Restrictive Covenant in Termination Agreement

It is to be recalled that Ontario law now forbids this. An exception such as the "CEO" status will be required.

In addition, all jurisdictions will prohibit such a clause from attaching to the statutory obligations.

Many employers request as a term of a settlement agreement that the employee “re-affirm” an existing covenant or enter into a new provision of the same genre in exchange for a separation payment as a lump sum or over time.

There is little law on this subject but it is to be expected that the statutory payment, absent controversy which would put this payment into debate, such as an allegation of just cause, should not be tied to such a covenant. It is the question of the enforceability of such a negative covenant tied to the common law payment which may be in debate.

The decision of D.M. Brown J. of the Ontario Superior Court in Dent Wizard v Catastrophe Solutions and Pietrantonio addresses this issue to some extent. The personal defendant entered into such a settlement agreement with the plaintiff in which he was paid for a period of four years, while the negative covenants endured for six years.

In determining the reasonableness of these covenants, the court applied the usual test of an employment restrictive covenant and did not distinguish the fact that these terms arose from a settlement agreement as opposed to an active employment agreement. The termination agreement did contemplate that Pietrantonio would provide certain services for the first four of these years, but the reality was that he was not called upon to do so.

The court found that such covenants were overly broad and unenforceable. The judge did, however, allow for the argument that the consideration paid for the period of the active covenant may have legs. In this instance, the reasoning was that the covenants must be examined in a global context. Had the covenants been limited to the four year period of compensatory payment, the case may have taken a different turn:

  While I am sympathetic to the applicants’ submission that during the first four of those six years DWC paid real money to Pietrantonio in consideration for the restrictive covenants it received from him, the difficulty with Section 12 is that it rolls together into one bundle the restrictions both for the periods during which consideration was paid and the period when it would not be paid.  As the Court of Appeal has said, “the question is not whether a valid agreement might have been made, but whether the agreement that was made is valid.”[25]  According to the Supreme Court of Canada’s decision in Shafron, I am not permitted to “read-down” Section 12 so that its obligations would apply only to those periods when DWC was paying some consideration (which would include the period covering the events of last July in Calgary) because “notional severance” is not available as a matter of law.  Nor could I “blue pencil” out of Section 12 the words “and for the 24 consecutive months following March 31, 2011” because to do so would not involve removing a trivial part of the clause unconnected with the main purport of the restrictive covenant.