Non-Competition Clauses in Employment Contracts

  • September 16, 2019
  • Andrea Sanche and Farhad Shekib, lawyers at Ricketts Harris LLP

Employment contracts often contain non-solicitation clauses, which generally prohibit departing employees from soliciting the customers or employees of their previous employers. Highly skilled employees, however, are often asked to sign contracts that include non-competition provisions, which prohibit them from competing with their former employers, subject to certain conditions. Consequently, non-competition clauses in employment contracts present a conflict between two long-standing common law principles: discouraging restraints on trade and respecting freedom of contract.

The “general rule”, as stated by the Ontario Court of Appeal in Lyons v. Multari,[1] is that non-competition clauses in employment contracts are void, particularly where a non-solicitation clause would have adequately protected the employer’s interest.

Indeed, a covenant in restraint of trade, such as a non-competition clause, is enforceable only if it is “reasonable” between the parties and with reference to the public interest.[2] Reasonableness is determined in light of the circumstances existing at the time the contract is made, which includes the parties’ expectation of what might happen in the future.[3]

Non-competition clauses must be interpreted and enforced in their entirety: they cannot be read down, and only trivial parts of such covenants may be removed unilaterally.[4] Moreover, the party seeking to enforce the non-competition clause bears the onus of establishing, on a balance of probabilities, that (i) it has a proprietary interest entitled to protection; (ii) the length of the clause and its geographical area (e.g., the City of Toronto or “Canada”) are not too broad; (iii) its term are clear and certain; and (iv) in all circumstances, the restriction is reasonably required for the employer’s protection.[5] In other words, if it is overreaching and unnecessary to protect the employer or its business interests, the court is unlikely to enforce these types of contractual provisions.