2005 BCCA 605 ACS Public Sector Solutions Inc. v. Courthouse Technologies Ltd.

Before:	The Honourable Madam Justice Southin
	The Honourable Madam Justice Prowse
	The Honourable Mr. Justice Donald

C. R. Forguson	Counsel for the Appellants
S. K. Gudmundseth, Q.C. and J. L. Gartner	Counsel for the Respondents
Place and Date of Hearing:	Vancouver, British Columbia
18 October 2005
Place and Date of Judgment:	Vancouver, British Columbia
8 December 2005

Written Reasons by:

The Honourable Mr. Justice Donald

Concurred in by:

The Honourable Madam Justice Prowse

Concurring Reasons by:

The Honourable Madam Justice Southin (P. 28, para. 64)

Reasons for Judgment of the Honourable Mr. Justice Donald:

[1] This case involves the application of the doctrine of severability to a restrictive covenant in a consultancy agreement. The parties were engaged in the business of developing software for jury management and related services.

[2] In the decision from which this appeal is taken, the trial judge declared the agreement enforceable after having severed parts of the restrictive covenant. In the same proceeding, the judge refused the plaintiffs' application for an interlocutory injunction for alleged breaches of the covenant primarily on the basis that damages were an adequate remedy. Finally, the judge denied the defendants' application to try the action by the summary trial process under Rule 18A. The judgment is cited as 2005 BCSC 909 and can be found at [2005] B.C.J. No. 1368 (QL).

[3] The plaintiffs, respondents in this Court, do not challenge the severance. The appellants appeal from the declaration of validity, as well as from the refusal of the summary trial.

[4] On the first aspect, the appellants allege the judge erred in law by changing the restrictive covenant, rather than by striking it out entirely. They say that when the judge found parts of the clause unreasonable, he had no alternative but to declare the entire covenant void ab initio.

[5] On the second aspect, the appellants allege that the judge wrongly exercised discretion in not proceeding with the summary trial.

[6] I would dismiss the appeal. While the law on severability of restrictive covenants in British Columbia is somewhat unclear, the judge's decision can be supported by established principles and represents a reasonable balance between the rights of the parties and the public interest in free competition. The refusal to embark upon a summary trial was based on an assessment of the readiness of the action to be tried and should not be interfered with.

Factual Background

[7] Mr. Arntsen is a computer software engineer who provides his services through his consulting company, Senaca Software Inc. While he was with Omni-Tech Systems Ltd., he created source code (a set of instructions written in computer language) for software programs for jury management. Omni-Tech paid Arntsen for his intellectual property in the software in the amount of $225,000.00.

[8] In November 2000, SCT Technologies (Canada) Inc. purchased the shares of Omni-Tech. Arntsen was paid additional compensation for his interest in the software on the SCT takeover of Omni-Tech. He received a signing bonus of $100,000.00 and an additional $50,000.00 per year for three years, in addition to consulting fees of $7,557.00 twice monthly, as provided in a consulting services agreement negotiated between SCT and the appellants. The appellants had the assistance of a lawyer in negotiations. The agreement, executed 16 November 2000 for a three-year term, contains the restrictive covenant (non-competition and non-solicitation) at issue in this case.

[9] In June 2001, the plaintiff, ACS Public Sector Solutions Inc., acquired SCT and received an assignment of Arntsen's consulting agreement. The agreement was extended for one year in November 2003 and for an additional month in November 2004, and then came to an end in December 2004.

[10] The relevant parts of the agreement are as follows:

[From the preamble - ]

D. The Company is acquiring the business of Omni-Tech Systems Ltd., of which the Consultant, and in particular the Consultant's employee Arntsen, has detailed and valuable knowledge;

E. The Consultant and Arntsen will become intimately involved with the Company's business and with the confidential information of the Company, and by virtue of such involvement will become personally acquainted with the business connections, customers, and trade secrets of the Company; and

F. The Company desires to be able to impart said confidential information and secrets to the Consultant with the secure knowledge that such information will be solely and strictly used for the sole benefit of the Company and not in competition with or to the detriment of the Company, directly or indirectly, by Arntsen or the Consultant or any of its agents, servants, or future employees.

* * *

[From the agreement - ]

8.1 Non-Competition

8.1.1 During the term of this Agreement and for 12 months following the termination of this Agreement, neither the Consultant nor Arntsen shall, without the written consent of the Company:

(a) own or have any interest directly in;

(b) act as an officer, director, agent, employee or consultant of; nor

any person, firm, association, syndicate, partnership, joint venture, collaboration, corporation or other entity that is engaged within North America in: (i) servicing courts of law, sheriffs, the judicial system, the judiciary, or any entity involved in case management, jury selection, jury management or jury administration, or (ii) a business that is substantially similar to or competes with the business engaged in by Omni-Tech Systems Ltd. as at the date hereof, whether or not Omni-Tech Systems Ltd. continues to exist after the date hereof.

8.1.2 Neither the Consultant nor Arntsen shall, for a period of 12 months from the date of termination of this Agreement:

(a) directly or indirectly, either personally, by agent or by letters, circulars or advertisements, contact for the purpose of solicitation or solicit any person, firm, association, syndicate, joint venture, collaboration, corporation, business entity or crown corporation who is or was a customer of the Company or its Affiliates on or at any time within the two years prior to the date of termination of the Consultant's employment with the Company or who was scheduled to become a customer of the Company or its Affiliates within twelve months prior to the date of such termination of employment.

(b) induce or attempt to induce any person:

(i) who was an employee of the Company or its Affiliates at the time of the date of termination of the employment of the Consultant; or

(ii) who has been, during the two years prior to such inducement or attempted inducement, an employee of the Company or its Affiliates;

to leave the employ of the Company or its Affiliates, whether to join the Consultant in a similar enterprise or otherwise.

(c) either directly or indirectly, solicit, divert or take away any staff, temporary personnel, trade, business, or goodwill from the Company or its Affiliates, or otherwise compete for accounts or personnel which become known to him or her through his or her relationship with the Company or its Affiliates and agrees not to influence or attempt to influence any of the Company's or its Affiliates' customers or personnel not to do business with the Company or its Affiliates.

* * *

8.3 Confidentiality

* * *

8.3.2 The term "Confidential Information" as used in this Agreement means all trade secrets, proprietary information and other data or information (and any tangible evidence, record or representation thereof), whether prepared, conceived or developed by an employee or consultant of the Company or its Affiliates or received by the Company or its Affiliates from an outside source which is maintained in confidence by the Company or its Affiliates or any of its customers to obtain a competitive advantage over competitors who do not have access to such trade secrets, proprietary information, or other data or information. Without limiting the generality of the foregoing, Confidential Proprietary Information includes:

(a) any ideas, improvements, know-how, research, inventions, innovations, products, services, sales, scientific or other formulae, patterns, processes, methods, machines, manufactures, compositions, processes, procedures, tests, treatments, developments, technical data, designs, devices, patterns, concepts, computer programs, computer code, creative development, training or service manuals, plans for new or revised services or products or other plans, items or strategy methods on compilation of information, or works in process, or any Invention (as defined in section 9.2 below), or parts thereof, and any and all revisions and improvements relating to any of the foregoing (in each case whether or not reduced to tangible form) that relate to the business or affairs of the Company or Affiliates, or that result from its marketing, research and/or development activities;

* * *

8.3.3 The Consultant and Arntsen agree that the Confidential Information is and will remain the exclusive property of the Company or its Affiliates. The Consultant and Arntsen also agree that the Confidential Information:

(a) constitutes a proprietary right which the Company or its Affiliates is entitled to protect; and

(b) constitutes information and knowledge not generally known to the trade.

* * *

14.0 SEVERABILITY

14.1 If any provision of this Agreement for any reason is declared invalid, such declaration shall not affect the validity of any remaining portion of the Agreement, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties that they would have executed the remaining portions of this Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid.

[11] As mentioned, the consultancy ended in December 2004. The restrictive covenant runs until 16 December 2005.

[12] ACS brought the within action because two employees (named as defendants below but not involved in this appeal) left the company shortly after Arntsen's departure and joined a rival company recently founded by a former Omni-Tech employee (who was also named as a defendant below). The rival company soon offered a jury software product in competition with ACS. ACS surmised that Arntsen must have participated in the new venture and used ACS's intellectual property and confidential information because the new product came onto the market so quickly.

[13] In the court below, ACS sought an injunction to prevent use or disclosure of its proprietary and confidential information; the appellants applied for a declaration that the restrictive covenant is unenforceable; and all the defendants sought a ruling pursuant to Rule 18A for dismissal of the action.

[14] The dismissal of the injunction application was not appealed.

[15] The relevant parts of the order under appeal state:

2. The restrictive covenant contained in the consulting agreement between SCT Technologies (Canada) Inc., Senaca Software Inc. and Paul Arntsen be severed as follows:

(a) portions of paragraph 8.1.1 be struck out as follows:

":i) servicing courts of law, sheriffs, the judicial system, the judiciary, or any entity involved in case management;" and
", or a business that is substantially similar to or competes with the business engaged in by Omni-Tech Systems Ltd. as at the date hereof, whether or not Omni-Tech Systems Ltd. continues to exist after the date hereof."

(b) the words "or its affiliates" be struck out from the two places they are found in paragraph 8.1.2;

3. The restrictive covenant as severed is declared enforceable;

[16] The judge found the restrictive covenant went too far in restricting the activities of Arntsen and Senaca. He said:

[48] Here, I conclude that the restrictive covenant goes beyond what is reasonably necessary to protect the interests of the plaintiff. The business with which we are concerned here is the provision of computer services for jury management or administration. It is apparent in paragraph 8.1.1 quoted above that the covenant would restrict Arntsen from any involvement in servicing courts of law in ways unrelated to jury management or in any business that is substantially similar to the business engaged in by ACSís predecessor. Further, the covenant in paragraph 8.1.2(a) prevents Arntsen from soliciting clients of affiliates of ACSís predecessor, affiliates which on the evidence are involved in many other businesses.

[49] Taking into account that the parties contemplated in paragraph 14.1 that if any provision of the agreement is invalid the remainder of it remains in full force and effect, I would limit the restriction set out in para. 8.1.1. to any entities involved in jury selection, jury management or jury administration. Insofar as 8.1.2 is concerned, I would strike from subparagraph (a) the words ìor its affiliatesî in the two places in which it is found.

[50] The offending words as set out above will be severed from the agreement and the remainder of the agreement will remain in force.

Issues

[17] The appeal is taken on four grounds (quoting from the appellants' factum):

[1] Whether the learned chambers judge erred in law in basing his decision on a concession that was not made and thereby failing to consider the existence of a legitimate proprietary interest, the temporal length of the restrictions, the spatial area of the restrictions;

[2] Whether the learned chambers judge erred in law in severing portions of the non-competition covenant and the non-solicitation to render them enforceable.

[3] Whether the learned chambers judge erred in law in severing the prohibited activities down to a category that includes activities that Arntsen was not engaged to perform.

[4] Whether the learned chambers judge erred in law in refusing to dismiss the claims against Arntsen and Senaca in the absence of any admissible evidence of any breach of contract or breach of fiduciary duty.

Discussion

[18] Because they can be quickly dealt with, I propose to discuss grounds 1 and 4 first.

Ground 1 - Concession

[19] It appears that the judge may have misapprehended counsel's position below when the judge said, at para. 45, "The defendants concede that it is appropriate that the Agreement restrict Arntsen or his company from being involved in jury management programs."

[20] In fact, the transcript indicates that counsel's remarks were spoken in the context of a submission that the covenant was overbroad and were to the effect that only the element "jury management" was seriously in question. Counsel was attempting to focus the debate, not to make a concession.

[21] However, I am not persuaded that the error affected the result. Nothing in the reasons suggests that the "concession" formed a basis for the conclusion that the covenant was valid after severance of the offending parts.

[22] It is alleged in ground 1 that, having wrongly taken counsel's remarks as a concession, the judge felt he did not need to consider whether the plaintiffs had a legitimate proprietary interest and whether the temporal length of the restriction or the geographical reach of the clause was reasonably connected to the proprietary interest.

[23] In Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, Dickson J. (as he then was) said at 923, 925:

A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest.

* * *

In assessing the reasonableness of the clause with reference to the interests of the parties, several questions must be asked. First, did Collins have a proprietary interest entitled to protection?

[24] In my view, the proprietary interest in the jury management software developed by Arntsen is established by the fact that he sold his interest in it to Omni-Tech and received further payment for his interest when SCT acquired Omni-Tech. The plaintiffs' entitlement to a proprietary interest is further buttressed by the strong language in the agreement, where, in paragraph 8.3.3, the appellants agree that the "confidential information" exhaustively defined in 8.3.2, which unquestionably encompasses the jury management source code and software program, "(a) constitutes a proprietary right which the Company or its Affiliates is entitled to protect;..."

[25] Returning to Dickson J.'s analysis in Elsley, the second question in assessing the reasonableness of the clause is (at 925):

Second, were the temporal or spatial features of the clause too broad?

[26] Here, the time was 12 months and the geographical scope was North America. There was evidence that the market pursued by the plaintiffs included both Canada and the United States; we were not told that the inclusion of Mexico was problematic. Twelve months is not an unreasonable time restraint in light of all the circumstances.

Ground 4 ñ Refusal of a Summary Trial

[27] The judge's reasons for declining a summary trial were briefly stated:

[51] The defendants seek to have the plaintiffsí claims dismissed pursuant to Rule 18A. I have already concluded that there is a fair question to be tried. Further, I accept the submissions of Mr. Gudmundseth that to dismiss this claim at this stage of the proceedings when pre-trial procedures have not been completed would be premature.

[28] The appellants' principal point is that the lack of readiness on the part of one side of the lawsuit, when adequate notice that the Rule 18A application has been given, is not a sufficient basis for refusing a summary trial: Anglo Canadian Shipping Co. v. Pulp, Paper and Woodworkers of Canada, Local 8 (1988), 27 B.C.L.R. (2d) 378 (C.A.).

[29] In Anglo Canadian Shipping, the defendant alleged that the trial judge ought not to have proceeded with the trial when pre-trial discovery was incomplete. This Court held that a party cannot frustrate the summary procedure by his own delay.

[30] There is no finding of delay on the part of the plaintiffs in the present case.

[31] It must be emphatically said that the decision not to proceed under Rule 18A is a discretionary matter for the trial court to which we will give considerable deference. No error in principle having been demonstrated, I would reject this ground of appeal.

Ground 2 ñ Severability

[32] Counsel for both sides in the appeal cited Canadian American Financial Corp. (Canada) Ltd. v. King (1989), 36 B.C.L.R. (2d) 257 (C.A.) as the leading case in this jurisdiction on the issue of severability. The three judges on the panel each delivered separate concurring opinions: Hinkson J.A. took a strict view of severability in employment contracts; Lambert J.A., a modified view; and Southin J.A. expressed no opinion on the subject; she simply agreed with the other two judges that on the evidence before the Court (the appeal was from an interlocutory order) the covenant was unreasonable and therefore unenforceable.

[33] In what follows, I hope to achieve some clarity on the subject of severability of non-competition covenants.

[34] An understanding of the legal theory on the subject begins with the general proposition that agreements in restraint of trade are contrary to public policy and are void, unless justified. This is embodied in the classic statement by Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co., [1894] A.C. 535 at 565:

The true view at the present time I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable ñ reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.

[35] In Maguire v. Northland Drug Co., Ltd., [1935] S.C.R. 412, Dysart J. put it this way, for the court, at 416:

The decision in this case must turn on the larger question of whether or not this particular covenant is one which ought to be enforced. Public policy, as interpreted by the courts, requires on the one hand that employers be left free to protect from violation their proprietary rights in business, and on the other hand, that every man be left free to use to his advantage his skill and knowledge in trade. In the weighing and balancing of these opposing rights, the whole problem in cases of covenants in restraint of trade is to be found. Less latitude is allowed in the enforcement of restrictions as between employer and employee than as between vendor and purchaser of good will. Prima facie all covenants in restraint of trade are illegal and therefore unenforceable: Morris v. Saxelby [[1916] 1 A.C. 688]. The illegality being a presumption only, is rebuttable by evidence of facts and circumstances showing that the covenant is reasonable, in that it goes no further than is necessary to protect the rights which the employer is entitled to protect, while at the same time it does not unduly restrain the employee from making use of his skill and talents. The onus of rebutting the presumption is on the party who seeks the enforcement, generally the covenantee. Reasonableness is the test to be applied in ascertaining whether or not the covenant is a fair compromise between the two opposing interests.

[36] The Supreme Court of Canada formulated a three-part test in Elsley, where Dickson J. said at 925-926:

The critical question, as I have indicated, is whether the employer, in seeking to protect his trade connection, overreached in the formulation of clause 3 of the agreement of May 30, 1956.

In assessing the reasonableness of the clause with reference to the interests of the parties, several questions must be asked. First, did Collins have a proprietary interest entitled to protection? The answer to this question must surely be in the affirmative. Shortly before the agreement for the employment of Elsley, Collins had paid Elsley some $46,000 for the general insurance trade connection of Elsley. By the agreement Elsley was placed in control, not only of that trade connection, but also the trade connection which Collins enjoyed prior to that time. Second, were the temporal or spatial features of the clause too broad? Some argument was directed to the Court as to those aspects, but I am in entire agreement with the courts below that they are not open to successful challenge. The next and crucial question is whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer. In a conventional employer/employee situation the clause might well be held invalid for that reason. The fact that it could have been drafted in narrower terms would not have saved it, for as Viscount Haldane said in Mason v. Provident Clothing and Supply Co., supra, p. 732, "... the question is not whether they could have made a valid agreement but whether the agreement actually made was valid." Whether a restriction is reasonably required for the protection of the covenantee can only be decided by considering the nature of the covenantee's business and the nature and character of the employment. Admittedly, an employer could not have a proprietary interest in people who were not actual or potential customers. Nevertheless, in exceptional cases, of which I think this is one, the nature of the employment may justify a covenant prohibiting an employee not only from soliciting customers, but also from establishing his own business or working for others so as to be likely to appropriate the employer's trade connection through his acquaintance with the employer's customers. This may indeed be the only effective covenant to protect the proprietary interest of the employer. A simple non-solicitation clause would not suffice.

[Emphasis added.]

[37] As discussed at paragraph 16 above, the trial judge found that the restrictive covenant in this case went too far in restricting the activities of the appellants. The crucial question then becomes: what happens when the clause goes too far? The two alternatives are to strike down the whole restriction or to sever the offending parts of the restriction, if the language permits, and save the rest. On the authorities, the choice of alternative depends largely on the relationship between the parties. The courts will not likely apply the doctrine of severability if the non-competition agreement was made between employer and employee; on the other hand, they will more readily use severance to preserve the core of the protection in a vendor-purchaser relationship.

[38] In an early decision of this Court, Hall v. More, [1928] 1 W.W.R. 400 (B.C.C.A.), which unfortunately appears not to have been drawn to the attention of the judges in Canadian American Financial Corp., Macdonald C.J.A. gave effect to the doctrine of severability and narrowed the geographical extent of a restrictive covenant in an arrangement where More joined Hall's medical practice as an assistant. At 402, the Chief Justice said:

But we may, if of opinion, as I am, that the restriction is reasonable as to one of the areas embraced in the contract, when that part is so described in the instrument itself as to be severable, give effect to the agreement in respect of that part. Goldsoll v. Goldman, [1915] 1 Ch. D. 292, at p. 299, 84 L.J. Ch. 228; Putsman v. Taylor, [1927] 1 K.B. 637, at p. 640, 96 L.J.K.B. 315; Baker v. Hedgecock (1888) 39 Ch. D. 520, 57 L.J. Ch. 889; Mason v. Provident Clothing, etc. Co., [1913] A.C. 724, at pp. 742 and 745, 82 L.J.K.B. 1153.

[39] The other three judges in Hall concurred with the severance in separate reasons. At 403, the judgment of Martin J.A. (as he then was) refers to the speech of Lord Moulton in Mason v. Provident Clothing & Supply Co., [1913] A.C. 724 at 745. This is an important reference because Mason, cited in Maguire and other cases, has been taken as limiting severance to only trivial or technical elements. Martin J.A. wrote, at 403:

In the discharge of this duty, I am of opinion that, in the circumstances before us, the test can be satisfactorily and properly applied by severing the covenant in its operation as above indicated, which we clearly have the power to do in accordance with the authorities cited by the Chief Justice, and I only note that the observations of Lord Moulton, at p. 745 of the Mason Case, which may point to another view on severance, were not concurred in by the other members of the Court and were not adopted by the English Court of Appeal in Goldsoll v. Goldman, [1915] 1 Ch. 292, 84 L.J. Ch. 228, nor by Mr. Justice Sargant in Nevanas & Co. v. Walker, [1914] 1 Ch. 413, 83 L.J. Ch. 380.

[40] The case of Goldsoll v. Goldman, [1915] 1 Ch. 292 (C.A.), to which Martin J.A. referred, involved the sale of a jewellery business with a covenant not to compete over a broad area of Europe and the United States for two years. The purchaser sought an injunction for breaches of the covenant. The Court of Appeal upheld the trial judge's decision to sever countries outside of the United Kingdom from the covenant, but it also went further and reduced the range of restricted activity. Kennedy L.J. wrote at 298-299:

As the Master of the Rolls has pointed out, it is of no use now to consider whether, when a person chooses to take from another a covenant in restraint of trade larger than is necessary for the protection of his business, the contract may not be enforced against the covenantor in respect of the part of the restraint not required for the protection of the covenantee. The doctrine of severability has been admitted by the Courts, and while I am far from saying that I do not see the force of the great objections brought forward by Lord Moulton in Mason v. Provident Clothing and Supply Co. and by Neville J. in this case, it is of no use going into that, because it has been held in decisions binding on this Court that, if words are used in a covenant such as admit of severability by mentioning different areas, we must sever the covenant so as to limit its operation to an area which is not too large.

[Emphasis added.]

[41] Returning to the Maguire v. Northland Drug Co. case, I observe that the differing views in Mason, to which Martin J.A. referred in Hall: see para. 39 above, were not noted in the following excerpt from Dysart J.'s judgment at 416-417:

The practical question then is this, (1) what are the rights which the employer is entitled to protect by such a covenant, and (2) does the covenant not go beyond what is reasonably adequate in furnishing that protection. Proprietary rights, such as secrets of manufacturing process and secret modes of merchandising, clearly come within the group of rights entitled to protection. So also is the right of an employer to preserve secret information regarding his customers, their names, addresses, tastes and desires: Mason v. Provident Clothing Co. Competition, as such, is something which will not be restrained: Vancouver Malt & Sake Brewing Co. v. Vancouver Breweries Ltd. [[1934] A.C. 181]. The information and training which an employer imparts to his employee become part of the equipment in skill and knowledge of the employee, and so are beyond the reach of such a covenant; Leng v. Andrews [[1909] 1 Ch. 763]. The covenant in any event must not go further than is reasonably adequate to give the protection that is to be afforded; if it goes too far or is too wide, either as to time or place or scope, it will not be enforced; and if bad in any particular, it is bad altogether; Mason v. Provident Clothing Co.

[Emphasis added.]

[42] The concluding words seem to support an all or nothing approach.

[43] Reconciliation of the cases would appear to lie, as I suggested earlier, in the nature of the relationship in question, that is, whether the agreement is between employer and employee, as was the case in Maguire and Mason, or vendor and purchaser, as in Goldsoll. This differentiation was well expressed by Jenkins L.J. in Ronbar Enterprises, Ltd. v. Green, [1954] 2 All E.R. 266 at 269-270 (C.A.):

We were also referred to Attwood v. Lamont [[1920] 3 K.B. 571], which, at first sight, is inconsistent with the other two authorities that I have mentioned inasmuch as it was a case in which there was a covenant not to carry on any of a long enumeration of different trades and businesses. There it was held by the Court of Appeal that the covenant could not be severed so as to make it equivalent to a string of independent covenants each dealing with a different business. The explanation of the different conclusion reached in Attwood v. Lamont, as compared with Goldsoll v. Goldman and the British Reinforced Concrete case [British Reinforced Concrete Engineering Co., Ltd. v. Schelff, [1921] 2 Ch. 563], appears to be that Attwood v. Lamont was a case as between master and servant, whereas the other two cases were cases as between vendor and purchaser, as is the present case. I think it can be regarded as settled that the court takes a far stricter and less favourable view of covenants in restraint of trade entered into between master and servant than it does of similar covenants between vendor and purchaser. In the case of a covenant between vendor and purchaser, the court recognises that it is perfectly proper for the parties, in order to give efficacy to the transaction, to enter into such restrictive provisions as regards competition as are reasonably necessary to enable the purchaser to reap the benefit of that which he has bought; and restrictions of that kind are regarded as necessary, not only in the interests of the purchaser, but in the interests of the vendor also, for they not only preserve the value to the purchaser of that which he buys, but also enable the vendor to realise a satisfactory price. It is obvious that in many types of business the goodwill would be well-nigh unsaleable if it was unlawful for the vendor to enter into an adequate covenant against competition.

[Emphasis added.]

See, to the same effect, Elsley, at 924:

The distinction made in the cases between a restrictive covenant contained in an agreement for the sale of a business and one contained in a contract of employment is well-conceived and responsive to practical considerations. A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser that he, the vendor, would not later enter into competition. Difficulty lies in definition of the time during which, and the area within which, the non-competitive covenant is to operate, but if these are reasonable, the courts will normally give effect to the covenant.

A different situation, at least in theory, obtains in the negotiation of a contract of employment where an imbalance of bargaining power may lead to oppression and a denial of the right of the employee to exploit, following termination of employment, in the public interest and in his own interest, knowledge and skills obtained during employment. Again, a distinction is made. Although blanket restraints on freedom to compete are generally held unenforceable, the courts have recognized and afforded reasonable protection to trade secrets, confidential information, and trade connections of the employer.

[Emphasis added.]

[44] That brings me to a consideration of the Canadian American Financial Corp. decision of this Court. In a commission sales arrangement characterized by Hinkson J.A. as a contract of service, the defendant King covenanted not to sell registered scholarship savings plans in Canada or Bermuda for two years after leaving the company. The evidence was that, within months of leaving the company, King engaged in activities prohibited by the covenant in British Columbia and Alberta. The company sought an injunction to enforce the agreement and, against the possibility that the Court might find the agreement unreasonable as to the area covered, the company proposed an order for Canada only. In the further alternative, the company proposed cutting that back to British Columbia and Alberta.

[45] Hinkson J.A. reviewed the case authorities extensively. He concluded that the agreement was unreasonably broad even if confined in its operation to Canada and that to reduce its scope to British Columbia and Alberta would amount to a rewriting of the agreement beyond the doctrine of severability.

[46] I am not sure whether Hinkson J.A. would have upheld the agreement by severing Bermuda if it had been shown that Canada was a reasonable area to be covered. That would have been accomplished by striking out a word ("blue pencilling": Attwood v. Lamont) and leaving the essential bargain intact, not by substituting new language.

[47] Some of the authorities to which Hinkson J.A. refers support the idea of severing the unreasonable parts of a divisible covenant, while others, in the employment context, tend in the other direction. Hall v. More was not referred to in Canadian American Financial Corp. The covenant in that case restricted the defendant from practising medicine in "Nanaimo or within a radius of 20 miles therefrom." He started a new practice in Ladysmith, 16 miles from Nanaimo. This Court severed the 20 mile radius restriction and left Nanaimo.

[48] I turn now to an examination of Lambert J.A.'s reasons in Canadian American Financial Corp. He agreed with Hinkson J.A. that the agreement, as it stood, was unreasonable and that British Columbia and Alberta could not be substituted for Canada and Bermuda by operation of the severance doctrine. He began his judgment by making six points about the severance of covenants in restraint of competition (at 270-271):

1. The first question that must be asked is whether a covenant in restraint of competition is valid as it stands....

2. If the covenant is valid as it stands, then it is open to being enforced, by injunction and by interim injunction....

3. It is only if the covenant is not valid as it stands that a question of severance arises. The courts have always resisted rewriting a contract that the parties have made. No doubt they will continue to do so. So whether the reason for the invalidity is because the covenant as it stands is void for uncertainty or because it is unreasonable either in reference to the interests of the parties or the interests of the public, the courts will only sever the covenant and expunge a part of it if the obligation that remains can fairly be said to be a sensible and reasonable obligation in itself and such that the parties would unquestionably have agreed to do it without varying any other terms of the contract or otherwise changing the bargain. It is only if they had been told when they made the contract that they could not have what they had drafted but could have the portion that would remain after the severance and expungement, and, only if in those circumstances they would both have readily agreed to the severance and expungement without any other change in the contract, that any request for severance can succeed. It is in that context that reference is made in the cases to severing and expunging merely trivial or technical parts of an invalid covenant, which are not part of the main purport of the clause, in order to make it valid. See Lord Moulton in Mason v. Provident Clothing & Supply Co., [1913] A.C. 724 at 745 (H.L.), and Dickson J.A. in T.S. Taylor Machinery Co. v. Biggar (1969), 67 W.W.R. 246 at 257, 60 C.P.R. 97, 2 D.L.R. (3d) 281 (Man. C.A.), as quoted by Mr. Justice Hinkson. The purpose of the severance is to retain the bargain made by the parties, not to impose a new bargain on them.

4. The so-called "blue pencil" rule was first called by that name, as far as I can determine, in Attwood v. Lamont, [1920] 2 K.B. 146 (Div. Ct.), [1920] 3 K.B. 571 (C.A.). It is important to understand that the rule does not automatically permit the severance of a part of a clause that could notionally be severed by merely striking out words. Rather, the rule says that only when the severance can be made simply by striking out words will a severance be permitted; but not necessarily then. Adding words or rewriting the clause is contrary to the "blue pencil" rule. In my opinion, the rule is overly artificial and places too much stress on the words chosen to express the intention of the parties and not enough stress on the intention of the parties themselves. In my opinion, the "blue pencil" rule in its strict form, as I have stated it, should not be considered as a rule of law and should not be applied as such in British Columbia. It should be regarded only as an aid to determining whether the case is an appropriate one for severance in accordance with the principles set out in para. 3 above.

5. Covenants such as the one in Attwood v. Lamont not to "carry on ... the trade ... of tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman's, ladies' or childrens' outfitter" can be considered for severance because each of those trades is separate and distinct. They can be said to be a group of separate covenants and not just one covenant. But, of course, it should be remembered that the Court of Appeal in Attwood refused to sever the covenant in that case and refused to confine it to the trade of tailor. The whole covenant was struck down.

6. It is no function of the courts to act as de facto arbitrators over clauses that are drawn as alternatives. If the covenant says that the employee will not compete in (a) Canada, (b) British Columbia, and (c) Vancouver, for (i) ten years, (ii) five years, and (iii) one year, for example, the courts ought not to use the "blue pencil" rule to make an agreement for the parties that they have been unable to make for themselves. Such a clause, where one alternative encompasses another, but on a wider scale, is, in my opinion, void for uncertainty and should not be made valid by severance. The only point on which the terms of the covenant are clear is that the covenant is to cover at least Vancouver for at least one year. The parties could have said that. If they failed to do so, then they will risk losing the whole clause.

[Emphasis added.]

[49] I interpret these learned reflections as saying that severance is permissible only when the core of the bargain will remain after the unreasonable parts are struck out. Thus understood, Lambert J.A.'s formulation supports what the judge did in the present case. As mentioned, whether the judgment of Hinkson J.A. would allow it is more doubtful, given his reference to cases taking a strict view of unreasonably broad restrictions.

[50] The doctrine of severability is more rigorously applied to restrictive covenants negotiated between employer and employee; the primary rationale is the imbalance of power which often leaves the employee with little room to manoeuvre in the negotiations. The policy of the law is to discourage employers from using their dominant position to extract unreasonable terms.

[51] In my opinion, the relationship between the parties in this case has elements of both vendor-purchaser and employer-employee.

[52] As the assignee of SCT's agreement with the appellants, ACS should be seen as the purchaser of Arntsen's proprietary interest in the source code and jury software program. There is an important personal service component to the agreement, but I think a consultancy of the nature contemplated in this agreement significantly differs from conventional employment. The negotiation of the agreement appears to have been between roughly equal parties, each with independent legal advice. In my view, the rationale for the application of the severability doctrine in vendor-purchaser cases applies to the circumstances of the present case. No one will pay a reasonable price for intellectual property developed by a programming engineer if the product cannot be protected from competitors for a reasonable time and within a reasonable area.

[53] The doctrine of severance has recently undergone a significant development. In Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249, a majority of the Supreme Court of Canada (4-3) held, for the reasons of Arbour J., that the severance remedy for illegal provisions in a contract included, on a spectrum of available remedies, not only the blue-pencil approach (striking out words), but also "notional severance" (altering the language of the agreement) and that the trial judge was correct in applying the latter to a contract with an effective rate of interest over 60 per cent, contrary to s. 347 of the Criminal Code.

[54] Bastarache J., one of the dissenting judges, criticized notional severance as an unruly concept that provides too much room for judges to rewrite the bargain made by the parties. He would limit severance to the blue-pencil rule, thereby tying the remedy more closely to the language chosen by the parties.

[55] Fish J., writing for himself and Deschamps J., assumed, for the sake of discussion, the validity of the spectrum theory, which included notional severance but found it inappropriate to the circumstances of the case.

[56] Arbour J. considered that the blue-pencil approach may be too limited in certain circumstances to achieve a satisfactory result. She began her general discussion of the topic with these remarks:

27 The blue-pencil approach is understood both as a test of the availability of severance to remedy contractual illegality and also as a technique for effecting severance. The blue-pencil approach as a test of the appropriateness of severance requires a consideration of whether an illegal contract can be rendered legal by striking out (i.e., by drawing a line through) the illegal promises in the agreement. The resulting set of legal terms should retain the core of the agreement. If the nature or core of the agreement is disturbed, then on this test the illegal clause in the contract is not a candidate for severance and the entire contract is void. The blue-pencil approach as a technique of effecting severance involves the actual excision of the provisions leading to the illegality, leaving those promises untainted by the illegality to be enforced.

28 The use of the blue-pencil approach to sever one or more provisions from a contract alters the terms of the agreement between the parties. The only agreement that one can say with certainty the parties would have agreed to is the one that they actually entered into. The insistence in the case law that the blue-pencil test derives its validity from refusing to change or add words or provisions to the contract is unconvincing.

[Emphasis in text.]

[57] Having concluded that the blue-pencil technique will inescapably alter the bargain, Arbour J. saw no special virtue justifying it as the sole remedy:

32 If the case is an appropriate one for the court to sever only those provisions of the loan agreement that put the effective interest rate over 60 percent, and if it is conceded, as it must be, that such a rewording alters the agreement of the parties, the question becomes only a choice of the appropriate technique of severance. The preferred severance technique is the one that, in light of the particular contractual context involved, would most appropriately cure the illegality while remaining otherwise as close as possible to the intentions of the parties expressed in the agreement. The blue-pencil technique may not necessarily achieve that result.

33 The blue-pencil test is imperfect because it involves mechanically removing illegal provisions from a contract, the effects of which are apt to be somewhat arbitrary. The results may be arbitrary in the sense that they will be dependent upon accidents of drafting and the form of expression of the agreement, rather than the substance of the bargain or consideration involved. For example, if the effective interest rate of the total interest obligation (as defined in s. 347(2) ) in the agreement between New Solutions and TNAE were only 0.1 percent lower, then the excision of the various charges, fees and royalty payment provisions using the blue-pencil technique would have resulted in a legally valid agreement bearing an effective annual rate of interest of 60 percent. Although the results obtained from the blue-pencil approach will in many cases be sensible and may often be desirable, due to its artificiality, the application of the blue-pencil approach will sometimes be inappropriate.

[Emphasis added.]

[58] In the end, the Supreme Court of Canada reversed the Ontario Court of Appeal, which blue pencilled the agreement to bring the rate of interest well under 60 per cent, and restored the trial judge's notional severance, which simply read down the agreement to 60 per cent.

[59] In my view, the spectrum theory endorsed by the Supreme Court of Canada applies to any illegal contract provision, whether by common law or statute. The blue-pencil approach finds itself on the spectrum and is an available remedy in appropriate circumstances. So the law has travelled some distance from the all-or-nothing proposition advanced by the appellants. In my judgment, this was an appropriate case for severance and the trial judge applied the blue-pencil remedy appropriately. Contrary to the submission of the appellants, he was not obliged to strike down the whole of the restrictive covenant because of overbreadth in part of it.

[60] The remaining question is whether, in striking out the language that he did, the trial judge sufficiently cured the overbreadth.

Ground 3 ñ Overbreadth of the Remainder

[61] The appellants' argument on ground 3 is that, having found at paragraph 48 of his reasons that, "[t]he business with which we are concerned here is the provision of computer services for jury management or administration", and having struck out "business that is substantially similar", the judge ought to have severed everything but "jury management or jury administration". Effectively, this is an argument for expunging "jury selection".

[62] The determination of what was reasonably encompassed by the agreement in relation to the evidence of ACS's business is a matter of judgment with which I am reluctant to disagree. It has not been shown to my satisfaction that the judge was plainly wrong in his assessment of the reasonable scope of the covenant.

Disposition

[63] For the above reasons, I would dismiss the appeal.

ìThe Honourable Mr. Justice Donaldî

I agree:

ìThe Honourable Madam Justice Prowseî

Reasons for Judgment of the Honourable Madam Justice Southin:

[64] I have had the privilege of reading in draft the reasons for judgment of my colleague, Donald J.A. I agree with him that for the reasons he gives, this appeal should be dismissed.

[65] I wish to note, however, that there was in this case no cross appeal from the finding that aspects of the covenant were unreasonable.

[66] Thus, the question of whether the learned judge erred in, so to speak, "blue pencilling" part of the covenant on the basis of that finding is not before us and I do not regard anything said by this Court as either approving of or disapproving of the course which the learned judge took, save insofar as my colleague has expressed.

ìThe Honourable Madam Justice Southinî

Citation:	*ACS Public Sector Solutions Inc. v. Courthouse Technologies Ltd.,*
	2005 BCCA 605