What is a restrictive covenant anyway?

Sometimes employers will include arestrictive covenant in your written employment agreement which purports to restrict your ability to work and/or compete with your former employer after termination of your employment. They are not always enforceable, though: they need to be reasonable in terms of the type of work restricted, the geographic scope, and the length of time covered.

There are different kinds of restrictive covenants.

1.      A non compete clause prohibits former employees for competing with their former employer, such as taking clients away from the former employer.

2.      A non-solicitation clause prohibits former employees from soliciting the clients/customers of their former employer. These are the most likely to be enforced.

3.      Restrictive covenants may be broader and may purport to prohibit former employees for working within the same or similar industry, and often for prolonged periods of time.

A restrictive covenant is prima facie unenforceable as a restraint oftrade. The courts will, however, uphold reasonable restrictive covenants (Shafron v.KRG Insurance Brokers (Western) Inc., 2009SCC 6). Restrictive covenants are scrutinized closely by the courts to determine whether they constitute an unreasonable restraint of trade or are contrary to the public interest. The covenant must be reasonable between the parties and with respect to the public interest, in the light of the circumstances existing at the time the contract is made, which includes the parties’ expectations of what could possibly happen in the future.

For instance, a restrictive covenant which prevents someone from working in an entire industry (say law) anywhere in Canada is much less likely to be enforced than a restrictive covenant that prevents someone from working in a particular practice area (say motor vehicle accident litigation) in a particular neighbourhood (say North Burnaby). Further, a restrictive covenant which would last for six months is more likely to be enforced than a restrictive covenant which would last for five years.

It’s important to note the courts have drawn a distinction between restrictive covenants in employment agreements, and restrictive covenants arising from the purchase and sale of a business. While restrictive covenants inemployment agreements are difficult to enforce, restrictive covenants in purchase and sale agreements are more often enforced. In the case of a contract for purchase and sale, it is up to the vendor affected by the restrictive covenant to show it's unreasonable.