Restrictive Covenant Void – Ontario Court of Appeal
The Ontario Court of Appeal has confirmed once again that restrictive covenants are subject to careful judicial scrutiny, and will often be struck out. According to the Court’s decision in Martin v. Concrete USL Limited Partnership, post-employment restrictions that are overly broad or otherwise unreasonable will be struck down and considered void, even where the dismissed employee was a shareholder.
The dismissed employee, Derek Martin, was a twenty year employee with a minority share in his employer’s business. When the assets of the business, Concreate USL were sold, Martin received significant compensation. However, he was required to sign a far-reaching non-competition and non-solicitation agreement. After later being dismissed, Martin asked the Ontario Superior Court to rule that the restrictive covenants were unreasonable and therefore unenforceable. The Ontario Superior Court held that the restrictions were reasonable and enforceable in the circumstances.
On appeal, one of the key issues was whether the duration of the agreements was uncertain. Martin would be bound to certain restrictive covenants as long has he continued to hold shares in the company. He could not dispose of these shares without the consent of third parties, including lenders and bonding companies with whom he had no connection. It was therefore, arguably, unclear how long these agreements might remain in place.
A second issue on appeal related to the overly broad scope of the prohibited activities. If the restrictions were enforceable, Martin would be prohibited from dealing with numerous potential customers, dealers and agents with whom he had not even had contact while working for Concreate.
Martin was successful with both of these arguments. The Court of Appeal held that the scope of the restrictions went “far beyond what was properly required to adequately protect the goodwill of the purchased business…” The unanimous decision of the Court references and relies on its prior decision from 2011 in Mason v. Chem-Trend Limited Partnership, in which it had held that it would not enforce an overly broad non-solicitation restriction.
The Court of Appeal noted that Martin had received independent legal advice about the restrictive covenant and he had signed a clause indicating that he agreed it was reasonable. However, the Court held that it must still scrutinize these types of agreements to determine whether they are in the public interest, even where the situation involves more of a business transaction than an employment contract.
In light of these decisions, employers seeking to impose and enforce restrictive covenants must be extremely careful. They must ensure that they are only restricting the employee from activities that would affect proprietary interests that they are entitled to protect and nothing more. As the Ontario Court of Appeal has indicated, employers who overreach will be left with little or no protection from post-employment activities, other than their continued ability to enforce restrictions on the use of their confidential information.