Public policy

How BC law treats it

Public policy is a judge-made limit on freedom of contract. Courts refuse to enforce contracts whose purpose or performance is illegal, such as agreements to commit a crime or defraud a third party, and terms that harm the public interest. The doctrine is applied narrowly, because courts generally respect bargains freely made between commercial parties. The best known business application is restraint of trade. A covenant restricting someone's ability to work or compete is prima facie contrary to public policy and unenforceable unless reasonable. In Shafron v KRG Insurance Brokers (Western) Inc, 2009 SCC 6, a BC case, the Supreme Court held that an employee non-compete with an ambiguous geographic scope was unenforceable and that courts will not rewrite it. Covenants given on the sale of a business are judged more leniently (Payette v Guay inc, 2013 SCC 45). Exclusion clauses are tested in three steps under Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4: whether the clause applies, whether it was unconscionable when made, and whether an overriding public policy outweighs the strong public interest in enforcing contracts. That last step applies only in rare cases, such as conduct that is fraudulent or seriously reckless. In Douez v Facebook, Inc, 2017 SCC 33, a BC case, public policy considerations led the court to refuse a forum selection clause in a consumer contract. Public policy is also a narrow ground for a court to set aside, or refuse to enforce, an international commercial arbitral award under the International Commercial Arbitration Act, RSBC 1996, c 233. The domestic Arbitration Act, SBC 2020, c 2 does not list public policy as a ground for setting aside an award (s. 58).

What it means for your business

Public policy is the reason some carefully drafted clauses fail. Overreaching non-competes, liability waivers for deliberate misconduct and terms that work around a statute may be struck out when the business most needs them. Because courts will not rewrite an unenforceable restraint, a clause that asks for too much can leave the business with no protection at all. Drafting covenants and exclusions that are narrow, clear and tied to a legitimate interest is the practical answer. Example: A Vancouver software company requires its sales staff to sign a non-compete covering all of Canada for three years. If it tries to enforce the clause, a BC court is likely to find it an unreasonable restraint of trade and refuse to enforce it at all.

Risks and common mistakes

Drafting broad non-competes on the assumption that a court will trim them to something reasonable. Confusing the legal doctrine of public policy with government policy statements or guidelines. Relying on an exclusion clause to excuse fraud or deliberate wrongdoing. Using contract terms designed to avoid mandatory statutory protections, which courts will not enforce. Assuming a consumer will be bound by a foreign forum selection clause in online terms.