Restrictive covenants are a common feature of employment agreements, shareholder agreements, and business purchase transactions. Among the most frequently used are non-solicitation clauses, which are intended to prevent former employees, executives, shareholders, or business owners from soliciting customers, clients, suppliers, or employees after the relationship ends.
Although non-solicitation clauses are generally viewed more favourably than non-competition clauses, they are not automatically enforceable. Canadian courts continue to require that these provisions be carefully drafted, reasonable in scope, and no broader than necessary to protect legitimate business interests.
A recent decision of the Alberta Court of King’s Bench, Intellimedia Limited Partnership v. Jawad, provides a useful reminder that even sophisticated commercial agreements may fail if restrictive covenants are drafted imprecisely.
What Happened?
The dispute arose following the sale of a business operating in the educational software industry. As part of the transaction, the former owner and chief executive officer agreed to restrictive covenants that included both non-competition and non-solicitation obligations.
Following the sale, the purchaser alleged that the former executive had established a competing business and sought an injunction to enforce those restrictive covenants.
The Court reached an important distinction between the two provisions. While it found the non-competition clause to be enforceable on the facts before it, it declined to enforce the non-solicitation clause because of the way it had been drafted.
Why Was the Non-Solicitation Clause Unenforceable?
The agreement prohibited the former executive from soliciting any person who “is a customer” of the purchaser.
At first glance, that wording may appear straightforward. However, the Court concluded that it created uncertainty because it failed to identify a sufficiently ascertainable group of customers.
The clause referred to customers in the present tense. As a result, it potentially captured individuals or organizations that became customers after the executive had already left the business. The Court concluded that this made it difficult for the former executive to know precisely who could not be contacted.
That uncertainty proved significant.
Canadian courts have consistently held that restrictive covenants must be drafted with precision. Where the scope of a covenant is uncertain or broader than reasonably necessary to protect a legitimate business interest, courts may decline to enforce it altogether.
Why Was the Non-Competition Clause Upheld?
The Court reached a different conclusion regarding the non-competition covenant.
Unlike restrictive covenants contained in ordinary employment agreements, courts generally afford greater deference to covenants negotiated as part of the sale of a business. This reflects the commercial reality that sophisticated parties negotiating the purchase and sale of a business are typically in a more equal bargaining position.
In this case, the Court concluded that the non-competition clause was appropriately tailored to protect the goodwill purchased through the transaction. Its scope, duration and subject matter were sufficiently limited to justify enforcement.
The decision illustrates that even where two restrictive covenants appear in the same agreement, each provision will be assessed independently.
Why This Decision Matters
Although Intellimedia is an Alberta decision arising from a commercial transaction, its broader principles are relevant across Canada.
Courts routinely emphasize that restrictive covenants are exceptional limitations on an individual’s ability to conduct business or pursue employment. For that reason, they are interpreted carefully and will only be enforced where their language is clear and their scope is reasonable.
The decision serves as another reminder that precision in drafting is often just as important as the commercial objective the parties seek to protect.
Practical Considerations for Employers and Businesses
Employers and business purchasers should periodically review their restrictive covenants to ensure they remain enforceable under current law.
Among other things, businesses should consider whether their agreements:
- clearly identify the persons or businesses subject to the restriction;
- define prohibited conduct with sufficient precision;
- impose reasonable temporal, geographic and functional limitations where appropriate;
- protect legitimate business interests rather than merely restrict competition; and
- use language that can be readily understood and applied if litigation becomes necessary.
Businesses reviewing their employment agreements should also ensure that restrictive covenant provisions remain consistent with current legal developments.
Readers may also be interested in our discussion of how employment obligations can continue following the sale of a business.
Considerations for Employees and Executives
Employees and executives should not assume that every restrictive covenant they have signed is automatically enforceable.
Whether a clause will ultimately be upheld depends on numerous factors, including its wording, the surrounding circumstances, the nature of the parties’ relationship and the legitimate interests the covenant seeks to protect.
Before changing employers, starting a competing business or soliciting former clients, it is often advisable to obtain legal advice regarding the scope and enforceability of any restrictive covenant.
Key Takeaways
The decision in Intellimedia Limited Partnership v. Jawad reinforces several important principles.
First, courts continue to distinguish between non-competition and non-solicitation clauses, even when they appear in the same agreement.
Second, restrictive covenants must be drafted with precision. Small drafting choices can have significant consequences if enforcement is later sought.
Finally, businesses should not assume that a restrictive covenant will be enforceable simply because it appears in a professionally drafted agreement. Regular review of employment agreements and commercial contracts can help reduce the risk of future disputes.
Frequently Asked Questions
Are non-solicitation clauses enforceable in Canada?
They can be. Courts generally enforce non-solicitation clauses where they are clear, reasonable and no broader than necessary to protect legitimate business interests. Each case depends on its own facts and the specific language used.
Are non-solicitation clauses easier to enforce than non-competition clauses?
Often, yes. Because non-solicitation clauses are generally less restrictive than non-competition clauses, courts are typically more willing to enforce them. However, they must still be carefully drafted.
Does this Alberta decision apply in Ontario?
While decisions of the Alberta Court of King’s Bench are not binding on Ontario courts, Canadian courts frequently apply similar legal principles when assessing restrictive covenants. The decision therefore provides useful guidance for employers, employees and businesses across Canada.
Can a court rewrite an overly broad restrictive covenant?
Generally, no. Canadian courts are often reluctant to rewrite or “blue pencil” restrictive covenants. If a provision is ambiguous or unreasonable, the court may simply decline to enforce it.
Final Thoughts
The enforceability of restrictive covenants continues to depend on careful drafting and the particular facts of each case. Intellimedia Limited Partnership v. Jawad demonstrates that even sophisticated commercial agreements may fail where key provisions lack sufficient precision.
Whether you are negotiating an employment agreement, purchasing a business, or assessing the enforceability of an existing restrictive covenant, obtaining legal advice before a dispute arises can help identify potential issues and reduce litigation risk.
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If you have questions about a non-solicitation clause, non-competition agreement or other restrictive covenant, please contact Pelsmakher Law.
