The issue which has arisen is whether the employer can terminate unlawfully and maintain the plea that the non-competition covenant must be enforced.
The issue is similar to the question of repudiation as is discussed here.
General Billposting
The common law appears to be that the employer cannot terminate unlawfully and then insist upon compliance with the restrictive covenant in its favour. This issue has not been without debate. The rule in General Billposting has been to this end.
Stinson J. of the Ontario Superior Court in Zesta v Cloutier et al relied upon this principle to conclude that a fiduciary was relieved on such obligations due to his unfair termination:
An analogous situation was considered in General Billposting Co. v. Atkinson, [1909] AC 118 (H.L.) where it was held that an employer was precluded from enforcing a restrictive covenant against competition, where the employer had dismissed the employee without cause and without notice. This makes sense, because to allow employer to enforce the restrictive covenant would be to allow it to benefit from its own breach of contract. This analysis applies equally to a general fiduciary obligation not to compete with one's former employer.
The most recent appellate authority on this subject is the Alberta Court of Appeal decision of Globex Foreign Exchange Corp v Kelcher. The decision was not based on this issue as the covenants were found to be unenforceable in any event.
The majority decision written by Hunt J.A. did review the law on this issue and concluded that an employer which had acted in breach of its contractual obligation by dismissing unfairly could not assert a claim to enforce the restrictive covenant:
I am not persuaded it is appropriate to deviate from this long‑settled principle of employment law. Indeed, there are valid reasons for excusing a wrongfully dismissed employee from compliance with restrictive covenants. Most particularly, to hold otherwise would reward employers for mistreating their employees. For example, an employer could hire a potential competitor, impose a restrictive covenant on the employee, then wrongfully dismiss her a short time later and take advantage of the restrictive covenant. This would be a highly effective, but manifestly unfair, way of reducing competition. A second justification (alluded to by Simon Brown L.J. in Rock Refrigeration) may be that enforcing a restrictive covenant in the face of wrongful termination prima facie negates the consideration (whether continued employment or something else) given by the employer to the employee when she accepted the restrictive covenant. Said another way, because the employment was prematurely and wrongfully terminated the employee will not “have received, during the period of his or her employment, an extra amount of remuneration for having conceded to be bound by the restraint in the contract”: Employment Law in Canada at §11.48.
The dissenting opinion of Slatter J. A. on this issue, which provides an excellent review of the law on this subject, is discussed subsequently.
The real issue which emerges from this principle is whether the draftsman may create a covenant which contemplates the dismissal, rightly or wrongly, and have the employee nonetheless attached to a restrictive covenant in this context.
The majority decision refers to the 1990 decision of Raymond Salons v Boucher in which Cowan J. found that the contract looked to the event of a wrongful dismissal and required that the covenant still apply. This was then found to be a complete answer to the issue:
That clause in my opinion contemplates the occurrence of such an event as wrongful dismissal, yet provides that the provisions of Schedule "A", which contains the restrictive covenant in issue "shall survive such termination". That is the agreement which the defendant made, and, in my opinion she is bound by it.
This decision of Raymond was given short shift by the majority as it described this case as a “weak foundation” for the argument.
One of the employees in Globex, MacLean, was subject to a covenant which applied to him on termination for “whatever reason”. Hunt J.A. reviewed the English decision of Rock Refrigeration and concluded that the parties could not by private contract allow for the enforceability of a restrictive covenant in such context. In Rock Refrigeration the covenant was applicable on the face of the contract due to a termination “for whatever reason”.
The employee in Rock Refrigeration was not unfairly dismissed, but rather resigned his employment. Nonetheless, his sense of temerity prevailed as he argued that the wording of the contract was unenforceable due to its broadly worded intent. Hunt J. A. referred to Rock as follows:
[68] All three judges agreed that the employee was bound by the restrictive covenant, although their reasons differed in part. Simon Brown L.J. reiterated the principle in General Billposting, noting that “in cases of repudiatory breach by the employer, the employee is ... released from his obligations under the contract and restrictive covenants, otherwise valid against him, accordingly cannot be enforced”: at 13. He added that it did not matter whether the covenants included phrases such as “whether lawfully or not”, because “they are merely writ in water, unenforceable under the General Billposting principle.”
[69] Morritt L.J. expressed similar views, noting that the employee’s lawyer accepted that “however expressed, the post-employment restrictions were unenforceable in the event of the employment terminating because of the employer’s repudiation accepted by the employee”: at 22. He considered extravagant the unnecessary claim that the restrictive covenants were “wholly invalid” simply because they purported to apply notwithstanding the manner of termination.
[70] Phillips L.J. stated that “if a covenant, otherwise reasonable, purports to remain binding in circumstances where the law would otherwise strike it down, I can see no justification for holding that it is, on that account, in unlawful restraint of trade. ... this is the short and simple route which leads to the conclusion that this appeal should be allowed”: at 29. In obiter, he expressed doubt about the continued appropriateness of the rule in General Billposting, specifically, whether its principle should apply to negative obligations placed on an employee by restrictive covenants. He described as “at least arguable” that “not every restrictive covenant will be discharged upon a repudiatory termination of the employment”, adding that it was unnecessary to resolve the issue: at 32.
For these reasons, the majority, in effect, stated that the parties cannot by contract, allow the employer to act unfairly and enforce the covenant:
I am persuaded by the majority reasons in Rock Refrigeration that the contractual language here does not affect MacLean’s rights. The same arguments apply to this point as those set out above concerning why restrictive covenants are not binding once there is wrongful dismissal. To hold otherwise would reward the employer who improperly terminates an employment contract.
The dissenting decision of Slatter J.A. took issue with the uniform proposition that a party in breach cannot seek recourse to the post-termination obligations of the contract, as a general rule:
It does not follow from this general principle that a party in breach of one clause of the contract cannot enforce any other covenants breached by the other party. If one party to a contract is in breach of an important covenant, the other party can accept the repudiation of the contract and terminate it. That ends the obligation of either party to perform the substantive or primary covenants in the agreement in the future, but it does not forgive any past lapses in performance, nor bring to an end all of the collateral covenants: Rock Refrigeration Ltd. v. Jones, [1997] 1 All E.R. 1 (C.A.), per Phillips L.J. at pp. 19-20 (dissenting on this point). There are many covenants in an agreement that survive its termination (for breach or otherwise): Moschi v. Lep Air Services Ltd., [1973] A.C. 331 at p. 350; Keneric Tractor Sales Ltd. at p. 455; Heyman v. Darwins, Ltd., [1942] A.C. 356. One of the most important functions of a modern, professionally drafted contract is to deal with the breach or termination of the agreement. Indeed, many covenants in agreements only take on their primary efficacy once there has been a breach: arbitration clauses, choice of forum and law clauses, confidentiality clauses, liquidated damage clauses, limitation of liability clauses, and generally all clauses that deal with how the parties will unwind their relationship upon termination. Non-solicitation and non-competition clauses generally fall into this category as well, as they are covenants primarily intended to apply only after termination.
Slatter J.A. concluded that the covenant not to compete would continue post-termination. MacLean may have had a right to sue for economic loss resulting from his termination, but this would not impact his negative covenant, so he said:
If his employment contract was breached by failure to give him reasonable notice (or pay in lieu), MacLean was relieved from any future obligation to provide his services, and was entitled to damages. But he was not entitled to simply ignore all the other covenants he made with, and duties he owed to the appellant.
This dissenting opinion also concluded that the wording of the covenant with respect to MacLean which allowed for the post-termination restriction to apply “for whatever reason” led to termination should allow the employer to prevail, even if the termination was unfair:
[152] Rock Refrigeration raised, but did not resolve, the issue of whether the unenforceability of restrictive covenants after breach is a rule of contractual construction, or a rule of law. The contract in this appeal reads “termination . . . for whatever reason”. What if the contract read “termination for whatever reason, including fundamental breach and repudiation”? (Leaving aside for the moment the fact that on a proper construction “whatever reason” must include “fundamental breach and repudiation” anyway.) Would the restrictive covenant still be unenforceable after breach? Logically, that should follow under the General Billposting rule, because the clause “including fundamental breach and repudiation” should be just as unenforceable after repudiation as the rest of it. That was the assumption of the majority in Rock Refrigeration about the effect of the rule. It appears, however, to be contrary to Lord Wilberforce’s statement in Photo Production that the rule could not prevail “regardless of intention”. It is also contrary to the conclusion of the Supreme Court of Canada in Guarantee Co. of North America at paras. 51-2 that the consequences of breach are a matter of construction, not a rule of law. Tercon Contractors also clearly holds that the issue of survival of covenants after breach is one of construction, and it follows that it rejects the underlying reasoning in General Billposting. If the issue is one of construction, and “whatever reason” includes “fundamental breach and repudiation”, then MacLean’s covenant remained enforceable after termination of his employment under any circumstances.
These differing commentaries on General Billposting did not decide the issue before the court and strictly speaking are obiter, yet such statement from the Alberta Court of Appeal must be given attention.
For the present moment, the draftsman may well consider wording in the covenant which will allow its effectiveness regardless of the issues which led to termination. An alternative would be to tie, absent the statutory sums, compliance with the covenant to an agreed notice period and/or a pre-determined reasonable estimate of damages as in Rhebergen v Creston Veterinary Clinic.
It is to be noted that the classification of contracts which are found to be in restraint of trade is not limited to the case law above, but rather is open-ended. As noted by the Ontario Court of Appeal in the 1982 decision of Tank Lining v Dunlop Industrial in which the court stated:
The second novel feature is provided by the subject-matter of the agreement -- the licensing of an industrial process, which is unprotected by patent, for the purpose of establishing a new business. I have been unable to discover any reported case dealing with the application of the doctrine to the licensing of unpatented processes or trade secrets although some cases have dealt with restraints imposed on patent licensees: see Heydon, The Restraint of Trade Doctrine (1971), p. 238. The doctrine has been applied mostly to restrictive covenants preventing the vendor of a business from competing with his purchaser. In a more limited way, it has been applied to employment contracts, not to prevent a former employee from earning his livelihood by skills acquired during his employment, but to prevent him from taking advantage of the "trade secrets, confidential information and trade connections of the employer" as Dickson J. stated in the Elsley case, supra, at p. 924 S.C.R. and p. 6 D.L.R. The doctrine is not, however, limited to these cases: See Heydon, supra, pp. 204-55 and Cheshire and Fifoot, supra, pp. 378-89. In Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] A.C. 269 Lord Wilberforce observed that the classification of contracts that are prima facie void is not static. He said at p. 337:
... the classification must remain fluid and the categories can never be closed.
This observation applies equally to such contracts which the Nordenfelt doctrine renders enforceable. (referring to Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co., [1894] A.C. 535 – ed)