Hitchcock v. Watson, 2015 ONSC 3145

COURT FILE NO.: CV-15-0137

DATE: 20150515

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

RUTH HITCHCOCK, carrying on business as Hitchcock Chiropractic

Applicant

– and –

CAROLINE WATSON

Respondent

J. Ironside, for the Applicant

S. Fairley, for the Respondent

HEARD: May 12, 2015

VALLEE J.

The Nature of the Application

[1] The applicant, Dr. Hitchcock brings this application to enforce a non-competition clause against the respondent Dr. Watson which is contained in an agreement between them. The agreement concerns Dr. Watson’s provision of chiropractic services at Dr. Hitchcock’s clinic in Collingwood, as a locum. It should be noted that a locum is not an employee. A locum operates a practise, essentially stepping into the shoes of the owner. Dr. Hitchcock alleges that Dr. Watson has breached the non-competition clause because she is now practising in Stayner within the geographic and time limit set out in the clause and has treated the clinic’s patients. Dr. Watson defends the application on several grounds, primarily that the clause is unenforceable.

Issues

1. Is the non-competition clause enforceable?

In order to determine this, I will consider the following:

a. Did the agreement expire?

b. Was the clause reasonable?

c. Did Dr. Hitchcock have a proprietary interest to protect?

d. Were the temporal or spatial terms in the clause too broad and not limited to prohibiting solicitation of the Hitchcock clinic patients when a non-solicitation clause would have protected Dr. Hitchcock’s interests?

2. If the non-competition clause is enforceable, was it breached?

3. If the non-competition clause was breached, what are Dr. Hitchcock’s damages?

Applicable Law

[2] A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. There is an important public interest in discouraging restraints on trade and maintaining free and open competition, unaffected by restrictive covenants. Nevertheless, courts have been disinclined to restrict the right to contract particularly when that right has been exercised by knowledgeable people of equal bargaining power. (see J.G. Collins Insurance Agencies Ltd. v. Elsley, 1978 CanLII 7 (SCC), 1978 CarswellOnt. 1235 (C.A.))

[3] Certain factors require special attention when considering a restrictive covenant. They are 1) whether the claimant has a proprietary interest entitled to protection; 2) whether the temporal or spatial features of the clause are too broad; and 3) whether the covenant is unenforceable as being against competition generally and not limited to prohibiting solicitation of clients of the other party. (see J.G. Collins, para. 23)

[4] Generally speaking, the courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect the other party’s interests. (see Lyons v. Multari, 2000 CarswellOnt 3186 (C.A.) para. 33)

[5] There are occasionally exceptional cases where a simple non-solicitation clause would not be adequate. (see Lyons v. Multari, para. 35)

[6] With respect to the differences between penalty clauses and genuine pre-estimates of liquidated damages, a clause will held to be a penalty clause if the amount required is extravagant and unconscionable, in comparison with the greatest loss which could conceivably be proved to have followed from a breach. There is presumption that a clause is a penalty when a single lump sum is payable for compensation when one or several events occur, some of which may cause serious damages but others may cause only trifling damages. (see Roynat Inc. v. Transport Training Centres of Canada Inc. 2010 CarswellOnt 7314 para. 44)

Did the 2012 Agreement Expire?

[7] Dr. Hitchcock and Dr. Watson entered into an agreement dated September 24, 2012. Dr. Watson worked at the Hitchcock Clinic up until June 27, 2014. Subsequently, she worked at a chiropractic office in Stayner which is approximately 8.5 miles from the Hitchcock Clinic. She has treated some of the Hitchcock Clinic’s patients at the Stayner clinic.

[8] The non-competition clause in the September 2012 agreement states as follows:

During the period of the Agreement and for a period of 2 years thereafter, should the Locum [Dr. Watson] not purchase the Practice, the Locum shall not provide chiropractic health care services to existing or former patients known or previously serviced by the Locum by virtue of this Agreement where the Patient’s file is owned by the clinic of the Contractor [Dr. Hitchcock].

For a period of two (2) years after the expiration of this Agreement for any reason, the Locum undertakes not to practice Chiropractic alone or in association with any person, partnership or corporation within a geographical area bounded by the circumference of a circle TEN (10) statute mile radius centered upon the geographical location of the Clinic, in default of which the Locum shall pay to Hitchcock Chiropractic by way of a reasonable estimate of damages and not as a penalty the sum of FIVE HUNDRED DOLLARS ($500) for each patient treated in such geographical area, plus the sum of THIRTY FIVE DOLLARS ($35) for each treatment performed within such geographical area.

[9] Dr. Watson’s position is that the 2012 agreement has expired. In paragraph 2 of the agreement, the term is set out. It is as follows:

The Locum and the Contractor agree that the term of the Assignment will be from September 24th 2012 subject to the Section 4 below. For the period commencing on September 24th 2012 through and including March 24th 2013, the Locum’s contract for service shall be of a probationary nature (the “Probationary Period”). The agreement shall only be terminable in accordance with Section 3 herein.

[10] Dr. Watson submits that the term of the contract was from September 24, 2012 to March 24, 2013. I do not agree. The paragraph states that the probationary term shall be from September 24, 2012 to March 24, 2013, being six months. It would be illogical to conclude that the contract ended at the end of the probationary term. The contract does not have an end date. It refers only to the termination clause which requires Dr. Watson to provide two months written notice.

[11] Curiously, a second agreement with the same terms was prepared dated April 26, 2013 although the term in the second agreement is stipulated to be April 26, 2013 to April 26, 2014. It states that locum assignments will be reviewed on a yearly basis. This second agreement was signed only by Dr. Watson. One wonders why Dr. Watson would sign a second agreement if the first agreement had not expired; however, there is no evidence that the second agreement was signed by both of the parties. In any event, the second agreement contained exactly the same non-competition clause as did the September 2012 agreement.

[12] For the reasons stated above, I conclude that the September 2012 agreement did not expire.

Does Dr. Hitchcock have a proprietary interest to protect?

Dr. Hitchcock’s Position

[13] Dr. Hitchcock’s sworn affidavit in support of this application is dated December 21, 2014. In this affidavit, she states that she is the owner of the Hitchcock Chiropractic Clinic. Then, three days later, on December 24, 2014 she sold the Hitchcock Chiropractic Clinic to another chiropractor, Dr. Wilson. Dr. Hitchcock is now living in Manitoba. Her chiropractic designation is inactive although she is still licenced.

[14] Dr. Hitchcock states that she had a proprietary interest to protect. At one point, Dr. Watson presented an offer to buy the clinic for $80,000. This deal did not proceed for various reasons.

[15] According to an affidavit of Heather McLeish, an associate at the office of counsel for Dr. Hitchcock, which is based on her information and belief, Ms. McLeish states that Dr. Hitchcock disclosed Dr. Watson’s alleged breach to Dr. Wilson. This affected the sale price that Dr. Hitchcock obtained for the clinic, being $50,000 rather than $80,000. Accordingly, Dr. Watson’s alleged breach caused Dr. Hitchcock a loss. It is this loss that affected Dr. Hitchcock’s proprietary interest.

Analysis

[16] Dr. Hitchcock had a proprietary interest only up until December 24, 2014. She does not request damages in the amount of $30,000, being the difference on the sale. The evidence of the alleged loss has not been provided in an affidavit sworn by Dr. Hitchcock. The evidence is second hand at best. I find that Dr. Hitchcock has not proved that the sale price that she received from Dr. Wilson for the clinic was connected with anything that Dr. Watson did. There is no affidavit from Dr. Wilson to explain the amount of the purchase price. It would have been affected by other factors. There is no other evidence that Dr. Hitchcock sustained a loss.

Were the terms of the non-competition clause too broad?

[17] Dr. Hitchcock states that the terms in the clause did not prohibit Dr. Watson from practising chiropractic. She could go anywhere but if she practised within 10 miles of the Hitchcock Clinic during a certain period of two years, there would be consequences.

[18] Dr. Watson states that she did not solicit any of the Hitchcock Clinic patients. She simply put an advertisement in the paper with respect to her new location.

[19] As noted above, one of the terms of the non-competition clause states that Dr. Watson shall not treat existing or former patients where the patient’s file is owned by the Hitchcock Clinic.

Analysis

[20] The non-competition clause is not limited to simply preventing Dr. Watson’s solicitation of Hitchcock Clinic patients. It states that she is not to treat them for two years. I find that the clause is against competition generally. The result is that Dr. Watson cannot compete against the Hitchcock Clinic, for example by charging a lower price, to encourage patients to go to the Stayner office for treatment. Dr. Hitchcock could rightfully have insisted that Dr. Watson not solicit the Hitchcock Clinic patients for a period of time if she left the Hitchcock Clinic. I find that a non-solicitation clause would have adequately protected the Hitchcock Clinic’s interest especially because Dr. Watson was practising in a different town, even though it was only 8.5 miles from the Hitchcock Clinic rather than 10 miles.

[21] Considering that Dr. Hitchcock’s proprietary interest existed only until December 24, 2014 when she sold the clinic to Dr. Wilson and the fact that a non-solicitation clause would have adequately protected the Hitchcock Clinic’s interests, I find that the non-competition clause is unenforceable. As a result of my finding, I do not need to consider whether Dr. Watson breached the non-competition clause or what Dr. Hitchcock’s damages would be in the event of a breach.

Costs

[22] Dr. Watson has been successful in defending the application. She is presumptively entitled to costs. Counsel for Dr. Watson sent a letter to counsel for Dr. Hitchcock dated February 18, 2015. In that letter, he noted that Dr. Hitchcock had sold the Hitchcock Clinic prior to the issuance of a Notice of Application. He stated that Dr. Hitchcock did not appear to have any proprietary interest to protect even if the non-competition clause was enforceable. He asked whether Dr. Hitchcock would be willing to abandon the application without costs before Dr. Watson filed responding materials.

[23] Dr. Hitchcock did not abandon the application. Counsel for Dr. Watson states that costs ought to be awarded to Dr. Watson on a substantial indemnity basis from the date of the letter, February 18, 2015.

[24] Essentially, Dr. Watson asks the court to consider the February 18, 2015 letter to be an offer to settle. I conclude that in the February 18, 2015 letter Dr. Watson does not offer to settle the application on the basis that Dr. Hitchcock withdraw the application and in return Dr. Watson will not seek costs. The letter alludes to this but the terms are not clear. I find that the letter does not constitute a formal offer to settle which would attract costs consequences.

[25] Counsel for Dr. Watson requests partial indemnity fees in the amount of $7,605.03 together with disbursements in the amount of $313.30.

[26] In contrast, counsel for Dr. Hitchcock if successful would have requested partial indemnity costs in the amount of $2,500 to $3,000. Dr. Hitchcock’s full indemnity amount is almost the same of Dr. Watson’s partial indemnity amount.

[27] Counsel for Dr. Hitchcock as well as an associate in his office spent approximately 15 hours on this matter. Counsel for Dr. Watson spent approximately 19 hours on this matter. Various law clerks and an articling student spent 21.5 hours on this matter.

[28] I find that the time spent by counsel for Dr. Watson together with the law clerks and articling student is somewhat excessive. The materials prepared for both Dr. Hitchcock and Dr. Watson are more or less comparable. In fact, their briefs of authorities contain three of the same cases. One additional case was provided by the applicant.

[29] Considering the principles expressed in Boucher v. Public Accountants 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291, being fairness and reasonableness, in my view, an appropriate costs award for this motion is $5,000 all inclusive which the applicant shall pay to the respondent within 30 days.

VALLEE J.

Released: May 15, 2015