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Courts Will Not Re-Write Restrictive Covenants
January 23, 2009

The Supreme Court of Canada today released its much anticipated decision in Morley Shafron v. KRG Insurance Brokers (Western) Inc, 2009 SCC 6.

Mr. Shafron was employed by KRG and was subject to an employment agreement which included a non-competition clause that restricted him from working as an insurance broker for a period of three years after the end of his employment within the “metropolitan City of Vancouver”.

At trial, the restrictive covenant was found to be unenforceable, due in part to the fact that the spatial area over which the covenant was to apply was uncertain and therefore, unreasonable. On appeal, the British Columbia Court of Appeal concluded that while the provision was ambiguous, it could apply the doctrine of notional severance to alter the language and give it effect. Specifically, the Court substituted the phrase “metropolitan City of Vancouver” with the phrase “City of Vancouver, the University of British Columbia endowment lands, Richmond and Burnaby”. Mr. Shafron appealed to the Supreme Court of Canada. In its unanimous decision, the Supreme Court of Canada overturned the Court of Appeal’s decision holding that it was improper to rewrite the restrictive covenant and substitute its own meaning for the term “Metropolitan City of Vancouver”.

On the doctrine of severance as it relates to restrictive covenants generally, the Court held that notional severance, or reading down of a contractual provision to make it legal and enforceable, cannot be used to cure a defect in an unreasonable restrictive covenant. This would amount to the court rewriting the covenant for the parties in a way that it considers reasonable which would enable employers to write overly broad restrictive covenants with the prospect that the court will sever or read down the covenant to what it considers reasonable. The Court stated that this would alter the risks assumed by the parties and inappropriately increase the risk that the employee will be forced to abide by an unreasonable covenant.

Blue-pencil severance, or removing part of a contractual provision, may only be resorted to sparingly and only in cases where the part of the provision being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant.

The Court held that notional severance did not apply in this instance since the covenant was unreasonable. Blue-pencil severance could not be applied because the term “metropolitan” was not a trivial aspect of the provision.

This decision reinforces the proposition that employers need to be particularly cautious in drafting restrictive covenants because if the covenant is found to be overly broad or unreasonable in any way, it will be struck out completely.