Enforcement of Restrictive Covenants

• Author: Malcolm J. MacKillop
• Pages: 297-348



Enforcementof

RestrictiveCovenants

Malcolm J. MacKillop*

A. INTRODUCTION

Itseemsthata gooddealoflegalk nowhowisrequiredfor thesuc-

cessfuldrai ngofarestrictivecovena nt

Lile has changed since Pearson Jsobservation in the  English

Court of Appeal decision Commercial Plastics The truth of the obser-

vationndspar ticular resonance when applied to the enforcement of

restrictivecovenantsinemploymentcontracts

Thecurrentstateoft helawonenforcementofthesecovenantscon-

sistsof amyriad ofconf usinga ndcontradictory judicialdeci sionsthe

majorityofwhich carryno precedentvaluetodraers ofthese clauses

excepttocautionagainsttheuseofsuchcovenants

It is common for employersto aempt to protect their goodwill

tradesecrets ormarketpositionby askingpres entorpotential employ-

ees to sign covenants which restrict t heir ability to poach clients use

condentialinformationorcompeteagai nsttheemployerinthefut ure

These restrictive covenants come in three general forms condential-

ityagreementsnonsolicitationagreementsandnoncompetitionagree-

 MalcolmJMacKillopisapa rtneratHodgsonShield sDesBrisayODonnellM acKMalcolmJMacKillopisapa rtneratHodgsonShield sDesBrisayODonnellM acK-

illopSquireLLPandiscertiedbyt heLawSocietyofUpperCa nadaasaspecial ist

inCivilLitigation 

 CommercialPlasticsLtdvVincentAllERatCACommercial

Plastics.

MJMK

mentsThispaperwil lnotexaminejudicialt reatmentofcondentiality

agreements

Thepri ncipalf unctionofthe lawof contracts is toprotect reason-

ableexpectation screated bypromis esFort hisrea soncourt swil lup-

holdtheexpress languageof acontractGenera llywherethelanguage

oftheagreementisclearthecourtswillnotinterferewiththeplainand

ordinarymeani ngofexpresstermsEquitywi llnotintervenetoprotect

aparty fromabadbargai nunlessit canbeshown thatonecontract ing

partyexertedunequalbargainingpower

EmploymentcontractsaretheexceptiontothisruleTimeandagain

courtshavedemonstratedtheir distasteforrestr ictivecovenantsinem-

ploymentagreementsbydeclaringsuchclausesunenforceableandvoid

Indoingsocourtshavebeenmotivatedbythehistoricalvulnerabilityof

theemployeein themasterserva ntrelationshipa ndbya publicpolicy

interesttopreventemployersfromplacingunconscionablerestraintson

freetradeandcompetition

Judicialhostility towardsrestrictivecovenantsinemploymentcon-

tracts is prevalent in all common law jurisd ictions and can be traced

backalmostyearstoInthatyearanEngli shcourtheldinthe

DyersCasetherstknowncasedealingwithrestrictionsonthepractice

ofacrathatcovenantsnottopracti seonestradeareagainstthecom-

mongood

Todayjudicialdisdainforsuchrestrictivecovenantscontinueswith

lile change in application Butwh ile the courts continue to enforce

principles developedin t he earlysi xteenth century current economic

realitiesnolongersupporttheoldprotectionistapproach

This paper consists of three parts The rst part wil levaluate the

commonlawtreatmentofrestrictivecovenantsinemploymentcontracts

 SMWaddamsThe Law of ContractsthedAuroraONCanadaLawBook

atWaddams

 See AylesfordEarlvMorrisChAppatHarryvKreutziger

BCLRCAMcKenzievBankofMontrealORd

C A

 HMBlakeEmployeeAgreementsNottoCompeteHarvLRevat

WLBlake

 YBMichHenfplCPDyersCasedescribedinBlakeibid

at

 SeegenerallyforexampletheOntCAdec isioninLyons v. Multari OR

d Lyons adoptingthereasoni ngfromNordenfeltvMaximNordenfeltGuns

Ammunition Co. ACatHLNordenfeltthatallinterferencewith

individualliber tyofactionint radingandallr estraintsoftradet hemselvesif

thereisnothi ngmorearecontraryt opublicpolicyandthereforevoid

EnforcementofRestrictiveCovenants

fromthe rstcase thatstruckdowna noncompetitioncovenantto the

modernday testsand judicial decisionsIn this section the paperwill

analyzethelegacyof theSupremeCourtofCanadaSCCdecisionin

ElsleyvJGCollinsInsuranceAgenciesLtdandtheOntarioCourtofAp-

pealdecision inLyo ns and theincongr uityin the judicialtreat mentof

nonsolicitationa ndnoncompetition covenants Itwi lla lsoas sesst he

testforenforceabilityofrestrictivecovenantsandtheissuesthatariseat

eachstepofthetestuponapplication

The secondpa rtofthe paper will evaluate the varying legal tests

andhurdlesemployersmustmeetto obtaint heprotectionof interlocu-

toryinjunct ivereliefin theface ofabreach ofarestrictivecovenantby

adepartingemployeeandtheimportanceof suchreliefto anemployer

losinga keyemployeeIn additionthe paperwill comparethe test for

grantinginterlocutoryinjunctiverelieftothetestforevaluatingarestric-

tivecovenant drawingparal lelsand highlight ingthe redundancies in

theapplicationofboth

Theth irdpart of this paperwill revisit thetest foren forcementof

restrictivecovenantsa ndmakerecommendationsforast reamlinedap-

proachto determining the validity of such covenants Itwi ll evaluate

therecent Canadiana ndAmerican jurisprudencea ndeconomicdevel-

opmentsand will incorporatethem into therecommendations In par-

ticular the paper will ana lyze the expansion in judicial protect ionto

employersfromemployeesdeemedtobeduciariesandtheconsequent

needtoadjustthetestforrestrictivecovenantstoreectthi strend

Canadianeconomicactivityhaschangedsignicantlysincethedays

of Norde nfelt and even Elsley  Theglobalization of capitaland product

marketstechnologicalchangeandeconomicintegrationwiththeUnited

StateshaveincreasedcompetitivepressuresHigherdemandsforprofes-

sional highly skilled workersin the marketplace have increased the re-

quirementandcostofhumancapitaldevelopmenttoemployersTherise

incompetitioninanumberofsectorshasincreasedthebargainingpowers

ofsk ille demploy eesa ndt heir abil ityt ocho oseb etwe end ier entemp loy-

ersandnegotiatecontracttermsThisisparticularlytrueforprofessional

employeestowhomtheserestrictivecovenantsmostoenapply

Against this backgrou ndof economic c hanget he courts protec-

tionist viewof restrict ivecovenants in employmentcontracts needsto

beupdatedThegeneraltestunderlyingthetraditionalcommonlawap-

proachtoenforcementoftheserestrictivecovenantsisreasonableness

 SCRElsley

 Lyonssupra note