Tuesday, February 10, 2009

Restrictive Covenants v Non Competition Clauses v Non Solicitation

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"...[42] In short, a general principle flowing from Elsley and reiterated in Lyons is that a non-solicitation clause -- suitably restrained in temporal and spatial terms -- is more likely to represent a reasonable balance of the competing interests than is a non-competition clause. An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in his or her chosen field. A non-competition clause, on the other hand, is enforceable only in exceptional circumstances.

43] The other legal principle that warrants mention is this: the fact that a clause might have been enforceable had it been drafted in narrower terms will not save it. The question is not whether a valid agreement might have been made but whether the agreement that was made is valid.[9]

[44] In accordance with the framework provided by Elsley, I begin my determination of the validity of the Restrictive Covenant by assessing it within the context of the employment relationship between Staebler and the Employees.

[45] For ease of reference, the Restrictive Covenant is set out again now.

In the event of termination of your employment with the Company, you undertake that you will not, for a period of 2 consecutive years following said termination, conduct business with any clients or customers of H.L. Staebler Company Limited that were handled or serviced by you at the date of your termination.

[46] It will be recalled that the trial judge found that the Restrictive Covenant was a “hybrid” clause. I disagree. On a plain reading of the Restrictive Covenant, it is a non-competition clause. It does not purport to merely restrain the Employees from soliciting the clients and customers they had served when they worked at Staebler, it prohibits the Employees from “conduct[ing] business” with any such clients or customers.

[47] As has been mentioned, Elsley indicates that an assessment of the clause is to be done with due consideration of the “surrounding circumstances”. This entails an examination both of the nature of the employer’s business and the character of the employee’s position.[10] The trial judge made two key findings in this regard: (1) the Employees knew that they would not receive the benefit of “gifted” clients unless they signed employment contracts with Staebler; and, (2) the Employees enjoyed close personal relationships with their clients.

[48] In my view, neither finding justifies the trial judge’s conclusion that the Restrictive Covenant was reasonable. The findings indicate only that an employment contract with some type of restrictive covenant was warranted. They do not, on their own, provide evidence of “exceptional” circumstances that would justify a non-competition clause nor do they speak to the reasonableness of the limits of the Restrictive Covenant. In order to decide those matters, the three factors enunciated in Elsley must be considered. I turn to a consideration of those factors now.

55] A non-solicitation clause is sufficient in conventional employer/employee situations.[12] The Employees were two of ten commercial insurance salespeople that worked for Staebler. They did not play an exceptional role in the Staebler business – they were ordinary salespeople. They were not managers, directors or key employees. They did not stand in a fiduciary relationship with Staebler.

[57] The 50 mile radius clause which Staebler had with five of its other commercial salespeople is significant. Under its terms, those employees could solicit their clients and customers and conduct business with Staebler clients so long as they did so outside of a 50 mile radius of the Waterloo region. No explanation was given to justify this differential treatment among Staebler’s commercial insurance salespeople which leads me to conclude that Staebler itself viewed the 50 mile radius clause as sufficient protection of its interest. Clearly, the terms of the Restrictive Covenant are far more restrictive than are those of the 50 mile radius clause.[15]
[58] Other provincial appellate courts have affirmed that suitably restricted non-solicitation clauses are likely to be found to be reasonable for “ordinary” salespeople in the insurance brokerage industry whereas non-competition clauses are not. See, for example, Valley First Financial Services Ltd. v. Trach, [2004] B.C.J. No. 1127 (C.A.).

[59] It follows from my determination that the Restrictive Covenant is not enforceable that Stevenson & Hunt are not liable for inducing a breach of contract...."

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