For the London Free Press – March 2, 2009

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A recent Supreme Court of Canada decision sent a message to employers to draft employment contracts carefully, holding that it’s inappropriate to rewrite restrictive covenants in most cases.

In Shafron vs. KRG Insurance Brokers (Western) Inc., the court dealt with a 15-year employee. His employment contract included a covenant forbidding him from being employed as an insurance brokerage in the “Metropolitan City of Vancouver” for three years after the end of his employment with KRG.

In 2001, the employee left KRG and began working at another insurance brokerage in Richmond, B.C. KRG commenced an action, arguing he was violating the restrictive covenant.

Restrictive covenants on employees are considered contrary to public policy because they’re viewed as a restraint on trade. In other words, they can prevent an individual from earning a living. Courts construe them very narrowly and won’t enforce them if they stray beyond certain accepted norms.

Courts are more inclined to enforce clauses that prevent a former employee from contacting customers of the former employer they dealt with or that prevent the employee using a former employer’s proprietary or confidential information.

Courts evaluate the reasonableness of a restrictive covenant based on its geographic and temporal scope and the scope of the work it seeks to prohibit. But reasonableness cannot be defined if the restrictive covenant is ambiguous.

In Shafron, the Supreme Court ruled that they could not assess the reasonableness of the covenant because the term “Metropolitan City of Vancouver” did not make clear what geographic location it was trying to exclude.

The court set out two possible ways of correcting an ambiguous covenant.

“Notional severance” includes “reading down” part of the restrictive covenant so the remainder is legal and therefore enforceable.

The court held that it is never appropriate to use notional severance to correct an ambiguous restrictive covenant because it amounts to the court rewriting the employment contract.

Such a remedy would cause problems because it would let employers draft overly broad restrictive covenants, knowing the courts will reduce unreasonable parts to make them reasonable.

The second method is “blue-pencil severance,” which involves removing the illegal or overbroad part of a restrictive covenant, then enforcing the rest.

The court held that blue-pencil severance is “only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining.”

The court said blue-pencil severance should only be used in the rarest of circumstances and only when the removed portion does not affect the overall intended purpose of the contract provision.

Ultimately, the court held that neither amendment method was appropriate in the Shafron case and ruled the restrictive covenant was too ambiguous to uphold.