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Blue Pencil is Not a Cure
Published in the January 2009 issue of Litigation Notes - View Article
The Supreme Court of Canada considers whether an unenforceable restrictive covenant can be saved by severing the offending portion of the clause
The Supreme Court of Canada recently considered whether severance can be used to render enforceable an otherwise unenforceable restrictive covenant. The case related to Mr. Shafron, who sold his insurance brokerage to KRG Insurance Brokers (Western) Inc.(“KRG”) in 1987. He remained on staff with KRG for a period of about 14 years, during which time he repeatedly executed employment contracts containing a restrictive covenant. The restrictive covenant provided that he would not carry on business in the “Metropolitan City of Vancouver” for a period of 3 years after leaving his employment with KRG.
In 2001 Mr. Shafron left KRG and began working as an insurance broker in Richmond, a suburb of Vancouver. KRG commenced an action to enforce the restrictive covenant, but it was dismissed by the trial judge on the basis that the term “Metropolitan City of Vancouver” was ambiguous and therefore unenforceable. This decision was reversed by the British Columbia Court of Appeal which concluded that it could apply the doctrine of severance to “read down” the provision. The Court of Appeal concluded that it was reasonable to conclude that “Metropolitan City of Vancouver” meant the “City of Vancouver, the University of British Columbia endowment lands, Richmond, and Burnaby”.
This decision was reversed by the Supreme Court of Canada. The Supreme Court began by reviewing the law relating to restrictive covenants which are prima facie unreasonable as being in restraint of trade. The burden is on the person seeking to enforce the restrictive covenant to demonstrate its reasonableness. However, for a determination of reasonableness to be made, the terms of the restrictive covenant must be unambiguous. The Court points out that limits on geographic scope often give rise to issues of severance and questions whether a restrictive covenant that is unreasonably wide in its geographic scope can be severed in some manner so as to leave in place what the Court regards as reasonable.
The Court goes on to review the two types of severance, being “Blue Pencil” severance and “Notional” severance. Blue Pencil severance “xis effected when the part severed can be removed by running a blue pencil through it”. It can be applied “xif the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining”.
Notional severance on the other hand involves “..reading down an illegal provision in a contract that would be unenforceable in order to make it legal and enforceable”. By way of example the Court refers to a case in which the parties intended to enter into a contract in which the highest interest rate permitted by law would be charged. They made a mistake and charged an interest rate in excess of that permitted by the Criminal Code of Canada and the Court was able to use notional severance to apply the legal interest rate. This was possible because there was a clear “bright-line” test of illegality.
The Supreme Court goes on to conclude that notional severance has no place in the construction of restrictive covenants in employment contracts. There “..is no bright-line test for reasonableness”. While the Courts “xwish to uphold contractual rights and obligations between the parties, applying severance to an unreasonably wide restrictive covenant invites employers to draft overly broad restrictive covenants with the prospect that the Court will only sever the unreasonable parts or read down the covenant to what the Courts consider reasonable”. The court quotes from Lord Moulton in Mason v. Provident Clothing and Supply Co., [1913] A.C., 724 where he stated: “It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the Courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master”.
The Court went on to say that in this case, blue pencil severance was not available because it was clear that the parties intended that the scope of the restrictive covenant should extend beyond the City of Vancouver and that to simply strike out the word “Metropolitan” would not be consistent with that intention.
The Court of Appeal had tried to resolve the ambiguity in the term “Metropolitan City of Vancouver” by reading down the covenant according to its notion of reasonableness and what it thought the parties might have intended. There was no basis for the solution reached and consequently the decision of the trial judge was restored and the action by KRG was dismissed.
Shafron v. KRG Insurance Brokers
(Western) Inc., 2009 SCC 6 (CanLII)