DATE: 20051012

DOCKET: C42983

COURT OF APPEAL FOR ONTARIO

RE:

MARTINREA INTERNATIONAL INC. (Applicant/Appellant)

– and – CANADIAN HYDROGEN ENERGY COMPANY LIMITED

BEFORE:

CRONK, ARMSTRONG and LANG JJ.A.

COUNSEL:

Arnold B. Schwisberg

for the appellant

Elee Scarlett

for the respondent

HEARD & RELEASED ORALLY:

October 7, 2005

On appeal from the judgment of Justice Todd Ducharme of the Superior Court of Justice dated December 17, 2004.

E N D O R S E M E N T

LANG and ARMSTRONG JJ.A.:

[1] This is an appeal from the decision of Justice T. Ducharme upholding a non-competition covenant.

[2] In our view, the application judge set out correctly the elements for determining whether the respondent established that the non-competition clause was reasonable.

[3] The appellant argues that the application judge erred in his application of the facts to the law and in his conclusion that this restrictive covenant was reasonable. The appellant sets forth several grounds: the subject matter of the covenant was too broad; the five-year term was too long; the global reach was too broad; the covenant was contrary to public policy, and the respondent had other adequate protections.

[4] The application judge, however, rejected those submissions, including the submission that the terms of the covenant were unclear. He noted that the respondent’s “business” was confined by s. 1(b) of the agreement to the respondent’s “Hydrogen Fuel Injection System”, a System that was not then within the appellant’s scope of business.

[5] The application judge implicitly accepted the respondent’s evidence on the lifespan of the technology and, accordingly, the reasonableness of the duration of the covenant.

[6] In finding the global reach of the covenant to be reasonable, the application judge relied on the respondent’s intention to expand into international markets, its significant monetary and other efforts to secure worldwide patents, and its discussions with the appellant about a worldwide licensing agreement.

[7] While recognizing the public interest in discouraging restraint of trade, the application judge noted that, in the context of this case, the parties were “knowledgeable parties of equal bargaining power” and, indeed, that if either one had superior bargaining power that party was the appellant. Further, the appellant executed the agreement fully cognizant of the terms of the restrictive covenant.

[8] With respect to alternative remedies, the application judge concluded that the non-competition covenant was the appropriate remedy to protect the respondent’s proprietary interest.

[9] Given these factual findings and the reasonable inferences drawn from those findings, the trial judge was entitled to conclude, in this commercial context, that the non-competition covenant was reasonable. We see no reason to interfere with his decision.

[10] For these reasons, we would dismiss the appeal. The respondent is entitled to its costs of the appeal, fixed in the net total amount of $5,000, inclusive of disbursements and GST.

“S.E. Lang J.A.”

“Robert P. Armstrong J.A.”

CRONK J.A. (dissenting):

[11] The appellant seeks to set aside the application judge’s holding that the non-competition covenant entered into by the appellant is reasonable and enforceable. The appellant argues that the covenant is void because it offends public policy; its purported duration is unclear and if, as assumed by the application judge, the duration of the covenant is five years, this term is excessive; and its geographic reach is unreasonable.

[12] I would allow the appeal.

[13] The restrictive covenant at issue is in the nature of a restraint on trade. Accordingly, it is presumptively unenforceable, except upon demonstration of special circumstances. The burden of establishing such special circumstances rests on the party asserting them. To be enforceable, the subject-matter, duration and geographical ambit of the covenant must not be overly broad, nor wider than necessary to protect the respondent’s propriety interest. As well, to be susceptible to enforcement, the terms of the restrictive covenant must be clear and certain and not vague or ambiguous.

[14] The restrictive covenant in this case baldly states “[the appellant] … shall not enter into a business that is competitive to the business of [the respondent]”. Although the word “business” is defined under the agreement between the parties, the duration of the non-competition covenant and its geographical scope are not mentioned. In these respects, the covenant is vague and uncertain.

[15] The application judge concluded that the covenant was intended to have global application. But, at the time of extracting the covenant from the appellant, the respondent did not carry on business outside of North America. Although it had sought patent protection for its product outside Canada and the United States, on the record before the application judge there was no evidence of firm or prospective plans to actually commence business operations outside North America. In my view, on this ground alone, the covenant is unreasonable and, hence, unenforceable. Its geographical reach is excessive to protect the business interests of the respondent as established before the application judge.

[16] Moreover, the evidence indicated that the technology at issue could undergo two or more generational changes within one five-year period. Thus, even if a five-year term is read into the covenant as the application judge did (to coincide with the term of the agreement between the parties), this exceeds the time necessary to protect the product of the respondent that existed when the contract between the parties was entered into. On this ground, as well, the covenant is unreasonable and, consequently, unenforceable.

[17] For these reasons, I would allow the appeal.

“E.A. Cronk J.A.”