Ontario Court of Appeal Rejects Restrictive Covenants

An interesting new case from the Ontario Court of Appeal was just released:  Veolia ES Industrial Services Inc. v. Brule.

Brule founded Veolia, a company which engages in "inspecting, cleaning and rehabilitating sewers".  In 1999, he sold it, and agreed as part of the sale to continue as Veolia's president for five years.  This included a non-competition clause which carried for five years beyond the end of the contract.  Four years in, they renegotiated the contract, and agreed to a new three year contract term starting January 1, 2004, with new restrictive covenants to become effective for two years starting January 1, 2007.  (The new contract completely and expressly superceded the terms of the old contract.)

The contract also included early termination language, permitting Brule to quit on 180 days' notice.  He did so, giving notice in July 2004, ending January 2005.

Brule went on to start a new company, Clean Water Works, originally intended to rehabilitate water mains (which did not compete with Veolia).  However, in fall 2005, Clean Water Works needed more business, and so tendered for sewer work with the City of Ottawa.  Clean Water Works won the tender process; Veolia was the next lowest bid.

Veolia brought an action seeking damages for breach of the non-comp clause and breach of fiduciary duties.

There was a problem with the language of the clause, however:  The clause specified that it became effective January 1, 2007.  The trial judge concluded that the intention of the parties was obviously to have a non-competition clause effective for two years following the end of employment, and interpreted the contract accordingly, finding that Brule breached it.

The Court of Appeal disagreed.

The specified 2007 date was not accidental - the evidence was clear that the intention was that, if the employment relationship extended beyond the anticipated three years, the non-comp would still not extend beyond December 31, 2008.  Veolia's own representative acknowledged that Brule would not have signed the contract otherwise.

In other words, the trial judge's interpretation of the contract was one that the parties had quite expressly drafted to avoid, and was therefore an error.  The Court of Appeal found that the language of the contract had to be left as it was, that the trial judge's "blue pencil" severance of the 2007 date was wrong, and that the language of the restrictive covenant was therefore unreasonable under the circumstances (and in any event wouldn't have barred Brule from competing in 2005).

As to the alleged breach of fiduciary duty, Brule had a common law duty not to compete unfairly.  However, the only unfairness of the competition that Veolia could point to was that Brule had retained a binder of Veolia's public tenders...but the evidence was that this binder was not used in the Ottawa tender, and therefore could not have made the competition unfair.  Besides, the tenders themselves were public record.

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