Challenging Non-Competes and Non-Solicitation Agreements (Part 2)
Non-Compete | Non-Solicit Agreements for Ontario Dentists (Part 2)
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
In this blog, I’ll be talking about how restrictive covenants can be challenged for substantive and procedural defects.
Substantive Defects
Since restrictive covenants are contractual, the principles of contract law apply to determine their validity, interpretation, and enforceability. When it comes to contract law, there are many ways in which a clause or agreement can be challenged. To begin, the clause or agreement may fail for substantive inadequacy. This means that the actual terms (i.e. the words) of the agreement are so deficient that they cannot be enforced.
For example, if the provision is so unclear that it is capable of multiple interpretations or is missing information, then it may not be enforceable. There‘s also an age-old rule of interpretation called contra-proferentum which states that, in the case of an ambiguity, the provision should be interpreted against the party who wrote it (unless the parties intended the opposite). Ouch!
To avoid having an agreement unenforceable, it is best to avoid using wishy-washy language (e.g. “may”) instead of definitive language (e.g. “must” or “shall”). Also, don‘t provide alternatives in the restrictive clause itself – for example “the non compete clause may last 1, 2, or 3 years”; this will make it unenforceable for vagueness.
Worth noting is that an agreement to agree about some critical part of the contract at a future time can also be challenged and struck down by a court. If significant terms are left out of a contract and the parties simply agree to come up with an agreement about them later, then the entire contract may be challenged! An agreement to agree is generally not enforceable.
Vague and Ambiguous Terms
The case of Shafron v. KRG Insurance Brokers (Western) Inc., [2009] S.C.J. No. 6 is a good example of how a restrictive covenant will be struck down if it is too vague and ambiguous. In that case, Shafron sold his insurance agency to KRG Insurance Brokers Inc. for $700,000. KRG continued to employ Shafron for a number of years. Their employment contract included a non-compete clause which stated that Shafron was not to compete with KRG‘s business “within the Metropolitan City of Vancouver” for a period of 3 years after being terminated. When Shafron stopped working for KRG in December 2000 and started working for a competitor in Richmond, British Columbia, KRG sued (claiming that he had breached the non-compete clause in his employment contract). Now the thing to keep in mind is that there is no such place as “Metropolitan City of Vancouver”. It‘s actually just called the “City of Vancouver”. When the matter reached the courts, they had to figure out how to deal with this ambiguity. Should they “read it down” so that “City of Vancouver” actually meant by “Metropolitan City of Vancouver”, thereby making the provision enforceable? Should they strike it down entirely due to ambiguity? Should the words “Metropolitan” be severed from the rest of the agreement, thereby leaving “City of Vancouver” enforceable? Should the clause be rectified?
The matter reached the Supreme Court of Canada, where that Court held that the non-compete clause was unenforceable. The Court held that the clause was uncertain and ambiguous. There was no mutual understanding of the parties at the time they entered into the contract as to what geographic area the restrictive covenant covered. Thus, it would be inappropriate to re-write the restrictive covenant (thereby interfering with the parties‘ intentions at the time of contracting) by severing or rectifying it.
Another good example is IT/NET Ottawa Inc. v. Berthiaume, [2002] 29 B.L.R. (3d) 261 (reversed on other grounds by the Court of Appeal in (2006) 13 B.L.R. (4th) 15 and leave to appeal refused by the Supreme Court of Canada in (2006) 357 N.R. 395. In that case, the plaintiff (a management consulting firm) sued the defendant (a subcontractor hired by the plaintiff) for breach of a non-compete agreement, among other things. The defendant‘s contract with the plaintiff said that he would not move to one of the defendant‘s competitors. Here‘s what it said:
4. NON-SOLICITATION & NON-COMPETITION: The [Defendant] agrees that during this Agreement period, and for a period of 12 months after its termination, that s/he will not, directly or indirectly, on anyone‘s behalf (including, company, partnership, person or self):
4.1 offer or cause to be offered, or to recommend, the offering of employment or subcontract services, to any employee or Subcontractor of [the Plaintiff].
4.2 he/she will not attempt to solicit business from any IT/NET clients or prospects without the written consent of [the Plaintiff]. The intent of this clause is to reasonably protect the goodwill of [the Plaintiff] while at the same time not unduly limiting the ability of the [the Defendant] to continue in the practice of his/her profession.
The defendant left the plaintiff and was engaged by a competitor. When the plaintiff sued, the defendant claimed (among other things) that the non-compete agreement was too vague and ambiguous. Justice Aitken of the Ontario Superior Court of Justice agreed and found that the non-compete agreement, in part, was too vague and ambiguous to be enforceable. He wrote the following at paras. 96-101:
(c) Were the terms of the restrictive covenant clear, certain and not vague?
96 The Master Agreement is not an example of clear drafting. There are several concepts contained in the Master Agreement which are not adequately defined. As a result, the terms of the restrictive covenant, when considered in the framework of the Master Agreement and in the context of the consulting business, are ambiguous.
97 The non-solicitation and non-competition clauses are said to apply “during this Agreement period and for a period of 12 months after its termination”; however, the “Agreement period” is not defined in the Agreement and the ways in which the Agreement can be terminated are not clarified. The first clause states that “[The Plaintiff] engages the [Defendant] to provide services to [the Plaintiff] for an indefinite term, subject to the termination provisions in clause 3″. Clause 3 only discusses those situations where [the Plaintiff] can terminate the Agreement immediately upon notice to the subcontractor — and those situations simply mirror the circumstances where [the Plaintiff]‘s client terminates its arrangement with [the Plaintiff] or complains that the subcontractor is not performing his or her duties appropriately. The Agreement still contemplates other situations where either [the Plaintiff] or the subcontractor will terminate the Agreement, but those other situations are not described. Clause 6.2 refers to the non-solicitation and non-competition clause and the duty of confidentiality clause continuing in force notwithstanding the termination of the Agreement by either party or the reasons for that termination. So the first area in which the Master Agreement‘s terms are ambiguous is in regard to how and when the Agreement is terminated. This means that the concept of “Agreement period” in clause 4 is unclear.
98 The second concept which is unclear is that of “employee or Subcontractor of [the Plaintiff]“, as used in clause 4.1. Clarification is required as to whether this refers to someone who was at any time in the past or will become at any time in the future an employee or subcontractor of [the Plaintiff] or whether it refers only to those individuals who were employees or subcontractors of [the Plaintiff] when [the Defendant] and [the Plaintiff] signed the Master Agreement. Does it simply refer to anyone who is an employee or subcontractor of [the Plaintiff] at the point in time that Berthiaume may want to offer work to that person or recommend that person for work?
99 The third concept which is unclear is that of [the Plaintiff]‘s “clients or prospects”. Does this refer to anyone who has been in the past or may be in the future a client or potential client of [the Plaintiff]? Does it refer to an organization or individual at the time [the Defendant] and [the Plaintiff] signed the Master Agreement to whom [the Plaintiff] was supplying services or to whom [the Plaintiff] was actively marketing in an effort to land a contract or to whom [the Plaintiff] had submitted a proposal? Does it refer to any organization or individual that would fit one or more of these descriptions at any point during the entire period of time in which the Master Agreement was binding on [the Defendant] and [the Plaintiff] plus 12 months thereafter. The statement in clause 4.2 that ―The intent of this clause is to reasonably protect the goodwill of [the Plaintiff] while at the same time not unduly limiting the ability of the Subcontractor to continue in the practice of his/her profession‖, although an appropriate statement of intention, does not go far enough to clarify the precise meaning of clause 4.2, and does not help to clarify the other concepts in clause 4.
100 The best evidence from the point of view of [the Defendant] tending to show that the wording of the non-solicitation and non-competition clauses in the Master Agreement was vague and ambiguous, was that of Brown. When he was pressed during cross-examination to describe the limits of the terms “clients” and “prospects”, he was unable to provide a clear answer. He was very clear that the term “client” included the government branch where the consultant was working and that the consultant was not free to have his services in regard to that position bid by another company at the end of [the Plaintiff]‘s contract with that government branch. However, he was unclear as to whether the consultant could have his services bid by another company in regard to another position at the government branch which may have come to his attention when he was an [the Plaintiff] consultant at that branch. He was also unclear as to whether the consultant was free to have his services bid through another company in regard to a position at another government branch where [the Plaintiff] was actively marketing and hoping to be invited to bid. Later he clarified that it was only if [the Plaintiff] were actively trying to place the consultant in another position would the consultant be prohibited from taking that position through another consulting firm. What Brown considered the meaning of the non-solicitation and non-competition clauses is of some interest in that he was the person who signed the Master Agreement on behalf of [the Plaintiff], and who answered any questions [the Defendant] had about the agreement before it was signed.
101 For reason of lack of clarity alone, the non-solicitation and non-competition clauses in the Master Agreement are unenforceable.
So what‘s the moral of the story? Well, first, you need to make sure that you have crystal clear and certain terms when you‘re drafting non-compete and non-solicitation clauses. This means that the definitions – such as the “Business” that you want to protect, the “Customers” and “Employees” that you want to prevent from being solicited, and the geographic scope of the covenant – need to be clear and certain.
Lack of Consideration
For any restrictive covenant to be valid and enforceable there must also be something called “Consideration“. Consideration is some benefit which the dentist receives in exchange for agreeing not to do something that they were otherwise agreed to do. Consideration in an associate agreement is typically the pay and benefits that the associate receives in exchange for providing services. Consideration in an agreement of purchase and sale agreement is the purchase price. Consideration in a shareholder or partnership agreement is the mutual promises that the dentists give each other to agree not do something that they would otherwise be able to do. The bottom line is that the party seeking to enforce the promise must show consideration. Motive or desire to make a promise does not constitute good consideration.
If a party is already under a pre-existing legal duty to do or not do something, that may be challenged as not being adequate consideration. Similarly, if a party is under a public duty to do something, then that is generally not considered to be adequate consideration. Finally, a pre-existing duty owed by one party to the other may not be adequate consideration unless something new of value is being provided. To wrap your head around it, just think about this example: if I promise to give you $1,000 if you like me more, there is NO consideration. Why? Because liking me more is not something that is recognized as having monetary value by our judicial system. It is not a promise that that can be enforced. So it‘s lacking consideration and is not valid. Get it? Here‘s another example of an agreement WITH consideration: in exchange for paying you $1,000, I promise not to sue you for the damage you did to my house. This time, I‘m promising not to make a claim against you, even though I could. I‘m giving up something of benefit in exchange for something valuable from you (i.e. money). There‘s a real and fundamental exchange here so this agreement can be valid and enforceable.
So that’s it for substantive defects. In the next blog, I’ll talk about procedural defects…
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David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks.
