Labor & Employment Law

Restrictive covenants, Canada style

Yesterday the Supreme Court of Canada decided a restrictive covenant case involving an employer and a former employee.

The covenant restricted the former employee from becoming employed in the business of insurance brokerage within the ?Metropolitan City of Vancouver?.

This was both ambiguous and geographically unreasonable, so the court had to determine what to do about that: (1) refuse to enforce, (2) re-write it to be reasonable [they call it "notional severance"], or (3) apply the "blue pencil" doctrine. The court refused to enforce the covenant. Shafron v. KRG Insurance Brokers (Western) Inc (Supreme Court of Canada 01/23/2009.

Here is some of the court's analysis:

Notional severance, reading down a contractual provision so as to make it legal and enforceable, is not an appropriate mechanism to cure a defective restrictive covenant. Notional severance may be available where an objective bright line test exists to distinguish what is legal from what is not. There is no objective bright-line test for reasonableness and applying notional severance simply amounts to a court rewriting a covenant in a manner that it subjectively considers reasonable. Employers should not be invited to draft overly broad restrictive covenants with the prospect that the court will sever the unreasonable parts or read down the covenant to what the courts consider reasonable. This would change the risks assumed by the parties and inappropriately increase the risk that an employee will be forced to abide by an unreasonable covenant. The Court of Appeal should not have attempted to resolve the ambiguity in this case by reading down the restrictive covenant according to its own notion of reasonableness and what it thought that the parties might have intended.

Blue-pencil severance, removing part of a contractual provision, 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. Blue-pencil severance cannot be applied to remove the word ?Metropolitan? from the restrictive covenant in this case because it is not merely a trivial part of the covenant agreed to by the parties. There is no evidence that the parties unquestioningly would have agreed to remove the word ?Metropolitan? without varying any other terms of the contract or otherwise changing the bargain.

I learned about this from Michael Fitzgibbon's Thoughts from a Management Lawyer - "Blue Pencil" and Restrictive Covenants.

Full post as published by Ross' Employment Law Blog on January 24, 2009 (boomark / email).