Its natural for employers to want to protect customer relationships. Restricting an employees’ right to contact and do business with clients after termination of employment is a common tool in the employment agreement “arsenal”.
Despite their frequent use restrictive covenants are difficult to enforce. The Canadian economy benefits from open competition free from encumbrances. Recently, the Court of Appeal demonstrated its distaste for these types of clauses by refusing to enforce overly broad restrictive covenants indicating they were unreasonable (see Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72).
Derek Martin worked for ConCreate for over twenty years. During the course of his employment he purchased shares in a related business. When the organization he worked for was acquired Mr. Martin continued to own the shares with his new employer.
At the time of the sale Mr. Martin signed agreements containing restrictive covenants. The non-competition clause prevented Mr. Martin from holding an interest in any business competing. He also agreed to a non-solicitation clause which prevented him from communicating or dealing with any customers, dealers, agents, or distributors. The restrictions were for twenty-four months beginning only when Mr. Martin sold his share interest.
To further complicate things, Mr. Martin could only dispose of his shares with the approval of the purchaser, general partner, and Lenders. This particular provision would prove fatal to the agreement.
The Court found the requirement to obtain consent from a third party (the lender) when selling his shares was unreasonable. Firstly, the lender had no contractual duty to provide its approval to Mr. Martin; furthermore the lender could change over time….how was Mr. Martin to know who he should approach for consent?
Remember - when drafting restrictive covenants they must have fixed time limits. Contractual restrictions which indefinitely prevent employees from working will not withstand judicial scrutiny. Restraints on re-employment must be for the minimum time necessary to protect an organizations’ proprietary interests.
