The Alberta Court of Justice has dismissed claims by NL Fisher Supervision & Engineering Ltd. against former contractors, ruling that the non-competition clauses in their agreements were unreasonable and unenforceable.
The decision, issued by Justice A.P. Argento, underscores the importance of clear and reasonable restrictive covenants in contractor agreements, particularly in industries reliant on independent contractors.
Background
NL Fisher, an engineering and supervision firm specializing in drilling plans and supervision in Western Canada’s energy sector, alleged that three consultants — D.B., T.M., and E.M. — breached their Confidentiality and Non-Competition Agreements (CNC Agreements) by providing services to one of NL Fisher’s clients after terminating their contracts.
The consultants had provided well-site supervision services through their respective corporations — 1226461 Alberta Ltd. (D.B.), Alpine Ridge Consulting Ltd. (T.M.), and 1127677 Alberta Ltd. (E.M.) — exclusively to NL Fisher from late 2016 or early 2017 until Sept. 2, 2022. After ending their agreements, they began working with Decca Consulting Ltd., performing similar services for Deltastream Energy Corporation, a client of NL Fisher.
NL Fisher contended that the consultants’ actions violated the CNC Agreements, which prohibited them from working for any NL Fisher clients for two years after termination. The company sought damages pursuant to these agreements, invoking a “conversion fee” clause that stipulated financial compensation without the need to prove actual damages.
Covenants for contractors subject to same scrutiny as employees: Court
Justice Argento found that the restrictive covenants in the CNC Agreements were subject to the same rigorous scrutiny as those in employment contracts, despite the consultants being independent contractors. The court noted that “the relationship between the parties exhibited the power imbalance typical of an employment relationship,” citing factors such as the use of standard form contracts drafted by NL Fisher’s legal counsel and the consultants’ lack of ability to negotiate terms.
“The CNC Agreements were standard form contracts presented to the Consultants for signing and the Consultants had no ability to negotiate any of the terms,” the judgment states. “The Consultants had to sign the CNC Agreements to get any further work from NL Fisher even though they had already signed the prior Confidentiality Agreements.”
The court held that Section 5.03 of the CNC Agreements, which prohibited the consultants from working for any NL Fisher client for two years after termination, was overly broad and unreasonable. Justice Argento stated that the clause extended to all clients of NL Fisher, regardless of whether the consultants had worked with or were aware of them, making it impossible for the consultants to know when they might be in breach.
“NL Fisher has not met its onus to demonstrate that the broad restrictions imposed by Section 5.03 are reasonable either as to activity or time,” the judgment reads. “As a result, this clause is unenforceable.”
Furthermore, the court found that Section 5.04, the conversion fee clause, was ambiguous and therefore unenforceable. The clause lacked clarity on critical aspects, such as which term or section of the agreement it referred to and the specifics of calculating the conversion fee.
“Section 5.04 is central to these actions. This clause seeks to make the Consultants liable to pay compensation to NL Fisher without proof of actual damages. While such clauses may be enforceable, they must be clear and unambiguous,” Justice Argento noted. “As Section 5.04 is ambiguous, it is unenforceable and it is not necessary to further analyze whether it is reasonable.”
The court dismissed NL Fisher’s claims, counterclaims, and third-party claims against the consultants and their corporations. It awarded the consultants’ corporations the unpaid invoices that NL Fisher had admitted were owing but had sought to set off against the alleged breaches. The amounts awarded were $29,100.86 to Alpine Ridge Consulting Ltd., $15,437.63 to 1226461 Alberta Ltd., and $30,770.25 to 1127677 Alberta Ltd., with interest payable from Sept. 2, 2022.
Takeaways from this case
This ruling highlights the necessity for employers and companies engaging independent contractors to ensure that restrictive covenants in their agreements are clear, unambiguous, and reasonable in scope. The court’s application of the same rigorous scrutiny to restrictive covenants in contractor agreements as in employment contracts emphasizes that the form of the relationship — employment vs. independent contractor — does not exempt companies from the requirement to draft enforceable covenants.
Key lesson include:
Ambiguity renders covenants unenforceable: Clauses must specify clearly the activities that are prohibited, the time frame, and the geographic scope if applicable.
Overly broad restrictions are unreasonable: Non-competition clauses that extend to all clients, including those the contractor did not work with or know about, are likely to be deemed unreasonable.
Power imbalance is significant: The use of standard form contracts without the opportunity for negotiation may lead courts to apply rigorous scrutiny, similar to that in employment relationships.
Clarity in compensation clauses is essential: Conversion fee clauses or liquidated damages provisions must be clear in their application and calculation methods to be enforceable.
Justice Argento’s decision serves as a reminder that companies cannot rely on broad or ambiguous restrictive covenants to prevent former contractors from engaging in their trade. Employers should review their agreements to ensure compliance with legal standards, keeping in mind that the courts will interpret such covenants strictly against the party that drafted them.
“The Court finds that Section 5.03 is overly broad and unreasonable and Section 5.04 is ambiguous,” the judgment concludes. “As a result, these clauses are not enforceable as against the Consultants.”
For more information, see NL Fisher Supervision & Engineering Ltd. v Boettger, 2024 ABCJ 225 (CanLII).
