Arguing Ambiguities in Restrictive Covenants – The Pendulum Swings Back to Enforceability

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  • July 16, 2015

Arguing Ambiguities in Restrictive Covenants – The Pendulum Swings Back to Enforceability

One of the most-used strategies to argue that a non-compete or non-solicit provision is unenforceable is to point to any possible ambiguity in the wording used.

In the leading Canadian decision, the Supreme Court of Canada held in J.G. Collins Insurance Agencies Ltd. v. Elsley Estate1978 CanLII 7 (SCC), that in order to be enforceable, the terms of the restraint must be clear, certain and not vague. In Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), the Court characterized the demand for clarity as high, finding a clause that prohibited competition in the “Metropolitan City of Vancouver” to be unenforceable, given there was no such legal entity in existence at the time.

Countless restrictive covenants have failed because of the ability of the employee to point to ambiguities in their wording.

In Rhebergen v. Creston Veterinary Clinic2014 BCCA 97, the British Columbia Court of Appeal has perhaps swung the pendulum back toward enforceability, holding that a difference of opinion over the meaning of a clause does not necessarily render it ambiguous and hence unenforceable.

As summarized in my earlier article about this decision, the clause at issue in Rhebergenset out economic consequences for a veterinarian if, upon the termination of her contract with a clinic, she were to set up a veterinary practice within three years and within a 25-mile radius in British Columbia.

Specifically, the clause stated:

 NON-COMPETITION

  1. The Associate acknowledges and agrees that she will gain knowledge of and a close working relationship with the CVC’s [Creston Veterinary Clinic Ltd.’s] patients and clients which would injure CVC if made available to a competitor or used for competitive purposes.
  2. The Associate covenants and agrees that in consideration of the investment in her training and the transfer of goodwill by CVC, if at the termination of this contract with CVC she sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of CVC’s place of business in Creston, BC, she will pay CVC the following amounts:

If her practice is set up within one (1) year termination of this contract – $150,000.00;

If her practice is set up within two (2) years termination of this contract – $120,000.00;

If her practice is set up within three (3) years termination of this contract – $90,000.00.

Relying on Elsley and Shafron, the trial judge (2013 BCSC 115 (CanLII)) held the clause to be unenforceable on several grounds, including ambiguity. He considered the words “sets up a veterinary practice” to have a variety of meanings:

In my view, the plaintiff’s concerns are well-founded. “[S]ets up a veterinary practice” can mean a variety of things. Does it prevent the plaintiff from practising veterinary medicine within that radius if her practice is based elsewhere? For example, if her office were outside the 25-mile radius, could she provide services inside the 25-mile radius? Conversely, does the covenant prohibit her from having an office within the 25-mile radius, but only doing veterinary work outside the 25-mile radius? What if she established an office with other veterinarians inside the 25-mile radius but did not personally conduct work within that radius? What if, as the plaintiff has suggested she may do, she seeks to set up a mobile veterinary practice with no specific physical location, but does some work within that radius? What if she joined another practice that started within that radius but did not herself participate in establishing it or “setting it up”?

(at. para. 24)

On appeal, Madam Justice D. Smith for the majority found there was no ambiguity in the clause, noting that differences of opinion on interpretation do not automatically lead to ambiguities. In a portion of the judgment that surely will be cited by many counsel for employers seeking to enforce restrictive covenants in the future, she held:

[74]       A clause is not ambiguous simply because of a difference of opinion as to whether the hypothetical activity triggers the compensable provision. If the clause can be construed by an application of the plain and ordinary meaning of its words and the ordinary rules of grammar, then the clause is not ambiguous. In deciding on the applicability of the contra proferentem doctrine, which is also premised on a finding of ambiguity, Ritchie J., in his concurring reasons in Survey Aircraft Ltd. v. Stevenson, 1962 CanLII 42 (SCC), [1962] S.C.R. 555 at 563, said the following:

In my view the principle was correctly stated by Lord Sumner in London and Lancashire Fire Insurance Company v. Bolands, Limited [[1924] A.C. 836 at 848], and the following language in my opinion has direct application to the present case:

It is suggested further that there is some ambiguity about the proviso, and that, under the various well-known authorities, upon the principle of reading words contra proferentes, we ought to construe this proviso, which is in favour of the insurance company, adversely to them. That, however, is a principle which depends upon there being some ambiguity–that is to say, some choice of an expression–by those who are responsible for putting forward the clause, which leaves one unable to decide which of two meanings is the right one. In the present case it is a question only of construction. There may be some difficulty, there may be even some difference of opinion, about the construction, but it is a question quite capable of being solved by the ordinary rules of grammar, and it appears to me that there is no ground for saying that there is such an ambiguity as would warrant us in reading the clause otherwise than in accordance with its express terms. (The italics are [Ritchie J.’s].)

The Court cited the factual matrix in which the agreement was reached, noting there were no other established veterinary clinics within a 60-mile radius generally or within a 100-mile radius in Canada. Further, the principal source of business for the clinic were the eight dairy herds in the Creston Valley, all of which were situated within the 25-mile radius described in the clause

The Court concluded by rejecting the hypothetical questions of the trial judge over the meaning of the clause:

In my opinion, the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley.  It matters not, in my view, where on the spectrum Dr. Rhebergen proposes to provide veterinary services within the 25-mile radius of Creston.  If her intention is to provide those services on a regular or continuous basis they will, in my view, trigger the non-competition clause.  That is the only reasonable interpretation that, in my view, could be made on a fair reading of the clause.

(at para. 85)