Sunday, July 17, 2011

Restrictive Covenant Language

I posted yesterday about the Superior Court enforcing a non-solicitation clause in an employment contract. This is actually fairly rare, as restrictive covenants are quite difficult to enforce.

In order to enforce a restrictive covenant in an employment contract, the employer first has to show that there is some legitimate proprietary business interest which couldn't be protected by lesser means, and then further has to establish that both the geographical restrictions and the temporal restrictions are reasonable. So a non-competition clause that says "You can never compete with my business, anywhere" would likely be unenforceable. What constitutes "reasonable" limitations is a matter of judgment, and varies from circumstance to circumstance. So in a particular circumstance a provision might say "You can't compete within a period of 18 months within 25 km." If the Court finds that only a 12 month covenant is appropriate, the clause doesn't get written down, but is void entirely. This forces employers to err on the side of caution and to be conservative with non-competition agreements.

A couple of years ago, I received a job offer that included restrictive covenant language in it along the following lines:
In the event of termination, commencing with the termination date, [employee] shall not practice law for the greatest of the following periods:
three years, or

two years, or

one year
within the largest of the following areas, being within a radius of:
35 kms, or

25 kms, or

10 kms

of the incorporated municipalities within which [employer] have offices at the time of termination. At the present time [employer] have offices within [location]. The clauses in this paragraph shall be read severally, and any clause found to be excessive or invalid shall be severed, leaving the next most restrictive clause in place.
When I first read it, I couldn't help but think that it was clever. I hadn't seen language like it before. And I was surprised, because it was clear that the specific law firm was not sophisticated in the ways of employment law. (Their HR recruiter - outsourced - found me and essentially the first three questions he asked were my age, marital status, and family status, and later the principals of the law firm asked the same questions repeatedly.)

Now, there are a number of potential problems with the implementation of the clause, but what interests me, and what I would welcome discussion on, is the overall concept of the clause, having a series of lesser alternatives built in.

There's nothing in the concept that is fundamentally at odds with the existing case law on restrictive covenants, but there still seems to be something...perhaps too good to be true...about the clause, from an employer's perspective. Conversely, there is something troubling about the way that it puts the ball entirely into the employee's court in terms of risk and legal costs. Imagine a clause that prevented competition "for the maximum time and geographical scope as a Court of competent jurisdiction finds reasonable". The effect is essentially the same, conceptually, and yet the trouble is that there's a lack of clarity, a failure to tell the employee exactly what terms the employee is going to be held to.

So I think that's the crucial flaw in the language: Saying "this or this or this" doesn't specifically tell the employee which one, and thus becomes unclear and ostensibly unenforceable.

I would back up this assertion with reference to Shore v. Ladner Downs, in which the question was whether or not a termination clause with a formula for notice which exceeded the statutory minimum at the time of termination but failed to formulaically meet the statutory minimums in other circumstances:

The policy considerations applied in Machtinger, supra, would not be served if the contract were to be interpreted in favour of the employer so as to leave the individual employee responsible for determining, at the point of termination, whether the statutory minimum had risen above the notice period stated in the contract. It is neither reasonable nor practical to leave the individual employee in the position of having to keep an eye on the relationship between the statutory minimum and the contractual term.
I would argue that the same policy considerations would lead to a conclusion that it cannot be put on the employee to determine which of several options is the applicable one. (Of course, it occurred to me that, as a labour and employment lawyer, I was ill-positioned to make such an argument. But I didn't accept the position for other reasons.)


This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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