Blue-Pencil Correction of Noncompete Gets Red Light from Canadian Court

April 08, 2012 - by: Northern Exposure 0 COMMENTS

By Marisa Victor and Yael Wexler

Noncompetition clauses in employment contracts are difficult to enforce in Canada. Courts tend to regard them as unreasonable restraints on trade. Any ambiguity usually will be fatal. Nor will the courts generally use a “blue pencil” to remove ambiguous words. This was made clear in the recent appellate decision in Veolia ES Industrial Services Inc. v. Brulé.

Facts
John Brulé was the president and chief operating officer of Veolia ES Industrial Services Inc. He had a three-year employment agreement starting January 1, 2004. It allowed him to resign on 180 days’ notice. It had a noncompetition clause that applied following Brule’s departure “for two years commencing on January 1, 2007.”

Brulé terminated the agreement early — on July 7, 2004. Veolia paid his salary until January 3, 2005. Later in 2005, Brulé competed against Veolia for a public tender. He won. Veolia sued him, claiming that Brulé violated the noncompetition clause in the employment agreement. Veolia asked for damages equal to the company’s lost profits.

Trial decision
The trial judge found in favor of Veolia. He decided that the intention of the parties was to create a two-year noncompetition obligation that applied whenever the agreement was terminated. The words “commencing on January 1, 2007″ were a drafting error.

The trial judge therefore severed those problematic words from the agreement. He said he was following the Supreme Court of Canada’s test for “blue-pencil severance” as set out in Shafron v. KRG Insurance Brokers (Western) Inc. (2009). By severing this phrase, the relevant time period for the noncompetition clause was broadened to catch Brulé’s actions.

Law on blue-pencil severance
The Supreme Court in Shafron had ruled that restrictive agreements like noncompetes are assumed to be unreasonable for being in restraint of trade. Courts should uphold them only when they are demonstrated to be reasonable. Enforceability will be especially limited in the employment context because of the power imbalance inherent in these contracts.

To resolve ambiguity in a noncompetition clause, a court may remove an ambiguous term. One way this is done is through blue-pencil severance, where the court erases the ambiguous words. This can be done only if the meaning of the clause isn’t altered and only where the removed words are clearly trivial and not part of the main agreement.

Canadian courts should apply blue-pencil severance only if the evidence shows that the parties would have unquestionably agreed to the contract without those words.

The use of this technique was at the heart of this case.

Appeal
The Ontario Court of Appeal overturned the trial judge’s ruling. It ruled that blue-pencil severance could not be used to save the non-competition clause.

The appeal court found that without deleting the words, “commencing on January 2007,” the clause as originally drafted was unreasonable and unenforceable. Blue-pencil severance could not be used to remove the words in question, since the evidence showed that neither party would have agreed to the same contract with those words removed. The words were therefore not trivial and the meaning of the original clause would have been altered. Therefore, the clause could not be corrected in the manner the trial judge had seen fit. Moreover, as the clause would have become effective only two years after Brulé ceased his employment in 2005, it was therefore demonstrably unreasonable and unenforceable.

To summarize, neither party would unquestionably have agreed to the amended clause without varying other areas of the contract, and the clause as drafted would come into effect only two years after Brulé actually quit. Therefore, blue-pencil severance could not apply to minimize the scope of the clause as the employer argued.

Take-away for employers
Noncompetition clauses in employment agreements remain difficult to enforce. Problematic wording in these clauses generally can’t be corrected using blue-pencil severance except in the rarest of occasions. Only when the words at issue are truly ambiguous and their removal wouldn’t alter the meaning of the clause.

The blue pencil technique won’t be used to sever aspects of an unreasonable noncompetition clause in order to render it reasonable.

The lesson for employers from Veolia v. Brulé is that noncompetition clauses need be drafted with utmost care, considering the courts’ continued preference for narrowing their application.

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