Top court finds ‘ambiguous’ restrictive covenant unenforceable

Wording of clause restricting employee’s business within geographic area was too vague to be legally valid, Supreme Court of Canada says

The Supreme Court of Canada has ruled a restrictive covenant prohibiting an insurance broker from working within a certain geographic area is invalid because it was too ambiguous.

Morley Shafron owned his own Vancouver insurance agency until late 1987, when he sold it to KRG Insurance Brokers. He stayed on as an employee of KRG and signed an employment agreement that was renewed several times, up to a 1998 agreement that expired on Dec. 31, 2000. A non-competition clause in each contract stipulated Shafron would not be involved in the insurance brokerage business “within the Metropolitan City of Vancouver” for a period of three years after the termination of his employment, unless he was terminated without cause.

Shortly before his latest contract expired in December 2000, Shafron left KRG. In January 2001 he began working as an insurance salesman for another agency located in Richmond, B.C., a suburb of Vancouver.

New job breached restrictive covenant: KRG

KRG sued Shafron for violating their non-competition agreement, claiming Richmond was part of Metropolitan Vancouver. It also said Shafron breached his fiduciary obligations to KRG by using confidential information to solicit clients for his new employer.

The B.C. Supreme Court found the restrictive covenant in Shafron’s contract was unreasonable and unenforceable because it didn’t define the specific area where he couldn’t work. It also found Shafron owed no fiduciary obligation to protect KRG’s information.

The B.C. Court of Appeal, while upholding the decision on Shafron’s lack of fiduciary obligation, had a different view on the non-competition clause. The Court of Appeal agreed the wording of the covenant that named the “Metropolitan City of Vancouver” was ambiguous, but it found the covenant could be made reasonable by applying “notional” severance, a practice in which an illegal provision in a contract is “read down” to make it legal and clearer.

The Court of Appeal used “notional” severance to determine “Metropolitan City of Vancouver” referred to “the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby.” This made the covenant enforceable and Shafron should be prohibited from working as an insurance salesman in Richmond for three years, it said.

Supreme Court of Canada finds restrictive covenant unreasonable

The Supreme Court of Canada overturned the B.C. Court of Appeal’s decision and restored the original decision that the restrictive covenant was unreasonable.

“For a determination of reasonableness to be made, the terms of the restrictive covenant must be unambiguous,” the Supreme Court of Canada said. “An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity.”

Wording too ambiguous to apply severance

The Supreme Court said by applying either notional severance or the second type of severance, “blue-pencil,” which involves striking out part of an illegal clause to make it legal, a court is altering the terms of the contract. Severance is used, it said, to achieve the intention of the parties when they entered into the contract but, for one reason or another, weren’t able to make their intention clear when the contract was written.

However, the Supreme Court found the intention of both KRG and Shafron was not clear in the contract. The ambiguousness of the wording, by definition, made it unreasonable and unenforceable. The Court of Appeal used notional severance to rewrite the covenant to reflect its view of the parties’ intention, but not necessarily their real intention.

“There is no evidence that the parties would have ‘unquestionably’ agreed to remove the word ‘Metropolitan’ without varying any other terms of the contract or otherwise changing the bargain,” the Supreme Court of Canada said.

The Supreme Court of Canada also ruled out the use of blue-pencil severance to correct the wording.

“There was nothing to indicate what the parties intended by the use of the term ‘Metropolitan’ when they entered into the covenant and nothing to indicate that they agreed on an area and then mistakenly wrote down ‘Metropolitan,’” it said. “The Court of Appeal imposed what in hindsight seemed to be a sensible arrangement that the parties might have made, but did not.”

The Supreme Court of Canada struck down the B.C. Court of Appeal’s decision and restored the B.C. Supreme Court’s ruling that the restrictive covenant’s wording was ambiguous, making it unreasonable and unenforceable. See Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (S.C.C.).

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