Rare ruling clarifies impact of non-compete clauses on notice period, The Law Times (August 4, 2014, p.7)

04 Aug Rare ruling clarifies impact of non-compete clauses on notice period, The Law Times (August 4, 2014, p.7)

RARE RULING CLARIFIES IMPACT OF NON-COMPETE CLAUSES ON NOTICE PERIOD
By Nikolay Y. Chsherbinin

Among the factors for assessing the quantum of damages in wrongful dismissals is the impact of non-competition clauses in employment contracts on the employee’s ability to find comparable employment. In Ostrow v. Abacus Management Corp. Mergers and Acquisitions, the Supreme Court of British Columbia had a rare opportunity to consider the impact of that factor on the length of the reasonable notice period.Having acknowledged the scarcity of jurisprudence on the relationship between a non-competition clause and the length of reasonable notice, the court concluded the presence of a non-competition clause serves as a factor that may increase the length of reasonable notice.

In Ostrow, a 42-year specialist in international and U.S. taxation provided services to Abacus, a private equity company with approximately $5.5 billion in holdings. He did so first as an employee serving in the capacity of a senior manager and then as a consultant through his new employer, C2 Global Solutions Inc. In February 2011, Abacus decided to re-employ Adam Ostrow. In furtherance of its goal, it provided the draft employment contract that permitted it to terminate the employee by providing him with the minimum notice under the Employment Standards Act. It also contained a six-month non-competition clause restricting him from working for other employers.

Following the ensuing negotiations, Abacus agreed to revise the termination provision, which, along with other amendments, provided Ostrow with the assurance he needed regarding job security. In the summer of 2011, the Grosvenor Group contacted Ostrow about a potential opportunity as a director of tax. In response, he approached Abacus for, and obtained reassurances about, his job security. He decided not to follow up with the Grosvenor Group. In October 2011, Abacus suggested Ostrow should start looking for a new job. In December 2011, it dismissed him on a without-cause basis. He went on to sue Abacus for wrongful dismissal.

At trial, Ostrow argued the existence of the non-competition clause in his employment contract was a factor for the court to consider when assessing the quantum of damages. In response, Abacus argued Ostrow couldn’t have believed the non-competition clause restricted him and that, if he did, such a belief was unreasonable because the company didn’t seek to enforce it.

In deciding this issue, Justice Jeanne Watchuk observed: “There is a surprising lack of jurisprudence on the relationship between a non-competition clause in the employment contract and the length of the reasonable notice period.” Even though the jurisprudence is scarce, it’s consistent. For example, in Watson v. Moore Corp. Ltd., the British Columbia Court of Appeal specifically considered the impact of the non-competition clause upon the length of the reasonable notice period. In that case, despite the finding the provision was unenforceable because the contract was void, the court awarded a 25-year employee 18 months’ notice after considering the existence of an onerous non-competition clause.

Similarly, in Ontario, the Ontario Court of Appeal affirmed in Murrell v. Burns International Security Services Ltd. the trial judge’s decision to award a three-year employee eight months’ pay in lieu of notice after accounting for the non-competition clause. In another Ontario case, Khan v. Fibre Glass-Evercoat Co., the plaintiff brought an action for wrongful dismissal arguing the notice period should take into account the five-year non-competition clause in his employment contract. The Ontario Superior Court of Justice allowed the action and added five months to the period of notice because the employer had insisted that the employee abide by the five-year non-competition agreement.

Having considered the limited jurisprudence, Watchuk dismissed Abacus’ argument. She found that when assessing the impact of the non-competition clause upon the period of reasonable notice, the issue wasn’t whether the employer enforced the restrictive covenant but whether such a clause existed in the employment contract and it had led the employee to believe he was bound by it.

In Ostrow, Abacus had given Ostrow a formal letter after his dismissal that reminded him of the non-competition clause in his employment contract. As a consequence, Watchuk concluded the existence of the non-competition clause in Ostrow’s contract was a factor that served to increase his entitlement to reasonable notice of termination. She awarded Ostrow, an 11-month employee at the time, six months’ pay in lieu of notice after considering his specialization, Abacus’ assurances of job security, and the non-competition clause.

Historically, the Canadian courts have been antagonistic towards enforcement of restrictive covenants. Ostrow reinforces this proposition, albeit from the different perspective. In light of the Ostrow line of cases, prudent employers should consult their legal advisers about the enforceability of a non-competition clause in the dismissed employee’s employment contract before insisting on compliance. If the enforceability of the non-competition clause is suspect, employers should relieve the employee from compliance and instead capitalize on the duty to mitigate with a view to minimizing their financial obligations.

Should the dismissed employee argue the existence of a non-competition clause negatively affects the chances of getting another job, employers should recall the Ontario Court of Appeal’s judgment in Link v. Venture Steel Inc. in which it found the existence of a non-competition obligation wouldn’t completely relieve someone of the legal duty to mitigate.

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