KRG Insurance Brokers (Western) Inc. v. Shafron et al., (2009) 265 B.C.A.C. 1 (SCC)

• Judge: McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 16, 2008
• Jurisdiction: Canada (Federal)
• Citations: (2009), 265 B.C.A.C. 1 (SCC);2009 SCC 6;[2009] CarswellOnt 79;68 CCLI (4th) 161;265 BCAC 1;383 NR 217;JE 2009-241;[2009] 3 WWR 577;70 CCEL (3d) 157;52 BLR (4th) 165;301 DLR (4th) 522;AZ-50532443;[2009] SCJ No 6 (QL);87 BCLR (4th) 1;EYB 2009-153214;[2009] CarswellBC 79;[2009] 1 SCR 157

KRG Ins. v. Shafron (2009), 265 B.C.A.C. 1 (SCC);

    446 W.A.C. 1

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

.........................

Temp. Cite: [2009] B.C.A.C. TBEd. JA.060

Morley Shafron (appellant) v. KRG Insurance Brokers (Western) Inc. (respondent)

(31981; 2009 SCC 6; 2009 CSC 6)

Indexed As: KRG Insurance Brokers (Western) Inc. v. Shafron et al.

Supreme Court of Canada

McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ.

January 23, 2009.

Summary:

Shafron sold his insurance agency business, Morley Shafron Agencies Ltd., and the name of the business was changed to KRG Insurance Brokers (Western) Inc. (KRG). Shafron continued to be employed in the business. A non-competition clause in Shafron's employment contract provided that, for three years after leaving the employment of KRG, Shafron would not be employed in the insurance brokerage business "within the Metropolitan City of Vancouver". Shafron left KRG's employment. The next month, he began working as an insurance salesman for another agency in Richmond. KRG commenced an action, claiming that Shafron was wrongly competing with it in breach of the restrictive covenant and that Shafron breached the fiduciary obligations he owed to KRG not to use confidential information and solicit KRG's clients.

The British Columbia Supreme Court, in a decision reported at [2005] B.C.T.C. 1611, dismissed the action. The court found that the term "Metropolitan City of Vancouver" was neither clear nor certain and, in any event, was unreasonable. The court also found that Shafron owed no fiduciary duty to KRG and that he had not breached any duty relating to confidential information. KRG appealed.

The British Columbia Court of Appeal, in a decision reported at 236 B.C.A.C. 116; 390 W.A.C. 116, allowed the appeal. Although the court found that Shafron owed no fiduciary duty to KRG, it held that the restrictive covenant was enforceable. The court held that while the term "Metropolitan City of Vancouver" was ambiguous, it was possible to apply the doctrine of "notional" severance to construe it as applying to the City of Vancouver and municipalities contiguous to it. According to the court, the covenant would cover the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby. The court concluded that the covenant was reasonable and enforceable. Shafron appealed.

The Supreme Court of Canada allowed the appeal and restored the judgment of the trial judge dismissing KRG's action. The court held that "notional" severance was not an appropriate mechanism to cure a defective restrictive covenant. As for "blue-pencil" severance, it could only be resorted to in rare cases where the part being removed was trivial, and not part of the main purport of the restrictive covenant. Those circumstances were not present in this case and the ambiguity therefore could not be cured by severing the word "Metropolitan". Rectification also could not be invoked to resolve the ambiguity as there was no indication that the parties had agreed on something and then mistakenly included something else in the written contract.

Contracts - Topic 1806

Severable agreements - Circumstances when contract will be severed - [See all Master and Servant - Topic 1312 ].

Deeds and Documents - Topic 5057

Rectification - When available - Mistake - Mutual - [See third Master and Servant - Topic 1312 ].

Deeds and Documents - Topic 5101

Rectification - Conditions precedent - General - [See third Master and Servant - Topic 1312 ].

Equity - Topic 3607

Fiduciary or confidential relationships - General principles - Relationships which are not fiduciary - Shafron left the employment of KRG Insurance Brokers (Western) Inc. (KRG Western) and began working as an insurance salesman for another agency the next month - KRG Western commenced an action, alleging, inter alia, that Shafron breached the fiduciary obligations he owed to KRG Western not to use confidential information and solicit KRG Western's clients - The trial judge found that Shafron owed no fiduciary duty to KRG Western and that he had not breached any duty relating to confidential information - That finding was upheld by the British Columbia Court of Appeal - On a further appeal, the Supreme Court of Canada stated that "The findings of the trial judge with respect to fiduciary obligations and the improper use of confidential information were based on evidence at trial. These are not pure questions of law. The Court of Appeal correctly did not interfere with the trial judge's conclusions on these issues. In the absence of palpable and overriding error by the trial judge, which KRG Western did not plead or demonstrate, the trial judge's conclusions - that Shafron was not a fiduciary and that he did not abuse confidential information belonging to KRG Western - must stand" - See paragraph 13.

Equity - Topic 3648

Fiduciary or confidential relationships - Breach of fiduciary relationship - By employee - Solicitation of business - [See Equity - Topic 3607 ].

Master and Servant - Topic 343

Fiduciary duty - When owed - [See Equity - Topic 3607 ].

Master and Servant - Topic 1312

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Severability - The Supreme Court of Canada discussed the application of "blue-pencil" severance to restrictive covenants in employment contracts - The court stated that "blue-pencil severance may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant. However, the general rule must be that a restrictive covenant in an employment contract found to be ambiguous or unreasonable in its terms will be void and unenforceable" - See paragraph 36.

Master and Servant - Topic 1312

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Severability - The Supreme Court of Canada held that the doctrine of "notional" severance did not apply to the construction of restrictive covenants in employment contracts for two reasons - First, there was no bright-line test for reasonableness - In the case of an unreasonable restrictive covenant, there was no objective bright-line rule that could be applied in all cases to render the covenant reasonable - The court stated that "applying notional severance in these circumstances simply amounts to the court rewriting the covenant in a manner that it subjectively considers reasonable in each individual case. Such an approach creates uncertainty as to what may be found to be reasonable in any specific case" - Second, applying the doctrine of notional severance invited the employer to impose an unreasonable restrictive covenant on the employee with the only sanction being that if the covenant was found to be unreasonable, the court would still enforce it to the extent of what might validly have been agreed to - The court stated that "Having regard to the generally accepted imbalance of power between employers and employees, to introduce the doctrine of notional severance to read down an unreasonable restrictive covenant to what is reasonable provides no inducement to an employer to ensure the reasonableness of the covenant and inappropriately increases the risk that the employee will be forced to abide by an unreasonable covenant" - See paragraphs 37 to 42.

Master and Servant - Topic 1312

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Severability - Shafron sold his insurance agency business and the name of the business was changed to KRG Insurance Brokers (Western) Inc. (KRG) - Shafron continued to be employed in the business - A non-competition clause in Shafron's employment contract provided that, for three years after leaving the employment of KRG, Shafron would not be employed in the insurance brokerage business "within the Metropolitan City of Vancouver" - Shafron left KRG's employment - The next month, he began working as an insurance salesman for another agency in Richmond - KRG sued, claiming that Shafron was wrongly competing with it in breach of the restrictive covenant - The trial judge dismissed the action - The trial judge found that the term "Metropolitan City of Vancouver" was neither clear nor certain and, in any event, was unreasonable - The British Columbia Court of Appeal allowed KRG's appeal, holding that the restrictive covenant was enforceable - The court held that while the term "Metropolitan City of Vancouver" was ambiguous, it was possible to apply the doctrine of "notional" severance to construe it as applying to the City of Vancouver and municipalities contiguous to it - According to the court, the covenant would cover the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby - The court concluded that the covenant was reasonable and enforceable - Shafron appealed - The Supreme Court of Canada allowed the appeal and restored the trial judge's decision dismissing KRG's action - The court held that "notional" severance was not an appropriate mechanism to cure a defective restrictive covenant - As for "blue-pencil" severance, it could only be resorted to in rare cases where the part being removed was trivial, and not part of the main purport of the restrictive covenant - Those circumstances were not present in this case and the ambiguity therefore could not be cured by severing the word "Metropolitan" - Rectification also could not be invoked to resolve the ambiguity as there was no indication that the parties had agreed on something and then mistakenly included something else in the written contract - See paragraphs 43 to 59.

Master and Servant - Topic 1323

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Whether reasonable - General - The Supreme Court of Canada stated that "a restrictive covenant is prima facie unenforceable unless it is shown to be reasonable. However, if the covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable. Thus, an ambiguous restrictive covenant is, by definition, prima facie unreasonable and unenforceable. Only if the ambiguity can be resolved is it then possible to determine whether the unambiguous restrictive covenant is reasonable" - See paragraph 43.

Master and Servant - Topic 1323

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Whether reasonable - General - The Supreme Court of Canada stated that "despite the presumption that restrictive covenants are prima facie unenforceable, a reasonable restrictive covenant will be upheld" - The court differentiated between a contract for the sale of a business and an employment contract, stating that "The absence of payment for goodwill as well as the generally accepted imbalance in power between employee and employer justifies more rigorous scrutiny of restrictive covenants in employment contracts compared to those in contracts for the sale of a business" - See paragraphs 15 to 25.

Master and Servant - Topic 1326

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Whether reasonable - Area - [See third Master and Servant - Topic 1312 ].

Cases Noticed:

Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535, refd to. [para. 16].

Herbert Morris Ltd. v. Saxelby, [1916] 1 A.C. 688 (H.L.), refd to. [para. 20].

Leather Cloth Co. v. Lorsont (1869), L.R. 9 Eq. 345, refd to. [para. 20].

Collins (J.G.) Insurance Agencies Ltd. v. Elsley's Estate, [1978] 2 S.C.R. 916; 20 N.R. 1, refd to. [para. 21].

Burgess v. Industrial Frictions & Supply Co. (1987), 12 B.C.L.R.(2d) 85 (C.A.), refd to. [para. 21].

Mason v. Provident Clothing and Supply Co., [1913] A.C. 724 (H.L.), refd to. [para. 22].

Attwood v. Lamont, [1920] 3 K.B. 571 (C.A.), refd to. [para. 29].

Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249; 316 N.R. 84; 183 O.A.C. 342; 2004 SCC 7, consd. [para. 29].

Globex Foreign Exchange Corp. v. Kelcher et al. (2005), 376 A.R. 133; 360 W.A.C. 133; 262 D.L.R.(4th) 752; 2005 ABCA 419, refd to. [para. 31].

Taylor (T.S.) Machinery Co. v. Biggar (1968), 2 D.L.R.(3d) 281 (Man. C.A.), not folld. [para. 35].

Putsman v. Taylor, [1927] 1 K.B. 637 (Div. Ct.), not folld. [para. 35].

Lucas (T.) & Co. v. Mitchell, [1974] Ch. 129 (C.A.), not folld. [para. 35].

Canadian American Financial Corp. (Canada) Ltd. v. King (1989), 60 D.L.R.(4th) 293 (B.C.C.A.), refd to. [para. 49].

Rose (Frederick E.) (London) Ltd. v. Pim (William H.) Jr. & Co., [1953] 2 Q.B. 450 (C.A.), refd to. [para. 52].

Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd. and O'Connor, [2002] 1 S.C.R. 678; 283 N.R. 233; 299 A.R. 201; 266 W.A.C. 201; 2002 SCC 19, appld. [para. 53].

Counsel:

Neo J. Tuytel and Valerie S. Dixon, for the appellant;

Frank G. Potts and Timothy J. Delaney, for the respondent.

Solicitors of Record:

Clark Wilson, Vancouver, B.C., for the appellant;

Lindsay Kenney, Vancouver, B.C., for the respondent.

This appeal was heard on October 16, 2008, before McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ., of the Supreme Court of Canada. The following judgment of the Supreme Court was delivered in both official languages by Rothstein, J., on January 23, 2009.