Nov 30, 2014

Facts:





D sold shares in an insurance company to P


D becomes employed by KRG under a series of contracts, and each of these contracts contain a restrictive covenant that said D could not carry on or be employed or be associated with the business of insurance brokerage. It said that he couldn’t carry these activities “WITHIN THE METROPOLITAN CITY OF VANCOUVER”.


Later, D leaves and works for an insurance brokerage in Richmond, which is near Vancouver. So the issue became whether the term “metropolitan city of Vancover” encompass the town of Richmond.


Issues:






Whether in an employment contract, the doctrine of severance or rectification can be invoked to resolve a restrictive term in a restrictive covenant or render an unreasonable restriction in the covenant reasonable.


(In other words, (1) can the courts use the doctrine of severance or rectification to receive an ambiguous term and figure out a way to overcome it? (2) Can it render a term that is unreasonable reasonable?)


Reasoning:


Restrictive covenant: a clause which precludes a vendor from competing with the purchaser and, in an employment contract, the restrictive covenant precludes the employee, upon leaving employment from competing with the formal employer.


2 step test to determine if restrictive covenant is to be upheld:



  1. Whether the restrictive covenant is ambiguous? (if it is, it cannot be determined if it’s reasonable)

  2. If it’s ambiguous, then it needs to be determined if it’s reasonable.

In other words, a restrictive covenant must be unambiguous and reasonable.

Two kinds of severance:



  1. Blue pencil severance: If it can be chopped off and leave the untainted portions in place. This has a limited use, and can only be used when the part being removed is clearly severable.

  2. Notional severance: reading down an illegal provision in a contract. This is reasoned not to have any place in the construction of restrictive covenants because (a) there is no bright line and (b) it invites the employer to come up with unreasonable conditions.

Court finds that BP test is not applicable because it was only to be applied narrowly and only when both parties would have agreed to it.

Court then looks at doctrine of rectification, which is said to restore what the parties to the agreement actually agreed to. For example, if both parties meant to put 2, but a 3 was put in the contract by accident. This was said not to apply to the case at hand because nothing in error was inserted into the contract.


“Metropolitan city of Vancouver” was found to be ambiguous, as there was no mutual understanding of that term.


The restrictive covenant was deemed to be unenforceable.


Ratio:






1) Restraints on trade are contrary to public policy except where the restraint on trade is found to be reasonable.


2) The geographic coverage of a restrictive covenant, the period of time in which it is effective, and the activity which is prohibited are all factors considered in determining whether a restrictive covenant is reasonable.


3) For a determination of reasonable the terms for the restrictive covenant must be ambiguous and the onus is on the party seeking to enforce that restrictive covenant to show the reasonableness of its terms.


4) A restrictive covenant is prima facie unenforceable unless it is show to be reasonable. If the covenant is ambiguous, it is not possible to demonstrate that it is reasonable.