Name of Case: KRG Insurance Brokers (Western) Inc. v. Shafron

Judgment under Appeal: Judgment of the British Columbia Court of Appeal dated February 12, 2007

Facts: In 1961, Morley Shafron established his own insurance agency business, MSA, in Vancouver. On December 31, 1987, Shafron sold the shares in the business to an Ontario company, KRG Insurance Brokers, which changed the name of the agency at the beginning of 1988 to KRG Insurance Brokers (Western) Inc.

Shafron was the only salesperson employed by the agency at the time of the sale, and he remained employed under the terms of a written employment contract. One of the provisions of this contract was a restrictive covenant that stated: "Shafron agrees that, upon his leaving the employment of MSA or KRG Insurance for any reason save and except for termination by KRG Insurance without cause, he shall not for a period of three (3) years thereafter, directly or indirectly, carry on, be employed in, or be interested in or permit his name to be used in connection with the business of insurance brokerage which is carried on within the Metropolitan City of Vancouver."

On July 31, 1991, KRG Insurance Brokers was sold to Intercity Investment Corp., and the following day, Shafron entered in a new employment contract with KRG Insurance Brokers (Western) Inc., under its new ownership, that was similar in many respects to his previous deal. After the new owners took over, Shafron was stripped of virtually all management responsibilities, but he nevertheless continued his employment with the company for another nine years, until he left of his own volition at the end of 2000. When Shafron began working as a salesperson for another agency in Richmond, an incorporated city that is part of the Greater Vancouver Regional District, KRG Insurance Brokers (Western) Inc. sued him, alleging breach of the non-competition agreement.

Case History: In a November 2005 decision, British Columbia Supreme Court Judge Glen Parrett dismissed the action against Shafron, on the ground that the non-competition agreement was not part of a vendor-purchaser contract, which would have entitled it to more permissive treatment by the courts, but rather was an unenforceable restrictive covenant between employer and employee. Parrett found that "[t]he plaintiff in this action KRG Insurance Brokers (Western) Inc. is not a purchaser either in the 1988 transaction where shares in the plaintiff were acquired by KRG Insurance Brokers or in the 1991 transaction when the same shares were acquired by Intercity Investment Corp." He further observed that, "[e]ven if somehow the present plaintiff could be viewed as having acquired goodwill in the 1991 transaction, it did not acquire that goodwill from the defendant Shafron who, at the time of the transaction, owned none of those shares."

An important factor, in the judge's view, was the nine years that had elapsed since the most recent purchase transaction, since "[a] close examination of the authorities reveals that to a very large extent these cases involve attempts within a very short period of a sale to go into competition." Indeed, Parrett observed, "[i]n the present case the facts are stretched even further with the plaintiff in this case being the corporate entity whose shares were acquired by someone else. That fact makes it clear, in my view, that this is in fact a case of an employer seeking to enforce a term of an employment contract."

That, he held, made the non-competition clause subject to the test set out in Aurum Ceramic Dental Laboratories Ltd. v. Hwang, [1998] B.C.J. No. 190 (QL): "For a 'post-employment' restraint to be enforced, the Courts have required the parties seeking to uphold the restraint to prove that the restraint has the following characteristics: (a) it protects a legitimate proprietary interest of the employer, (b) the restraint is reasonable between the parties in terms of: (i) temporal length; (ii) spatial area covered; (iii) nature of activities prohibited; and (iv) overall fairness; (c) the terms of the restraint are clear, certain and not vague; and (d) the restraint is reasonable in terms of the public interest with the onus on the party seeking to strike out the restraint."

The judge found that the employer had failed to prove that the restrictive covenant at issue met these criteria, and noted in particular its lengthy three-year duration and that it was fatally vague with regard to the spatial area covered, since there existed no such entity as the "Metropolitan City of Vancouver" specified in the agreement. He therefore dismissed the action against Shafron.

The company appealed this decision to the British Columbia Court of Appeal.

The British Columbia Court of Appeal allowed the appeal, ruled that Shafron had breached a valid restrictive covenant, and sent the matter back to the B.C. Supreme Court to determine the damages to be awarded to his former employer.

Writing the unanimous decision of a three-member panel of the Court, Justice Charles Chiasson found that neither the vagueness of the term "Metropolitan City of Vancouver" nor the three-year duration was cause to invalidate a non-competition agreement that the parties had willingly entered into, that Shafron had allowed to remain in effect without seeking any changes throughout his lengthy employment, and that did not appear to be in any way unfair in the circumstances of the case.

With regard to the geographic limitation, Justice Chiasson acknowledged that "[t]here is no fixed, recognized meaning for the phrase 'Metropolitan City of Vancouver,'" and that "[t]o strike the word 'metropolitan' would not reflect the obvious intention of the parties," since they clearly intended a geographic reach that included the City of Vancouver and something more." However, rather than finding as did the lower court judge that this made the covenant unenforceable, he relied on the decision of the Supreme Court of Canada in Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249, in which, he said, the Court "endorsed 'remedial flexibility' with the objective of giving effect to the '... substance of the bargain or consideration involved' rather than allowing the result to be '... dependent upon accidents of drafting and the form or expression of [an] agreement'." Applying this approach, Chiasson held that "[i]n the circumstances of this case, Mr. Shafron should be held to his bargain if the Court reasonably can oblige him to do so."

Starting from the premise that "the parties intended to limit Mr. Shafron's ability to compete for a period of time and within a geographic area that at the time they contracted the parties thought were reasonable," Chiasson reasoned that "[t]o construe the phrase 'Metropolitan City of Vancouver,' as was suggested at the hearing, to mean the Greater Vancouver Regional District would give to the restrictive covenant an unreasonable reach, a spatial area that was unlikely to have been in the contemplation of the parties when they made their agreement and not necessary to protect the [employer's] legitimate interest in its customer base. That base was in the south-western area of the City of Vancouver where its business was located and in municipalities reasonably close to the area." He therefore decided that "I would construe 'Metropolitan City of Vancouver' to prevent Mr. Shafron from competing in the City of Vancouver and municipalities directly contiguous to it. Geographically, I would include the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby."

Chiasson held that, "[b]y reading down the phrase 'Metropolitan City of Vancouver' to an area consistent with the need to protect KRG Western's business, an area that likely was in the reasonable contemplation of the parties when they made their agreement, the substance of their bargain is respected and enforced. To do otherwise would be to allow form to triumph over substance; to ignore the parties' express intention to limit competition, and to allow Mr. Shafron to walk away from a bargain he made repeatedly over many years to his benefit and to KRG Western's corresponding loss."

As to the three-year duration of the temporal restriction on competition within this geographic area, Chiasson took into account that "Mr. Shafron committed to the same three-year restriction for 12 years, through the 1988 Agreement, the 1991 Agreement, the August 1991 Agreement and two renewals of the latter. The price to Mr. Shafron of not continuing in KRG Western's employ would be a move beyond the geographic limit of the non-competition agreement or three years of inactivity. Mr. Shafron made his choice on each of those occasions fully aware of the agreement he was making and presumably was compensated to his satisfaction for the choice he made until December 2000. In so doing, he successfully deferred a three-year period of restricted activity in the general insurance business until then. Similarly, KRG Western would pay the price of losing the producer with long ties to its customers. By the renewal of the agreement in 1998, it accepted that reality. In the language of the authorities, the restrictive covenant was agreed to by knowledgeable persons of equal bargaining power."

He concluded that "[t]wo parties of equal bargaining power made a bargain with a temporal restriction on competition they must both be taken to have considered reasonable when they last made it in 1998. Given that fact and Mr. Shafron's 40-year relationship with his employer's customers, I am persuaded a three-year restriction on competition to begin at the termination of that contract falls within the range of what reasonable people would consider necessary to protect KRG Western's legitimate proprietary interest."

Allowing the appeal on behalf of the Court of Appeal, Justice Chiasson ruled that "the restrictive covenant in this case is reasonable between the parties in terms of its temporal length, the spatial area covered, the nature of the activities prohibited and its overall fairness," and referred the matter back to the B.C. Supreme Court to determine the damages to be awarded.

Issue(s): The issues in this case include: (i) whether the British Columbia Court of Appeal erred by applying principles applicable to restrictive covenants in commercial contracts to a restrictive covenant in an employment contract; (ii) whether the Court of Appeal improperly applied the doctrine of severance to interpret the restrictive covenant; (iii) whether the Court of Appeal erred by applying its own view of the reasonable geographic scope of the restrictive covenant.

Status: The Supreme Court of Canada granted leave to appeal on March 6, 2008.

Lancaster Reference: For analysis of the British Columbia Court of Appeal’s decision, see Lancaster’s Wrongful Dismissal E-Bulletin, May 17, 2007, Issue No. 185.