Wrongful dismissal generally relieves an employee from compliance with covenants that restrict future employability

Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 is an important employment law case from Alberta. Among other things the Court concludes that wrongful dismissal generally relieves an employee from compliance with covenants that restrict future employability:

(i)  Effect of Wrongful Dismissal on Restrictive Covenants
 
a.         The Appellant's Submissions
 

[44]           The appellant relies on a trial decision, Raymond Salons Ltd v Boucher 1990 CanLII 1763 (BC SC), (1990), 47 BLR 217, 1990 CanLII 1763 (SC) where an injunction based on a restrictive covenant was granted against an employee despite her contention she had been wrongfully dismissed. Without analysis or discussion, the judge held that the restrictive covenant was enforceable despite a possible wrongful dismissal because the contract provided that it would apply notwithstanding the reasons for or circumstances of termination: paras 12-13. As the appellant cites no other authority, its argument is constructed on a weak foundation.
 
[45]           On the other hand, there is long-standing authority for the proposition that the restrictive covenants did not bind MacLean once the appellant repudiated the employment contract by wrongfully dismissing him, and he accepted the repudiation by taking up other employment. The fact that MacLean chose not to sue for damages is irrelevant since an innocent party is not obliged to sue for damages. Moreover, it seems likely that he mitigated any damages by accepting new employment. The effect of mitigation is touched upon further at paragraphs 55-57.
 
b.         General Principles of Repudiation
 
[46]           Repudiation occurs by words or conduct evincing an intention not to be bound by the contract. If the non-repudiating party accepts the repudiation, the contract is terminated and the parties are discharged from future obligations. Rights and obligations that have already matured are not extinguished: Guarantee Co of North America v Gordon Capital Corp, 1999 CanLII 664 (SCC), [1999] 3 SCR 423 at para 40, 178 DLR (4th) 1. Prospective obligations may be relevant to assessing damages to which the innocent party may be entitled: ibid at para 41, see also MP Furmston, Cheshire, Fifoot & Furmston's Law of Contract, 14th ed (Markham, Ont: Butterworths LexisNexis, 2001) at 605-6.
 
[47]           Waddams explains that repudiation terminology is often ambiguous:
 
First, there is the question of excuse of the innocent party from further performance. As we have seen, a substantial breach or a repudiation of substantial future obligations will have the effect of excusing the innocent party from the exchange performance .... Thirdly, the expressions ... may indicate the release of the innocent party from future obligations, but they are sometimes used to indicate total abrogations of the contract with all its obligations. A repudiation puts an end to the contract in the sense that it releases the innocent party from the duty of further performance, but it does not abrogate the whole contract – the innocent party can sue for damages.
 
S.M. Waddams, The Law of Contracts, 6th ed (Aurora, Ont: Canada Law Book, 2010)
at ¶629 with emphasis added
 
c.         The General Billposting Principle
 

[48]           When an employee is dismissed without cause or notice, the employer cannot enforce a restrictive covenant otherwise binding the employee: General Billposting. This early case remains the law in England: Rock Refrigeration Ltd v Jones, [1997] 1 All ER 1, [1997] ICR 938; Explora Group Plc v Hesco Bastion Ltd, [2005] EWCA Civ 646; and Stone v Fleet Mobile Tyres Ltd, [2006] EWCA Civ 1209. One rationale for the General Billposting principle is that it would be "morally unjust to permit an employer to recoup the benefit of a contractual restraint after it has acted reprehensibly by repudiating the contract": Peter Barnackle, Employment Law in Canada, 4th ed (Markham, Ont: LexisNexis, 2005) at §11.47.
 
[49]           General Billposting was cited by the Supreme Court in Waugh v Pioneer Logging Co, 1949 CanLII 23 (SCC), [1949] SCR 299, 2 DLR 577 and American National Red Cross v Geddes Brothers 1920 CanLII 6 (SCC), (1920), 61 SCR 143, 55 DLR 194. Neither concerned the specific principle from General Billposting that wrongful termination renders unenforceable the restrictive covenants in an employment contract. On the other hand, the Supreme Court has never cast doubt on that principle.
 
[50]           Other Canadian appeal courts have relied on General Billposting to relieve employees from restrictive covenants upon their wrongful dismissal: Cohnstaedt v University of Regina 1994 CanLII 4566 (SK CA), (1994), 116 Sask R 241, 113 DLR (4th) 178 (CA); Poole v Tomenson Saunders Whitehead Ltd 1987 CanLII 2647 (BC CA), (1987), 16 BCLR (2d) 349, 43 DLR (4th) 56 (CA). Some appellate cases have cited General Billposting for the more general principle that, on repudiation, prospective covenants are no longer binding: Pitre v Gordie's Auto Sales Ltd (1976), 73 DLR (3d) 559, 16 NBR (2d) 328 (CA); Belgo‑Canadian Real Estate Co v Allan, [1925] 1 DLR 41, 34 Man R 545 (CA).
 
[51]           Alberta trial courts have relied on General Billposting for over 35 years: See Allison v Amoco Production Co (1975), 58 DLR (3d) 233, [1975] AJ No 490 at paras 21-22; Burns v Oxford Development Group Inc (1992), 129 AR 345, [1992] AWLD 351 at paras 26-28; Windship Aviation Ltd v deMeulles, 2002 ABQB 669 (CanLII), 2002 ABQB 669, [2003] 1 WWR 393 at para 394. In Burns, for example, Conrad J. (as she then was) held that an employer who breached the contract by termination without notice could not rely on the contract to deprive the employee of benefits.
 
[52]           Other Canadian trial courts have also referred to General Billposting in the context of terminated employees and the enforceability of restrictive covenants, for example Zesta Engineering Ltd v Cloutier, 2010 ONSC 5810 (CanLII), 2010 ONSC 5810, 86 CCEL (3d) 1; Psenica v Dee‑Zee Construction Ltd, 1999 SKQB 198 (CanLII), 1999 SKQB 198, [2000] 5 WWR 206; Jostens Canada Ltd v Zbieranek reflex, (1992), 42 CCEL 264, 42 CPR (3d) 519 (Ont Ct J - Gen Div).
 
[53]           Authors and legal encyclopedias in Canada refer frequently to this principle from General Billposting, see e.g., S.R. Ball, Canadian Employment Law, vol 1, looseleaf, (Aurora, Ont: Canada Law Book, 2008) at 7:60; Employment Law in Canada at §11.47; CED (Western) and CED (Ontario) Employment Law; Halsbury's Laws of Canada, HEM-272.
 

[54]           I am not persuaded it is appropriate to deviate from this long‑settled principle of employment law. Indeed, there are valid reasons for excusing a wrongfully dismissed employee from compliance with restrictive covenants. Most particularly, to hold otherwise would reward employers for mistreating their employees. For example, an employer could hire a potential competitor, impose a restrictive covenant on the employee, then wrongfully dismiss her a short time later and take advantage of the restrictive covenant. This would be a highly effective, but manifestly unfair, way of reducing competition. A second justification (alluded to by Simon Brown L.J. in Rock Refrigeration) may be that enforcing a restrictive covenant in the face of wrongful termination prima facie negates the consideration (whether continued employment or something else) given by the employer to the employee when she accepted the restrictive covenant. Said another way, because the employment was prematurely and wrongfully terminated the employee will not "have received, during the period of his or her employment, an extra amount of remuneration for having conceded to be bound by the restraint in the contract": Employment Law in Canada at §11.48.
 
[55]           There is an additional reason why wrongful dismissal ought to relieve an employee from compliance with covenants that restrict future employability. A wrongfully terminated employee is entitled to damages, but a defendant employer can argue that damages ought to be reduced because of the employee's unreasonable failure to mitigate the loss by taking other employment: Red Deer College v Michaels, 1975 CanLII 15 (SCC), [1976] 2 SCR 324, [1975] 5 WWR 575. The defendant's burden of demonstrating a failure to mitigate is onerous, however, because although in breach, he is demanding positive action from the innocent party: Cheshire, Fifoot and Furmston at 683. Defendants cannot complain of a failure to mitigate caused or materially contributed to by their own actions: 2438667 Manitoba Ltd v Husky Oil Limited, 2007 MBCA 77 (CanLII), 2007 MBCA 77, [2007] 9 WWR 642 at 654.
 
[56]           If a wrongfully terminated employee is prevented from doing similar work because of a restrictive covenant, the ability to mitigate will be severely constrained. In many such cases, the employee will be unable to mitigate damages until the expiry of the restrictive covenant and will be entitled to damages for the entire period of the covenant. The entitlement to damages might well be of a similar magnitude to the damages claimed by an employer based on a breach of the restrictive covenant.
 
[57]           Of course, that is not the situation here because MacLean's new employment made it unnecessary for him to pursue damages arising from his wrongful dismissal. Nevertheless, this analysis demonstrates the futility of binding a wrongfully dismissed employee to a covenant that restricts his employability: if the employee cannot work because bound by the covenant, the employee will be able to claim damages for the entire period and will not be able to mitigate the loss.
 
[58]           Nor, for the reasons that follow, do recent Supreme Court cases, including Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII), 2010 SCC 4, [2010] 1 SCR 69 and Guarantee Co of North America, dictate a different approach. This issue was raised by the panel post-hearing and dealt with by the parties in supplementary written argument.
 
d.         Impact on General Billposting of Recent Supreme Court Cases
 
[59]           Tercon and Guarantee Co of North America concern the doctrine of fundamental breach and whether, as against an innocent party, a wrongdoer can take the benefit of limitation of liability (exclusion) clauses and clauses requiring the commencement of suits within a specific time period. In both cases, the questions arose in the context of commercial contracts between large sophisticated entities of equal bargaining power, see e.g. Binnie J.'s dissenting reasons in Tercon at paragraph 82, and Guarantee Co of North America at paragraphs 46, 47, and 56.
 

[60]           As the respondents assert in their written submission, in these two cases and Photo Production Ltd v Securicor Transport Ltd, [1980] AC 827, the contract breaker was relying on an exclusionary or limitation clause to escape potential liability. In this appeal, the contract breaker is attempting to enforce prospective obligations on the innocent party under an agreement which it has breached. In effect, the prospective obligation is being used a sword, not a shield.
 
[61]           Tercon's application may be even more circumscribed because it concerned tendering contracts. The majority noted that in interpreting such contracts, the Court has "been careful to consider the special commercial context of tendering" (para 67) especially "in the context of public procurement": para 68.
 
[62]           In Tercon, the Supreme Court seems to agree that when a party purports to rely on an exclusion clause, it should first be determined whether the clause was intended to apply to the circumstances at hand: para 62. The majority concluded it was not. If it was, according to Binnie J.'s dissenting reasons, two further questions arise: paras 121-22. Was the contract unconscionable when it was entered into, "as might arise in cases of unequal bargaining between the parties?" A final inquiry would be whether there are valid public policy reasons not to enforce the valid exclusion clause that would outweigh the public interest in enforcing it.
 
[63]           I doubt that the approach taken in Tercon and Guarantee Co of North America to fundamental breach in the context of exclusion clauses and contractually‑agreed limitation periods (both of which concern the assessment or availability of damages against the breaching party) was intended to apply to the prospective enforceability of restrictive covenants in employment contracts against an innocent party whose employment contract has been repudiated. As set out in Section B, employment contracts are very different than commercial contracts between sophisticated parties. Moreover, the majority reasons in Tercon, per Cromwell J. at para 62, only indicate agreement with Binnie J.'s dissenting reasons about "the analytical approach that should be followed when tackling an issue relating to the applicability of an exclusion clause" (emphasis added). Binnie J. sets out, beginning at paragraph 121, the inquiries to be made "when a plaintiff seeks to escape the effect of an exclusion clause or other contractual term to which it had previously agreed." But in his dissenting reasons he also mentions many times that the issue was an exclusion clause: paras 81-82, 105, 107, 113-14, 119-23. Indeed, at paragraph 81 he frames the issue as being "whether, and in what circumstances, a court will deny a defendant contract breaker the benefit of an exclusion of liability clause to which the innocent party, not being under any sort of liability, has agreed." Commentators have noted that Tercon and Photo Production (referred to by Binnie J. in Tercon) concern exclusion clauses, and whether their enforcement is unconscionable, see e.g., Waddams at ¶484‑86.
 
[64]           To summarize, were it necessary to decide this appeal on the basis of Tercon and related cases, I doubt my view would change. Such cases concern parties who argue they are not bound by exclusion-type provisions that limit their damages. This case, in contrast, is about an employer which, having wrongfully dismissed its employee, nevertheless claims to control the way in which the employee can earn his living. Whatever the scope of Tercon, I doubt it goes that far.