Supreme Court of Canada Overturns BC Court of Appeal on Restrictive Covenants

In Shafron v KRG Insurance Brokers (Western) Inc. 2009 SCC 6, the Supreme Court of Canada re-affirmed strict requirements on enforcing restrictive covenants (non-competition clauses) in employment contracts. In 2004, The Supreme Court of Canada approved a concept to “save” illegal contracts by reading the offending terms down to a permissible level. In the 2004 case (Transport North American Express Inc. V. New Solutions Financial Corp. 2004 SCC 7, the contract provided for an interest rate above 60% which offended the criminal interest rate provisions of the criminal code. The Supreme Court “read down” the interest rate to the maximum permissible rate and avoided striking out the interest provision altogether. This concept was called “notional severance”.

At the appeal level of the Shafron case, the British Columbia Court of Appeal sought to apply this “notional severance” by “reading down” the geographic scope of a restrictive covenant because the phrase “Metropolitan City of Vancouver” was ambiguous. The BC Court of Appeal enforced a geographic scope that had not been agreed by the parties and substituted their interpretation on the ambiguous phrase. In a unanimous decision, the Supreme Court of Canada reversed the Court of Appeal decision and held that a restrictive covenant must be unambiguous in order to be enforced and rejected the concept of notional severance in employment law cases.

The Supreme Court also put strict limits on other forms of severance that might be called in aid of sloppy or overreaching covenants by limiting any form of severance to situations where offending terms are “clearly severable, trivial and not part of the main purport of the restrictive covenant”.