Legally speaking: Restrictive covenants in advisor contracts

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship; Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant; Do not add unnecessary or overly restrictive terms to a restrictive covenant; and Specifically indicate in the […]

By Harold Geller | June 1, 2009 | Last updated on June 1, 2009

4 min read

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

When an employee or agent departs, it’s best to attempt to constructively, consensually and proactively work together towards a clean break and not resort to the enforcement of restrictive rights through expensive referral to a court.

Both parties should seek legal advice before entering into a restrictive covenant, and should also consider a robust Mediation and Arbitration clause. Such clauses are highly beneficial in all employment and/or services contracts. They can ensure cost reductions in resolving disputes; quicker resolution of disputes; and the possibility for more creative resolution of disputes.

And all that’s good.

(06/01/09)

Harold Geller

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;

Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and

An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;

An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;

An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;

An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

It is an implied term of every employment contract that employees owe a duty of good faith to their employers. Traditionally this has only been used to find a non-fiduciary employee liable for damages if he or she has competed with the employer during the employment relationship, or has made improper use of confidential information;

The general interest of the public in free competition and the consideration that employees should be free to pursue new opportunities requires courts to exercise caution in imposing restrictive duties on former employees in less-than-clear circumstances. Generally speaking, the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment; and

The parties to an employment contract can contractually modify an employee’s freedom of mobility following the termination of an employment contract by negotiating a reasonable restrictive covenant.

The key here is to determine the reasonable expectations of both parties. Those expectations must take into account that relationships between employees and employers are often short-lived and subject to abrupt changes. Firms engage in aggressive recruitment practices and investment advisors are expected to do everything they can to take clients with them when they leave their firms.

In this culture, a damage award based on five years’ lost profits is unreasonable. Within such a fiercely competitive industry, no non-fiduciary employee without a non-competition clause would reasonably expect to be held liable for the employer’s lost profits arising from his or her departure, or the influence it may have had on fellow employees; let alone for so lengthy a period of time.

In Shafrom vs. KRG Insurance Brokers, the Supreme Court further clarified the employment and contract for services relationship as it relates to restrictive covenants as follows:

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

It is an implied term of every employment contract that employees owe a duty of good faith to their employers. Traditionally this has only been used to find a non-fiduciary employee liable for damages if he or she has competed with the employer during the employment relationship, or has made improper use of confidential information;
The general interest of the public in free competition and the consideration that employees should be free to pursue new opportunities requires courts to exercise caution in imposing restrictive duties on former employees in less-than-clear circumstances. Generally speaking, the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment; and
The parties to an employment contract can contractually modify an employee’s freedom of mobility following the termination of an employment contract by negotiating a reasonable restrictive covenant.

In Shafrom vs. KRG Insurance Brokers, the Supreme Court further clarified the employment and contract for services relationship as it relates to restrictive covenants as follows:

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

It is an implied term of every employment contract that employees owe a duty of good faith to their employers. Traditionally this has only been used to find a non-fiduciary employee liable for damages if he or she has competed with the employer during the employment relationship, or has made improper use of confidential information;
The general interest of the public in free competition and the consideration that employees should be free to pursue new opportunities requires courts to exercise caution in imposing restrictive duties on former employees in less-than-clear circumstances. Generally speaking, the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment; and
The parties to an employment contract can contractually modify an employee’s freedom of mobility following the termination of an employment contract by negotiating a reasonable restrictive covenant.

In Shafrom vs. KRG Insurance Brokers, the Supreme Court further clarified the employment and contract for services relationship as it relates to restrictive covenants as follows:

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Last October, the Supreme Court of Canada released a long-awaited decision clarifying the role of restrictive covenants in an insurance agent’s employment or services contract.

These covenants are written agreements to limit the actions of one or more of the contract’s parties, usually after the employment relationship ends. For example, a restrictive agreement may bar a former employee from providing financial advice from a new office or location within five kilometres of the old office for two years after termination of a contract.

For a court to enforce a restrictive covenant, the stipulations must be clear and reasonable as to time and area. That’s a fundamental prerequisite.

In general, an employment contract is one of personal service. That means, aside from any discussion about non-competition clauses and fiduciary duties, employees are generally free to leave their employment and, upon leaving, compete with their former employers. This can be a painful reality for an employer to accept.

In the financial industry, there’s an implicit acknowledgment that a departing advisor will carry a large portion of his or her client book with him, much to the firm’s detriment: And that there’s inevitably active competition for clients when a relationship ends.

Legal findings

Courts have frequently been called upon to adjudicate a reasonable parting of the ways. But when a court decision is required, all parties lose because the costs of the dispute routinely grow close to the size of any damages that could have taken place had a former employee done his or her worst.

This issue was dealt with not long ago by the Supreme Court in the now infamous dispute between RBC Dominion Securities and Merrill Lynch in British Columbia. In that decision the court held:

It is an implied term of every employment contract that employees owe a duty of good faith to their employers. Traditionally this has only been used to find a non-fiduciary employee liable for damages if he or she has competed with the employer during the employment relationship, or has made improper use of confidential information;
The general interest of the public in free competition and the consideration that employees should be free to pursue new opportunities requires courts to exercise caution in imposing restrictive duties on former employees in less-than-clear circumstances. Generally speaking, the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment; and
The parties to an employment contract can contractually modify an employee’s freedom of mobility following the termination of an employment contract by negotiating a reasonable restrictive covenant.

In Shafrom vs. KRG Insurance Brokers, the Supreme Court further clarified the employment and contract for services relationship as it relates to restrictive covenants as follows:

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Last October, the Supreme Court of Canada released a long-awaited decision clarifying the role of restrictive covenants in an insurance agent’s employment or services contract.

For a court to enforce a restrictive covenant, the stipulations must be clear and reasonable as to time and area. That’s a fundamental prerequisite.

Legal findings

This issue was dealt with not long ago by the Supreme Court in the now infamous dispute between RBC Dominion Securities and Merrill Lynch in British Columbia. In that decision the court held:

It is an implied term of every employment contract that employees owe a duty of good faith to their employers. Traditionally this has only been used to find a non-fiduciary employee liable for damages if he or she has competed with the employer during the employment relationship, or has made improper use of confidential information;
The general interest of the public in free competition and the consideration that employees should be free to pursue new opportunities requires courts to exercise caution in imposing restrictive duties on former employees in less-than-clear circumstances. Generally speaking, the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment; and
The parties to an employment contract can contractually modify an employee’s freedom of mobility following the termination of an employment contract by negotiating a reasonable restrictive covenant.

In Shafrom vs. KRG Insurance Brokers, the Supreme Court further clarified the employment and contract for services relationship as it relates to restrictive covenants as follows:

Reasonableness cannot be determined if a restrictive covenant is ambiguous in the sense that what is prohibited is not clear as to activity, time, or geography;
An ambiguous restrictive covenant is, by definition, unreasonable and unenforceable;
The onus is on the party seeking to enforce the restrictive covenant to show it is reasonable, and a party seeking to enforce an ambiguous restrictive covenant will be unable to demonstrate reasonableness;
Restrictive covenants in employment contracts are scrutinized more rigorously than restrictive covenants in a sale of a business, because there is often an imbalance of power between employees and employers, and because a sale of a business often involves a payment for goodwill—whereas no similar payment is made to an employee leaving his or her employment; and
An unambiguous covenant will not be enforced or rewritten by a court so as to make the intentions of the parties enforceable.

Based on court activity, there are a few things to glean about how to develop and enforce restrictive covenants:

All restrictive covenants should be negotiated prior to the commencement of the contractual employment or services relationship;
Parties must carefully negotiate a clearly defined geographic area as well as a reasonable and limited time for the restrictive covenant;
Do not add unnecessary or overly restrictive terms to a restrictive covenant; and
Specifically indicate in the agreement that the employer/principal has recommended and provided opportunity for the employee/agent to obtain independent legal advice prior to singing the contract.

And all that’s good.

(06/01/09)

Harold Geller

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