January 1, 2003 By: Janice B. Payne
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In recent years there has been a move away from the traditional employer – employee relationship. More workers are now self-employed, self-contractors, or sub-contractors hired through temporary help agencies or consulting firms.1 Not surprisingly, the obligations a former consultant/sub-contractor owes towards the consulting firm that initially placed him or her in a position, have recently been addressed.

The Ontario Superior Court of Justice Decision in IT/NET Ottawa Inc. v. Berthiaume2 illustrates that a duty of confidentiality can effectively place a fiduciary type noncompetition obligation upon a non-fiduciary. Sub-contractors will not be permitted to take advantage of confidential information obtained as a result of their employment to redirect opportunities from the consulting firm that placed them in the position in the first place.

The Facts

The plaintiff, IT/NET Ottawa Inc. ("IT/NET") placed the defendant, Mr. Berthiaume, with the federal government in the SXID Branch of the Department of Foreign Affairs and International Trade ("SXID") from 1996 to 2000 as a consultant.

When Mr. Berthiaume became one of IT/NET's subcontractors in August 1996 he signed a Master Agreement that included non-solicitation and non-competition clauses, effective for 12 months after termination of the agreement. It also contained a duty of confidentiality clause.

Mr. Berthiaume was informed that the non-solicitation and non-competition clauses meant that he could not go back to his SXID position through another consulting firm at the end of the IT/NET – SXID contract. Likewise, he knew the Master Agreement remained in force throughout his relationship with IT/NET even though the agreement was not re-signed every time the work assignment changed.

The parties also executed supplementary agreements, which became appendices to the Master Agreement, each time the contract with SXID was renewed. These specified SXID as IT/NET's client, and confirmed Mr. Berthiaume's role, remuneration, and the start and end dates of the agreement.

Prior to June 1998 Mr. Berthiaume asked IT/NET for more money and more training. On June 16, 1998 he gave written notice that IT/NET could no longer subcontract him out. However, the parties soon resolved their differences, and on June 19, 1998 an agreement was signed giving IT/NET the right to subcontract Mr. Berthiaume's services at an increased rate of pay. With Mr. Berthiaume as subcontractor, IT/NET secured a further contract with SXID.

Despite IT/NET's efforts, Mr. Berthiaume avoided signing a supplementary agreement because he no longer wanted to be bound by the Master Agreement. He did not communicate his intention to IT/NET, but simply remained silent. The relationship between the parties otherwise continued as before, with the exception of the pay increase.

On May 29, 2000 Mr. Berthiaume again sought a pay raise and advised IT/NET not to use his name as a service provider or contractor. IT/NET said another pay raise was not possible. As a result, Mr. Berthiaume gave Pertinex Software authority to use his name to bid for contracts. In 2000, Pertinex Software was successful in the bidding process with SXID, and Mr. Berthiaume continued with Pertinex in the same role he had occupied as an IT/NET subcontractor with SXID.

The Decision

The Solicitation and Non-Competition Clauses

Justice Aitken was of the view that IT/NET had a proprietary interest warranting protection through a restrictive covenant. Through its marketing procedures, IT/NET developed business opportunities of which it or other companies would not otherwise have been aware, and there was a reasonable expectation that a profit would result from that investment.

Mr. Berthiaume had the opportunity to get to know the needs of his particular work environment, and develop personal relationships with key people at SXID because IT/NET put him in that position. He only knew about SXID's need for a consultant in 2000, the technical requirements of the position and the type of proposal that had been successful in the past by reason of his subcontract relationship with IT/NET. The company had a proprietary interest in that information worthy of protection.

Nevertheless, the non-solicitation and non-competition clauses in the Master Agreement were unenforceable for several reasons. First, the wording of the clauses regarding termination of the agreement and which employees, subcontractors, and clients it applied to was vague and ambiguous. The restrictive covenants were also contrary to public policy because they provided too wide a prohibition against trade and competition.

Furthermore, the clauses were not reasonable as between the parties. The wording of the clauses went further than required to protect IT/NET's interests, and would have prevented Mr. Berthiaume from seeking work at job sites with which he had no contact or relationship while at SXID. Had the clauses only placed a restriction on the ability of a consultant to go back to the same position through a different service provider, the covenants would have been reasonable.

Duty of Confidentiality

Although he was not an employee or a fiduciary, Aitkin J. concluded Mr. Berthiaume nevertheless had both a contractual duty of confidentiality, and a common law duty not to exploit confidential information obtained while working on a subcontract. In using the information he gathered as a subcontractor for IT/NET at SXID to help Pertinex secure the contract for his position when it was renewed, Mr. Berthiaume breached those duties. In Aitken J.'s words:

… under the common law, Berthiaume was obliged not to exploit confidential information it obtained while working on contract for IT/NET to the detriment of IT/NET. Berthiaume became aware of SXID's needs for someone to fill the position he was in, he learned how much IT/NET had bid for the contract he was fulfilling, he learned about the technical aspects of IT/NET's proposal to SXID and he learned when that IT/NET-SXID contract was coming up for renewal. By sharing this confidential information with Pertinex, one of IT/NET's competitors, Berthiaume was able to give Pertinex a competitive advantage it would not otherwise have had. In fact Pertinex would not have been aware of IT/NET's contract coming up for renewal and would not have been invited to respond to the RFP had Berthiaume not shared this information with Daoust. The duty of confidentiality clause was included in the Master Agreement to cover precisely this type of situation. Berthiaume breached that clause.

Result

In the end, IT/NET was awarded $22,000 in damages for lost revenues. This covered the revenues IT/NET would have earned had it been successful in the bidding process for the 2000 contract. Damages for lost revenues beyond that point were not awarded because there was inadequate evidence to establish that SXID would have continued to seek a consultant to fill Mr. Berthiaume's position in 2002 and beyond. IT/NET was also awarded punitive damages of $2,000 as a result of the underhanded way Mr. Berthiaume went about trying to distance himself from the terms of the Master Agreement.

Concluding Remarks

In a previous article,3 I examined the obligations a former employee owes to a previous employer upon moving to new employment, and the liability that may flow (to the employee or the new employer) if those obligations are not fulfilled. I noted that these obligations are often contractual duties, such as those contained in confidentiality and non-competition clauses. However, they could also be implied by the common law, and include the duty of confidence with respect to confidential information, which is a duty owed by all employees, as well as the special fiduciary duties owed by very senior or key personnel.

It is well established that fiduciary employees owe a higher duty of good faith to their former employer than do ordinary employees. Generally, a fiduciary employee cannot, even absent a restrictive written agreement, solicit customers of the former employer or redirect opportunities of which he or she became aware while employed by the former employer.

IT/NET Ottawa Inc. v. Berthiaume indicates that courts will imply a fiduciary type duty upon a sub-contractor not to redirect from the consulting firm opportunities of which he or she became aware as a result of being placed in a position by that agency.

In the wake of this decision, both consultants and consulting firms should reexamine the methods they use to secure contracts. Consultants should be careful not to exploit opportunities at the expense of their former placement agencies if those opportunities arise as a result of that previous relationship. Likewise, consulting firms should take care not to use consultants who are doing so to secure contracts against competitors.

Employers and employees should also take note. A similar fiduciary type duty may be implied in the employer – employee context. Non-fiduciary employees already have a duty of confidence with respect to confidential information. It would not be a big step to extend that concept to include a duty not to take advantage of confidential information and redirect opportunities from a former employer to a new employer.

Finally, this decision reminds us that non-competition and non-solicitation clauses should be drafted as narrowly and precisely as possible in order to ensure enforcement by the Courts.

Mr. Berthiaume has appealed the decision. Therefore, whether the reasoning in IT/NET Ottawa Inc. v. Berthiaume will remain the state of the law in Ontario will depend upon the outcome of the appeal.

(Originally published in the Executive Employment Newsletter – Volume X, No. 2, 2003)


1 J. Fudge, "New Wine into Old Bottles?: Updating Legal Forms to Reflect Changing Employment Norms" (1999) 33 U.B.C. L. Rev. 129 at 137, 139.
2 IT/NET Ottawa Inc. v. Berthiaume, [2002] O.J. No. 4256 (S.C.J.).
3 See Janice B. Payne, "Employer and Newly Recruited Employee Could be Liable to a Former Employer" (1995) 3 Executive Employment Law at 127.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law