawful provided that it is limited as to its term and to the territory and activities to which it applies to whatever is necessary to the protection of the legitimate interests of the party in whose favour it was granted. In this case, there was no evidence that the five year period was unreasonable having regard to the highly specialized nature of the business activities involved.

In addition, Justice Wagner found that, while in the case of non-competition covenants, the territory to which the covenant applies must be identified, a determination that a non-solicitation covenant is reasonable and lawful does not generally require a territorial limitation. In this case, the parties' failure to include a territorial limitation in the non-solicitation clause did not make it unreasonable and therefore unenforceable

Regards,

Blair

Ontario Court Stays Action to Enforce $17.2 Billion Ecuadorian Judgment against Chevron Corporation

From 1964 to 1992, Texaco Inc., its subsidiaries and various partners engaged in oil extraction activities in the Lago Agrio region of Ecuador's Amazon Basin. The next year, various plaintiffs filed suit in the Southern District of New York against Texaco alleging a variety of environmental, health and other tort claims related to Texaco's extraction activities. The District Court dismissed the plaintiffs' claims, in part because it believed that "the case had everything to do with Ecuador, and nothing to do with the United States".

The United States Court of Appeals, Second Circuit disagreed. It required Texaco to make a commitment to submit to the jurisdiction of the Ecuadorian Courts. After several more years of "legal wrangling", Texaco accepted the conditions established by the Appeal Court but reserved its right to contest the validity of a judgment rendered by a court in Ecuador.

While the litigation was ongoing in the Southern District of New York, Texaco entered into a settlement with the Ecuadorian Government and funded certain environmental remediation projects in exchange for a release from liability for environmental impact which fell outside the scope of the settlement. The settlement was finalized in 1998. Chevron Corporation acquired Texaco in 2001. Ecuador and Chevron continued to litigate the validity and effect of the settlement.

The individual plaintiffs started a lawsuit against Chevron in Ecuador despite the settlement. After seven years of litigation, on February 14, 2011, the trial court found Chevron liable for $8.6 billion in damages.  It ordered Chevron to pay another $8.6 billion in punitive damages unless Chevron apologized within 14 days of the judgment. Chevron did not apologize. Accordingly the pending judgment is for $17.2 billion.

In 2011 Chevron sought and obtained a global anti-enforcement injunction against the plaintiffs in the United States District Court for the Southern District of New York. The Court of Appeal, Second Circuit reversed the injunction initially granted, in part because enforcement proceedings in New York had not yet been sought by the plaintiffs. The Court of Appeal stated "the plaintiffs hold a judgment from an Ecuadorian Court. They may seek to enforce that judgment in any country in the world where Chevron has assets."

On May 30, 2012, the plaintiffs commenced an action in Ontario against Chevron, Chevron Canada Limited and Chevron Canada Finance Limited seeking to enforce the judgment. The plaintiffs pleaded that Chevron  had resiled from Texaco's promise to satisfy the judgment.  In fact, Chevron's general counsel stated, "We're going to fight this until Hell freezes over and then fight it out on the ice." 

On a motion heard by Justice D. M. Brown of the Ontario Superior Court of Justice,  Justice Brown dismissed the defendants' request to set aside the service of the statement of claim against them but granted the defendant's motions to stay the action to enforce the Ecuadorian judgment in Ontario.

The Judge was not prepared to set aside service of the statement of claim on Chevron and ruled that service had been effected pursuant to Ontario's rules of civil procedure.  Nor was he inclined to set aside service against Chevron Canada.  Among other things. that defendant operated a business establishment in Ontario. However, Justice Brown ruled that a stay of the action against the defendants was justified on the bases of mootness.

Justice Brown found that the evidence disclosed that Chevron had no presence, business activity or assets in Ontario or elsewhere in Canada. That had been the case for 86 years and there was no reasonable basis to believe that those circumstances would change.  In addition, the evidence disclosed that Chevron did not conduct any business in Ontario.

The judge held that Chevron Canada was a "seventh generation indirectly-owned subsidiary" of Chevron. The plaintiffs had argued that the assets owned by Chevron Canada are available for execution against Chevron as judgement debtor, because those assets were "beneficially" owned by Chevron. However, Justice Brown held that under Canadian law  a shareholder in a corporation does not posses a legal or equitable interest in the assets of the company. Accordingly the plaintiffs filed a pleading that Chevron beneficially owns the assets of Chevron Canada was inconsistent with the basic principles of Canadian corporate law. The plaintiffs had failed to "pierce the corporate veil" between the two entities.

Justice Brown ruled that Chevron Canada and Chevron Canada Finance were not the judgment debtors.  They were separate legal entities and had nothing to do with Chevron's operations.  He concluded that the plaintiffs had "no hope of success" that the corporate veil of Chevron Canada would be pierced and ignored so that  it assets would be available to satisfy the Ecuadorian judgment.  Accordingly any recognition of the Ecuadorian judgment by an Ontario court would have no practical effect.  As a result, he exercised his discretion to stay the action.

Regards,

Blair

Second Chance for Lawyer Ordered to Pay Costs Personally?

Rule 57.07 of Ontario's Rules of Civil Procedure gives the court (including a Master of the court) discretion to award costs of a proceeding against a lawyer and to require the lawyer to pay the costs personally. Specifically, the rule provides that where a lawyer for a party has caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default, the court may make an order, (a) disallowing costs between the lawyer and the client or directing the lawyer to repay the client money paid in respect of costs; (b) directing the lawyer to reimburse the client for any costs that the client has been ordered to pay to another party; and (c) requiring the lawyer personally to pay the costs of any party.   Such an order may be made by the court on its own initiative or on the motion of any party to the proceeding but the court has no discretion to make such an order unless the lawyer is given a reasonable opportunity to make representations to the court. 

In the case of Haider Humza Inc. v. Rafiq [2012] ONSC 6161, Master Dash of the Ontario Superior Court of Justice ordered the plaintiff's lawyer, Murray Teitel, to personally pay the defendant's lawyer costs in the sum of $3,000 for conduct which Master Dash defined as "sharp practice".  Master Dash held, among other findings, as follows: 

In my April 23rd endorsement I had contemplated costs personally against Mr. Teitel for the earlier motion, but elected not to do so. ... This time a line has been crossed.  Mr. Teitel has breached his duty to another lawyer not to take steps without fair warning and to take advantage of Mr. Datt's (the other lawyer) mistake.  He lulled Mr. Datt into believing the costs would be paid in accordance with the order and on time, while taking steps to frustrate that payment by informing the Ministry without any warning to Mohammed or Mr. Datt until after payment was made to the Ministry.  The decision not to warn was his decision alone.  Even if I am wrong and he acted on his client's instructions, a lawyer should not take instructions from a client that would cause him to breach his professional obligations to another lawyer.  It appears that no lesson had been learned from my criticism of the plaintiff's scorched earth policy set out in my earlier endorsement.  It has instead been taken to a new level.  Mr. Teitel has engaged in share practice and is no longer entitled to the benefit of the doubt.  A message must be sent that the court will not abide such behaviour.  This is an appropriate case for the costs award to be made personally against the plaintiff's lawyer. 

Mr. Teitel sought leave of a single judge of the Superior Court of Justice to appeal the Master's order to another judge of the Superior Court.  In granting leave, Justice Morgan held that the Master had exceeded his jurisdiction in what amounted to making a determination under the Rules of Professional Conduct that Mr. Teitel had engaged in sharp practice.  The judge held that it is one thing to use a phrase such as "sharp practice" in the way that it is commonly used - meaning an aggressive tactic that is disapproved of by the court.  It is another thing for a Master, sitting in motions court and writing an endorsement on a question of costs, to cite a specific provision of the Rules of Professional Conduct to analyze a lawyer's conduct in reference to the terms of that rule and to make a specific finding that the lawyer has breached the rule. 

Justice Morgan held that under the Law Society Act only a discipline panel of the Law Society has jurisdiction to make a determination that a lawyer has breached the Rules of Professional Conduct.  Such a determination was not one that the Master could make.  The judge held that in his view, Master Dash's venture into an area that was not in his jurisdiction needs to be revisited by an appellate court given its centrality to his assessment of costs against Mr. Teitel.  Accordingly, Justice Morgan granted Mr. Teitel leave to appeal from Master Dash's order. 

While I make no comment on Mr. Teitel's conduct or whether it constituted sharp practice, it seems surprising that although the rule empowers a Master to make findings of "negligence or other default" when awarding costs against a lawyer personally, Justice Morgan didn't appear to consider whether conduct that may amount to professional misconduct (regardless of whether a finding of professional misconduct was made) fell within the meaning of "other default".   

Regards,

Blair

Ontario Court Awards Plaintiff Substantial Indemnity Costs Despite Late Offer

In Ontario, a successful litigant is usually entitled to have a portion of his legal costs paid by the losing party - a concept known as partial indemnification of legal costs.  Rule 49 of Ontario's Rules of Civil Procedure governs written offers to settle and provides for certain cost consequences that follow when a litigant refuses to accept a reasonable offer to settle litigation.  The general principle is that if a successful party serves a written offer to settle at least seven days before the commencement of a hearing, the losing party might be required to pay a higher scale of legal costs than it might otherwise have paid - substantial indemnification of legal costs.

 

The Ontario Court of Appeal has held that courts should depart from these prima facie cost consequences only if, after giving proper weight to the policy of the rule and the importance of reasonable predictability and the even application of the rule, "the interests of justice require departure".  As can be seen from the following case, the "interests of justice" is a vague standard.  Ontario courts appear willing to depart from the general principle of Rule, while giving it lip service.

 

In the recent case of Stetson Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc. 2013 ONSC 5213, Mr. Justice Newbould of the Ontario Superior Court of Justice, awarded a plaintiff substantial indemnity costs (substantially all of its reasonably incurred legal costs) of its successful action even though its offer to settle was served too late to be treated as a "Rule 49" offer - i.e. less than seven days before the hearing.

 

In the case, Justice Newbould had awarded the plaintiff more than $16 million in damages, plus interest and costs.  The plaintiff sought costs in excess of $2 million.  The defendants argued that the plaintiff's costs should be limited to $650,000.   

 

The plaintiff had served an offer to settle which was purported to be under rule 49 for $8 million.  The defendant had served its own offer to settle for $1 million.  Upon receipt of the plaintiff's offer, the defendant's counsel wrote to counsel for the plaintiff and said that while he had forwarded the offer to his client "he very much doubted that the offer would provide the basis for a meaningful discussion".

 

In awarding the plaintiff substantial indemnity costs, Justice Newbould held that it was clear to him that the defendant had plenty of time to consider the plaintiff's offer.  He further held that the defendant's objection was really quite technical given that its lawyer made it clear on the day after the offer was served that it was not going to be met with favour.   

 

Justice Newbould reasoned that the offer had been made by one sophisticated commercial party to another, who clearly had time to deal with it and choose not to act on it.   It was a serious offer to settle made in a reasonable attempt to settle the case.

 

 He further held that, in awarding substantial indemnity costs, he was entitled to exercise his discretion with respect to costs and accordingly could take into account any offer to settle made in writing, the date the offer was made and the terms of the offer.  Whether his discretion was exercised under rule 57.01 (dealing with costs of a proceeding in general) or rule 49.13 (dealing with offers to settle) didn't matter.  In his view, the plaintiff was entitled to costs on a substantial indemnity basis from the date of its offer. 

 

Regards,

 

Blair

 

 

Supreme Court of Canada Deals a Blow to a Higher Rate of Pay for Amici Curiae

In three criminal cases in Ontario, the trial judges appointed amici curiae to assist the accused, who had fired their lawyers.  The judges did so in order to "maintain the orderly conduct of the trials" or to avoid delays in what they considered were complex, lengthy proceedings.  The cases were not decided under the Canadian Charter of Rights and Freedoms and did not proceed on the basis that the accused could not have had fair trials without the assistance of counsel.  An issue arose as to how much the province of Ontario should pay the amici.

 

The Attorney General of Ontario took the position that the three amici had played a role similar to that of defence counsel and should accept the legal aid rates that were paid to defence counsel.  The amici refused to accept those rates and the trial judges fixed rates that exceeded the legal aid tariff and ordered the Attorney General to pay.  The Attorney General appealed the decisions on the basis that the judges lacked the jurisdiction to fix the compensation for amici curiae.

 

The Ontario Court of Appeal dismissed the appeal, holding that, incidental to a superior or statutory court's power to appoint an amicus, is the power to set terms and conditions of that appointment, including a rate of compensation and monitoring of accounts. 

 

In a 5 - 4 decision, the Supreme Court of Canada allowed the Attorney General's appeal.  The majority (reasons written by Justice Karakatsanis) held that while it is true that courts of inherent or statutory jurisdiction have the power to appoint amici curiae, the doctrine of inherent jurisdiction does not operate without limits.  Such inherent and implicit powers are subject to any statutory provisions and must be responsive to the separation of powers that exist among the various players in the "Canadian Constitutional Order", in other words, the federal government and the provinces.  Justice Karakatsanis held that a court's inherent or implied powers must not trench on the provinces' role in the administration of justice.

 

The majority of the court reasoned that while the courts have the jurisdiction to set terms to give effect to their authority to appoint amici curiae, the ability to fix rates of compensation for an amicus is not essential to the power to appoint them and its absence does not imperil the judiciary's ability to administer justice according to law in a regular, orderly and effective manner.  

 

Justice Karakatsansis held that to the extent that the terms of an amicus' appointment mirrors the responsibilities of defence counsel, they blur the lines between those two roles.  A lawyer appointed as amicus who takes on the role of defence counsel is no longer a friend of the court.  An order requiring the Attorney General to compensate an amicus at a particular rate is an order directing the Attorney General to pay specific monies of public funds.  She held that the allocation of resources between competing priorities remains a public and economic question.  It is a political decision and the legislature and the executive are accountable to the public for it.  

 

The Supreme Court held that in cases that do not involve a constitutional challenge, making a payment order does not respect the institutional roles and capacities of the legislature, the executive and the judiciary or the principle that the legislature and executive are accountable to the public for the spending of public funds.  Accordingly,the inherent or applied jurisdiction of superior or statutory courts to appoint amici does not extend to setting rates of compensation for amici.  

 

As a result of this decision, the Ontario Criminal Lawyers Association, has indicated that it will seek to meet with the Attorney General to come to an agreement about a compensation protocol for amici.  

 
See - Ontario v. Criminal Lawyers Association of Ontario 2013 SCC 43

 

Regards,

 

Blair