Archive for January, 2009

Restrictive Covenants in Employment Contracts & Purchase Agreements

Monday, January 26th, 2009

The Supreme Court of Canada released its decision this past Friday in Shafron.  In that case, the employee’s employment contract had a restrictive covenant which prevented him from working for any competitor for three years anywhere within “the Metropolitan City of Vancouver” after he left his employment with the employer.  There was no such thing and, as such, the geographic scope of the restrictive covenant was unreasonable – or so concluded the trial judge after the employer attempted to enforce the covenant since the employee went to work for a competitor.  The British Columbia Court of Appeal, however, used the concept of “notional severance” and “read down” the phrase to mean what most people consider to be metropolitan Vancouver, that is: the City of Vancouver, the UBC endowment lands, Richmond and Burnaby.  Of course, the ex-employee went to work in Richmond, B.C., so if the B.C. Court of Appeal was correct, then he was caught by the restrictive covenant.  The Supreme Court, however, disagreed with the B.C. Court of Appeal.

Notional severance permits a court to “read down” a provision so that it will not be found unlawful.  Generally speaking, restrictive covenants in employment contracts are found to be unlawful unless they are reasonable as to time and geographic scope.  Thus, a restriction from working “ever again, anywhere in the world” for a competitor will be struck down by a court in a nanosecond.  Similarly, a restriction from working “anywhere in Canada” would be struck down.  What if it is only a province?  Maybe.  A city?  Possibly.  The problem for the Court in this case, though, was that in order to determine what is considered clearly lawful, there has to be a “bright line”.  This concept of notional severance arose in one of the cases I have previously commented on – Transport North American Express v. New Solutions Financial.  In that case, the issue was whether an interest provision could be “read down” to be legal.  The Criminal Code clearly says that 60% is the maximum annual interest rate permitted by law and any amount over that is unlawful.  As such, there is a “bright line” – 60% – so the provision could be read down to an interest rate of no more than 60%.  However, what is a “reasonable” restrictive covenant has no such bright line – not only would right thinking members of the public disagree, but so would judges.  As such, there cannot be notional severance.

Similarly, the Court held that other concepts such as “blue pencil severance” or rectification could not be used to help the employer.  In the end, therefore, the Court overturned the B.C. Court of Appeal’s decision and restored the trial judge’s decision.

There are two points that I wish to bring to your attention.  The first is that this case represents yet another example of how the Court have shown a consistent displeasure with restrictive covenants in employment contracts.  So does that mean that you should thrown them out of your contracts?  No.  It is always possible that the courts could eventually start to shift their view the other way.  And it is always possible that the restrictive covenant might be found to be reasonable and, thus, enforceable.  I would keep them in, but don’t bet the farm that it will be sufficient.  Instead, what you should ensure is that the employment contract also has a non-solicitation clause.  The courts are presently more willing to enforce non-solicitation clauses than they will enforce restrictive covenants.  Make sure you have both in your employment contracts.

The second point is to mention that the Court took great pains to stress that the courts should take different views of restrictive covenants in employment contracts and in sale of business contracts.  The former is generally seen with displeasure by the courts whereas the latter is permissible.  As Justice Rothstein notes:  “The sale of a business often involves a payment to the vendor for goodwill.  In consideration of the goodwill payment, the custom of the business being sold is intended to remain and reside with the purchaser.”  And then, quoting a prior case: “A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser, that he, the vendor, would not later enter into competition.”  There has been a lot of talk recently about how the courts are reluctant to enforce restrictive covenants – and that is true … in the employment law context.  I want to ensure that you are not confused and think that if you sell your business today with the possibility that you might go back into that line of business a little while later if you don’t like what you went to do after you sold the business, that you will not be prevented from competing with the “old business” – because you will.


Obtaining Information from Non-Parties

Saturday, January 24th, 2009

Maybe it’s just a coincidence, but I have had to deal several times in the past few weeks with requests for documents or information from my clients who are not parties to the litigation by one of the parties to litigation.  I’ll give you a couple of examples.  In one case the was a lawsuit over a car crash and part of the claim dealt with whether the plaintiff was entitled to disability benefits.  My client was a benefit supervisor and one of the parties wanted copies of the client’s file.  In another case, there was a commercial dispute and my client was the accountant for one of the parties who had prepared that party’s tax returns and the other side wanted both the production of documents and also the ability to conduct an examination of my client regarding his tax work.  In the final example, my client was a doctor who had treated the plaintiff and the defendant wanted to examine my client.

Clients can be forced to be “pulled into” someone else’s litigation.  The question, though, is what are the terms for this.  One aspect is the production of documents.  This is relatively simple since Rule 30.10(5) of the Rules of Civil Procedure requires that the non-party (ie. my client)  is entitled to be paid his/her/its “reasonable costs” of providing the documents.

From here it gets a little more uncertain when it comes to an examination of a non-party.  In particular, three issues arise.  The first is whether the non-party is entitled to have a lawyer present for the examination.  This is relatively simple to answer: generally, yes.  The next issue, though, is who has to pay for the lawyer – the non-party of the person who is requesting the examination.  The position of the non-party would be to say “I’m being dragged into this by party A while party B will be interested in protecting its own interests, so nobody is there to protect me, so if party A is forcing me to be here, he/she should pay for me to have counsel here.”  The position of party A, who is requesting the examination, would be to say “look, if you were a witness at trial, you wouldn’t normally be entitled to your own lawyer, so if you want to have your own lawyer, you should pay for him/her to be there – it’s your choice.”    The difference, though, is that a witness at trial is ultimately under the protection of the trial judge – who is not present during the examination for discovery.  In LaFarge v. Khan, the Superior Court ultimately held that the witness was entitled to have a lawyer if he/she so wished, but went on to hold that the general rule is that the obligation to pay for the lawyer would fall on the non-party unless there are factors which would cause a judge to depart from this general rule.  No list of such factors were given, although some of them would appear to be the non-party’s ability to pay for a lawyer, whether the examination will just seek information or will challenge the non-party’s credibility, or whether the procedure to be used on the examination is straightforward or different from the standard procedure.

The last issue is whether the non-party can seek to have his/her fees paid for the attendance.  This is the murkiest of the three issues.  For example, suppose that I am an accountant, or a doctor, or a lawyer and I am required to attend and I therefore have to give up my earnings to participate in a matter that I’m not a party to.  The older cases state that compliance with the legal process is part of each citizen’s civic responsibility or duty.  This view is comparable to the view that, again, witnesses at trial can be forced to attend the trial to give their evidence and are not paid for their time.  However, Rule 31.10 permits examinations of non-parties “on such terms … as are just”.  As well, Rule 31.10(2)(c)(iii) allows the court to consider whether the examination will result in unfairness to the person being examined.  In a 2000 case called Lana International v. Menasco Aerospace, the Master (who was upheld on appeal by the Divisional Court) held that “unfairness” can include the expense to which the non-party is put.  It would therefore appear that an argument can be made that if someone wants to force you to attend an examination, you can make it a term of the Order that that party should pay your reasonable fees for having to attend (such as your reasonable hourly if you charge in this way).  Unfortunately, there is no clear decision nowadays on this issue and it remains to be seen.

In the end, if someone comes out of the blue and demands that you provide documents or submit to an examination, see if they will agree to compensate you for your time and effort.  If they do, then great.  If they don’t, then it may be worthwhile challenging their right to get the documents or to examine you.  As it turned out, in my three examples, a resolution was achieved without the need to go to court and get a firm decision on these issues – but I expect that it will only be a matter of time before these issues are brought up again.


Why is Your Fee so Much?

Wednesday, January 21st, 2009

I had a potential client call me a while back for a consultation about incorporating a company.  I spent a fair amount of time answering his questions and pointing out things for him to think about and to talk about with his accountant.  He eventually contacted me again recently and asked for a quote on incorporating a company that would have three classes of shares and would likely involve other aspects such as shareholder loans and he also wanted a shareholder agreement to be set up among the three shareholders and the company.  I gave him the quote and said that the next step should be to have another meeting since there were numerous issues that arose out of the structure he was trying to create.  The response was, essentially, “Thanks, but we’re a startup company and your quote is double what the other guys are quoting.  Unless you give us a lower quote we’ll go elsewhere.”  OK, fair enough.  But I wanted to share my response to him with all of you because it’s applicable for everyone.

Think of going to the lawyer as going to the auto repair shop.  You take your car in and say to the guy at the service counter “I need someone to take care of this noise that my car is making.”  Mechanic A jumps up and says “I’ll do it for $5″, so you agree, give him the money and he says: “All you need to do is turn up the music on your radio loud enough that you don’t hear the noise anymore.”  Mechanic B jumps up and says “I’ll do it for $10″, so you agree, give him the money and he fixes the problem, but two days later it’s back again (and it might be worse this time).  Mechanic C jumps up and says “I’ll do it for $20″, so you agree, give him the money and he fixes the problem and it stays fixed.  Mechanic D jumps up and says “I’ll do it for $50″, so you agree, give him the money and he does the same job as Mechanic C.

I am the equivalent of Mechanic C.  I’m just as good as Mechanic D, but I choose to charge less and give the same service.  That is not to say that Mechanic D (or in this case more appropriately Lawyer D) is any better or worse than I am.  Some people wish to pay a premium to have their work done by “a big name lawyer”.  Similarly, some people prefer to go to the dealer to have their lube, oil and filter done on their car rather than take it to the local independent mechanic who charges less than the dealer.  It’s all a matter of a comfort level and that’s perfectly fine.

Similarly, there are those whose budgets or whose key interest is having the noise dealt with.  If that’s the case, then either Mechanic A or B will be sufficient.  However, there are times where this will come back to bite you in the rear end.  I’ll give you an example.  I have a current client who went to someone to have a company incorporated.  All he wanted was an incorporation and that’s all he got.  Just one little problem, now the two main people involved in the company are having a fight and the company was never organized – so there are no officers of the company, no proper signing authorities and the fight is on.  The bank doesn’t know which side is in charge and doesn’t want to take sides, so the bank account is frozen and it is a complete and total mess.  Clearly, the client wanted to save money and went with the lawyer equivalent of either Mechanic A or Mechanic B.  The client took a gamble that didn’t pay off and now the client is caught in what is likely to be a very messy, expensive and prolonged lawsuit that will cost many times what the cost of organizing the corporation and doing a shareholders’ agreement would have cost.

In the end, it is partly a matter of “you get what you pay for” but also you get what you can afford (either in the short-term or in the long-term).  I chose to be the equivalent of Mechanic C because it gives my clients quality legal work at a price most can afford.  If you cannot afford it, or don’t want to pay it, that is your choice and you’re fully entitled to make whatever suits your needs and purposes.  But if you think that my rates are high, ask a few questions of the other lawyers to ensure that the service you get from them is the same as the service you get from me so that you know whether you are comparing apples to apples or apples to oranges.  If it’s the same level of service, then by all means go with the lower price.  If it isn’t, then you have to ask yourself whether it’s worthwhile to go with the higher price in the short-term or in the long-term.

Meanwhile, you might want to look at my blog posting of July 5, 2008, “Legal Fees – What’s the Going Rate?” to see whether any of the fees quoted to you are higher or lower than the average rates.


Arbitration – He Who Waits …

Tuesday, January 20th, 2009

An old saying is “He Who Waits is Lost” – in other words, if you don’t act quickly, it might be too late.  That principle was applied last week in a decision by the Superior Court on an arbitration matter.

In Bouchan, two dentists formed a professional corporation and one of the dentists then became disabled and had to stop practising.  A dispute arose between the dentists as to certain amounts to be paid (a fight over money, whoda thunk it?!).  In any event, the shareholders agreement provided for arbitration and when the one dentist sought to have a lawsuit stopped and have the parties only go forward with arbitration the Court denied the request.

Mr. Justice O’Marra gave two reasons for the denial.  The first was that an arbitration will only be mandatory under the Ontario Arbitration Act where the subject-matter of the dispute is one which is covered by the arbitration provision.  So, in this instance several claims were advanced by the plaintiff.  Many dealt with whether certain payments should be made by the defendant dentist to the plaintiff dentist.  Justice O’Marra held that these disputes were ones which fell within the arbitration provision that required arbitration for any dispute that arose over “the interpretation” of the agreement.  However, the plaintiff also alleged that the defendant had acted in an oppressive manner and that the plaintiff was therefore entitled to relief from that oppression pursuant to the “oppression remedy” found in Section 248 of the Business Corporations Act.  That issue did not deal with interpretation of the agreement and therefore fell outside of the arbitration provision and thus was not required to go to arbitration.  Since part of the claim did not require arbitration, it made sense to have everything dealt with at the same time, so the request for arbitration was denied.

Justice O’Marra went further, though, and held that even if all of the issues were covered, the defendant dentist was too late in requesting that the lawsuit be stopped and sent to arbitration instead.  In this case, the parties had exchanged pleadings and several other procedural steps before the defendant said that they should go to arbitration.  This was too late for Justice O’Marra who accepted that the rule should be that if you want an arbitration, you should ask for it right away and if you take any steps in the lawsuit, such as even serving a Statement of Defence, then you’re in the lawsuit and it’s too late to force the matter to arbitration.

Arbitrations are generally faster and less costly than full-blown trials.  It is now quite common to find many agreements that contain arbitration clauses.  However, the Bouchan decision helps to show that such clauses and the rights provided under them are fragile and can be easily lost.  As times get tougher and businesses start to fight over failed commercial relationships, a first question you should ask yourself (and tell your lawyer) is whether there is an arbitration agreement.  If you do not, you could be stuck with a more costly lawsuit.


Construction Liens – A Quick Primer

Monday, January 19th, 2009

As credit gets tighter and bills are not getting paid as quickly as before, the one thing which I have noticed lately is the spike in construction lien matters coming in the door.  I won’t say that these situations do not arise in the good times.  For example, I have a matter that involves a fight between a contractor and an owner that has gone on now for a year and my clients are the mortgagees that are just sitting back waiting for the other two parties to beat each other up.  However, while these matters show up during the good times, a quick indicator of the bad times is when these matters start to frequently pop up.  So, lets talk about the timing for construction liens since this is a question I have been getting lately.

There are two key concepts and two associated time periods.  Before this, though, I should mention that a lien arises when services or materials are first supplied to the job site.  The first concept is called “preserving a lien”.  The key time period is 45 days.  But, 45 days from what?  The answer is one of three things: (a) when the work is certified to be substantially complete; or if there is no such certification, then 45 days after (b) the date the contract is completed or (c) the date that the work is abandoned.  Within that 45 day period, the worker has to register a claim for lien against title to the property.  If that does not occur, then the lien right expires.

The second concept is “perfecting a lien”.  This requires the supplier of materials or services to start a lawsuit against the owner of the property to enforce payment.  This must occur within the next 45 day period after the three dates set out above for preserving the lien (ie. within 90 days of such initial date).  Again, if a preserved lien is not perfected within the next 45 day period, the lien expires.

So, if you have provided services or materials to an owner of property and it is 46 days after you finished your work and you have not registered a claim for lien OR you did so but waited too long to sue, then you will be out of luck.  I should also mention that, unlike other time limits in litigation, the time limits for construction liens are extremely strict, so if you miss the timing there’s no “mulligans” or “do-overs”.  This, then, begs the question of: “so then what?”  The answer is that the loss or expiry of a lien does not negate the claim that you have for payment.  You can still sue to get paid.  However, you have lost a significant advantage.

For example, I am currently dealing with a lien situation in which the general contractor has not paid a few of the sub-contractors and those sub-contractors have registered several liens against the property.  The owner has said “I’m not paying you anything unless and until you get those liens off of the title to my property and clean up this mess.”  The result is that the owner has tied up not only the money that represents payment for the sub-contractors, but ALL of the money and this puts significant pressure on the general contractor to pay the sub-contractors so that they will remove their liens.  Without those liens, who knows when the general contractor would pay the sub-contractors’ invoices.

Now, suppose that you are having your business established and you have employed a general contractor to do leasehold improvements and the general contractor has, in turn, hired specialty workers (say, electricians) to do some of the work.  Let’s suppose that either the general contractor doesn’t pay the electricians or else a dispute arises as to how much is owed.  The electricians will put liens on the property and this could put you in the middle of a fight you’d rather not be a part of.  Moreover, if you are getting progress advances from your lender, it might not make the next advance if there are liens.  Similarly, the landlord will not be happy at all that there are liens.  All of this will add to the pressures you are facing – and you’re just trying to get your business set up and ready to roll.  And, I should also mention that the legislation requires (in most instances) that you withhold 10 percent of the contract price as a “holdback” to ensure that all contractors and sub-contractors are paid.  If you do not withhold these funds, the sub-contractors who are not paid could go after your business directly (so you could end up paying twice to some extent).

If your business supplies materials that might make their way into some form of an improvement of property, you might want to consider whether you could find additional leverage for non-payment in the form of a construction lien.  Conversely, if your new business requires construction or renovation work to the premises in which you will do business, it would be a good idea to keep an eye on the workers to ensure that everyone gets paid so that no liens or claims for holdbacks are made.