General Billposting: A Rule in Doubt

In 2011, the Alberta Court of Appeal decided the case of Globex Foreign Exchange Corporation v. Kelcher, dealing with the enforceability of non-competition agreements under certain circumstances.

Two of the defendants, Kelcher and Oliveiro, had entered into these non-comps during the course of their employment relationships, without any 'fresh consideration'.  The third, MacLean, entered into it at the commencement of his employment relationship.  MacLean was wrongfully dismissed; he entered into competition with Globex, and Kelcher and Oliveiro resigned their positions to join him.

The absence of fresh consideration made Kelcher's and Oliveiro's agreements unenforceable; this issue has been explored indepth in the Ontario appellate case law, and the majority of the Alberta Court of Appeal decided to follow the Ontario jurisprudence.  (Justice Slatter, in dissent, argued that the Ontario case law gets it wrong.)

However, the question of MacLean's agreement was a bit more obscure, turning on the question of whether or not a century-old English decision, General Billposting Co. v. Atkinson, was still good law in Alberta.  The majority of the Alberta Court of Appeal found that it was:  In essence, having repudiated the employment contract with MacLean by wrongfully dismissing him, Globex was no longer entitled to rely on the restrictive covenants contained in the employment contract.  (Again, Justice Slatter dissented.)

The General Billposting Rule is a broad one, essentially applying to all employment-related non-competition agreements in the Province:  If the employer dismisses the employee without such notice (or pay in lieu? This is a surprisingly difficult question that will be discussed below) as the contract may expressly or impliedly require, it will no longer be able to rely on restrictive covenants in the employment contract.

But another recent decision of the Alberta Court of Appeal, Servicemaster of Canada Ltd. v. Meyer, casts doubt on the longevity of the General Billposting Rule in Alberta.

The Facts

Wade Meyer was an employee of Servicemaster Edmonton, a franchisee of Servicemaster of Canada.  After he entered into an employee share purchase program, he signed onto the franchise agreement as well.  Both the franchise agreement and the employment contract contained restrictive covenants.

Servicemaster Edmonton then terminated Meyer's employment, alleging just cause.  Meyer denies that just cause existed, and commenced litigation against his former employer for wrongful dismissal.

He then incorporated his own business, and began competing with Servicemaster, ostensibly in breach of the terms of the restrictive covenants.  Servicemaster Canada and Servicemaster Edmonton both sought interlocutory injunctions to enforce the covenants and shut him down.

The Application Decision

Justice Ross decided the issue on the basis of the General Billposting Rule:  Put briefly, the employer was required to show a strong prima facie case that the covenants were being breached.  (This is the 'standard' for the first of three stages of the RJR-MacDonald test in cases of this nature.)  However, because of the General Billposting Rule, that strong prima facie case required significant evidence of just cause, and that wasn't there.

Furthermore, the second and third branches of the test were also not satisfied - the applicants were unable to show that they would suffer 'irreparable harm' if the injunction were not granted, nor that the balance of convenience favoured them.

Failure on any one of the branches of the RJR-MacDonald test is fatal to an applicant.  They failed on all three.

And they appealed.

The Appellate Decision

Servicemaster Edmonton and Servicemaster Canada were unsuccessful on their appeals.  Justice Paperny and Justice Hughes wrote a short decision finding that the application decision was well-supported at least on the second and third branches of the RJR-MacDonald test, and that this finding was sufficient to ground dismissal of the appeal without considering the other issues.

However, Justice Wakeling authored more detailed reasons, ultimately coming to the same conclusion, but raising questions about the General Billposting Rule on the way there.

Firstly, he asserted that the General Billposting Rule does not apply to the franchisor:  They were not in breach of any contractual obligation, and did not repudiate the employment contract.  As such, there was no reason to deny them recourse to contractual remedies that may be otherwise available.  Furthermore, he took the opportunity to express his doubts as to the correctness of the General Billposting Rule:

"I wish to point out that this Court, if asked to reconsider the validity of the General Billposting rule, may decide to restate it in less absolute terms."

He argued that the rule is at odds with "commercial common sense", and expressed a tentative opinion that the language of the contract as to the survival of these terms (or, if the contract is silent on the point, the reasonable expectations of the parties) should govern.

However, he agreed with the majority that the second and third branches of the RJR-MacDonald test were applied correctly by Justice Ross - and as such, also concluded that the appeal should be dismissed.

Significance of the Decision

At face value, this decision does not change the state of the law in Alberta.  The question of applicability of the General Billposting Rule to franchise agreements is not fully settled; an obiter comment by a single justice of the Court is not a binding precedent on lower courts.  Furthermore, Justice Wakeling accepts that General Billposting remains, for the moment, good law in Alberta.

But Justice Wakeling is an employment law scholar, and formerly a labour arbitrator.  While not an uncontroversial figure (employment lawyers elsewhere in Canada might know his name from the eponymous 'Wakeling approach' to interpretation of the Canada Labour Code which the Supreme Court of Canada rejected in Wilson v. AECL), he is nonetheless arguably persuasive in this area of law.

As such, his narrowing of General Billposting (in context of franchise agreements) is something that we might expect lower courts to take seriously, and his invitation to parties to ask the Court to reconsider the rule in its entirety is to be taken seriously.

Up until now, employment lawyers generally advised their clients - on both sides - that a non-competition or non-solicitation would not be enforced following a wrongful dismissal.  There was usually no need to litigate the issue, barring exceptional circumstances.  Now, that will change:  Employment lawyers will have to qualify their advice, and employees who consider entering into competition after dismissal will be faced with an open question as to whether or not the protection of the General Billposting Rule will be pulled out from under them.

Legal and Practical Issues

Franchise Agreements and Restrictive Covenants

In the circumstances of this case, Justice Wakeling's decision dealing with the application of the principle to franchise agreements seems theoretically sound.  That being said, even this gets us into a challenging quagmire:  The franchisor argued primarily that Meyer would continue to be bound by the 'in-term' provisions of the franchise agreement for the life of that agreement as it existed between Servicemaster Edmonton and Servicemaster Canada.

Justice Ross was very skeptical of this, and Justice Wakeling did not challenge that.  Restrictive covenants are prima facie unenforceable as restraints of trade, and we only bind employees to them in relatively narrow circumstances, for constrained periods of time.  To allow an agreement with a third party, from which the employee receives no direct benefit, to impose indefinite obligations on the employee even after the end of the employment relationship...would be plainly absurd.

Still, this clearly-absurd result highlights that there's something amiss with this framework:  If we can take a clinical theoretical approach to say that Servicemaster Canada's rights vis-a-vis Meyer are unaffected by Servicemaster Edmonton's termination of his employment relationship, how can we simultaneously conclude that it is not entitled to insist on Meyer complying with its obligations through the remainder of the term?  There's something missing from the analysis.  Problem Number One.

Moreover, it is not uncommon for franchisors to require employees of franchisees to sign restrictive covenants to the benefit of the franchisor, even without share purchase rights, etc.  If we assume that the General Billposting rule continues to be good law in Alberta, but that it does not apply to restrictive covenants to the benefit of franchisors, then how would this not create an arbitrary end-run around the rule?  "Sure, I can't rely on a non-comp with the employee I fire, but what I just have her enter into a separate non-comp with some other third party as a pre-condition to her employment or some part of her remuneration?"  Problem Number Two.

These problems require us to look very closely at two relationships:  The relationship between the employee and the franchisor; and the relationship between the franchisee and the franchisor.

The Employee and the Franchisor

The importance of this relationship is, as we recall, the prima facie unenforceability of restraints of trade:  When we are looking at a restrictive covenant entered into for the benefit of the franchisor, proving the enforceability of such a covenant requires evidence that the covenant is necessary to protect a legitimate business interest of the franchisor.  In corporate commercial transactions, this may be satisfied by the conveyance of 'good will'.  In an employment relationship, this may be satisfied by a particular vulnerability of the employer to competition by the employee.

But, in general, the relationship between the franchisor and an arm's length employee of a franchisee is distant enough that it should likely be generally impossible for the franchisor to assert much more than confidentiality obligations as against the employee.  This may well be different for the principal and/or directing mind of a corporate franchisee.  But for an employee with no ownership interest, or an ownership interest limited to a good faith employee share purchase plan - essentially, anyone who could realistically be fired by the franchisee - the legitimate interests threatened by competition or solicitation by that employee will be legitimate interests of the employer, not the franchisor.

And if we look to the extreme scenario, where the franchisor so closely guards its customer lists, pricing paradigms, etc., that it can assert vulnerability to competition or solicitation by mere employees of its franchisees...then we need to ask if, perhaps, the franchisor has stepped into the role of 'employer' after all.

The Franchisor and the Franchisee

There is a spectrum of franchise relationships.  Some franchisors exert more control over the day-to-day practices of their franchisees than others.  But in a scenario where the franchisee and franchisor are not sufficiently unrelated, or where the franchisor is actually the one making decisions on day-to-day human resources matters, there may be an argument to be made that the franchisor is a joint or common employer.

In such a scenario, wrongful dismissal by one (the franchisee) amounts to wrongful dismissal by both.

These two issues are flip sides of the same coin.  I would suggest that there is simply no relationship that exists between a conventional arm's length employee and his employer's franchisor, capable of justifying enforcement of restraints of trade to be enforced against the employee...and that, where the facts suggest that such a relationship does exist, it is - ipso facto - not simply a relationship between an employee and his employer's franchisor.

Business Realities of the General Billposting Rule

The approach advocated by Justices Slatter and Wakeling has some theoretical appeal, as I will discuss below.  However, "commercial common sense" is not one of the strengths of this approach.

Even without considering the broadly recognized imbalance of power typical to employment relationships, employers are in complete control of scenarios to which General Billposting applies:  Wrongful dismissal is a choice made by employers.  One for which there are about a thousand different legitimate and valid business reasons, but a choice nonetheless.

An employer who dismisses an employee without notice is in control of the timing and circumstances of that departure.  Under most circumstances, an employer will be able to establish immediate control of most or all of the employee's access and possession of employer property - terminating computer and email access; eliminating access to physical files; reclaiming the employer-issued cell phone and/or contact list; removing the employee from the physical worksite and proximity to co-workers; etc.  Furthermore, the employer will be able to plan for this event, having succession plans in place and ready to go - ensuring sufficient staff resources are available; reaching out to clients to immediately transition their files; taking whatever steps it deems necessary to protect its business interests.

And perhaps most importantly, in the vast majority of wrongful dismissal scenarios, the departing employee is utterly unprepared to immediately scoop up business, having had no opportunity to obtain employment with a competitor, or to lay the groundwork for his own competing business - secure investment, incorporate a company, obtain necessary business registrations and licenses, set up contracts with suppliers, lease a business site and/or necessary business equipment, etc.

So the employer, in such a scenario, has every opportunity to take whatever steps it deems appropriate to secure its interests, while the employee has to regroup and develop a strategy moving forward.

As a business operator, if I'm letting go of an employee who I feel could be a competitive threat, I would far rather have the element of surprise than an arguably enforceable non-competition agreement.

Conversely, to do away with the General Billposting rule would render significant hardship to employees:  We're terminating your employment, and no, we're not giving you the notice to which you're entitled...and by the way, you can't compete with us for x months, so you can't get a new job either.

And relieving the wrongfully dismissed employee of obligations under restrictive covenants isn't usually going to be a particularly significant windfall, either.  As an employee, I would generally prefer to have a soft landing with a reasonable opportunity to develop a re-employment strategy that complies with the requirements of reasonable restrictive covenants, rather than being cut loose without any notice and being immediately unemployed - but free to take whatever new job I can find.

Finally, there is the mitigation issue to consider, which balances these interests somewhat:  A wrongfully dismissed employee is obligated to make reasonable efforts to reducing his loss, but an enforceable non-competition agreement would effectively undermine that duty.  (One could also make the argument that, if General Billposting doesn't apply, the presence of restrictive covenants might be worth considering in the context of the Bardal factors themselves, to define the reasonable notice period in the first place.)

And finally, it is much easier to implement an enforceable termination clause, that specifies what an employee will receive upon dismissal, than an enforceable restrictive covenant:  The implications of the General Billposting rule include that an employer who wants to enforce a restrictive covenant after termination should contract for more flexible rights of termination - so that it can comply with its obligations on termination in the first place, preventing the General Billposting question from arising at all.

The Theoretical Challenges

I have always found certain aspects of the Globex majority reasons to be somewhat unpersuasive.

"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."

This argument simply does not resonate.  For one thing, the General Billposting rule doesn't fix it:  If an employer were to embark upon such a scheme, it would be easy enough to build a termination clause into the contract that minimizes the employer's liabilities while complying with its full contractual obligations.  Secondly, there are probably other doctrines that would more effectively defeat such a strategy:  Short tenure may well inform the analysis of whether or not the employer is legitimately entitled to enforce restrictive covenants in the first place; and the duty of good faith and fair dealing (and/or Bhasin, now) would probably create obstacles for using such a strategy as well.

"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."

The articulation of this argument seems very odd indeed.  It is not necessary for each promise in a contract to have consideration.  If I enter into a contract that includes a variety of promises on my part (to perform the duties of the job, to abide by the restrictive covenants, etc.), and a variety of promises on your part (to employ me, to pay me a salary, to not terminate me except on reasonable notice, etc.), there's no question that the contract, on the whole, has consideration.  There's no basis for a suggestion that your later breach of one of your promises negates the whole contract from its inception.

That being said, the majority's notion that this is a simple 'repudiation' issue - that a party that fundamentally breaches a contract is no longer entitled to insist on compliance with the promises given by the other party - is on solid footing in terms of first principles.  Justice Slatter points out that there are many types of covenants that survive termination of the contract (by breach or otherwise), such as arbitration clauses, choice of forum, limitations of liability, liquidated damages, and any clauses that specify how the parties will "unwind their relationship upon termination" - including restrictive covenants.

Justice Slatter, though, seems to create one category of two.  The 'dispute resolution' category - the kind that is triggered by breach or a perception of breach - obviously survives breach.  The other category of promises - the 'unwinding of the relationship' promises - will not necessarily survive a breach.  (If my business partner openly repudiates the contract in a way that seriously prejudices my legitimate interests, it is often not going to be the case that I would be bound to our predetermined fair and reasonable exit strategy.  Indeed, one might reasonably question whether such exit terms 'survive' termination at all, or if the proper characterization would be that the contract has not fully been terminated so long as these ongoing contractual obligations persist.)

This brings us to the real dispute in Globex, which is a much more fundamental dispute about whether or not a dismissal without notice amounts to a 'repudiation' of the contract.  And that is a much larger question.  In fact, I have a paper on the subject which has been accepted for publication in this fall's edition of the Alberta Law Review.  Suffice it to say that there are certain decisions of the Alberta Court of Appeal - including Merrill Lynch Canada Inc. v. Soost, relied upon by Justice Slatter - that assert that 'pay in lieu of notice' at common law is not in the nature of damages for breach of contract, but rather is in the nature of money owing under the contract.  And that these decisions are deeply inconsistent with most appellate authorities on the subject.

(To elaborate a little more on the subject...if you ask the Ontario Court of Appeal, or the BC Court of Appeal, or the Federal Court of Appeal, or a range of other courts, they will tell you that, in the absence of contractual language to the contrary, an employer is entitled to terminate an employee upon provision of "reasonable notice".  Terminating employment is not a breach of contract; terminating without notice is.  But the Alberta Court of Appeal - in Soost, Carroll v. ATCO, and Styles v. AIMCo - has started saying that the only breach is in the "failure to pay".  Under that framework, terminating without notice is permissible, leaving only a liquidated debt owing from the employer for pay in lieu of notice.  But it's a problematic framework, inconsistent with various well-established principles of Canadian employment law.)

If one accepts that wrongful dismissal is, in fact, a repudiation of the contract (which, everywhere outside Alberta, is uncontroversial), then we are left asking whether or not Justice Wakeling's 'contractual construction' approach still makes sense:  Can a contract specify that substantive contractual obligations of one party - not dealing with remedies for breach, or dispute resolution practices - will persist despite repudiation of the contract by the other?

Outside of present discussions, I am not aware of any broader authorities on the point, but my instinct would be toward the negative:  A repudiation, by definition, relieves the non-breaching party of further obligations under the contract.  These are fundamental principles of contract law - to contract out of the right to performance would be akin to contracting out of the requirement for consideration:  We can sign a contract that sells you my car for whatever price we may agree to - $10,000, 10 cents, 1 cent, a peppercorn - but if that price is zero, then it's not a contract, and even a clause that says it's a contract, or that waives the requirement of consideration, won't make it one.

Besides, a framework that allows one party to completely disregard its own substantive contractual obligations and nonetheless insist on having all its contractual rights satisfied...would be asking for trouble.  And even if we wanted to generally allow this framework under the auspices of freedom of contract, the employment relationship would not be the appropriate place to apply such a framework.

Concluding Thoughts

The General Billposting principle is a good one.  From a practical policy perspective, the balance is in the right place.  From a theoretical perspective, it's well in line with the principles of repudiation, and there's no compelling reason to allow parties - and employers in particular - to contract out of those principles.

But Justice Wakeling's reasons in Meyer are going to throw the entire question up in the air for the foreseeable future:  General Billposting is, at this moment, the law in Alberta.  But parties dealing with these issues at the ground level - employers deciding how to manage a termination; dismissed employees trying to figure out if they can accept a job - cannot have any confidence that their issues will be adjudicated in accordance with that rule.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.