Duhaime's Law Dictionary

Restrictive Covenant Definition:

A contract in which a party agrees to be restricted in some regards as to future conduct.

Related Terms: Covenant, Non-compete Agreement, Employee Choice Doctrine, Nordenfelt Test

A contract to be limited in some regards as to future conduct.

As Justice Burgess succinctly notes in Patch, in reference to real property covenants:

"Covenants are agreements or promises of two or more parties that something is done, will be done, or will not be done, and are characterized by the type of burden they impose: an affirmative covenant calls for the covenanter to perform an act, while a negative covenant requires the covenanter to refrain from performing one. Negative covenants that limit the uses that can be made by the owner or occupier of land are also called restrictive covenants."

In use at law re real property and re employment law, both as set out below.

Real Property

Originally, and still today, the term refers to a limitation imposed on real property such as a prohibition of cats and dogs or of a clothesline or in rural areas, any number of restrictions dealing with agriculture.

In real property law, a restrictive covenant runs with the land and would be registered against title such that a new owner would have to take the land with the restrictive covenants, subject to a Court striking the restrictive covenant upon application of the landowner.

As Justice Paul Danielson of the Supreme Court of Arkansas wrote in Cochran v Bentley:

"[R]estrictions upon the use of land are not favored in the law. Further, a restrictive covenant will be strictly construed against limitations on the free use of land. Thus, all doubts are resolved in favor of the unfettered use of land." Any restriction on the use of land must be clearly apparent in the language of the asserted covenant. See id. Where the language is clear and unambiguous, the parties will be confined to the meaning of the language employed, so long as the meaning does not defeat the plain and obvious purpose of the provision."

Given the restrictive nature of these documents, jurisdictions typically draft and implement statutes setting out the terms and conditions of restrictive covenant to reduce the restraint of trade element of them. For example, British Columbia has a Property Law Act which, as of 2007, had the following provision:

"If the benefit of a restrictive covenant about building on or the use of land is annexed or purports to be annexed by an instrument to other land, the benefit, unless expressly agreed otherwise, is deemed to be annexed to the whole and to each and every part of that other land capable of benefiting from the restrictive covenant."

Employment Law

Restrictive covenants are also very important concepts in employment law, covering agreements prepared by employers who seek to protect themselves from an employee leaving and joining the competition, or becoming the competition!

A restrictive covenant can provide for a number of limitations.

It may prohibit the employee from working for a competitor business for a period of time after they leave the employer's business.

It may also restrict the departing employee from joining a competing business within a defined territorial limits.

Other restrictive covenants deal with an employer's intellectual property, mostly just to supplement the protections already afforded to employers in the protection of their intellectual property by common law, statute and even the criminal law.

In employment law, a restrictive covenants must be contractual and will always be exceptional.

As Justice Tindal wrote in 1831 (Horner):

"It is to be remembered that contracts in restraint of trade are in themselves, if nothing more appears to show them reasonable, bad in the eye of the law."

So, it is always an uphill battle for an employer's lawyer to defend a restrictive covenant before the Court.

In point of fact, restrictive covenants are usually presented to an employee at the time of hiring or, worse, during the period of employment with the implied or express understanding that acceptance of the restrictive covenant is a condition of future employment or advancement.

In one Canadian case, Lyons v Multari, Dr. Lyons had a successful dental practice.

He needed an associate.

So he hired a person graduating from dentistry, Dr. Multari.

They discussed terms of employment over dinner and at one point, Dr. Lyons scribbled on a napkin these words: "covenant 3yrs. – 5 miles". The new associate initialed the napkin.

Before long, Dr. Multari quit Lyon's dental practice opened up his own dental office less then 4 miles away. Dr. Lyons asked the Court to shut him down based on the restrictive covenants.

The Ontario Court of Appeal restated the general position of all Canadian courts on restrictive covenants.

They gave no codifiable guidelines to employers and employees (which remains the state of the law) and deferred instead to a "reasonableness" assessment on a case-by-case basis, adding that restrictive covenants that purport to limit competition will only exceptionally be upheld by the courts, and not so where a nonsolicitation clause would have done the trick (a clause prohibiting the departing employee from using the employer's client list to build his or her own business).

"This appeal calls for striking a proper balance, in a professional employment context, between competing values – on the one side, the sanctity of a clear contract between equals, set against, on the other side, the law’s long-standing aversion to contracts that attempt to restrict competition generally."

"Dr. Lyon’s non-competition clause is unenforceable.  His legitimate interest in protecting his own referring dentists and patients could have been protected by a non-solicitation clause. Non-solicitation clauses are permissible. In exceptional cases only, non-competition clauses will be upheld."

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