Tag Archives: litigation

The Latest on Non-Competition Covenants

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On December 2, 2021, the Working for Workers Act, 2021, came into force. The Act prohibits non-competition clauses in employment or other agreements except in the context of a sale of the business, or if the employee operates at an executive level. The effective date of the Act is October 25, 2021. The Court has held that it does not apply to agreements entered into prior to that date.

Non-competition clauses have always been fertile ground for litigation simply because many employers consider them vital to their business. But, they are also very difficult to enforce. At the end of the day, at common law, the enforceability of such clauses depends on whether or not a court considers them reasonable. For that reason, it is important for both employers and employees to give careful thought to how a Court will make that determination when negotiating the terms of a non-competition clause.

In the recent case of M & P Drug Mart Inc. v. Norton and Whitehead Pharmacy Ltd., the Ontario Court of Appeal took the opportunity to review this process.

Norton, a pharmacist, had been the pharmacy manager of a pharmacy owned by M & P in Huntsville, Ontario. His employment agreement contained a non-competition covenant. The clause in issue provided that for one year after the termination of Norton’s employment for any reason, he would not “carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to, or competitive with the business within the 15 km radius of the business located at 10 Main Street East, Huntsville, Ontario”.

The agreement also provided an acknowledgement on Norton’s part that the clause was necessary to protect M & P’s legitimate business interests and was reasonable in the circumstances.

Norton resigned and became an employee at a pharmacy less than 3 km away.

M & P sued Norton and the matter was determined by Application. The Application judge found the covenant to be unreasonable and therefore unenforceable. The Application was dismissed. The decision was appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal began its analysis by observing that, as a general rule and on public policy grounds, a non-competition clause is unenforceable unless it is reasonable considering the interests of the parties and the public based on the circumstances at the time that the covenant is made. In order to determine whether the clause is reasonable, the Court will consider the extent of the activity to be prohibited, the geographic coverage of the restriction, and its duration. The covenant must be clear as to activity, time and geography. If it is ambiguous on any of these factors, it is likely to be considered unenforceable simply because the ambiguity will make it impossible to show that it is reasonable.

If the covenant is clear and unambiguous, it will then be assessed for reasonableness. The Court will not rewrite the covenant in accordance with what it thinks is reasonable. If it is unreasonable, the Court will simply decline to enforce it.

In this case, M & P argued that the clause merely restricted Norton from working as a pharmacist for a pharmacy or a store that includes a pharmacy. However, the words contained in the clause went well beyond this restriction. In the view of the Court, the covenant would have prohibited Norton from working in a job at a supermarket, for example, that included a pharmacy department, even if his job was in a completely different department and he was not employed as a pharmacist. Furthermore, Norton would have been prevented by the clause from being a passive investor in any such business.

As it happens, Norton did become re-employed as a pharmacist. Nevertheless, as the clause included activities beyond working as a pharmacist, it was considered overly broad and, therefore, unenforceable.

The jurisprudence is filled with cases in which a non-competition clause was found to be unenforceable. This is because historically, employers have insisted on protections well beyond what is truly necessary, thinking that inclusion of an acknowledgment by the employee that the employer’s concerns are reasonable will preserve the clause.

While the number of such cases will start to decrease given the new legislation, the vast majority of contracts existing today that include such clauses will not be subject to the legislation. They will continue to be litigated, and Courts will continue to be vigilant in protecting the ability of employees to make a living elsewhere unless the clause restricting the new employment is eminently reasonable.

Even with the new legislation, the common law will apply to “executive” employees. In addition, this issue will arise in the context of the sale of businesses. In the latter cases, while the attitude of the Court has always been more generous to parties seeking to enforce non-competition covenants, the issue of reasonability will continue to be one to which attention must be paid.

Injuries During Sporting Events: When Does a Participant Give Up His Right To Sue?

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Last month my recreational hockey career was (temporarily) interrupted by a season-ending injury suffered during a game. While it would never occur to me to blame anyone for the injury, it is interesting to consider when a participant in a sporting event might actually have the right to sue someone who causes him or her an injury.

The issue was addressed by the Ontario Court of Appeal in the recent case of Kempf v. Nguyen.

This was a case arising out of an incident that took place in 2008 during a charity bicycle ride to benefit the Heart & Stroke Foundation.  In that ride, which was is an annual event, over 12,000 cyclists took to the Don Valley Parkway in Toronto.  The ride was open to cyclists of all abilities.  Participants could choose a 25, 50 or 75 kilometre route.  The road was closed to cars for the event.

Like most charity rides, this was not a competitive event.  There were no prizes.  Having said that, many cyclists at these events tend to ride as fast as they can.  The entire roadway was open to the cyclists but experienced cyclists at these events often ride in packs to take advantage of the ability to draft.  Inside the packs, riders roughly organize into lines with one cyclist following immediately behind another.  The front wheel of a cyclist is often within a foot or less of the back wheel of the cyclist ahead.

The parties in this action, Mr. Kempf and Mr. Nguyen, were both experienced cyclists and members of cycling clubs, riding several times a week.  Both were familiar with the generally understood rules pertaining to cycling safely in a group.

To participate in the ride, Kempf and Nguyen signed a waiver that made it clear that each cyclist was releasing the Heart & Stroke Foundation of Canada and its sponsors from any liability arising out of the cyclist’s participation in the event.

Shortly after the ride started, Nguyen was at the back of the first group of cyclists intending to ride 75 kilometres.  A second group was slightly behind. Kempf was at the front of the second group.

Wanting to join the first group, Kempf approached Nguyen’s left side.  At a point at which Kempf’s front wheel overlapped Nguyen’s back wheel, Nguyen swerved to the left, clipping Kempf’s front wheel with his back wheel.  Kempf fell to the ground.  A number of other cyclists rode over him.  Some of them fell as well. Kempf was seriously injured.

It appears that Kempf tried but was unable to avoid the contact with Nguyen.  Both cyclists were travelling between 20 and 25 kilometres per hour and the contact happened in a split second.

Nguyen did not stop after the impact of the two bicycles.  Kempf was later able to identify Nguyen as the rider who collided with him by looking through pictures of the ride posted online.

Kempf sued Nguyen for damages for negligence.  Nguyen’s evidence at trial was that immediately before the impact, the rider two places ahead of him suddenly slowed down.  This caused the rider directly ahead of him to take the evasive measure of decelerating and swerving to the right.  Nguyen was not forewarned of this and had no time to consider his options.  To avoid impact with the riders ahead, he swerved to his left.  He had no time to shout out a warning.  He was not aware that there was someone moving up behind him on his left.  In cross-examination, he admitted that his sudden movement to the left was not one that he would ordinarily make in a group ride.

Immediately after swerving to the left, he heard a crash behind him.  He did not look back as he was concentrating on the rider in front of him.  He carried on with the ride apparently unaware of his involvement in what had just happened.

The trial went on for five days. The trial judge found that Nguyen’s actions had caused Kempf’s injuries.

Nguyen appealed to the Court of Appeal on a number of grounds, including the fact that at the outset of the trial, the trial judge had dismissed the jury and proceeded with the trial on a “judge alone” basis for certain technical reasons.

At the appeal, in a two-to-one decision, the majority set aside the judgment on the basis that the jury notice should not have been struck, and ordered a new trial.  However, the interesting point in my view has to do with the court’s views as to Kempf’s right to recover on any basis.

Kempf had signed a waiver at the outset.  However, the waiver was very clearly intended to benefit the ride organizer.  No document was signed in which Kempf waived his rights against other cyclists acting negligently.

However, Nguyen argued at trial that Kempf should not have been able to recover anything on the basis of a doctrine of law identified by the Latin phrase volenti non fit injuria – literally, “to one who is willing, no harm is done”.  Kempf had agreed to participate in this event knowing full well that people sometimes fall off bicycles and hurt themselves.  As a result, when that happened to Kempf, he had no one to blame but himself.

This type of argument is not new. People have tried to sue each other over injuries suffered, for example, during fights on the ice at hockey games. There is always an argument about whether or not a participant voluntarily assumes the risk of an injury arising out of that type of violent event, given that hockey typically involves physical contact.

The Court of Appeal made it clear that in sports such as hockey or basketball, for example, players have to assume some risk of injury from bodily contact even if it is intentional or in breach of the rules. This type of thing is part of the ordinary risk of the game. Nevertheless, such conduct in these contact sports will be unacceptable where it is malicious, out of the ordinary or beyond the bounds of fair play.

Having said that, sports participants are not exempted from the application of ordinary negligence law. If a defendant conducts himself in a negligent manner, he will have to answer for the damages that he causes. When Kempf decided to participate in the ride, he assumed the usual risks associated with it including the actions of reasonable cyclists who could be expected to follow the known rules governing group rides. However, in the view of the court, by its nature “cycling is not a contact sport or one that involves physical encounters with opponents such as football or rugby”. Since Nguyen’s actions went beyond what Kempf agreed to reasonably expect given the nature of the activity, he was liable for damages.

In my view, it would seem that the extent to which a participant accepts the risk of injury will actually depend on two things. The first is the nature of the activity.  Clearly, the more violent the activity, the less likely an injured party will be able to sue.  Secondly, it seems fair to say that any negligence on the part of a participant causing injury to another will be actionable. However, the question of whether or not a participant’s conduct was negligent will be related to the nature of the sport. In other words, the more inherently violent the sport, the less likely that violent conduct on the part of a participant causing injury will be considered to be negligent.

When Will the Court Refuse to Enforce an Arbitration Clause?

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The recent Ontario Court decision in Hargraft Schofield LP v. Fluke provides some interesting reminders as to problems that can arise when one attempts to enforce an arbitration clause in a contract.

In this case, the plaintiff sued its former employer for an alleged breach of a variety of clauses in the employment agreement that had existed between them.

The parties had entered into an employment agreement in June 2000 with a three-year fixed term. The agreement included an arbitration clause that required that all disputes relating to the agreement would have to be referred to arbitration.

After the first employment agreement expired, the parties entered into a second employment agreement for another fixed term. That document did not include an arbitration clause. It did include a clause providing that it represented the entire agreement between them.

Over the ensuing years, the parties entered into further employment agreements as the terms of each one expired. Eleven years after the first agreement had been entered into, the defendant resigned.

Several months after the defendant’s resignation, the plaintiff sued in Ontario Court. Over the course of the next two years and ten months, the dispute proceeded through the litigation process. The parties exchanged pleadings, negotiated a discovery plan, agreed to a timetable for the balance of the steps in the action, exchanged sworn affidavits of documents, scheduled examinations for discovery, and conducted a mediation (which failed). The defendant then raised the argument that the matter should be proceeding by way of arbitration. The plaintiff refused to change its course of action and the defendant brought a motion for an order staying the action and referring the issues to arbitration.

The first question that the court dealt with had to do with whether or not there even existed an arbitration clause in the agreement between the parties. The initial employment agreement had contained such a clause but the court found that it had been superseded by the second employment agreement which did not include such a clause. Even though one of the subsequent employment agreements specifically indicated that the defendant’s employment would continue on the same terms and conditions as had been contained in all of the previous agreements, so that they were deemed to be incorporated in the most recent agreement, the court determined that as the first agreement had been superseded by the second, and the second included an “entire agreement” clause, there did not exist a valid arbitration clause upon which the defendant could rely.

One of the interesting points in this respect had to do with whether or not the court even had the jurisdiction to make this decision. The Ontario Arbitration Act provides that:

    “An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.”

It was suggested that based on that provision, where there is an issue as to whether or not there even exists a valid arbitration clause, an arbitrator would have to be appointed to make that determination. Fortunately, in this case, the court took a more common sense approach and considered that this provision in the Act was not mandatory and that the court had the jurisdiction to determine whether or not an arbitration clause was in existence.

Secondly, the court went on to consider whether or not, if there did exist an arbitration clause, there was a valid basis for refusing to refer the matter to arbitration. The court pointed out that while the Arbitration Act requires the court to stay a proceeding that has been commenced in the face of a valid arbitration clause, there are exceptions. One of the exceptions arises where a motion for a stay of the proceeding is brought with undue delay.

The court pointed to the fact that almost three years had elapsed since the law suit had started. During that time, there had been a substantial amount of progress made along the litigation path. The court seemed to suggest that the defendant had either forgotten about the arbitration clause, or deliberately refrained from insisting on arbitration until after the mediation had failed. While not stated in the court’s decision, the idea that the defendant was now raising this argument merely to delay may also have been a concern.

In any event, the court dismissed the motion and the matter was ordered to proceed to trial in the usual course.

Among other things, this is an important reminder to parties to a contract with an arbitration clause that if they do not address the arbitration clause promptly but rather proceed by way of a legal action, they may lose the ability to insist on arbitration at a later date.

The Further Development of Ontario’s Summary Judgment Rule

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Several weeks ago, I posted an article about the decision of the Supreme Court of Canada in Hryniak v. Mauldin, et al., and indicated that in my view this case represented a momentous shift in Ontario’s law on summary judgment.

Further cases released since that time have confirmed my view. I believe that we are approaching a point at which summary judgment motions will become the norm and trials the exception.

The most recent pronouncement in this regard, released several days ago, is the decision of Mr. Justice Corbett in Sweda Farms v. Egg Farmers of Ontario. In that case, a factually complex claim in which the plaintiff alleged that it had been the victim of a conspiracy, that it had suffered losses as a result of the misuse of confidential information, that it had been the victim of violations of the Federal Competition Act, and that it was entitled to damages for both breach of contract and unjust enrichment would never, under the old regime, have been considered a candidate for a summary judgment ruling in favour of either party and on any basis.

However, that is no longer the case.

Leaving the facts aside, the important part of the decision for our purposes has to do with the manner in which Justice Corbett analysed the results of the Hryniak case. In his view, that case:

“… provides a basis for a sort of reverse engineering of this motion, one that may be of great use in summary judgment motions in general. The Supreme Court of Canada is clear that the motions court should ask itself why it should not grant summary judgment”
[emphasis added]

The Court goes on to say that where the motion fails, the Court’s answer to that question “will become an agenda for the case up to its final disposition, in most cases, by the judge who presided on the motion for summary judgment.”

In the past, motion court judges have looked at voluminous motion records, raised their eyebrows and wondered how it could ever be possible to conclude, on the basis of such a significant amount of evidence, that the outcome of a case was beyond doubt. It is clear that this is no longer a relevant consideration. As the Court in this case said, “summary judgment motions come in all shapes and sizes, and this is recognized in the Supreme Court of Canada’s emphasis on ‘proportionality’ as a controlling principle for summary judgment motions. This principle does not mean that large complicated cases must go to trial while small single issue cases should not.” At the end of the day, a judgment will be rendered if it can be done fairly and justly without a trial, and a formal trial is no longer to be “the yardstick by which the requirements of fairness and justice are measured.”

To reiterate a sentiment that I expressed previously, the consequences of this new regime for litigants cannot be understated. While summary judgment motions were once the exception, it appears to me that they will now become commonplace. At the same time, of course, this will mean that the evidence that will be required either to prove a claim, or to prove that a claim has no merit, will now have to be generated at a very early stage in the proceeding rather than later in the process and usually after the completion of examinations for discovery and the exchange of undertakings.

Accordingly, and at its most basic, it now appears that the expense to which litigants can expect to be put near the outset of a matter is going to increase very substantially. At one time, intensive trial preparation commenced within the weeks preceding a scheduled trial. At that point, the meters began running almost continuously and the costs to a litigant of getting ready for trial began to mount. However, up to that point, the extent to which litigants were put to expense depended not only on the complexity of a matter but also on the willingness of counsel to expend the time necessary to prepare every minute aspect of a case any sooner than he or she had to do so.

This may no longer be the case. Even though summary judgment motions generally take place early on in a proceeding, and often before examinations for discovery, it is clear that the motions court will require a full evidentiary record in order to deal with a matter. In the Sweda Farms case, the Court found that the plaintiff had failed to provide it with sufficient hard evidence to justify its position. It asserted that it would be calling nearly 100 witnesses at trial but as at the date of the motion, it was found not to be able to put forward sufficient evidence to justify its position.

Accordingly, Sweda‘s claim was dismissed summarily. This is not withstanding the fact that as Courts have noted in the past, conspiracy claims by their very nature involve investigation and the generating of evidence usually not known to a plaintiff until after the completion of the discovery process.

Looking at the situation from a different perspective, I have for many years lamented the fact that pressure on litigants and their counsel to settle cases, relentless as it has been, has made it exceedingly difficult for parties and their lawyers wishing to go to trial to actually do so. This may have significant advantages for a number of litigants, who should be taking a serious look at settlement early on. However, a reduction in the number of matters going to trial does have some negative repercussions.

Firstly, while much of the law governing citizens of Ontario are contained in statutes, as much or more is reflected in jurisprudence. The fewer the number of matters that go to trial, the less guidance that becomes available to us all as to what our rights and obligations are, as society evolves.

Secondly, I am becoming increasingly aware of young and perhaps not so young lawyers in this province who wish to become proficient advocates, having fewer and fewer opportunities to actually go to trial and learn how to advocate. Fewer trials means fewer opportunities for professional growth. As a result, when matters ultimately do go to trial, to the extent that this ever happens, litigants are not as well represented as they might otherwise have been.

In my view, these trends will now be accelerated as a result of the change in the law of summary judgment. One can only hope that the positives will outweigh the negatives over the long haul.

The Latest on the Duty of Good Faith Between Contracting Parties

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The recent case of Ashbury Cleaners v. Crisolago Holdings may make the murky world of the law concerning the duty of good faith between contracting parties even murkier.

In this case, the Judge described the action as a claim “for damages for breach of contract and bad faith.”  The Judge went on to say that “in order to be successful, the plaintiff must prove on the balance of probabilities that the defendant was acting in bad faith in deceiving the plaintiff of its stated intention.”

The law is very clear: there is no independent duty of good faith upon which one can sue for breach.  Parties are obliged to act in good faith towards each other in the implementation of a contract but one cannot sue for damages for bad faith.  There is a distinction, and this case is very close to the line.

The plaintiff worked part-time at a dry cleaning business owned and operated by the defendant.  The plaintiff offered to buy the dry cleaning business from the defendant and the parties agreed to a purchase price of $250,000.  Since the defendant owned the premises in which the business was located, they also agreed on a lease for the use of the premises for five years at $4,000 per month in rent.  The lease included a right of first refusal for the plaintiff to lease the premises again after the end of the five-year term, exercisable if the defendant decides at that time to continue to lease the premises out.  It was expressed this way because the defendant wanted the freedom to take the premises back after the five-year term to operate it himself.

At the end of the five-year term, the parties discussed a renewal.  While the evidence of the parties differed with respect to their discussions, it appears that at the very least the defendant indicated that if the plaintiff wanted to lease the premises for a further term, the rent would be $4,500 per month. The plaintiff indicated that she could not afford to pay that much and asked the defendant whether or not he would be interested in buying the business back. The defendant expressed such an interest and offered the plaintiff $35,000 on a take it or leave it basis. She took it.

Several days later, another individual passed by the store and bumped into the defendant.  This person knew the defendant because her employer had been a tenant at the premises several years before.  The defendant asked this individual if she wanted to buy the dry cleaning business.  She expressed interest and ultimately they agreed on a sale of the business for $225,000.  A lease with the purchaser was entered into for a five-year term at $4,500 per month to start, increasing to almost $5,500 in the final year of the lease.

The plaintiff then sued, insisting that the defendant had deceived her into giving up her right of first refusal.  The plaintiff advanced the theory that the defendant had the new buyer (and new tenant) in mind all along and persuaded the plaintiff to walk away from the business and the lease for very little compensation so that the business could be flipped at a significant profit.

The trial Judge found in favour of the defendant.  The Judge was satisfied that there was no evidence that the defendant had intended anything other than to take the premises back and operate the business himself until, by coincidence, he bumped into a person who turned out to be a new purchaser and new tenant.  There was no evidence of premeditation.

The problem I have is the trial Judge’s suggestion that the defendant would have been liable for damages if the plaintiff had been able to prove that the defendant had “breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived [the plaintiff] into signing away her rights under the lease.”  In my view, even if the defendant had deprived the plaintiff of her right of first refusal by misleading her about his intentions, the fact is that the new lease entered into with the new purchaser provided for rental amounts which the plaintiff had clearly indicated that she simply could not afford.  In other words, even had the plaintiff been told that the defendant had an opportunity to lease the space to someone else at $4,500 per month to start, increasing annually thereafter, the plaintiff would never have been able to match that offer.  For that reason alone, in my view, there is some considerable doubt whether or not the plaintiff was deprived of her rights.  In those circumstances, there is no question that the plaintiff would have been mistreated.  However, shabby treatment does not amount to a cause of action in and of itself.

The Cruel World of Insurance Policies

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In the recent case of Certain Underwriters at Lloyd’s of London v All Spec Home Inspections and Mario Lucciola, the Court considered the availability of insurance coverage to a home inspector who missed a critical electrical problem on a home inspection resulting in a contractor’s death. At the very end of the decision, the Judge made reference to the “cruel world of claims-made-and-reported policies of insurance.” While colourful language of this nature is not unusual for the particular Judge in this case, it is not language that one sees very often.  Nevertheless, the facts of this case show how appropriate they are.

Mr. Lucciola, a self-employed home inspector, conducted an inspection of a property in St. Catharines in July 2010.  At the time, Mr. Lucciola had professional liability insurance on the basis of a one-year term renewed annually through to 2011.

Mr. Lucciola produced a report and photographs, making no reference whatsoever to any electrical problems.

On August 16, 2010, a contractor was doing work in the attic of the property.  He came into contact with an exposed energized bare copper wire.  He was electrocuted and he died.

Three days later, on August 19, 2010, Mr. Lucciola signed an application for professional liability insurance as he had done every year since 2006.  His insurance application required him to indicate whether or not any claim had been made against him in the last five years, and whether or not he was aware of any situation or circumstance which may result in a claim in the future.  Mr. Lucciola answered “no” to both questions.

The policy was then issued for a further period of one year.

Several days later, Mr. Lucciola was interviewed by an investigator for the Ministry of Labour, at which time he was asked whether or not he had noticed the wire in the attic. He indicated first that he had not noticed it and subsequently that he had but that he had tested it with an electrical tester and received no response from it.  For that reason, he had not made any note of it in his report.

About a year later, the Ministry of Labour conducted an inquest.  Subsequently, Mr. Lucciola signed yet another application for insurance.  It contained the same questions and he answered them in the same way.  Accordingly, a policy was issued for a further one year.

All of these policies contained language to the effect that if the insurer subsequently became aware that if any of these questions had been answered incorrectly, there would be no coverage for any claim or action emanating from a fact or circumstance that the applicant failed to mention in his application.

A lawsuit was subsequently brought against Mr. Lucciola.  He notified his insurer of the claim.  The insurer brought this application for an order that it had no obligation to provide insurance coverage.

The Court had little difficulty concluding that Mr. Lucciola should have known of the potential claim against him when he made his application for the insurance policy that was in effect at the time that he was sued, and should have answered “yes” to that question on his application.  As a result, the Court ruled that the insurer was entitled to deny coverage.

The interesting point in this case has to do with the type of insurance policy that was in place.  Mr. Lucciola’s policy was a “claims-made-and-reported” insurance policy, rather than an occurrence policy.  These are very different.  In a claims-made-and-reported policy, it is the transmittal to the insurer of notice of the claim that invokes coverage.  In an occurrence policy, coverage goes into effect when the incident upon which the claim is based actually takes place.

In this case, the incident (the contractor’s death) took place in August 2010.  The policy in place at that time had been applied for by Mr. Lucciola in 2009.  In 2009, when he answered “no” to the questions as to whether or not he was aware of a possible claim, he was being entirely accurate.  Had his policy been an occurrence policy, the insurer would have had to provide coverage.

In this case, however, the policy in place when coverage was invoked was the policy in effect at the time that Mr. Lucciola notified his insurer of the claim.  In applying for that policy, Mr. Lucciola had answered “no” to questions that should have been answered “yes”.  For that reason alone, Mr. Lucciola was disentitled to coverage.

This is obviously a critical distinction.  If you have professional liability insurance coverage, and you are not aware of the type of policy that protects you, this case is a good lesson on the importance of finding that out and keeping it in mind.