


COURT OF APPEAL FOR ONTARIO

CITATION:
Veolia
    ES Industrial Services Inc. v. Brulé, 2012 ONCA 173

DATE: 20120320

DOCKET: C53054

Doherty, Rosenberg and Hoy JJ.A.

BETWEEN

Veolia ES Industrial Services Inc.

Plaintiff (Appellant/                                                                                      Respondent
    by way of cross-appeal)

and

John Brulé and Clean Water Works Inc.

Defendants
    (Respondents/                                                                            
    Appellants by way of cross-appeal)

and

John Brulé

Plaintiff by Counterclaim

Rodney M. Godard and Daniel Ableser, for the
    appellant/respondent by way of cross-appeal

Joseph Y. Obagi and Elizabeth A. Quigley, for the respondents/appellants
    by way of cross-appeal

Heard: January 16, 2012

On appeal and cross-appeal from the judgment of Justice Albert
    J. Roy of the Superior Court of Justice, dated October 27, 2010.

Hoy J.A.:

[1]

Veolia ES Industrial Services Inc. (Veolia) successfully sued its
    former employee, John Brulé, for breaching a non-competition covenant in his
    employment contract and for breach of fiduciary duty. Veolia appealed the
    quantum of damages awarded. Mr. Brulé cross-appealed, claiming that the trial
    judge erred in finding that he breached the his non-competition covenant or his
    fiduciary duty.

[2]

In my view, the trial judge erred both in finding that Mr. Brulé
    breached his non-competition covenant and in finding that he breached his
    fiduciary duty. I would allow Mr. Brulés cross-appeal and dismiss the action. It
    is not necessary to address the issue of damages raised by Veolia and I would
    dismiss its appeal.

BACKGROUND

[3]

Mr. Brulé founded Veolia. Veolia engaged in inspecting, cleaning and
    rehabilitating sewers using a cost-effective technique that it developed.

[4]

In 1999, Mr. Brulé sold Veolia to its current shareholders.  As part of
    that transaction, Mr. Brulé entered into an employment agreement which obliged
    him to continue as Veolias President and Chief Operating Officer until
    December 31, 2004 and prohibited him from competing with Veolias business for
    five years thereafter.

[5]

Irritants developed in the employment relationship.  Before the expiry
    of the initial employment agreement, Veolias parent corporation approached Mr.
    Brulé with a new proposal and Mr. Brulé, Veolia and its parent corporation
    entered into the Senior Executive Employment Agreement dated for reference
    January 1, 2004 (the Agreement) at issue on this appeal.

[6]

The Agreement expressly superseded Mr. Brulés initial employment
    agreement.  The parties stipulated that the Agreement was the whole of the
    agreement between the parties and that there are no collateral
    representations, agreements or conditions not specifically set forth herein.

[7]

Pursuant to the Agreement, Mr. Brulé was employed by Veolia, as
    President.  In addition, he was to act as Chief Executive Officer of the parent
    corporations business in Ontario and as President of Veolias Ontario
    affiliates.  The arrangement was to continue for a three-year term (s. 1.2),
    subject to Veolias right to terminate Mr. Brulé for cause or without cause
    upon payment of the compensation to which he was entitled until the end of the
    term (s. 2.3(a)), and to Mr. Brulés right to terminate the arrangement on 180
    days notice (s. 2.3(b)).

[8]

The Agreement contains the following non-competition covenant:

5.1 Non-Competition. Subject to sections 1.2 and 2.3, and to
    any other provision of this Agreement, during the Senior Executives employment
    with the Employer and for a period of:


(a) Two (2) years following the termination of the Senior
      Executives employment for cause or, two (2) years from the termination of the
      Agreement pursuant to section 1.2, the Senior Executive covenants and agrees
      not to compete, either directly or indirectly, with the core Business within;


(i) the Provinces of Ontario and
        Quebec; or


(b) Two(2) years
commencing on January 1, 2007
following termination by the Senior Executives employment without cause.

(c) Two years
commencing on January 1, 2007
following termination by the Senior Executive pursuant to section 2.3(b).  [Emphasis
      added.]


[9]

On July 7, 2004, Mr. Brulé gave notice to Veolia, pursuant to s. 2.3(b)
    of the Agreement, that he was terminating his employment in 180 days.  Veolia
    advised Mr. Brulé that he was not to come into work, but was to be available
    for consultation and discussion, if necessary.  Veolia continued to pay Mr.
    Brulé until one or two weeks prior to the January 3, 2005 end of the 180 day
    notice period.

[10]

Mr.
    Brulé had a Veolia employee assemble a binder containing 30-50 recent municipal
    tenders and information about bids by Veolia and others. He took this binder
    and a list of Veolias employees when he left Veolia.

[11]

Mr.
    Brulé incorporated the defendant Clean Water Works Inc.  He intended Clean
    Water Works to be involved in rehabilitating water mains, not sewers.  Veolia
    was not engaged in rehabilitating water mains.

[12]

In
    the fall of 2005, Clean Water Works did not have sufficient work to keep all of
    its employees employed. The City of Ottawa issued a public tender for sewer
    work.  Mr. Brulé obtained the tender documents and sought legal advice
    regarding his obligations to Veolia.  Veolia was aware that Mr. Brulé had
    obtained the tender documents. Both Veolia and Clean Water Works submitted
    bids.  Clean Water Works was awarded the tender; Veolia was the next-lowest
    bid.  Veolia sued Mr. Brulé and Clean Water Works, seeking the gross profits
    that Veolia lost as a result of not being awarded the tender. Mr. Brulé counterclaimed
    for unpaid compensation pursuant to the Agreement.

THE TRIAL JUDGES DECISION

[13]

The
    trial judge cited
Consolidated

Bathurst v. Mutual Boiler
,

[1980] 1 S.C.R. 888

for the proposition that where there is
    confusion or ambiguity in contracts, the court should attempt to determine what
    the intention of the parties was.  He found that the parties were trying to
    get a two year non-competition agreement and unfortunately, the draftsmanship
    of the lawyer drafting the agreement did not produce what, in fact, the parties
    intended (at pp. 18-19).  He concluded that severing the words commencing on
    January 1, 2007 where they appeared in the non-competition covenant would
    produce exactly what the parties had intended, and was consistent with the
    Supreme Court of Canadas  test for blue-pencil severance in restrictive
    covenants set out in
KRG Insurance Brokers (Western) Inc. v. Shafron
,
    [2009] 1 S.C.R. 157. As severing the words commencing on January 1, 2007 from
    s. 5.1(c) resulted in Mr. Brulé having a two year non-competition covenant
    running from January 3, 2005, and such a covenant was, in the trial judges
    opinion, reasonable, the trial judge found that Mr. Brulé had breached his
    non-competition covenant.

[14]

Mr.
    Brulé did not dispute that he had owed a fiduciary duty to Veolia, and that he
    had continuing duties for a reasonable period of time after the end of his
    employment.  The trial judge concluded, at p. 27, that it would be reasonable
    that the term for the fiduciary duty would be the same length of time as the
    non-competition agreement.  He then concluded that Mr. Brulé breached his duty
    to Veolia because he breached his non-competition covenant, he left Veolia with
    the binder of information with respect to prior bids, which the trial judge described
    as confidential information, and he did not tell Veolia that he was submitting
    a bid.

[15]

The
    trial judge determined that $465,000 would be reasonable compensation to Veolia
    for Mr. Brulés breach of the non-competition covenant and his fiduciary duty and
    fixed damages in that amount.  On this appeal, Veolia seeks damages in the
    amount of $930,000.

[16]

The
    trial judge also determined that Veolia owed Mr. Brulé $90,896.62 pursuant to
    the Agreement.  The parties do not appeal this determination.

ANALYSIS

(1)

DID MR. BRULÉ BREACH
    HIS NON-COMPETITION AGREEMENT?

[17]

In
    my view, blue-pencil severance could not be resorted to in this case to remove
    the words commencing on January 1, 2007 from the non-competition covenant. Without
    the deletion of these words, the restrictive covenant, which commences two
    years after Mr. Brulé ceased to be employed by Veolia, is clearly unreasonable
    and unenforceable. Moreover, the undisputed evidence was that Mr. Brulé competed
    with Veolia in the fall of 2005 and not in the two years commencing on January
    1, 2007.  As a result, even if the non-competition covenant was enforceable, he
    did not breach it.

[18]

The
    principles of general contract interpretation in
Consolidated Bathurst
are subject to the test for blue-pencil severance of restrictive covenants in
    employment contracts set out in
Shafron
.  Restrictive covenants are
prima
    facie
unenforceable.  A restrictive covenant will be upheld only where it
    is shown to be reasonable by the party seeking to enforce it.

[19]

In
Shafron
, the Supreme Court of Canada addressed when the doctrine of
    severance may be invoked to resolve an ambiguous term in a restrictive covenant
    in an employment contract or render an unreasonable restriction in the covenant
    reasonable. Rothstein J., writing for the court, stated at para. 2:


Severance, when permitted, appears to take two forms.
      Notional severance involves reading down a contractual provision so as to
      make it legal and enforceable. Blue pencil severance consists of removing
      part of a contractual provision. For reasons I set out below, notional
      severance is not an appropriate mechanism to cure a defective restrictive
      covenant. As for blue-pencil severance, it may only be resorted to in rare
      cases where the part being removed is trivial, and not part of the main purport
      of the restrictive covenant.


[20]

The
    Supreme Courts application of the test for blue-pencil severance in
Shafron
is instructive.  In that case, the employee agreed not to compete within the
    Metropolitan City of Vancouver  a term with no legal or judicial definition.
     The British Columbia Court of Appeal determined that the parties intended to
    prevent the employee from competing in the City of Vancouver and in an area
    beyond the City, and that what likely was in the reasonable contemplation of
    the parties when they made their agreement was the City of Vancouver, the
    University of British Columbia Endowment Lands, Richmond and Burnaby.  The
    Supreme Court held, at para. 47,  that the British Columbia Court of Appeal
    erred in trying to resolve the ambiguity in the term Metropolitan City of
    Vancouver by reading down the covenant according to its notion of
    reasonableness and what it thought the parties might have intended.

[21]

Further,
    in the circumstances, blue-pencil severance was not available to delete the
    word Metropolitan and thereby reduce the geographical scope of the covenant
    to the City of Vancouver.  The Supreme Court referred to Canadian
American
    Financial Corp. (Canada) Ltd. v. King
(1989), 60 D.L.R. (4th) 293
    (B.C.C.A.), at pp. 305-306:


The courts will only [apply blue pencil severance to] sever the
      covenant and expunge a part of it if the obligation that remains can fairly be
      said to be a sensible and reasonable obligation in itself and such that the
      parties would unquestionably have agreed to it without varying any other terms
      of the contract or otherwise changing the bargain. ... It is in that context
      that reference is made in the cases severing and expunging merely trivial or
      technical parts of an invalid covenant, which are not part of the main purport
      of the clause, in order to make it valid.


[22]

The
    Court of Appeal had concluded that the parties intended a geographic reach that
    included the City of Vancouver and something more.  Blue-pencil severance was
    not available because there was no evidence that the parties would have
    unquestionably agreed to remove the word Metropolitan without varying any
    other terms of the contract or otherwise changing the bargain.

[23]

In
    this case, there was evidence, not referenced by the trial judge in his
    reasons, that the parties would not have agreed to remove the words commencing
    on January 1, 2007 without varying other terms of the contract.  Blue-pencil
    severance was therefore not available.

[24]

The
    Agreement went through numerous drafts.  Initially, Mr. Brulés obligation not
    to compete extended beyond the period of his employment only if he was
    terminated for cause.  On October 29, 2003, Mr. Vasseur of Veolia sent a
    memorandum to Mr. Brulé proposing the following addition:


5.1(a) Or for the termination of the Executives employment
      without cause, two years starting from January 1, 2007.


[25]

In his memorandum, he explained: Salaire payé jusqua la fin du
    terme  employé jusqua la fin du terme.
(Salary paid until the end of
    the term  employed until the end of the term )

[26]

Mr.
    Vasseur did not testify.  The evidence of Daniel Marc-Aurèle, for Veolia, was
    that he was aware that Mr. Vasseurs proposal was being sent and that starting
    from January 1, 2007 was added to create a sunset clause.  Veolia wanted to
    make clear that if Mr. Brulé continued in employment beyond the three-year term
    of the Agreement, and Veolia terminated Mr. Brulé without cause, he would in no
    event be bound by a non-competition covenant beyond December 31, 2008.  In Mr.
    Marc-Aurèles words, Mr. Brulé would never have accepted it [the Agreement]
    otherwise.

[27]

The
    evidence of Veolias own witness indicates the parties would not
    unquestionably have agreed to remove the words commencing on January 1,
    2007 without varying any other terms of the contract or otherwise changing the
    bargain.

[28]

Mr.
    Vasseurs memorandum to Mr. Brulé, in my view, suggests a more obvious
    rationale for the addition of the words commencing January 1, 2007.  To
    terminate Mr. Brulés employment without cause, Veolia had to immediately pay
    Mr. Brulé his salary until the end of the three-year term of the Agreement.  Given
    this, it is logical that Veolia would seek to have Mr. Brulé treated as if he
    continued to be employed until the end of the three-year term for the purpose
    of determining his non-competition obligation and have his non-competition
    obligation end two years after the end of that three-year term, and not two years
    after he ceased to be employed by Veolia.  Removing the words commencing on
    January 1, 2007 without varying any other terms of the contract would have
    left Mr. Brulé free to compete with Veolia during a period in respect of which
    he may have been paid by Veolia.  It cannot fairly be said that the parties
    would unquestionably have agreed to remove the words commencing on January
    1, 2007 without varying any other terms of the contract or otherwise changing
    the bargain.

[29]

The
    words commencing on January 1, 2007 are not trivial.  They go to the duration
    of the restriction and are part of the main purport of the clause.  This is not
    one of those rare cases where blue-pencil severance may be resorted to.

[30]

I
    do not accept Veolias argument that, in any event, a case for severance is
    made out based on the doctrine of rectification. In
Shafron
, at para.
    53, the Supreme Court stated that rectification is to be used with great
    caution and set out three requirements: (1) an inconsistent prior oral
    agreement; (2) that the party seeking to uphold the written agreement knew or
    ought to have known about the lack of correspondence between the written
    document and the oral agreement, in circumstances amounting to fraud or the
    equivalent of fraud; and (3) the precise form in which the written instrument
    can be made to express the prior intention.

[31]

In
    this case, Veolia has shown no prior oral agreement, let alone the content of
    one.  There do not even appear to have been oral discussions about the
    non-competition agreement.  Mr. Marc-Aurèles evidence was that Veolia never
    received any response from Mr. Brulé pertaining to its drafts of the
    non-competition provisions and Veolia merely assumed that he understood its
    interpretation.

(2)

DID MR. BRULÉ BREACH
    HIS FIDUCIARY DUTY TO VEOLIA?

[32]

It
    is clear that certain of a fiduciary employees duties to his employer may survive
    his employment:
Can. Aero v. OMalley
, [1974] S.C.R. 592.

[33]

Without
    disclosure and consent, a fiduciary cannot compete with his employer during the
    course of his employment.  After his employment ends, the fiduciary employee generally
    cannot directly solicit the employers customers for a reasonable period of
    time:
Mountjoy v. Alberts
(1977), 16 O.R. (2d) 682 (H.C.J.) at paras.
    21-26. The parties agree that the fiduciary is free to otherwise compete once
    his employment ends, provided that he does not do so unfairly:
Cygnal
    Technologies Corp. v. Taylor
, [2005] O.J. No. 3093, (S.C.) at para. 16;
Sanford
    Evans List Brokerage v. Trauzzi
, [2002] O.J. No. 1394 (S.C.) at para. 49.

[34]

In
    my view, Mr. Brulé did not compete unfairly with Veolia, and in the result did
    not breach his fiduciary duty, as a result of Clean Water Works submitting its
    bid to the City of Ottawa.

[35]

The
    trial judges conclusion that Mr. Brulé breached his fiduciary duty to Veolia
    by competing is anchored by his finding that Mr. Brulé was subject to an
    enforceable non-competition covenant and breached that covenant. The
    unfairness aspect of the competition was the breach of contract.  As there
    was no breach of contract, this basis of liability falls away.

[36]

Nor,
    in my view, do the other bases identified by the trial judge  that Mr. Brulé
    left Veolia with the binder of information with respect to prior bids and did
    not tell Veolia that Clean Water Works was going to bid  amount to unfair
    competition.

[37]

I
    will address the issue of the binder first.

[38]

Counsel
    for Veolia argues that this case is on all fours with
Cygnal
.  In that
    case, the former fiduciary employee took sales reports that set out significant
    detailed information about his employers contracts with various customers.  Five
    months after leaving his employment, he bid against his former employer on
    several tenders.  His evidence was that he did not use the information in
    bidding.  McMahon J. found that by keeping this sensitive information, which
    could have been beneficial to someone competing for tendered contracts, and
    then competing directly five months later, the employee had competed in an
    unfair manner.

[39]

The
    trial judge did not find that Mr. Brulé used the information in the binder in
    making his bid, and the evidence is that he did not.  If he did not use the
    information, mere possession of it cannot make the competition unfair. In this
    regard, I respectfully differ from the view of McMahon J. in
Cygnal
.

[40]

Moreover, in my view the trial judge made a palpable error in inferring
    from the evidence that the information in the binder was confidential. No
    witness testified that the information in the binder was confidential. At the
    time, Veolia was known as SARP Sewer-Matic. The only evidence with respect to
    the contents of the binder was that of Mr. Brulé:

Q: when you left SARP Sewer-Matic, certain
    documents left with you --

A: Yes

Q: --that had been there before?

A: That's right

Q: Okay. What were they sir?

A: I believe I took the tender document book.
    It was a three-inch binder with 30, 40, 50 different municipality tenders in
    them. Either we bid it or we did it with the total numbers of the competitors
    and who won them.

Q: Did you use those binders at all with this
    job?

A: No.

Q: And was this a public tender sir?

A: Yes, it was.

[41]

In
Mr. Brulés cross examination he was
    asked again about the contents of the binder:

Q: Yeah. And the file you took had all of the
    tender results for Sewer-Matic for the whole period of time--

A: No, I did not have the whole period of
    time.

Q: Let me finish the question.

A; I'm sorry.

Q: Thank you. It had all of the file, the
    tender results that Sewer-Matic was involved in, including the competitors' per
    meter prices for at least the period of time since SARP bought your business,
    correct?

A: I disagree. I didn't think it went back
    from the day they bought me. There was one binder, and I would have to see it.

Q: All right. But the point is it was a binder
    that was kept by SARP because it was useful for the tender process?

A: That binder was not kept by SARP. I asked
    the girl at SARP Sewer-Matic to make it before I left.

Q: Yeah.

A: There were no other binders before that. I
    deliberately asked the girl to make a binder for me, and I took that binder
    with me.

Q: Right.

A: But what Sewer-Matic had before that is that
    we had every tender and each file for the last 20 years.

[42]

Municipal
    tenders are publically issued and inherently not confidential. Information
    about what Veolias competitors bid could not amount to Veolias confidential
    information, unless, perhaps, Veolia had acquired the information subject to
    the terms of a confidentiality agreement. There was no evidence that this was the
    case. In fact, Mr. Brulé testified that after the tender at issue closed, he
    obtained information from the City of Ottawa with respect to the bids submitted
    by all the competitors, including the prices per metre. Based on the record,
    the type of information in the binder was publically available. It was neither
    confidential nor sensitive.

[43]

Does
    the fact that Mr. Brulé did not tell Veolia that Clean Water Works was
    submitting a bid make his competition unfair?  In the trial judges view, the
    fact that Mr. Brulé knew that Veolia was bidding, but Veolia did not know that
    Clean Water was bidding meant that, [t]hey were not playing on a level playing
    field and that Mr. Brulé clearly had an unfair advantage.  Counsel for
    Veolia submits that had Veolia known that Clean Water Works was bidding it
    would have adjusted its bidding strategy to factor in this additional
    competition.  In my view, a former fiduciary employee who is free to compete is
    not required to tell his former employer that he is about to do so.  It must be
    kept in mind that the restrictive covenant on which Veolia was relying was
prima
    facie
unenforceable. It should also be noted that Veolia was aware that
    Mr. Brulé had obtained a bid package.

[44]

No
    other factors which would render Mr. Brulés competition unfair were drawn to
    our attention.  Clean Water Works bid was submitted in response to a public
    tender; it did not solicit the City of Ottawa.  The tender was issued by the
    City of Ottawa well after Mr. Brulé had left Veolia.  Mr. Brulé did not take
    advantage of a business opportunity developed during his employment.  He did
    not improperly solicit and hire Veolias employees in order to be in a position
    to compete.  Although Mr. Brulé had taught Mr. Peori, who compiled Veolias
    bid, how to put together estimates for sewer work, Mr. Brulé did not know what
    Veolia would bid.  Mr. Brulé and Mr. Peoris evidence describing how they
    determine the amount to bid suggests something akin to an art rather than a
    science.  Mr. Brulé was guessing what Veolia would bid some 15 months after he
    had ceased to be involved with Veolia.  There was no evidence that Veolias
    method of conducting the sewer work was, at the time, unique or proprietary. 
    Mr. Brulé did not make preparations to compete, on company time or at Veolias
    premises while still an employee. Nor was there evidence that Mr. Brulé used or
    disclosed any confidential information of Veolia in competing.

[45]

Veolia
    argues that the fact that Mr. Brulé contacted a known third party competitor to
    ascertain if it was also putting a bid in amounts to unfair competition. Veolia
    submits that Mr. Brule knew the third party as a result of his employment. Veolia
    also contacted that third party.  The fact that the third party was among the
    universe of potential competitors could be ascertained from publically
    available documents.

COSTS

[46]

If
    the parties are unable to agree on the issue of costs at trial and on appeal,
    Mr. Brulé should provide brief written submissions within 14 days, and Veolia
    should provide its brief written submissions in response within 10 days
    thereafter. No reply submissions shall be provided without leave.

Released: March 20, 2012                                      Alexandra
    Hoy J.A.

DD                                                                   I
    agree Doherty J.A.

I
    agree M. Rosenberg J.A.


