Supreme Court of Canada Unwilling to Apply Doctrine of Severance to Restrictive Covenants

Shafron v. KRG Insurance Brokers (Western) Inc. – Supreme Court of Canada – January 23, 2009

Ambiguous terms in a restrictive covenant will not be remedied through notional severance and only narrowly through blue-pencil severance.

The recent Supreme Court of Canada decision on January 23, 2009 in Shafron v. KRG Insurance Brokers (Western) Inc. [2009] 1 S.C.R. 157 (“Shafron”) demonstrates the court’s reluctance to alter ambiguous terms in a restrictive covenant. Although the doctrine of severance may be applied in some cases, such amendments will only occur in very limited circumstances.

In Shafron, the employee was employed by the employer as an insurance salesman.

Over the course of his employment, the employee had signed multiple employment contracts each containing a similarly worded restrictive covenant. The restrictive covenant provided that the employee agreed not to be employed by another insurance brokerage within the “Metropolitan City of Vancouver” for three years after his employment ended with the employer. In 2001 the employee left his employment position with the employer to work for a competitor insurance broker in Richmond, British Columbia. As a result of this new employment within the three year period, the former employer commenced an action to enforce the restrictive covenant.

The Trial Judge found that the restrictive covenant agreed to by the employee was not enforceable because the term “Metropolitan City of Vancouver” was neither clear, certain nor reasonable. The employer appealed this decision to the Court of Appeal where the Trial Judge’s findings were reversed. The Court of Appeal held that the restrictive covenant was enforceable, even though the term “Metropolitan City of Vancouver” was ambiguous. This decision was reached by the Court of Appeal applying the doctrine of notional severance to construe the restrictive covenant as applying to “the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby” rather than he “Metropolitan City of Vancouver”, which does not exist. The employee appealed the matter to the Supreme Court of Canada.

The Supreme Court allowed the appeal, finding that the term “Metropolitan City of Vancouver” was ambiguous and that the Court of Appeal erred when it decided to rewrite the geographic terms of the restrictive covenant to what it thought was reasonable. In reaching this decision, the Court considered whether the Court of Appeal’s use of the doctrine of severance was permissible.

The Court established that there are two forms of severance, “notional severance” and “blue-pencil severance”. According to the Court, notional severance involves “reading down an illegal provision in a contract that would be unenforceable in order to make it legal and enforceable”. The Supreme Court determined that notional severance “has no place in the construction of restrictive covenants in employment contracts” as there is “no objective bright-line rule that can be applied in all cases to render the covenant reasonable. Applying notional severance in these circumstances simply amounts to the court rewriting the covenant in a manner that it subjectively considers reasonable in each individual case.” Further, the Supreme Court stated that applying the doctrine of notional severance “invites the employer to impose an unreasonable restrictive covenant on the employee with the only sanction being that if the covenant is found to be unreasonable, the court will still enforce it to the extent of what might validly have been agreed to.” Applying this to the actions of the Court of Appeal, the Court found that the actions of the Court of Appeal did not constitute notional severance.

The other form of severance, blue-pencil severance, occurs when part of the contract can be removed “by running a blue pencil through it”. The Court stated that this should be “resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant. However, the general rule must be that a restrictive covenant in an employment contract found to be ambiguous or unreasonable in its terms will be void and unenforceable.” In application to the restrictive covenant in Shafron, the Court determined, “the Court of Appeal stated that the parties –clearly intended a geographic reach that included the City of Vancouver and something more’. However, there is no evidence that the parties would have –unquestionably’ agreed to remove the word –Metropolitan’ –without varying any other terms of the contract or otherwise changing the bargain’. Blue-pencil severance is therefore not applicable in this case.”

The Supreme Court of Canada’s decision in Shafron provides insight for both employees and employers in regards to ambiguous restrictive covenants. The decision demonstrates that the Courts will not be overly flexible when interpreting restrictive covenants, nor will they rewrite ambiguous terms in order to make the restrictive covenant reasonable. Rather, the Courts will refrain from using the doctrine of severance to alter an ambiguous term of a restrictive covenant unless it is unquestionable that the parties would have agreed to this alteration “without varying any other terms of the contract or otherwise changing the bargain”. Therefore, both employees and employers should be extremely mindful when drafting and agreeing to a restrictive covenant. Both must ensure that the terms are clearly described and provide for a complete understanding as to what is intended by the agreement in order to avoid any such ambiguity.

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