Non-competition clauses have recently come under fire, as some Canadian courts and legislatures have rebuffed their application to independent contractors and employees. Courts are generally cautious about enforcing these types of clauses because they are seen as a restraint on trade. Further, given the power imbalance inherent in employment and contractor relationships, non-competition clauses are subject to heightened scrutiny.
Despite their contentious reputation, non-competes are still legal in British Columbia. One recent decision of the Supreme Court of British Columbia acts as a reminder that, with careful design and drafting, non-competition clauses can be enforceable.
The Case
In Quick Pass Master Tutorial School Ltd. v Zhao, 2022 BCSC 1846 (“Quick Pass”), the Court upheld a non-competition agreement against an independent contractor. In this case, a real estate school engaged Mr. Zhao to provide tutoring services for its students. The school operated classrooms in Vancouver, Burnaby and Richmond.
Mr. Zhao signed both an independent contractor agreement and a non-competition agreement. The non-competition agreement prohibited Mr. Zhao from competing with the school in Vancouver, Burnaby or Richmond for 18 months from the date his contract was terminated. As consideration for the non-compete, the school paid Mr. Zhao an additional $15 per hour.
One year later, Mr. Zhao notified the school that he was terminating his independent contractor agreement. He also advised that he intended to set up a competing tutorial business in Richmond and Burnaby. The school reminded Mr. Zhao of his obligation to avoid competing with the company. Mr. Zhao responded that he considered the non-compete to be unenforceable. He then then started his competing business. The school sought an injunction to bar Mr. Zhao from competing. It also sought damages arising from Mr. Zhao’s breach.
At trial, the Court rejected Mr. Zhao’s argument that the non-compete was invalid for being ambiguous and overly broad. Instead, the Court found the non-competition agreement reasonable in terms of restricting Mr. Zhao’s ability to compete with the school in the business of pre-licensing real estate training and education in the cities of Vancouver, Burnaby and Richmond for 18 months. The Court determined that the additional $15 per hour paid to Mr. Zhao as consideration for his agreement to accept the restraints imposed by the non-compete enhanced the reasonableness of the restriction.
Ultimately, the Court found that the non-compete was enforceable against Mr. Zhao, and that his breach was deliberate and calculated. The Court ordered the former real estate school tutor to pay $50,000 in damages for breaching the non-competition agreement when he set up his own competing school.
The Takeaway
This decision serves as a reminder to employers that enforcing a non-compete against an independent contractor or employee is possible with careful design and drafting. As the case law in this area evolves, employers are encouraged to consult with legal counsel for any questions concerning the enforceability of non-competition clauses.
