Legal News

Court “Reads Down” Restrictive Covenant from Five Years to Two Years
August 8, 2006

A BC Supreme Court judge recently “read down” a restrictive covenant, finding that the five year term to which the parties had agreed was too long. A term in the plaintiff’s employment contract prohibited him from competing against his previous employer in the painting industry for five years after his termination. The plaintiff asked the Court to strike the clause out, arguing that it unreasonably prevented him from making a living.

Before an important decision from the BC Court of Appeal in 2005 in ACS Public Sector Solutions Inc. v. Courthouse Technologies Ltd., the Court probably would have struck the clause out. Courts usually refuse to enforce restrictive covenants that last for more than two years and they historically considered themselves bound either to enforce restrictive covenants on precisely the terms agreed by the parties or to strike them out entirely.

The Court in ACS Public Sector Solutions Inc. changed the law in BC, though, when it held that Courts could read restrictive covenants down to replace unreasonable terms with reasonable terms. Relying on this decision, and a provision in the restrictive covenant that provided for revision of unreasonable terms, the Court held that striking the restrictive covenant out entirely would create a substantially different bargain than that contemplated by the parties. The Court held that the five year term should be reduced to two years instead.

Employers should consider whether restrictive covenants that were unenforceable before ACS might now be read down to establish reasonable, enforceable post-employment obligations.

(Click here for link to Decision)