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Written by Abdul Abbas
JD Candidate 2025 | UCalgary Law This blog outlines the legal effect of incorporating indemnification rights in a contract, as opposed to relying on a common law claim for breach of contract or tort, including:
1. Brief Summary Indemnity remedies are enforceable when the event stipulated in the indemnity clause occurs, regardless of the circumstances that led to the event. While remedies commonly take the form of monetary relief, an indemnity remedy can take whatever form the parties agree upon. When indemnity clauses are disputed, a court’s discretion is used to decide whether the terms of the indemnity clause have been fulfilled, rather than what the appropriate remedy is. In contrast, common law claims and remedies are typically determined at the court's discretion, through the application of established legal tests. Therefore, indemnity clauses streamline the remedial process by providing indemnified parties the right to obtain monetary reimbursement for demonstrated losses sustained. Indemnity clauses allow contracting parties to better manage what remedy each party will and will not be entitled to, so as to mitigate and allocate risk. 2. Analysis A. Available Remedies and Enforcement Without an Indemnity Clause Remedies Remedies available for breach of contract and tort claims at common law are generally limited to damages,[1] injunctions,[2] and, in rare circumstances, declarations.[3] The court may decide at its discretion what remedies it awards, in accordance with the common law. Enforcement Tort Claims A simplified version of the test for tort claim damages (the “Tort Remedies Test”) is:
Breach of Contract To receive damages for a claim in respect of a breach of contract, the plaintiff is required to prove the non-performance of a contractual provision by the defendant. Unlike tort claims, neither foreseeability nor proximity are considered when determining breach of contract claims.[7] Rather, “any award for contract damages is based on the undertakings or promises made by the defendant”.[8] The damages awarded are intended to represent “the losses that the promisee has already incurred and the court’s estimate of any future losses for which the promisee might be entitled to compensation”. [9] Enforcement of breach of contract remedies also involve the duty to mitigate, which requires plaintiffs to take all reasonable efforts to reduce their losses after a breach of contract.[10] An injured party that fails to mitigate may be awarded reduced damages by a court. Drawbacks of Not Including Indemnity Clauses Indemnity clauses allow contracting parties to mitigate the risk of extensive legal procedure. Plaintiffs must establish substantial deprivation of benefit[11] and reasonable mitigation efforts in order to be awarded damages for breach of contract claims, and must satisfy the Tort Remedies Test to be awarded tort claim damages. Both types of claims require extensive legal analysis and are ultimately decided at the discretion of the court, which leaves the parties in a state of uncertainty regarding the court’s final decision. A. Available Remedies and Enforcement With an Indemnity Clause Overview Indemnity clauses allow contracting parties to avoid having to satisfy common law requirements to claim contract/tort damages. Instead, indemnity clauses allow parties to agree in advance that one contracting party will owe another contracting party a specified amount of money (or be liable for a specified category of damages, which may be broadly defined) if a certain event takes place. Remedies The application of an indemnity remedy is more flexible than breach of contract or tort claim remedies since the parties have control over drafting the indemnity clause. Therefore, indemnity remedies can take any form, but commonly take the form of monetary relief. As long as the event stipulated in the indemnity clause takes place, the indemnified party is owed the agreed upon remedy, without having to satisfy common law tests for damages. Enforcement An indemnified party only needs to prove the loss specified in the indemnity clause occurred to receive the indemnity. Essentially, if a contracting party forgoes the inclusion of an indemnity clause, they also forego their ability to pursue remedies without having to prove fault or mitigation efforts (subject to the terms that the parties agree must be satisfied for such indemnity to be applicable in the first instance). The event that triggers an indemnity can be any event the parties agree upon and does not need to be a breach-of-contract-like event (e.g. non-performance of contract provision). Also, similar to common law claims, the extent to which indemnity-based damages are enforced is subject to the indemnified party’s duty to mitigate against losses.[12] Benefits of Indemnity Clauses Indemnity clauses provide contracting parties with greater control over undesired scenarios that often result from the common law awards process, such as:
Indemnity remedies are also not limited to the losses recognized at common law, as is the case with claims for breach of contract or in tort. For instance, legal costs on a solicitor-and-client basis do not generally fall within the scope of damages recognized by courts.[15] However, an indemnity clause can account for that type of loss, since it allows contracting parties to control not only the events that trigger the indemnity, but also the extent indemnified parties are compensated. A practical example of this is an indemnity clause that states compensation shall include all loss resulting from an event, rather than only reasonably foreseeable losses, as is the case for common law remedies. B. Limitations Limitations of Indemnity Clauses in Jurisprudence There are limitations to what can be included in indemnity clauses, as courts generally tend to read down “sweeping” [16] or overly broad contractual provisions. The interpretation of indemnity clauses is essentially consistent in this respect with general contractual interpretation considerations, with courts attempting to balance parties’ freedom of contract with overly broad or onerous provisions. A couple general rules to keep in mind in this respect are that courts (i) will interpret contractual provisions on a contextual basis,[17] and will read down a provision to give it a more context appropriate effect, and (ii) tend to read down contract provisions less frequently between parties it believes to be of “equal bargaining power”.[18] An example of a sweeping contractual provision that would be more likely to be read down absent express evidence of the parties’ intentions to the contrary is an indemnity clause that protects a party against its own negligence or deliberate wrongdoing.[19] As a general rule, when drafting indemnity clauses, a drafter should therefore consider the scope of the indemnity clause (how broad or narrow the language used is) and the perceived bargaining power between the contracting parties. [20] Exclusive Remedy Clauses It is not uncommon for "exclusive remedy" clauses to accompany indemnity clauses, so as to limit indemnified parties from pursuing any remedies other than those prescribed (whether in the contract as a whole, or in a particular provision, as applicable).[21] Exclusive remedy clauses act as a risk mitigation tool for the indemnifying party and eliminate the possibility of "incurring liability beyond the remedy specified in the agreement".[22] In such case, the drafter should pay particular attention to the scope of the indemnity – if the scope of the indemnity is broad (in terms of both the types of loss or damage it covers, as well as the extent of available damages), such indemnity being an “exclusive remedy” may be acceptable. However, drafters should not assume that having an indemnity within an agreement, as an exclusive remedy, is necessarily preferable to having access to other common law remedies, particularly if the indemnity applies narrowly. [1] Canadian Encyclopedic Digest [CED], Contracts at s 260. [2] Ibid. [3] CED, Torts at s 57. [4] Vaughan v Menlove (1837), 132 ER 490. [5] Cooper v Hobart, 2001 SCC 79. [6] Mustapha v. Culligan of Canada Ltd, 2008 SCC 27. [7] Canadian Contract Law, Angela Swan, Jakub Adamski, Annie Y. Na, LexisNexis, Fourth Edition [Canadian Contract Law] at 409. [8] Ibid. [9] Canadian Contract Law, supra note 7 at 407. [10] Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51. [11] Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd., [1962] 2 QB 29. [12] Parc Downsview Park Inc v Penguin Properties Inc, 2018 ONCA 666 at para 89. [13] CED, Guarantee, Indemnity and Standby Letters of Credit [“CED on Indemnities”], at s 116. [14] Ibid. [15] CED on Indemnities, supra note 13 at s 122. [16] The Law of Guarantee, Kevin McGuinness, 3rd ed, LexisNexis [“The Law of Guarantee”] at 8.12. [17] Rizzo & Rizzo Shoes Ltd, [1998] 1 SCR 27. [18] Globex Foreign Exchange Corp v Kelcher, 2005 ABCA 419 at para 28 [“Globex”]. [19] The Law of Guarantee, supra note 16. [20] Globex, supra note 18. [21] Risk Allocation in Commercial Contracts, Practical Law Canada, at Practice Note 3-617-7736. [22] Ibid.
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NON-COMPETE CLAUSES
What are they? A non-compete clause is a provision designed to limit a former employee’s ability to work for a competitor or open a competing business. Non-compete provisions are sometimes included in employment contracts, but they can also form a standalone agreement. Non-compete clauses are very common, especially among start-up companies. After all, the last thing a company wants when an employee resigns or is terminated is for that employee to launch a competing business or head straight to the nearest competitor. Employees may have intimate knowledge of their former employer’s trade secrets, operations and business plans, and may have gained access over the course of their employment to valuable information relating to customers, clients, new products and marketing strategies. Are they enforceable? Despite their popularity, non-compete clauses can be difficult to enforce. From a public policy perspective, the courts want to ensure that individuals are not unfairly prevented from earning a living. This has resulted in courts frequently striking down non-compete provisions that are deemed to be “an unreasonable restraint on trade”.[1] However, there are a number of surrounding factors that courts consider in assessing the reasonableness and validity of a non-compete clause. Understanding these considerations can help employers craft effective non-compete provisions that are as minimally restrictive as possible. To design a non-compete that will protect the company and withstand a legal challenge, consider the recommendations below. Limit the scope The more limited a non-compete is with respect to duration and geographic scope, the more likely courts are to enforce it. In Kohler Canada v Porter, the provision in question restricted a manager from competing anywhere in North America for one year after termination of employment “in a line of business…in which the employee worked”. The court struck down the provision for being too broad.[2] Moreover, the geographic scope should be clearly and unambiguously defined. In Shafron v KRG Insurance Brokers (Western) Inc., the court refused to uphold a non-compete clause they deemed unenforceable due to ambiguity.[3] The contract in question sought to prevent a former employee from working anywhere in “the Metropolitan City of Vancouver”, which is not a legally recognized geographic area. As a consequence, the court held that the entire agreement was invalid. Employers should also embed in the agreement itself the rationale for the geographic and temporal scope.[4] Courts may consider such factors as the duration of the employee’s tenure, the size of the market in a geographic region, and the nature of the information to which the employee had access or how closely they worked with clients.[5] Being transparent about the factors that inform the scope of the non-compete can help a court assess whether or not it is reasonable. Further, a company may choose to tailor a non-compete clause in terms of the specific jobs its employee will be prevented from taking, or the competitors they will be prevented from joining for a period following the termination of their employment.[6] This way, the company can protect itself in the areas in which it is most vulnerable, without unduly hampering the employee’s ability to find subsequent employment. This means that non-compete clauses must be specific to the employee, having regard for the roles and competitors where that employee most poses a risk to the company. Don’t impose non-compete agreements on everyone While it may be tempting to bind every employee to a non-compete agreement, such indiscriminate application can actually weaken the protection afforded by such provisions. If every employee is required to sign a non-compete agreement regardless of how tangential their role is to the company’s main business, the courts may view this as demonstrating a company’s unreasonableness.[7] In assessing whether a non-compete clause is necessary or reasonable, courts will consider whether a departing employee had influence over clients or customers and how much damage the employee could do in the same market as the company.[8] A receptionist leaving the company likely doesn’t pose the same risk that a software engineer or salesperson does. A company’s use of non-compete agreements should reflect that. Consider a non-solicitation agreement instead A non-solicitation agreement can be used to prevent a departing employee from poaching the company’s clients, investors, suppliers and other employees. While non-solicitation agreements can also be struck down if they are too broad, they are more likely to be enforceable than are non-compete agreements. Non-solicitation agreements may be as (or more) effective as non-compete agreements at protecting a company. A salesperson leaving to join a competitor’s team can do far less damage if they are not allowed to take clients with them. Although non-solicitation clauses should be customized just as non-competes are too avoid being struck down for over breadth, there are a few good rules of thumb. First, limit them to one year or less. Second, the clause should be drafted to prevent an employee from soliciting only those individuals with whom they developed a relationship over the course of their employment. Attempting to prevent the employee from contacting anyone the company does business with has greater potential to be viewed as unreasonable, particularly in smaller markets. Melanie Bowman is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary. References: [1] Bryce C. Tingle, Start-up and Growth Companies in Canada 3rd ed (LexisNexis Canada Inc., 2018), at 131. [2] Kohler Canada Co. v Porter [2002] OJ No.2418, 26 BLR (3d) 24 (Ont SCJ). [3] Shafron v KRG Insurance Brokers (Western) Inc.,2009 SCC 6, [2009] 1 SCR 157. [4] Supra, note 1 at 132. [5] Lisa Stam, “Is My Employee’s Non-Compete Agreement Enforceable?” (21 February 2018), online (blog): Employment and Human Rights Law in Canada < https://www.canadaemploymenthumanrightslaw.com/2018/02/employees-non-compete-agreement-enforceable/> [6] Supra, note 1, at 132. [7] Ibid. [8] Supra, note 5. |
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