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Court of Appeal Neuters Restrictive Covenants

17-Aug-11

By Hugh McPhail, Q.C.

Last week, the Alberta Court of Appeal issued an important decision on restrictive covenants. The employer, Globex Foreign Exchange Corporation (“Globex”), completely failed in its effort to enforce fairly standard non-solicitation covenants against three former employees. If you have non-solicitation covenants affecting current employees or hope to impose them on future employees, your chances of success have been dealt a major blow. This is particularly significant because non-solicitation covenants have a much better chance of being enforced than the blunter instrument of non-competition agreements.

Why did the attempted enforcement fail?

First, the covenant was, in the view of the Court, ambiguous. The clause said that the employee would not “solicit customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings”. At first that seems quite clear, yet, the court said it was ambiguous for two reasons:

  1. “dealings” was ambiguous because the employees might have just had an isolated contact with a customer, such as when filling in for another staff member, so it would be hard for the employee to know which customers he was prevented from soliciting. The employees seemed to have no difficulty preparing lists of their customers so the conclusion is particularly strict. One would have thought that the dissenting judge made more sense when he said “Just because the parties might not agree on everything that the word covers, does not justify a conclusion that it is too vague to be used at all".
  2. “for any client” was ambiguous and unclear since it seemed to require that their new employer was a client of Globex. This would seem to also be a minor quibble with what was the obvious intent.

Second, the majority concluded that the clause was overly broad because it prevented solicitation for “any business or activity”, not just for the currency exchange business the employees had been involved in when they worked for Globex. That seems odd because it was surely only that business that was the intended scope.

Third, the majority of the court was of the view that restrictive covenants are unenforceable when the employee had been wrongfully discharged i.e. without just cause and without adequate notice. That was so even though the covenants said they applied to terminations “for whatever reason”.

Finally, two of the employees’ covenants were not binding because Globex had provided no “consideration” for them. “Continued employment” was not valid “consideration” even when it was the view of the dissenting judge that “the employee was given to understand, and did understand, that his refusal to execute the covenant would lead to an early termination of his employment”.

These conclusions all spell bad news for employers.

Yet, there is a glimmer of hope in the dissent of Justice Slatter who strongly disagreed with the majority decision on every ground. That said, unless his views prevail in future cases or an appeal is successful, employers should have another look at their restrictive covenants. They have to be exceptionally clear; they should probably only prevent the employee from contacting the customers he/she worked with directly, and “consideration” in the form of exchange for a raise or other obvious quid pro quo should be provided. Furthermore, employers should try to specifically cover what happens when there is a termination without just cause in the hope that Justice Slatter’s view takes hold.


 

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