In Great North Equipment Inc v Penney, 2024 ABKB 533 (Lema), the Alberta Court of King’s Bench considered an injunction application to enforce non-compete and non-solicit clauses, extend a period of fiduciary non-solicitation, and other issues. The court did not enforce the non-competition and non-solicitation covenants, because they were not supported by consideration.
This case is important because it considers some technical legal questions related to restrictive covenants.
Facts
The following were some of the pertinent facts summarized by the Alberta Court of King’s Bench:
- The plaintiff Great North Equipment Inc. sued three of its former employees for non-competition, non-solicitation and confidentiality breaches. As part of the legal action, the defendants then agreed to not solicit clients for a period of 12 months. When that 12 month period ended, the plaintiff brought this injunction application as an attempt to extend the period of non-solicitation
- The non-comp and non-solicit clauses were contained in a shareholders agreement. The clauses stated that they limited competition and solicitation for 2 years after the end of employment
- The defendant employees signed a joinder agreement to become part of the shareholder agreement. The employees said they had not received a copy of the shareholder agreement, were not told about the restrictive covenants, and were told the shareholder agreement was just a mechanical means to facilitate the acquisition of shares
- The defendant employees already had options to purchase shares (“OTP’s”) prior to signing the joinder agreement
Analysis / Conclusion
Justice Lema found that the non-comp and non-solicit clauses were not enforceable against the defendants because the joinder agreement they signed to become part of the shareholders agreement was not supported by consideration, a required element of any valid contract. The reasoning was as follows:
- The agreement did not reference what consideration was provided by the company to the employees
- The agreement referenced the employees being bound by the obligations under the shareholders agreement, but said nothing about the rights and benefits
- The agreement did not provide any right or benefit to the joining party
- The employees already had OTP’s before signing the joinder agreement, so it appeared the only function of the joinder agreement was an attempt to add burdens to the joining parties
- The OTP’s did not refer to the joinder agreement in any way
- The plaintiff employer did not show that any statute filled the consideration gap, which can happen in some contexts like Insurance.
Since the joinder agreement was not supported by consideration, it was not a valid agreement. The only way the employees would have been bound by the shareholders agreement, including its restrictive covenants, was if the joinder agreement would have been valid.
In the result, the non-competes and non-solicits were found to be unenforceable against the employees, and the injunction application failed.
My Take
This case is important because it is a reminder that the three essential elements of a contract – offer, acceptance, and consideration – are always required. The Courts appear to be extra vigilant with these technical requirements where there are things like non-competition and non-solicitation clauses an employer is trying to enforce against a former employee.
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