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knowhowisrequiredforthesuc-

cessfuldraingofarestrictivecovenant

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particularresonancewhenappliedtotheenforcementof

restrictivecovenantsinemploymentcontracts

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

sistsofamyriadofconfusingandcontradictoryjudicialdecisions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presentorpotentialemploy-

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

condentialinformationorcompeteagainsttheemployerinthefuture

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

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

 MalcolmJMacKillopisapartneratHodgsonShieldsDesBrisayODonnellMacKMalcolmJMacKillopisapartneratHodgsonShieldsDesBrisayODonnellMacK-

illopSquireLLPandiscertiedbytheLawSocietyofUpperCanadaasaspecialist

inCivilLitigation

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

Plastics.

MJMK

mentsThispaperwillnotexaminejudicialtreatmentofcondentiality

agreements

Theprincipalfunctionofthelawofcontractsistoprotectreason-

ableexpectationscreatedbypromisesForthisreasoncourtswillup-

holdtheexpresslanguageofacontractGenerallywherethelanguage

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

ordinarymeaningofexpresstermsEquitywillnotintervenetoprotect

apartyfromabadbargainunlessitcanbeshownthatonecontracting

partyexertedunequalbargainingpower

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

courtshavedemonstratedtheirdistasteforrestrictive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servantrelationshipand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Englishcourtheldinthe

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

ofacrathatcovenantsnottopractise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will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decisioninLyons v. Multari OR

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

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

individuallibertyofactionintradingandallrestraintsoftradethemselvesif

thereisnothingmorearecontraryto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Lyonsandtheincongruityinthejudicialtreatmentof

nonsolicitationandnoncompetitioncovenantsItwillalsoassessthe

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

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

Thesecondpartofthepaperwillevaluatethevaryinglegaltests

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

toryinjunctive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parallelsandhighlightingtheredundanciesin

theapplicationofboth

Thethirdpartofthispaperwillrevisitthetestforenforcementof

restrictivecovenantsandmakerecommendationsforastreamlinedap-

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

therecentCanadianandAmericanjurisprudenceand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this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skilledemployeesandtheirabilitytochoosebetweendierentemploy-

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restrictive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