Supreme Court Affirms Traditional Approach to Restrictive Covenants

On January 23, 2009, the Supreme Court of Canada released its decision in Shafron v. KRG Insurance Brokers (Western) Inc. The decision confirms the traditional approach of the court to determining whether a restrictive covenant will be enforceable by an employer against an employee.

Mr. Shafron entered into a series of employment agreements with KRG, all of which contained an agreement that he would not compete with KRG anywhere in the “Metropolitan City of Vancouver” for a period of three years after the end of his employment. When Shafron left KRG to work for a competing insurance brokerage in Richmond, B.C., KRG sought to enforce the restrictive covenant. Shafron challenged the enforceability of the non-compete clause.

The trial judge dismissed KRG’s claim. After finding that there was no such legal entity as the “Metropolitan City of Vancouver”, and that the geographic scope of the restrictive covenant was therefore ambiguous, the judge ruled that the covenant was void for ambiguity. However, the British Columbia Court of Appeal set aside the trial judge’s decision. While the Court of Appeal agreed that the geographic scope was ambiguous, it read “Metropolitan City of Vancouver” to mean the City of Vancouver and surrounding suburbs, including Richmond. The Court of Appeal was then able to conclude that the scope of the covenant was reasonable and enforceable, and that Shafron was in breach of it.

The Supreme Court of Canada allowed the appeal and overturned the Court of Appeal’s decision, finding that the term “Metropolitan City of Vancouver” was ambiguous and unenforceable, and that the Court of Appeal had erred in attempting to rewrite it.

In its reasons, the Supreme Court confirmed that a restrictive covenant found in an employment contract will be subject to stricter scrutiny than one found in the context of a sale of business, due to the “generally accepted” power imbalance between an employer and employee.

The Court reiterated that, in order to be enforceable, a restrictive covenant must be reasonable in respect of three primary factors: geographic scope, temporal scope, and the activities it seeks to restrict. Since an ambiguity makes it impossible for the party seeking to enforce the covenant to demonstrate reasonableness, an ambiguous covenant will always be unenforceable. In the end, the Court refused to rewrite or sever the unenforceable part of the clause.

Restrictive covenants will only be enforceable when they are specific to the employer’s needs and are not more geographically or temporally extensive than the employer reasonably requires. Since the Supreme Court in Shafron has clearly stated that courts will not assist employers in remedying defects in restrictive covenants, employers are

reminded to draft such clauses carefully. The lawyers at Bird Richard can assist employers in drafting tailored restrictive covenants that maximize their enforceability.