Alberta Court of Appeal finds restrictive covenants are not enforceable against a wrongly dismissed employee, considers "consideration"

November 14, 2011

In Globex Foreign Exchange Corp. v. Kelcher, the Alberta Court of Appeal released a decision with several important implications for employers. The Court examined the reasonableness of a restrictive covenant in the employment context. Further, the Court found that where an employee has been wrongly dismissed, an employer may no longer be able to enforce restrictive covenants against that employee. The Court also clarified that continued employment is not valid consideration for an amendment to an employment agreement, and any such amendment needs “fresh” consideration in order to be enforceable. In addition, a strong dissenting opinion indicates the uncertainty which lingers in this area.

Facts

The appellant is a currency exchange business which had previously employed the three individual respondents as traders.  The respondents all had signed contracts that contained restrictive covenants, which restricted their activities after the end of the employment relationship.  One of the respondents entered into the agreement at the beginning of his employment, while the other two entered into the agreements after they had been employed by the appellant for some time.

In 2005, all three respondents ceased their employment with the appellant and joined a competitor.  In an attempt to respect their non-solicitation covenants, the respondents prepared “do not call” lists identifying clients of the appellant which were not to be contacted.  Then, following the expiration of the non-solicitation covenants, the respondents used these lists as a source of client contact information.

At trial, it was found that despite their efforts to respect the non-solicitation covenants, the respondents had contacted some clients that were off limits.  The trial judge also found that the respondents had breached their non-competition covenants.

However, the trial judge found that the agreements that were entered into by the two respondents after they had been hired were not enforceable as they lacked consideration.  The trial judge also found that the respondent that entered into the agreement at the beginning of his employment had received valid consideration, but that the restrictive covenants were not enforceable as he had been wrongfully dismissed.

The Alberta Court of Appeal’s Decision

On appeal, the Court addressed three important issues: whether the restrictive covenants at hand were reasonable, whether continued employment is valid consideration, and whether a restrictive covenant is enforceable against an employee who is wrongfully dismissed.  The Court was divided on the answers to these questions.

Were the restrictive covenants reasonable?

The Court affirmed that restrictive covenants must be reasonable in order to be upheld, and focused on two particular components of reasonableness: ambiguity and the scope of coverage. Regarding ambiguity, the Court took issue with the covenant’s restriction on soliciting any customer which the employee had “dealings” with during their employment. The Court found the definition of “dealings” in this context to be so ambiguous that it would be impossible for an employee to predict when he or she was breaching the covenant, and therefore found the agreement to be unreasonable.

Regarding the scope of coverage, the Court looked at the language restricting former employees from “solicit[ing] customers in any manner whatsoever, in any business or activity for any client of Globex.” As this provision prevented employees from not only soliciting customers of the appellant related to the currency exchange business, but also in any unrelated business, the Court found this restriction to be unreasonably broad.

In his dissenting reasons, Mr. Justice Slatter agreed with the majority’s statement that a restrictive covenant must be reasonable in order to be enforceable, but did not agree that the restrictions were so broad and ambiguous as to be unreasonable.

Is continued employment valid consideration?

The appellant argued that the continued employment of the two respondents that had signed the agreements during the course of their employment was consideration for the agreements. The majority of the Court disagreed, finding that “continued employment alone does not provide consideration for a new covenant extracted from an employee during the term of employment because the employer is already required to continue the employment until there are grounds for dismissal or reasonable notice of termination is given.”

In a strong dissent, Mr. Justice Slatter disagreed with the majority of the Court’s approach on two grounds.  First, he surveyed the case law and found that, in Alberta, the “tacit agreement” of an employer to forbear from exercising its right to terminate an employee can be valid consideration for an employment agreement.  While the majority agreed with this statement of law, Mr. Justice Slatter found that such “tacit agreement” could be found in the present case.

Second, Mr. Justice Slatter looked at the unique nature of employment agreements, and objected to the requirement of consideration being used to relieve parties of obligations which they intended to be bound by, stating:

“The courts should not bend over backwards to find that agreements, believed by the parties to be enforceable, are essentially toothless because of the doctrine of consideration. Here the appellant and the respondents signed the non-competition agreements in full expectation that they were enforceable, and they thereafter continued with their business relationship on that assumption. … In applying the law of consideration, the courts should refrain, if possible, from relieving the parties of covenants freely entered into, absent some overriding public policy consideration…”

Mr. Justice Slatter then, would have relaxed the requirements of consideration in this case on the basis that the parties had clearly intended to be bound by the restrictive covenants and had treated the covenants as binding for some time.

Is a restrictive covenant binding following a wrongful dismissal?

In the 1909 decision General Billposting Co Ltd v. Atkinson, the House of Lords held that when an employee is dismissed without notice or cause, the employer cannot enforce a restrictive covenant against that employee. In Globex, the majority of the Court considered the long line of Canadian cases which had followed General Billposting, and found that this principle should still be applied.

The majority of the Court also considered the implications of breaking from the General Billposting approach, thus allowing employers to enforce restrictive covenants against wrongfully dismissed employees. The Court found that this could potentially reward employers for wrongfully dismissing their employees, as employers would be able to hire a potential competitor, impose a restrictive covenant, and then wrongfully dismiss the employee while still taking full advantage of the restrictive covenant. In light of the potentially unfair consequences of abandoning General Billposting, the majority concluded that an employer cannot rely on restrictive covenants against a wrongfully dismissed employee.

In dissent, Mr. Justice Slatter disagreed with the conclusion of the majority, finding that a breach of a contract does not result in the automatic termination of all the rights associated with that contract. Where a contract is terminated as the result of a breach, any obligations for future performance are ended.  However, any existing obligations under the contract still remain.  Mr. Justice Slatter wrote, “Just because the employer is in breach of the employment contract does not give the employee the right to breach his own covenants, appropriate the employer’s proprietary information for himself, or otherwise ignore his contractual obligations.”  As a result of his analysis, Mr. Justice Slatter would have held that the restrictive covenant was still binding on the respondent, despite being wrongfully dismissed by the appellant.

Our Views

Setting aside the strong dissent, the implications for employers from Globex are clear. First, employers should ensure that restrictive covenants are drafted as clearly and precisely as possible, and go no further than necessary to protect the employer’s legitimate interests.

Second, employers should be aware that any modification to an existing employment agreement requires valid consideration to be enforceable. As continued employment is not consideration, employers should ensure that “fresh” consideration is provided as a part of any new agreement.

Finally, a wrongful dismissal may render any restrictive covenants unenforceable against the terminated employee. Employers should take extra care to observe notice (or pay in lieu of notice) requirements when terminating an employee bound by restrictive covenants.

However, the dissent of Mr. Justice Slatter highlights the fact that the law in this area is not settled. Though not enough to convince the majority in Globex, compelling arguments can be made for modifying the doctrine of consideration as it applies to employment agreements, and for moving away from the principles of General Billposting. We will be watching carefully for any further developments in these areas and whether Globex will seek leave to appeal this decision to the Supreme Court of Canada.

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Authors

Gary T. Clarke
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