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Contracts - Restraint of Trade (2). ITCAD Tech Inc. v. Patel et. al.
In ITCAD Tech Inc. v. Patel et. al. (Ont Div Ct, 2026) the Ontario Divisional Court dismissed an appeal, here involving a cross-claimed case where the motion court granted to plaintiffs [Patel] "summary judgment ... on their claim for the two months pay that had been withheld and awarded them punitive damages" and also found that the plaintiffs "had breached the non-competition clause in the contract between the parties and awarded" damages to the the defendants [ITCAD] (plaintiffs by counterclaim).
Here the court considers 'restraint of trade' issues:The Restrictive Covenant
The Restrictive Provision
[40] The 2021 Agreement between the parties included the following provision:
Non-Competition/Non-Solicitation: The Independent Contractor agrees that:(i) During the term of this Agreement and for a period of 12 months after the expiration of this Agreement and any Extension, ITCAD is the sole representative through which the Independent Contractor provides services to the Client, and the Independent Contractor agrees that ITCAD has the sole and exclusive right to submit and represent the Independent Contractor for the Request for Services from the Client.
(ii) During the term of this Agreement and for the period of 12 months after the expiration of the Agreement and any Extension, he will not accept work directly or indirectly from the Client without ITCAD’s prior written consent. [41] The 2022 Agreement contained essentially the same provision.
Was the Non-compete clause invalid at common law?
[42] In Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, the Supreme Court of Canada outlined the following principles that must be kept in mind when considering the validity of restrictive covenants at common law:1. Restrictive covenants are covenants in restraint of trade, which “are contrary to public policy because they interfere with individual liberty of action and because the exercise of trade should be encouraged and should be free.” They are therefore presumptively unenforceable: para. 16.
2. “However, the recognition of the freedom of the public to contract requires that there be exceptions to the general rule against restraints of trade. The exception is where the restraint of trade is found to be reasonable.” Assessing reasonableness is done with reference to the interests of the parties concerned and with reference to the interests of the public: para. 17.
3. Restrictive covenants in an employment contract are subject to a higher level of scrutiny than restrictive covenants in a contract for a sale of a business. This is because there is “more freedom of contract between buyer and seller than between a master and servant or between an employer and a person seeking employment”: para. 19. There is generally an imbalance in power between employer and employee: para. 22.
4. “The onus is on the person seeking to enforce the restrictive covenant to show the reasonableness of its terms”: para. 27. [43] The Consultants submit that the motion judge erred, when he found that the non-compete clause was enforceable at common law. As noted by the Consultants, the test for the enforceability of a restrictive covenant in the employment context requires a court to answer the following questions:(a) Does the party seeking to enforce the covenant have a proprietary or legitimate interest entitled to protection?
(b) Are the temporary and spatial features of the covenant reasonable or too broad?
(c) Does the covenant prevent competition generally, and if so, is this restriction reasonably required for the protection of the covenantee in the circumstances?
Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 925. ....
[50] Finally, far from furthering the right to freedom of contract, which is the countervailing interest in favour of allowing for the enforcement of restrictive covenants, the enforcement of the restrictive covenant in this case was, indirectly, a stamp of approval of ITCAD’s conduct, which involved directing the Consultants to enter into a contract with an entity that they did not want to contract with. This frustrated, rather than furthered, their freedom to contract.
[51] For these reasons, I find that the motion judge ignored the fundamental principles that must guide the enforceability of restrictive covenants at common law when he allowed the restrictive covenant to be enforced in the circumstances of this case. This is an extricable legal error. His decision in this regard must be set aside. Given this finding, ITCAD’s counterclaim for damages cannot succeed. I appreciate that in coming to this conclusion I am disagreeing with the decision of the Small Claims Court judge in 673978 Canada Ltd. v. ITCAD Tech Inc., concerning the enforceability of the restrictive covenant. However, I am not bound by that decision and decline to follow it. . 7868073 Canada Ltd. v. 1841978 Ontario Inc.
In 7868073 Canada Ltd. v. 1841978 Ontario Inc. (Ont CA, 2024) the Ontario Court of Appeal considered the validity of an licensing agreement, here on grounds of restraint of trade:(i) Did the trial judge err in failing to find the License Agreement was an unlawful restraint of trade?
[37] First, the appellants argue that the trial judge erred in failing to consider whether the License Agreement was void ab initio as a restraint of trade.
[38] On its face, the License Agreement limits Mr. Langlois’ ability to work using his knowledge and experience in the powder-coating industry for the benefit of anyone other than the ACS plaintiffs, even after he stopped working for ACS. Relying on Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, at paras. 16-17, the appellants say that such a provision is void as being contrary to public policy unless it can be shown to be reasonable having regard to three factors: its geographic scope, its period, and the extent of the activity it prohibits. Here, they contend that the worldwide scope and restriction on the use of Mr. Langlois’ knowledge in perpetuity make the restrictions in the License Agreement obviously unreasonable. In failing to even consider those factors, the appellants submit that the trial judge failed to apply the proper test to determine if the License Agreement was void ab initio as an unlawful restraint of trade, which they say it clearly was. Although they acknowledged in oral argument[10] that the Shafron test has not been applied in the employment context to hold that contracts of employment, while in effect, are an unlawful restraint of trade because they prohibit an employee from competing with their employer during their employment[11], the appellants nonetheless submitted that the Shafron test should apply in this case based on “first principles”.
[39] Also relying on Shafron, the appellants argue that the onus was on the ACS plaintiffs to show that the License Agreement was not an unlawful restraint of trade and that the trial judge reversed the burden of proof by requiring the appellants to show that the License Agreement is invalid or unenforceable. I would not accept these submissions. The Shafron decision, on which the appellants rely, is about a restrictive covenant in an employment contract that restricted the right of an employee to compete with his former employer after leaving his employment. The decision also speaks generally to restrictive covenants, for example, those contained in a contract for a sale of business addressing a seller’s right to compete with a purchaser following a sale.
[40] While there is no doubt that restraint of trade principles may apply to a restrictive covenant applicable after the termination of a licensing agreement (e.g., Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2d) 219 (C.A.)), the appellants have proffered no authority to support their argument in this case that restraint of trade principles apply to the License Agreement prior to termination or cancellation in accordance with its terms.
[41] I am sceptical that restraint of trade principles apply in this case. See, e.g. Warner Brothers Pictures Inc. v. Nelson, [1936] 3 All E.R. 160 (K.B.), in which Branson J. held that restraint of trade principles did not apply to a contract which required an actress to provide her services exclusively to the plaintiff film producers. He said, “[w]here, as in the present contract, the covenants are all concerned with what is to happen whilst the defendant is employed by the plaintiffs and not thereafter, there is no room for the application of the doctrine of restraint of trade”: at p. 163.
[42] However, in his authoritative text, The Law of Contracts, 3rd ed. (Toronto: Irwin Law, 2020), John D. McCamus questions whether the principle from Warner Brothers should be “generalized beyond the employment context”: at p. 527, fn. 154. This is because covenants restraining competition have been subject to the restraint of trade principle during the term of other contracts, such as certain music publication contracts used by music publishers for young artists and solus contracts used by gas station suppliers. Nonetheless, in relation to the question whether restraint of trade principles should apply during the currency of the License Agreement, I see the principle in Warner Brothers as being more appropriate.
[43] Under the terms of the License Agreement, Mr. Langlois granted an exclusive worldwide license in the Licensed Rights to 786 in exchange for an interest in 786. He sought out his investor business partners, who had little, if any, knowledge of the powder coating industry, so he could grow his business. The restrictions on competing prior to cancellation or termination of the License Agreement were neither unreasonable to him nor contrary to public policy. That such restrictions existed made sense in the context of the business arrangement that was negotiated. Mr. Langlois participated in the negotiations, agreed to the terms of the License Agreement and was not hampered by inequality of bargaining power.
[44] However, in the end, I need not resolve the issue whether restraint of trade principles apply. Even assuming that they could apply while the License Agreement was in force, I am satisfied that the restriction on Mr. Langlois’ use of the Licensed Rights was reasonable between the parties and reasonable in the public interest for the same reasons that I consider restraint of trade principles may not apply. Notwithstanding its broad geographic scope and the limits it placed on selling, distributing and putting to use the Licensed Rights, the License Agreement was temporally limited in the sense that it was subject to cancellation and termination by the Licensor, and restricted Mr. Langlois from competing with ACS only during its currency. It did not purport to restrain him from using the Licensed Rights after its termination and went no further than necessary to protect the legitimate interests of 786, the party in whose favour it was granted: see MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168, 129 O.R. (3d) 161, at para. 38.
[45] As this court observed in Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72, 359 D.L.R. (4th) 123, “[g]reater deference is given to the freedom of contract of ‘knowledgeable persons of equal bargaining power’”: at para. 53, citing Elsley v. J.G. Collins Ins. Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 923; see also Payette v. Guay inc., 2013 SCC 45, [2013] 3 S.C.R. 95, at para. 58. Mr. Langlois was not in a situation akin to an employee, where the power imbalance between an employer and employee demands more rigorous scrutiny: see Shafron, at para. 23; M & P Drug Mart Inc. v. Norton, 2022 ONCA 398, 79 C.C.E.L. (4th) 171, at para. 34. Assuming, without deciding, that restraint of trade principles apply, I am satisfied that the License Agreement is reasonable between the parties and with reference to the public interest.
[46] I acknowledge that, at both the outset and the conclusion of her discussion concerning Mr. Langlois’ and Gary Sugar’s arguments that the License Agreement was invalid or unenforceable, the trial judge stated that the onus was on them to show that it was. I observe that the onus of proof issue may be more nuanced than the appellants acknowledge: see e.g., Martin v. ConCreate, at paras. 49-50. However, as I have reached the conclusion that, even assuming that restraint of trade principles apply, the License Agreement was reasonable between the parties, the question whether the motion judge reversed the burden of proof does not arise.
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