Restrictive Covenant Not Enforced Against Consultants

In NL Fisher Supervision & Engineering Ltd. v Bottger, 2024 ABCJ 225, the Alberta Court of Justice ruled that the restrictive covenants contained in consulting agreements were an unfair restraint on trade, as they were both ambiguous and unreasonable.

This case is important because it found that consulting agreements, in which the Defendants were party to through their corporations, still indicated the presence of a traditional employment relationship, thus the non-compete and non-solicit restrictive covenants contained within were subject to more rigorous scrutiny than those contained in business contracts.

Facts

• The matter involves five separate actions that were ultimately ordered to be heard together. The parties are as follows:
  • The plaintiff, NL Fisher Supervision & Engineering Ltd.
  • Defendant Darren Boettger and his corporation 1226461 Alberta Ltd.
  • Defendant Tom McNally and his corporation Alpine Ridge Consulting Ltd.
  • Defendant Ed Mandell and his corporation 1127677 Alberta Ltd.
• The defendants were each consultants of NL Fisher.
• NL Fisher is an engineering and supervision firm that creates plans for the drilling of energy, supervises drilling, and provides drilling expertise to clients in Western Canada.
• NL Fisher’s business model is to assign contractors and subcontractors to its clients to design and supervise drilling projects.
• The Consultants are all experienced rig managers and were hired by NL Fisher as consultants through their respective corporations to provide well-site supervision services for NL Fisher from late 2016/early 2017 to September 2, 2022.
• No written consulting agreements were entered into evidence; however, it was understood that upon completing project work, the Consultants would submit their invoices to NL Fisher, and NL Fisher would in turn issue their pay.
• At some point during the Consultants’ tenure with NL Fisher, they initially entered into two sets of agreements dealing with confidentiality and non-competition (the “Confidentiality Agreements”).
• The Confidentiality Agreements contained a clause prohibiting the Consultants from working for NL Fisher’s clients for a period of six (6) months after the termination of their consulting agreements.
• Later, NL Fisher modified the Confidentiality Agreements (the “Modified Agreements”) with the assistance of legal counsel to further prevent contractors from poaching work, which included the following changes:
  • A new provision allowing contractors to terminate the agreement and engage in work with NL Fisher’s clients if they paid a fee to NL Fisher
  • An increase in the restricted period prohibiting the Consultants from working for NL Fisher’s clients from six (6) months to two (2) years after termination, and
  • The inclusion of a “Conversion Clause”, which provided a table of compensation payable by the Consultants to NL Fisher in the event of a breach.  
• The Consultants individually signed and were party to the Modified Agreements in early 2018, however, their respective corporations were not.
• On September 2, 2022, the Consultants’ corporations terminated their agreements and ceased their work with NL Fisher.
• Prior to termination, however, the Consultants had invoiced NL Fisher for services they had performed for NL Fisher’s client, Deltastream Energy Corporation (“Deltastream”).
• After ceasing to work for NL Fisher, the Consultants’ corporations began working with Decca Consulting Ltd. (“Decca”).
• The Consultants’ corporations were contracted to perform work for Deltastream alongside Decca’s other contractors and employees who were already performing services for Deltastream.  
• The services provided by the Consultants’ corporations to Deltastream through Decca were the same as the services they had previously provided through NL Fisher. 
• NL Fisher commenced an initial action against Mr. Boettger and Mr. McNally alleging that they had breached their Modified Agreements after they stopped working for NL Fisher.
• The Consultants’ corporations then commenced separate actions against NL Fisher for their unpaid invoices.
• NL Fisher in turn issued counterclaims against the Consultants’ corporations, again alleging breaches of the Modified Agreements. NL Fisher also third-partied the individual Consultants.
• Although there were five separate actions among the parties, there were ultimately two sets of claims:
  • NL Fisher alleged that after the termination of their consulting agreements, the Consultants provided services to NL Fisher’s clients in breach of the Modified Agreements and sought damages pursuant to the Conversion Clause contained therein, and
  • The Consultants alleged that they provided services through their corporations to NL Fisher prior to the termination of their consulting agreements, but that NL Fisher has refused to pay for these services.
• NL Fisher did not dispute that they owed the Consultants the amounts claimed, however, due to the alleged breaches of the Modified Agreements, they argued the amounts were subject to set-off. 

Analysis / Conclusion

The primary issue to be resolved in this case was whether the non-competition and non-solicitation restrictive covenants contained in the Modified Agreements were in fact enforceable.

A Review of Restrictive Covenants

To assess enforceability, Justice Argento turned to the leading authority on the interpretation of restrictive covenants, Shafron v KRG Insurance Brokers, 2009 SCC 6 (“Shafron”), where restrictive covenants are defined as follows: 

[15]     A restrictive covenant in a contract is what the common law refers to as a restraint of trade.  Restrictive covenants are frequently found in agreements for the purchase and sale of a business and in employment contracts.  A restrictive covenant precludes the vendor in the sale of a business from competing with the purchaser and, in an employment contract, the restrictive covenant precludes the employee, upon leaving employment, from competing with the former employer. 

As a general common law rule, Shafron established that all restraints on trade are contrary to public policy and thus unenforceable unless the restraint on trade is reasonable. Further, for a determination of reasonableness to be made, the terms of the restrictive covenant must be unambiguous.

The onus of proving reasonableness rests with the party seeking to enforce the restrictive covenant, meaning they must be able to show that the restrictive covenant in question was unambiguous, in the sense that what is prohibited is clear as to activity, time, or geography. If this can be established, then the restrictive covenant will be enforceable. Conversely, if the restrictive covenant is ambiguous, and the ambiguity cannot otherwise be resolved, then it will be deemed unreasonable and unenforceable.

Importantly, Shafron further distinguished how rigorously restrictive covenants are scrutinized depending on whether they are contained in an employment contract or contract for the sale of a business. Unlike the latter, employment contracts generally do not include payment for goodwill. Moreover, it is generally understood that there is an imbalance in bargaining power between an employee and employer, thus restrictive covenants are subject to greater scrutiny in an employment context.  

The Modified Agreements

NL Fisher argued that the Modified Agreements were not a restraint on trade because a) it was not an employment situation, and b) the Consultants were able to continue working for anyone after their consulting agreements ceased, except for NL Fisher clients. They also argued that if the Consultants paid NL Fisher a conversion fee, they were free to work for NL Fisher’s clients.

Justice Argento rejected this argument, however, turning to the restrictive covenants in question. The wording of the relevant provisions in the Modified Agreements clearly demonstrated an intention to prohibit the consultants from engaging in various activities, including expressly prohibitive language with respect to hiring, engaging, contacting, canvassing or enticing NL Fisher’s clients for two (2) years after termination.

Further, the Modified Agreements also contained an injunctive relief provision in the event of a breach. Justice Argento reasoned that there would be no need for an injunctive provision if the prohibited activities were allowed simply upon paying a fee to NL Fisher. Instead, NL Fisher expressly preserved the right to seek action within the courts in the event of a breach, thus the restrictive covenants were in fact a restraint on trade subject to NL Fisher proving reasonableness.

Importantly, in determining the level of scrutiny the restrictive covenants would be subject to, a review of recent case law determined that key markers of an employment relationship can include the use of standard form contracts drafted by one of the parties and presented to the other party without negotiations. Further case law also showed that the more rigorous scrutiny of restrictive covenants applied in cases of independent contractor agreements as well.

Considering the above, Justice Argento pointed out that the nature of the parties’ arrangement was clearly not a commercial sale of a business, nor was there payment for goodwill by the Consultants. Further, the relationship between the parties exhibited the power imbalance typical of an employment relationship as follows:

• NL Fisher used legal counsel to help draft detailed Modified Agreements containing various restraining covenants.
• NL Fisher had these agreements signed by hundreds of consultants.  The Consultants had never signed such agreements prior to their association with NL Fisher.
• The Modified Agreements were standard form contracts presented to the Consultants for signing and the Consultants had no ability to negotiate any of the terms.  The Consultants had to sign the Modified Agreements to get any further work from NL Fisher even though they had already signed the prior Confidentiality Agreements.  
• The Modified agreements contained language suggestive of an employee and employer relationship, i.e. “The Consultant understands that if, either during employment or thereafter…” (emphasis added).

For the above reasons, Justice Argento determined that an employment relationship existed and therefore the restrictive covenants were subject to a more rigorous standard of scrutiny.

Assessing Reasonableness

In determining whether the provisions NL Fisher relied upon (Sections 5.03 and 5.04 of the Modified Agreements) were unambiguous, and therefore reasonable, a review of the case law provided that:

• Ambiguous restrictive covenants are prima facie unreasonable
• If the prohibition is not clear as to “activity, time, and geography”, it is ambiguous.
• The reasonableness of restrictive covenants can only be determined if the ambiguity can be resolved.
• And unreasonable restrictive covenant will not be enforceable.

Section 5.03 of the Modified Agreements stated:

The Consultant covenants and agrees that, for a period commencing on the date of the termination of the Consultant’s contract, for any reason whatsoever, and ending [two] years after the date of the termination of the Consultant’s contract, the Consultant shall not, directly or indirectly, for personal benefit of any kind, in any capacity, work for an entity, corporation or individual that has been a client of NL Fisher’s at any time during the [one]-year period prior to the date of the termination of the Consultant’s contract with NL Fisher.  (Emphasis added)

The Consultants argued that since they were not provided with a list of all of NL Fisher’s clients, section 5.03 was overly broad and unreasonable.

A review of the case law revealed that restrictive covenants are unreasonable if it is impossible to predict when they will be breached. Since the language contained in Section 5.03 was not limited to NL Fisher clients that the Consultants worked for or knew, the Consultants could not have known the extent of the proposed restrictions as they did not know the identity of all NL Fisher’s clients.

Further, when asked why they changed the restricted period from six (6) months to two (2) years in the Modified Agreements, NL Fisher was unable to provide a reason. Because of this, NL Fisher failed to demonstrate the broad restrictions imposed by this section were reasonable as to activity or time and it was deemed unenforceable.

Section 5.04 was also relied upon by NL Fisher in the Modified Agreements which contained the “Conversion Clause” and conversion fee table. It stated that “if the Consultant breaches the term, compensation shall be paid to NL Fisher as follows…” (emphasis added). It ultimately sought to make the Consultants liable for NL Fisher without actual proof of damages.

Justice Argento also rejected the reasonableness of this clause for the following reasons:

• The wording was vague. By relying on the word “term” rather than “terms”, one cannot say with specificity exactly which term within the Modified Agreements it was referring to. This was important considering the various activities that were listed (i.e. hiring, soliciting, etc.)
• Terms contained in the headings of the fee table, such as “Conversion Fee” and “Total Actual Invoiced Amount” were not defined in terms within the Modified Agreements. As a result, it was unclear, for example, if the “Total Actual Invoiced Amount” referred to amounts invoiced to NL Fisher before termination, to an NL Fisher client, or to some other entity. It was also unclear as to who was invoicing those amounts, the individual, or the corporation.

In light of the above, Justice Argento held that the restrictive covenants contained in the Modified Agreements were ambiguous and therefore an unreasonable restraint on trade. All claims against the Consultants were dismissed and NL Fisher was ordered to pay the Consultants their owed invoiced amounts.

My Take

This case signals that employers cannot necessarily sidestep the rigorous scrutiny under which restrictive covenants are subject to in employment contexts by contracting services through corporate entities. Much like the test for independent contractors versus employees set out in Sagaz Industries Canada Inc. et al. v. 671122 Ontario Limited, 2011 SCC 59, the relationship between the parties will ultimately decide how the courts will assess non-competition and non-solicitation restrictive covenants; engaging in work through a corporation rather than as an employee will not necessarily be determinative, especially in the absence of goodwill.

Further, this case serves as a lesson on the importance of drafting and language. Failure to define key terms or even the exclusion of a single letter can result in a finding of ambiguity in a restrictive covenant. 

Ultimately, NL Fisher Supervision & Engineering Ltd. v Bottger, 2024 ABCJ 225 serves as a reminder of the law of restrictive covenants, but moreover, indicates the courts’ continued commitment to recognizing power imbalances in all forms of working arrangements and is another step forward in furthering workers’ rights.

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Bow River Law is a team of knowledgeable, skilled and experienced employment lawyers handling employment law, human rights (discrimination) and labour law matters.  Bow River Law is based in Calgary but we are Alberta’s Workforce Lawyers.