Insurable Interest

SCC Declares Broker's Non-Competition Clause Unenforceable

The Supreme Court of Canada today released its first decision in over 30 years dealing with the issue of restrictive covenants in employment agreements. This case is of particular interest to the insurance industry, as it deals with a dispute between an insurance brokerage and a producer over the latter’s right to compete against his former employer.

Morley Shafron was an insurance salesperson and had owned his own brokerage in the South Granville area of Vancouver since the early 1960s. In 1987, he sold his business to KRG Insurance Brokers Inc. but stayed on as an employee, continuing his successful career as a producer. In 1991, the business was sold again, this time to Intercity Investment Corporation, which purchased the shares of KRG Insurance Brokers (Western) Inc., Mr. Shafron’s employer.

In 1991, prior to Intercity’s purchase of KRG, Mr. Shafron signed an employment contract that included a restrictive covenant which read as follows:

Shafron shall not, upon his leaving the employment of the Corporation [KRG Western] for any reason, save and except for termination by the Corporation or KRG Management without cause, for a period of three (3) years thereafter, directly or indirectly, carry on, be employed in, or be interested in or permit his name to be used in connection with the business of insurance brokerage which is carried on within the Metropolitan City of Vancouver. [emphasis added]

In December 2000, Mr. Shafron left the employ of KRG and began working as an insurance salesman for Shaw Insurance Agency in Richmond, BC.

KRG commenced an action in the Supreme Court of British Columbia against Mr. Shafron for, among other things, breach of the restrictive covenant. The claim was dismissed. The trial found, in particular, that the restrictive covenant’s reference to the "Metropolitan City of Vancouver" (which had no legal definition) was neither clear nor certain and in any event was an unreasonable restraint on Mr. Shafron’s ability to compete against his former employer.

On appeal to the BC Court of Appeal, the trial judge's decision was over turned. Using the "doctrine of notional severance", the Court determined that it was able to interpret the restrictive covenant to cover the City of Vancouver, the University of BC endowment lands, Richmond and Burnaby.

Mr. Shafron sought and was granted leave to appeal to the Suprme Court of Canada. In allowing the appeal and restoring the judgment of the trial judge, the Supreme Court very clearly enunciated several principles:

1. A contractual term which limits an employee's right to compete with its former employer (a restrictive covenant) is on its face unenforceable unless is can be proven to be reasonable in terms of subject matter, geographical and temporal scope.
2. The language of the restrictive covenant must be unambiguous. If a restrictive covenant is ambiguous, it cannot be cured by the Court.
3. The Court cannot simply add or delete words (using the "doctrine of notional severance") in a restrictive covenant in an employment agreement to render it unambiguous or reasonable.
4. The Court cannot impose upon the employee and employer a bargain that they could have but did not make for themselves.

Ultimately, the Supreme Court of Canada found that since the term "Metropolitan City of Vancouver" was neither clear nor certain and thus the restrictive covenant could not be enforced. Since no evidence had ever been adduced as to what the parties believed "Metropolitan City of Vancouver" to mean, the Court concluded that it could not step in and impose a bargain that the parties themselves had not made.

Insurance Agencies have perfectly legitimate business interests to protect by way of restrictive covenants in employment agreements or purchase and sale transactions. If the proper protection is to be obtained, this case again emphasises the importance of having these sorts of restrictive covenants drafted by lawyers with real expertise in this area of the law.

Clark Wilson was counsel for the successful appellant in this case.