Labor & Employment Law

"Blue Pencil" and Restrictive Covenants

By Michael Fitzgibbon

The Supreme Court of Canada has released its much anticipated Shafron v. KRG Insurance Brokers (Western) Inc. (a Digest of the case can be found here). The case dealt with restrictive covenants and the circumstances in which a court may "fix" an ambiguous covenant (in this case, the geographic scope). 

The headnote to the case is instructive:

An ambiguous restrictive covenant is by definition, prima facie unreasonable and unenforceable.  The onus is on the party seeking to enforce the restrictive covenant to show that it is reasonable and a party seeking to enforce an ambiguous covenant will be unable to demonstrate reasonableness.  Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business because there is often an imbalance in power between employees and employers and because a sale of a business often involves a payment for goodwill whereas no similar payment is made to an employee leaving his or her employment.  In this case, the restrictive covenant arises in an employment contract and attracts the higher standard of scrutiny.

In terms of various "curing" mechanisms, the Court commented:

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.... 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. ...

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.

It's an important case that highlights the obvious: drafting these covenants (when they are determined to be necessary) is critically important. The party seeking to enforce the covenant, usually the employer must not assume that the Court will serve as a back-stop and repair an otherwise ambiguous covenant.

Full post as published by Thoughts from a Management Lawyer on January 23, 2009 (boomark / email).