An insurance agent in British Columbia has won the right to compete with his former agency because wording in the contract that tried to stop him from jumping to a new firm was too murky.

The late-January ruling by the Supreme Court of Canada also clarifies a long-standing principle that shields employees who want to work for a competitor. Any agreement that restricts the employee’s freedom of movement must be clear and it must be reasonable. If it is not, it has no effect.

The SCC decision was a triumph for Morley Shafron, 73, a property and casualty insurance agent who has worked in the Vancouver area for most of his 53-year career. “My wife and I are feeling so happy and relieved,” Shafron says. “We’ve been vindicated.”

Shafron spent eight years appealing his case to the SCC in order to preserve his right to work in Richmond, B.C. — even though he is at an age when most people retire. Shafron says he’s simply not ready to call it quits. “A lot of people stop working at age 65,” he observes, “and they wither on the vine.”

As a result of the SCC decision, Shafron is not bound by a clause in his non-compete agreement with his former Vancouver agency that tried to restrict the geographical area in which Shafron could work after leaving that agency.

The SCC’s ruling overturns a 2007 decision of the B.C. Court of Appeal. Although the lower court agreed that the boundaries set out in the non-compete were vague, that court concluded the boundaries could be altered to make them precise. In doing so, the B.C. court substituted its own view of what the parties had intended when the contract was signed, the SCC noted.

Both court decisions focus on a single phrase in the contract. Shafron’s lawyers argued that the offending words “metropolitan City of Vancouver” were ambiguous and could not be clearly defined. The description had crept into the contract because of a drafting error by a lawyer in Toronto; there was no such formal entity in the 1980s when the agreement and similar subsequent agreements were negotiated. Since the phrase was too vague, Shafron’s lawyer argued, Shafron should not have to abide by it.

LIMITED CIRCUMSTANCES

The B.C. Court of Appeal thought otherwise. That court ruled that the phrase should be altered to include the City of Vancouver, the University of British Columbia Endowment Lands and the cities of Richmond and Burnaby. (The last three are adjacent to Vancouver.)

But the decision of the SCC emphasizes that courts may not wade into contracts to make them clear, except in very limited circumstances.

To allow such alterations, or “severances,” especially in the case of employment situations, would create too much leeway for employers, says the SCC judgment, written by Justice Marshall Rothstein: “Where the provision in question is a restrictive covenant in an employment contract, severance poses an additional concern. Although the courts wish 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.”

In other words, when employers seek to limit an individual’s freedom, they must use clear and unambiguous language. They may not use vague terminology in an effort to cast a wider net.

For Shafron, the road to victory has been a long one.

It began when he sold his agency, Morley Shafron Agency Ltd. to KRG Insurance Brokers Inc. in December 1987 for $700,000. Shortly afterward, Shafron began working for KRG and signed an agreement stipulating that for three years after leaving KRG’s employment, he would not compete in the “metropolitan City of Vancouver.” This agreement was renewed several more times with the subsequent buyer of KRG, entrepreneur and auto insurance king Jack Meier of Vancouver. The final agreement expired Dec. 30, 2000. In January 2001, Shafron left to work for another insurance agency, located in Richmond. Meier’s agency then sued, losing at trial for reasons similar to those set out by the SCC.

Shafron’s case raises another issue of interest to those who sell a business and then work for the new owner. When does a non-compete contract between two businesses, negotiated when their bargaining power is relatively equal, end —and when does it become an employment relationship?

@page_break@The distinction can be important, as tougher standards of fairness are usually imposed on the party with greater bargaining power — in this case, the employer.

TOUGHER STANDARDS

Tim Delaney, who practises employment and commercial law in Vancouver and whose firm, Lindsay Kenney LLP, represented KRG, says his firm tried to argue that the restrictive covenant was a “hybrid” contract dealing with both business and employment. But the SCC concluded that the initial non-compete contract was between two contracting businesses and that the subsequent agreements were different in nature, and should be subject to the tougher standards appropriate to employment contracts.

So, here’s the lesson for those who sell their businesses: if you stay on, Delaney says, the courts will treat the arrangement as an employment situation.

In the future, however, such arrangements may look very different in terms of what is prohibited by a non-compete contract. Delaney says restrictive covenants with geographical stipulations are becoming less relevant in the Internet age, when agents can do business from any part of a province. He says it’s more useful simply to attach a client list to the contract, stating that these clients are off-limits as prospects.

But disputes about what a contractual provision means can still arise. For instance, there may be debate over what constitutes a current client, a prospective client or a former client. “That’s the kind of challenge solicitors are facing right now,” Delaney says. “There never is pure certainty in the law.”

For his part, Shafron is relishing the win. “I felt I was right and he wasn’t,” Shafron says of Meier.

Shafron is also happy that this is the end of the line for the case: “You can’t go any further, unless you go to The Hague.” IE