Enforceability of non-competition clauses and damages for mental distress in commercial agreements: Ruel v Rebonne, 2023 ABCA 156

Introduction and overview

In Ruel v Rebonne, 2023 ABCA 156,[1] the Alberta Court of Appeal (“ABCA”), upheld a 5-year non-competition clause in a purchase and sale agreement as being reasonable. In doing so, the Court confirmed the proper approach for courts to follow when considering non-competition clauses in commercial agreements, as well as the scope of damages that can be recovered when non-competition clauses are breached.

Background

In July of 2014, Mr. Ruel purchased a wholesale, home décor business called “Down the Beaten Path” from Mr. Rebonne and his business partner. The parties completed a purchase and sale agreement (“Agreement”), which defined Down the Beaten Path’s business as « the importation, distribution and sale in Canada of all types of home décor including pottery, paintings, wall art, glass art and metal art including all other aspects of the business of the Vendor Corporation ». The Agreement also contained the following non-competition clause:

That for a period of FIVE (5) years from the effective date, the Vendor shall not directly or indirectly:

1. 1. operate or have any interest in or association with any business resembling the Business in their own name or as a proprietor, partner, shareholder, director or consultant or salesman;
   2. attempt to solicitor [sic] customers of the Business;
   3. approach or contact, either directly or indirectly, or provide any goods or services which the Business is capable of providing, to any such customer; or
   4. act in a manner which may impair or which otherwise may be detrimental to the relations between the Business and its customers.

Later in 2014, Mr. Rebonne disclosed to Mr. Ruel that he had started another company, “Mood Dekor”, which, like Down the Beaten Path, engaged in importing home décor items, including vases, urns, and other kinds of pottery from Mexico for distribution to retailers, gift shops and designers. Despite these similarities, Mr. Rebonne assured Mr. Ruel that Mood Dekor would only sell products to customers in the United States.

In 2017, the relations between the parties worsened and Mood Dekor began directly selling products to Down the Beaten Path’s client base.

As a result, Mr. Ruel commenced an action against Mr. Rebonne on the basis that the latter had:

1. violated the non-competition clause in the Agreement;
2. breached a fiduciary duty owed to the Plaintiff; and
3. breached the common law duty of confidence.

Procedural history

The trial judge found that the non-competition clause was properly enforceable as:[2]

1. it was integral to the Agreement;
2. Ruel had a legitimate interest in protecting the value of the business he was purchasing;
3. the clause was accepted by all parties (who were each represented by legal counsel); and
4. the clause was clear as to the prohibited activities and it was reasonably limited both in terms of geography and time.

The trial judge further found that Mr. Rebonne breached the non-competition clause by operating Mood Dekor (which resembled the business of Down the Beaten Path) in Canada, and by selling the same goods which Down the Beaten Path could have provided to Down the Beaten Paths’ Canadian clients.[3]

However, the trial judge did not find that Mr. Rebonne had breached the duty of honest contractual performance, any fiduciary obligations or any duty of confidence between the parties.[4]

Pursuant to the breach of the non-competition clause, the trial judge awarded Mr. Ruel expectation damages in the amount of $83,266.05 (on the basis of the net profit that Down the Beaten Path would have received from the sales made by Mood in breach of the non-competition clause), as well as $30,000 in aggravated damages due to the mental distress caused by Mr. Rebonne’s actions.[5]

Mr. Rebonne appealed to the Alberta Court of Appeal on a number of grounds. Namely:

1. That the trial judge has erred in finding the non-competition clause to be enforceable;
2. That the trial judge had erred in finding a breach of the non-competition clause;
3. That the trial judge had erred in granting an order which amounted to a disgorgement of business profits; and
4. That the trial judge had erred in applying the wrong test in awarding Mr. Ruel damages for mental distress.

Alberta Court of Appeal’s decision & Analysis

In their decision, the Alberta Court of Appeal (“ABCA”) addressed the four issues before the Court as follows:

1. Did the trial judge err in finding the non-competition clause to be enforceable?

The ABCA disagreed with Mr. Rebonne’s assertions that the non-competition clause was ambiguous or unreasonably broad and upheld the trial judge’s finding that the non-competition clause was enforceable. In doing so, the ABCA confirmed that the proper analysis of non-competition clauses will be governed by a review of the reasonableness of their scope and duration in light of the specific circumstances in which they arise. Specifically, the ABCA confirmed that the trial judge had applied the correct legal test in light of his factual findings regarding the role and significance of the non-competition clause to the sale of Down the Beaten Path.[6]

2. Did the trial judge err in finding a breach of the non-competition clause?

Having found the non-competition clause to be enforceable, the ABCA further found there was no palpable and overriding error in the trial judge’s conclusion that Mr. Rebonne had breached it. In this respect, the Court pointed to the documentary evidence as well as Mr. Rebonne’s own testimony at trial which indicated that he had sold products to Down the Beaten Path’s Canadian customers in violation of the Agreement.[7]

3. Did the trial judge order disgorgement in error?

Mr. Rebonne characterized the trial judge’s order as a disgorgement of profits, which is considered an exceptional remedy for breach of contract, where the plaintiff has a legitimate interest in preventing the defendant’s profit-making activity. The ABCA disagreed with this interpretation.[8] Beyond the fact that the trial judge never used the term “disgorgement” in describing the damages awarded, the ABCA found that the trial judge properly determined that the ordinary rule for damages for breach of contract applied, thus giving rise to expectation damages (damages aimed at putting Mr. Ruel in the position he would have been if the non-competition clause had not been breached).[9]

Although the ABCA acknowledged that there was no way to know with certainty how Down the Beaten Path would have performed had Mr. Rebonne not breached the non-competition clause, the ABCA found that the trial judge’s calculation of expectation damages on the basis of Mr. Rebonne’s gain (the value of the orders fulfilled by Mood Dekor for Canadian customers) was an appropriate approach, supported by case law, in order to achieve the overall compensatory purpose of expectation damages generally.[10]

4. Did the trial judge utilize the incorrect test for calculating mental distress damages for breach of contract?

Although unsuccessful on the first three grounds of appeal, the ABCA agreed with Mr. Rebonne that the trial judge had erred in applying the wrong test for damages for mental distress.[11] First, the ABCA confirmed that in order to award mental distress damages for breach of contract, a court must find that:[12]

1. an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and
2. the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation.

The ABCA noted that the trial judge did not articulate this test or refer to any case law in awarding Mr. Ruel damages for mental distress. Most significantly, the ABCA noted that the trial judge did not make any finding that an object of the Agreement was “to secure a psychological benefit to the Plaintiff that would have brought mental distress upon breach within the reasonable contemplation of the parties.”[13]

As a result, the ABCA allowed Mr. Rebonne’s appeal insofar as it concerned damages for mental distress.[14]

Practical takeaways

This ABCA decision usefully summarizes legal principles regarding non-competition clauses and provides important practice points to takeaway and consider, including the following:

• Non-competition clauses in commercial contracts are subject to a specific analysis to determine both: (i) if they are enforceable, and (ii) have been breached.
• Determining the enforceability of non-competition clauses in commercial contracts is a highly fact-specific exercise and will involve considerations of its duration, geographic scope, and the activities it prohibits as they relate to the legitimate interests of the party who benefits by it, with the overriding consideration being whether the restrictions imposed by the clause are reasonable. Non-competition clauses have the potential to cause significant hardship on the vendor where they are overly broad or ambiguous.
• The usual means of determining damages for a breach of a non-competition clause in a commercial contract are the same as with breaches of contract generally, aiming to put the non-breaching party in the position they would have been had the breach not occurred and the contract been properly performed. The Court may assess the financial benefit received by the party in breach.
• It is possible to claim for damages for mental distress (also referred to as “aggravated damages”) for a breach of commercial contract, including a breach of a non-competition clause. However, in order to successfully do so, a claimant must be able to establish both that an object of the contract was to secure a psychological benefit (such that mental distress upon breach within the reasonable contemplation of the parties), and that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. These types of damages are more common in certain contractual situations (e.g. insurance or employment contracts), however they can be awarded in any situation where a breach of contract occurs, provided that the above-noted criteria can be satisfied.

Miller Thomson’s Commercial Litigation Group is experienced in complex commercial litigation and is able to assist with cases involving corporate litigants. If you have questions about this decision or any other matter, please contact a member of our Commercial Litigation group.

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[1] Ruel v Rebonne, 2023 ABCA 156 at para 11 [Ruel (CA)]

[2] Ruel v Rebonne, 2022 ABQB 271 [Ruel (QB)], at para. 66

[3] Ibid, at para. 73

[4] Ibid, at paras. 74-93

[5] Ibid, at paras. 94-116

[6] Ruel (CA), at paras. 10-11

[7] Ibid at para. 13

[8] Ibid at para. 16

[9] Ibid

[10] Ibid, para. 16, citing Atlantic Lottery Corp. Inc. v Babstock, 2020 SCC 19, at para. 58

[11] Ibid at para 18

[12] Ibid at para 19, citing Fidler v Sun Life Assurance Co of Canada, 2006 SCC 30 at para 47

[13] Ibid, at para. 20

[14] Ibid, at paras. 20-21