When presented with a contract related to work, whether as an independent contractor, dependant contractor, or employee, it is vital that you closely examine the terms of the proposed agreement. Proposed contracts may contain non-competition clauses that limit your capacity to participate in rival business ventures, sometimes long after the contractual relationship has ended.
In most industries, an overly burdensome non-competition clause will severely limit the employee/contractor’s ability to perform alternative work in their chosen field. Because the restrictions can have such a severe impact, courts have established that an appropriate balance must be struck between the protection of proprietary business interests and the prevention of unreasonable restrictions on trade.
As such, when taken to court, there is a presumption that all non-competition clauses are unenforceable. The party seeking enforcement must demonstrate that the clause is enforceable by showing the clause was freely entered into and that the terms are reasonable and necessary for the protection of proprietary business interest (such as a trade secret, a customer list, or a specific vulnerability to unfair competition).
Two recent decisions of the Ontario Superior Court, 11766554 Canada Inc v Tingz Restaurant Bar LTD and Jihad Samaha (“Tingz”) and SI Systems Partnership v Geng (“SI Systems”) provide further clarity about the factors the Court will examine closely when determining if a non-competition clause is binding and enforceable. Both decisions place emphasis on the requirement to demonstrate that the signer is bound by the limitation, that the terms do not result in an unreasonable restriction on trade, and that the limitation is required for the protection of a legitimate business interest.
The agreement must be entered freely.
To be bound by a non-competition clause, a party must have entered into the agreement willingly and knowingly. In SI Systems, the Court found that identical non-competition clauses had bound one of the defendant consultants, but not the other. The consultant who was bound had signed the agreement with full knowledge of the non-competition clause, whereas the other consultant had the non-competition clause incorporated into a series of agreements, and the change of terms was never explicitly brought to their attention. The Court noted at paragraph 69, “an obscure clause that is buried in ‘fine print’ or complex language which could not be readily understood, or a provision that is startling and would be unanticipated, may engage a requirement to specifically draw the clause to the attention of the party”.
The limitations must be reasonable.
Even if a non-competition clause is found to be binding, the presumption that a non-competition clause will be unenforceable still applies. To rebut that presumption, the clause must contain unambiguous and reasonable limitations. The two main limitations a court will consider is the geographic scope covered and the duration of the clause.
In Tingz, the Court found that the geographic restriction of the clause, which spanned the entire City of Ottawa, was unreasonably broad and beyond that which would be required to provide protection against a loss of customers. As such, the Court stated that the clause was likely unenforceable.
Likewise, in SI Systems, the clause sought to prevent the consultants from performing any consultation work on any contract between the RCMP and an alternative service provider. The Court found that this limitation was far too broad to be enforceable, given the abundance of RCMP contracts for IT services, and the fact that the RCMP is national, so the clause would restrict work across Canada.
The limitations must be necessary to prevent harm
Further consideration of the Court is that a non-competition clause will only be enforceable if it is necessary and rationally connected to the protection of a proprietary interest.
In Tingz, the Court found that it was reasonably foreseeable that a former business partner opening a rival restaurant with very similar characteristics just down the block from Tingz would cause serious harm. In that case, enforcing the clause was necessary for the protection of Tingz’s customer base.
In SI Systems, despite one of the contractors being bound by the non-competition clause, the limitation was still unenforceable against him, as it was found to not be necessary or rationally connected to the protection of a proprietary interest. Prohibiting the consultants from performing any consultation work on contracts that involved IT service to the RCMP would not provide protection of a specific proprietary interest of the Applicant. It would simply limit the capacity of competing organizations to hire experienced consultants and successfully bid on RCMP contracts. Such an outcome is very restrictive, and the Court found it to be an unreasonable restraint on trade.
If you have questions or concerns about the implications of a contractual non-competition clause in a work-related agreement, our experienced Ontario employment lawyers will be happy to advise you. Please call 613-567-2901 or email [email protected] to request further information.