Morley Shafron sold his Vancouver-based insurance agency business in 1987 for $700,000 in cash and shares. He became a shareholder and director of the surviving company and agreed to provide management services. The agreement included a non-competition clause that would take effect if he left the company. The clause would prohibit him from engaging in the insurance brokerage business “within the metropolitan City of Vancouver” for a period of three years after departure.
The business changed hands three and a half years later. Morley signed another employment agreement with essentially the same non-competition clause, although he would be dropped from virtually all aspects of management. This agreement was renewed in 1993 and 1998, with the last agreement expiring December 31, 2000.
In the last month of the last contract, Morley advised he was leaving. In January 2001, he started working for another insurance agency at their offices in Richmond, a municipality adjoining Vancouver. Several clients followed Morley. His former employer then sued for breach of the non-competition clause as well other alleged breaches.
Trial judgment
The trial judge expressed concern about the long duration of the non-competition clause While a three year restriction may have been reasonable at the time of the initial sale in order to protect the goodwill purchased, the court was not convinced that it was still necessary 12 years later. The judge was also of the view that the area where the restriction was said to apply, “the Metropolitan City of Vancouver,” was vague and uncertain as there was no such actual entity. The non-competition clause was thus struck down in its entirety. It was found to be completely unenforceable.
First appeal
On appeal, the employer argued that the court should apply the legal concept of “notional severance” and rewrite the clause to reflect the parties’ mutual intentions. The British Columbia appeal court agreed. It ruled that the parties would have intended that the non-competition clause encompass the City of Vancouver and certain surrounding municipalities. The clause should be notionally re-written to reflect that.
Supreme Court of Canada
Canada’s highest court took a different view. It ruled that it was inappropriate to apply the “notional severance” concept to a defective restrictive covenant such as this non-competition clause. Rewriting the clause would change the risk allocation between the parties.
The court referenced the general power imbalance between employers and employees. It reasoned that a policy of rewriting these restrictions, when combined with the greater ability of employers to negotiate and litigate them, would “inappropriately [increase] the risk that the employee will be forced to abide by an unreasonable covenant.”
Instead, the Supreme Court reaffirmed the traditional “blue-pencil” approach to restrictive clauses such as this. It ruled that a court can strike out “merely trivial or technical parts” of a clause in order to make it valid, but only where it is clear that this would not fundamentally change the bargain. In this case, the removal of the word “metropolitan” in order to leave just “City of Vancouver” was inappropriate, as the employer insisted that the parties had agreed to something broader than that. Nor could the clause be rectified to correct what had “gone wrong with the language”. This wasn’t possible because the employer could not point to any evidence of the mutual understanding between the parties that had been incorrectly recorded in the final written form. (Shafron v. KRG Insurance Brokers (Western) Inc. [2009 SCC 6])
Lesson: Employers should only seek reasonable restrictions
This decision confirms that Canadian courts will generally not correct defective non-competition clauses or other defective restrictive covenants. It also clearly places the risk of broad or vague employment contract language upon employers’ shoulders. In most circumstances an ambiguous or vague restriction will be entirely unenforceable.
This decision illustrates that it is wise for employers to seek only those post-employment restrictions that a court would deem to be reasonable. And it highlights the importance of reassessing the necessity and reasonableness of restrictions each time an employment contract is extended or renewed.
Canadian courts are acutely aware of the power imbalance that generally exists between employers and employees. As a result, employers who try to capture too much with overly broad language may be left without any protection at all.
