Confidentiality, non-competition, and non-solicitation clauses often show up in a variety of business contracts including employment and executive contracts, shareholder, and director agreements, as well as, independent contractor agreements, joint venture agreements and mergers, to name a few.
A question that must be considered by contracting parties to such agreements is: What is the enforceability of these types of restrictive covenants? This question particularly becomes important when parties may part ways and a breach of the clauses is suspected or confirmed. These clauses are premised on the assumption that the relationship between the parties will result in the sharing of proprietary and sensitive business knowledge, contacts and relationships related to the operations of a business, which the company seeks to protect, particularly once the relationship between the parties ends.
Non-competition clauses usually restrict one’s ability to engage in a competing business. Non-solicitation clauses prohibit one from soliciting stakeholders and contacts such as employees, customers or suppliers, and confidentiality clauses restrict the use and dissemination of proprietary and sensitive information. It is important to note that courts may find that parties are bound by such restrictive covenants in certain circumstances even absent an agreement.
These clauses make good business sense for businesses seeking to maintain their market share, restrict competition and maintain secrecy over proprietary business know-how and a company’s competitive advantage. They are therefore often included in such contracts to protect the business. However, the willingness of courts to enforce such restrictive covenants has often been circumscribed on public policy grounds.
CONFIDENTIALITY CLAUSES
The common law test for breach of confidence was established by the Supreme Court of Canada in Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574 as follows:
(a) the information itself must “have the necessary quality of confidence about it”;
(b) the information must have been imparted in circumstances importing an obligation of confidence; and
(c) there must be an unauthorized use of that information to the detriment of the party communicating it.
The determination is fact driven in nature and a contextual approach is taken given the nature of the business as a whole, the value of the proprietary information to the particular business and the context of disclosure. A well drafted confidentiality clause will describe the purpose of disclosure, scope of information intended to be protected and which is proprietary and confidential as thoroughly as possible. A clause which is too broad will invite enforceability risks.
Confidentiality clauses are usually enforceable if the scope is well defined and the breach is clear, but the harm of such a breach can be irreparable and the damages which may potentially flow can be difficult to prove. Courts will often question whether adequate consideration has been given by the party being restricted in exchange for being bound by this clause, thus it is beneficial to have this clause as a part of a broader agreement rather than in a stand alone agreement.
Confidentiality clauses should also contemplate the return or destruction of such information under the appropriate circumstances. Finally, the duration of the covenant should always be considered with a view to enforceability, though it may be beneficial to the discloser to require an indefinite time period, the courts may view this as unduly restrictive.
NON-COMPETITION CLAUSES
Non-competition clauses are much more difficult to enforce as compared to confidentiality clauses. On public policy grounds, the courts often view these types of clauses as void by imposing a restraint on trade, competition, and the right to pursue a livelihood. The Supreme Court of Canada in Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 916, held that such clauses will only be enforceable if it is reasonable between the parties and with reference to the public interest. The Supreme Court affirmed that there are important public interests in discouraging restraints on trade and maintaining free and open competition.
At the core of enforceability of such clauses is reasonableness. Courts will consider whether the terms of the clause are clear and are more likely to enforce such clauses if they are narrowly circumscribed as to the duration and geographical location, as well as, including a well defined scope of competitive activity. This involves a balancing act between the interest of the party seeking to invoke the clause to have it drafted as broadly as possible, while maintaining a view to enforceability. The assessment by a court as to the reasonableness of the geographical scope or duration of such clauses will be a fact driven analysis with a contextual view to the business interests intended to be protected by the clause. These clauses may often be struck down because of lack of consideration given in exchange for the covenant.
NON-SOLICITATION CLAUSES
Non-solicitation clauses are often included with Non-competition clauses but are usually more likely to be upheld because they are by their definition more circumscribed. It is a useful clause to include to mitigate against the risk of an unenforceable non-competition clause. Breach of such clauses can be difficult to prove. By example does a public advertisement which comes to the attention of a former customer amount to a solicitation? Though these clauses are still assessed by the courts for reasonableness and clarity, such clauses must be narrowly drafted in order to be enforceable and should be clear as to the type of activity which would fall within the ambit of solicitation. In the recent Ontario Court of Appeal decision in MD Physician Services Inc. v. Wisniewski, 2018 ONCA 440, the Court of Appeal held that a non-solicitation clause related to prospective clients was unduly restrictive.
INJUNCTIVE RELIEF CLAUSES
An injunctive relief clause may also be included along with any of the above clause, providing for an entitlement to such relief in the case of a breach, to emphasize the seriousness of the potential harm associated with the breach. Such clauses contemplate urgent relief against the harm of a breach of any of the restrictive covenants contracted between the parties.
Courts will weigh the rights of the parties to contract, and those of the party seeking to enforce such clauses against public policy interests and the severity of the restrictions on the bound party including the difficulty for an employee to find new work, particularly when working in a specialized field, or the chilling effect on free trade and fair competition such clauses can have. It should be noted that if the clause is found to be overly broad as drafted, the courts will not write them down, but will strike the clause entirely. The courts will also assess any inequity in bargaining and balance of power between the parties in entering into the agreement.
Whether you are preparing an agreement which requires inclusion of such clauses, have been asked to sign one, are looking to enforce these clauses where a breach has or may have occurred, require urgent injunctive relief related to such a breach, or have been threatened with suit for breaching such clauses, the lawyers at Gilbertson Davis have experience in drafting these types of clauses and litigating disputes around these clauses. Contact us to see if we can help.
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