December 14th - 2009

LEGAL BEAT: Use non-competition clause in exceptional circumstances

The insurance brokerage employees had written contracts which contained a restrictive covenant which stipulated that for two years after the termination of employment, they were not to "conduct business with any clients or customers of H. L. Staebler Company Limited that were handled or serviced by you at the date of your termination".

The insurance brokerage employees had written contracts which contained a restrictive covenant which stipulated that for two years after the termination of employment, they were not to "conduct business with any clients or customers of H. L. Staebler Company Limited that were handled or serviced by you at the date of your termination".

The employment contracts also contained a liquidated damages clause. The judge found the employees liable when they went to work for a competitor, and assessed damages at $2 million.

The Ontario Court of Appeal found the clauses to be unenforceable. Such a covenant is enforceable "only if it is reasonable between the parties and with reference to the public interest." This test reflects the competing principles that must be balanced when a court is called on to decide the validity of such a covenant. On the one hand, there is the "important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants." Open competition benefits both society and the affected employees. Society benefits from having greater choice and employees benefit as they have greater employment opportunities. On the other hand, however, "the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power."

Three factors must be considered. First, did the employer have a proprietary interest entitled to protection? Second, are the temporal or spatial features of the covenant too broad? And, third, is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?

Staebler v Allan 2008 ONCA 576

MERV'S COMMENTS
A non-solicitation clause is normally sufficient to protect an employer's proprietary interest; a non-competition clause is warranted only in exceptional circumstances.

That may be true in the brokerage contracts that many of you have. It may also be important when drafting clauses in the sale of a business. Be reasonable. Use non-solicitation clauses whenever possible and non-competition ones only in exceptional circumstances. Some clients try both and then see which one is enforceable.

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