Are non-compete clauses in management agreements enforceable?

An interesting case recently had to rule on whether non-compete clauses in management agreements are enforceable. This case dealt with a condo corporation who continued to employ the same manager after they had both left the management firm.  This case contains important lessons when dealing with a situation that is more common than one would think.

Facts

The facts are rather simple:  A condo corporation employed a management firm for 5 years or so. For the duration of the agreement, they were managed by an on-site manager who was employed by the management firm.

In the summer of 2016, the corporation initiated a request for proposal for a new property manager. On November 1, the corporation gave the required 60-day notice that it intended to terminate the management contract (to move to a new management firm). On that same day, the on-site manager indicated that she was resigning from the management firm and that she would continue to manage this corporation as an employee of the newly retained management firm. Basically, both the condo and the manager were moving to a new management firm.

The problem is that the management agreement in place contained the following non-compete clause:

The Corporation covenants and agrees with the Manager that within one year after the termination of this Agreement, it will not enter into a subsequent management agreement directly or indirectly involving a former employee of the Manager, who was employed by the Manager during the currency of this Agreement…

The manager was advised that continuing to manage this site (as an employee of the new management firm) would place the condo corporation in breach of this non-compete clause. They ignored this warning and proceeded anyway.  The former management firm sued the condo.

Legal question

Ultimately, the question to be ruled upon was whether continuing to employ the same manager (under a new management agreement with a new management firm) was in breach of this non-compete clause.

Answer

The court examined at great length what went into the negotiation of the non-compete clause and what the parties understood it to mean at the time. Ultimately however, at the end of the day, the non-compete clause meant exactly what it said:  For an entire year following the termination of the management agreement, the condo corporation could not enter into a new agreement that would use the same manager.

The purpose of these clauses is to ensure that former clients (condo corporations) do not take property managers away from a management firm when they move to a new firm. These clauses also ensure that a manager who leaves a firm does not bring clients with them.

Let it be clear: the condo corporation was entirely at liberty to terminate the management agreement and to go elsewhere.  Similarly, the manager was at liberty to leave the management firm and to start working with a new firm. What the new property management company ought to have done however is to allocate a different manager to this site… for one year.

Damages

Of interest, the former management firm sued, not only for the revenue it lost at this condo corporation but also, for the revenue it lost from the sister condo corporation (who was also managed by the same manager and who also went to the new firm but who did not have the same non-compete clause).  The former management firm took the position that had the manager not resigned when the management contract ended, she could have been assigned to new corporations and would have continued to generate revenue for two condo corporations.   The judge agreed with this and awarded the revenue lost from both condos.

I don’t agree and am very surprised with this outcome.

The breach of contract was limited to the one condo corporation who breached the non-compete clause. There was nothing wrong with the manager resigning and moving to another firm (which would have resulted in the loss of all of the revenue she generated). The only wrongdoing was for that one condo corporation to continue to use her at the new firm.  The manager was entitled to continue to work with the second condo corporation.  As such, in my view, the former management firm should only have been able to recover the loss associated with one condo.

Are non-compete enforceable?

Ontario became the first province to pass legislation prohibiting non-compete in employment contracts.  The Working for Workers Act, 2021, received royal assent on in December 2021 – although not all provisions have been enacted yet.

Essentially, this piece of legislation will prohibit employers from binding an employee to any form of non-compete agreement. The clauses that are prohibited are any clause that prohibits an employee from engaging in any business or work that is in competition with the employer’s business after the relationship is terminated.

I’m not sure this would have helped since the non-compete in question was not in the employment agreement (it was not prohibiting the manager from being in competition with the management firm). It was prohibiting the client (the condo corporation) from retaining a former employee for a period of time. As such, this clause may not have been captured by this new legislation.

One last thing to keep in mind, while non-compete agreements are not permitted in the employment setting (there are some exceptions), the amendment does not affect the use of other forms of restrictive covenants such as non-solicitation, confidentiality and intellectual property provisions. You can read more about this new piece of legislation here.

Lessons learned

Read your management agreement both before you sign it but also before you terminate it (and many times in between). Terminating a service agreement (or any contract really) requires a careful consideration of the all of its contractual terms.

Best to run these decisions by your favourite condo lawyer before you pull the plug.

You can read the decision here.