The recent case Latreille c. Industrielle Alliance (L ‘), compagnie d’assurance vie, ¹, involving an employee having signed an employment contract imposed by his employer, which contract included a non-competition undertaking, offered the Court of Appeal of Quebec the opportunity not only to state that a contract of employment may be qualified as a contract of adhesion, but also outline the criteria to be considered for to qualify a provision as abusive, if applicable.

Facts

Pierre Latreille (hereinafter “Latreille”) works as a personal insurance agent for L’Industrielle Alliance, compagnie d’assurance-vie (hereinafter “Alliance”). Latreille and Alliance are bound by an agent contract which establishes a payment mechanism. Alliance agents receive, when they sell a new insurance policy, a commission which is paid in advance on the revenue generated by the insurance policy. Furthermore, the contract also includes the following clause:

(our translation)

Latreille is dissatisfied with his position, which has been transformed from an employee position to a service provider, and wishes to become a broker. Following the refusal of Alliance to give him this promotion, he quits his position. Following his departure, Latreille works as a broker, in violation of his non-competition undertaking.

Alliance launches proceedings against Latreille to stop the contravention and to obtain compensation for the damage suffered. Latreille counterattacks by initiating proceedings to obtain payment of amounts that he would have been paid in the absence of clause 14 of the contract. He receives assistance from the Fonds d’aide aux recours collectifs and launches a class action against Alliance.

The Court of Quebec ruled in Alliance on the issue of the non-competition undertaking. The Superior Court examines the various issues raised by the class action, including the validity of clause 14 of the agent contract, and concludes that clause 14 of the contract is not abusive.

Positions of the parties

On appeal, Latreille essentially argues that the judge erred in law by not declaring clause 14 of the contract to be abusive. Alliance claims the contrary.

Decision

The Court of Appeal dismisses the appeal of Latreille, and reiterates the criteria for determining whether a term is unfair. The Court analyzes the provision claimed to be abusive by using four criteria.

The first criterion is the question of commercial usage of the field of activities in which the parties operated. The evidence shows that in the field of insurance, in agent contracts, it is not uncommon to find similar clauses to Clause 14 of the contract between Alliance and Latreille. The Court of Appeal considers that, without being the sole criterion, commercial customs are a consideration in determining whether a term is unfair. In this case, the trial judge stated that the contract between Latreille and Alliance is consistent with customary business practices – it is actually, according to analysis by an expert, an insurance agent contract that is very advantageous to the agent. The Court of Appeal sees no error in that decision.

Secondly, the Court examines the duties of Latreille toward Alliance. The trial judge in his ruling establishes that the duties imposed to Latreille pursuant to the contract are not excessive. They are simply normal duties related to the function of insurance agent. In addition, Alliance supports the costs resulting from the departure of its agents. The Court of Appeal respects the analysis of the trial judge regarding this criterion.

The third criterion analyzed is the ease of understanding of the supposedly abusive provision of the contract. The trial judge considers that the clause is sufficiently clear and understandable to allow Latreille to understand the scope of his undertaking. The Court of Appeal confirms once again that analysis.

The last criterion considered is the existence of an imbalance between the respective obligations of each party. The trial judge believes that Latreille had not established that such an imbalance exists, and the Court of Appeal sees no error in that decision.

In the absence of error in the decision of the Superior Court, the Court of Appeal dismisses the appeal of Latreille and confirms the decision of the trial judge.

Comments

Even though the Court of Appeal did not rule on the nature of the disputed contract, namely whether the contract was a contract of employment or a service contract, the ruling nonetheless reminds us that a mere insurance agent contract may be a contract of adhesion, whose content may be revised, if the reasonableness criteria are not met. Consequently, it is vital for the creator of such contracts to keep the aforementioned four criteria in mind and to ensure that they are complied with so that the content of the agreement will be respected by the courts.

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Facts

Agence Maître Boucher inc. (hereinafter referred to as “Agence”) is a personnel placement agency which is specialized in the field of butchery. In the course of its activities, it executes contracts with butchers, which contracts contain, among others, a non-competition provision. Martin Lessard (hereinafter referred to as “Lessard”) is a butcher working for Agence.

In May 2003, Lessard is sent by Agence to work with a client, Les Entreprises Raphaël Picard Ltée, which operates an IGA grocery store in St-Amable. Lessard works for Agence at this client’s location until October 2004. At this date, Lessard stops working for Agence, but continues to work at IGA St-Amable.

The contract between Lessard and Agence includes a non-competition provision and a penal clause. The relevant portion of the non-competition provision reads as follows:

(our translation)

The penal clause reads as follows:

(our translation)

The amount of penalty is eventually increased to five hundred dollars ($500.00) per day in a subsequent update to the service agreement.

Contention of the Parties

Agence claims from Lessard, the defendant, an amount of one hundred and twenty thousand dollars ($120,000.00) pursuant to a penal clause establishing a penalty equal to five hundred dollars ($500.00) for each day during which Lessard failed to comply with the non-competition undertaking provided by the service agreement entered into by the parties.

Lessard defends himself by claiming that he dealt with Mr. Pothier, ex-officer of Agence and founder of Gesco JFP inc., who told Lessard that he would handle any issue with Agence.

Ruling

The evidence shows that Lessard did fail to comply with the non-competition undertaking. However, the judge severely limits the scope of the penal clause, ordering Lessard to only pay the amount of three thousand dollars ($3,000.00) to Agence.

The judge bases his ruling on sections 1622 and 1623 of the Civil Code of Québec which read as follows:

The judge states that these provisions are intended to allow for compensation of damages and to dissuade non-compliance with contracts. However, penal clauses must not be abusive. In other words, dissuasion is not a justification to claim excessive amounts. The qualification of a penal clause as abusive is the principal limit to the scope of such a provision.

The abusive nature of a provision depends on its purpose and on its scope, in the context of the obligation it is intended to secure.

In this case, the judge rules that an amount of five hundred dollars ($500.00) per day is abusive, as the defendant earns fourteen dollars and fifteen cents ($14.50) an hour. In addition, the evidence shows that the damages suffered by Agence are equal to eight thousand one hundred and fifty-eight dollars and fifty-one cents ($8,158.51), of which only a part was caused by the defendant. Under the circumstances, it is obvious that by claiming an amount of one hundred twenty thousand dollars ($120,000.00) from the defendant, Agence wishes to punish him and make him an example for its other subcontractors, and not only to compensate the loss it suffered. Consequently, the judge reduces the amount of the claim to three thousand dollars ($3,000.00).

Discussion

From this ruling, we can infer that the amount provided in a penal clause must remain realistic when compared to the damages really suffered by the party benefiting from said provision. The penal clause frees a party from the obligation to prove damages, but it doesn’t prevent the other party from demonstrating that the amount claimed is abusive.

In addition, if the penalty amount is set too high, there is a incentive for the party subject to the provision to contest the claim in court, which creates an additional cost for the beneficiary of the provision. Consequently, it is also to the latter’s advantage to set a more reasonable amount, and to reserve the right to eventually claim an additional amount if necessary.

Finally, it is important to mention that in this case, the judge raised on his own initiative the issue of the reasonability of the penal clause. This reinforces the need to ensure that the provision is reasonable, as the amount within may be reduced even if the other party does not consider such provision to be abusive or if it forgets to raise the unreasonability argument.

For more information on non-competition and penal provisions, please register to our courses on business contracts.

Facts:

Société de Cogénération de St-Félicien (Cogénération) and Les industries Piékouagame inc. (Piékouagame) have entered into a supply agreement pursuant to which Piékouagame supplies wood by-products to Cogénération, for use as fuel in Cogénération’s electrical production system. The duration provision of the contract reads as follows:

On May 13th, 2008, Piékouagame notifies Cogénération that it terminates the contract on May 31st, 2008. Cogénération replies by stating that it considers that the contract will remain valid until May 31st, 2012. Cogénération then seeks an injunction to ensure that Piékouagame continue supplying its facility with wood by-products.

Contention of the Parties:

Cogénération claims that the contract is clear, that it has a FIVE (5) years duration, and that since Piékouagame sent a notice of termination in May 2008, the contract expires FOUR (4) years later, in May 2012.

Piékouagame claims that the contract had an initial duration of FIVE (5) years, namely from May 31st, 2001 to May 31st, 2006, and that it was renewed for additional ONE (1) year periods since then. Consequently, it can terminate it on May 31st, 2008.

Ruling:

The Superior Court judge first rules that Provision 3 of the contract is ambiguous. The Court of Appeal affirms that part of the ruling, going into greater detail on the ambiguity of Provision 3.

Specifically, the Court of Appeal rules that the first segment of Paragraph 3.1 , which states that the contrat has a FIVE (5) years duration, contradicts the second segment providing for yearly renewal. In addition, the segment of Paragraph 3.3 providing that the contract shall never have a remaining duration of less than FOUR (4) years contradicts the segment providing for renewal for an additional ONE (1) year period.

As he considers the contract ambiguous, the Superior Court judge can then use other information sources, in addition to the contract, to properly interpret it, among other referring to the testimony of Mr Charles Paul, owner of Piékouagame. The judge ultimately rules that the contract was intended to have an initial duration of FIVE (5) years, followed by additional ONE (1) year renewed periods. Consequently, Piékouagame could terminate the contract on May 31st, 2008. The Court of Appeal also affirms this ruling.

Comments:

Regardless of which interpretation of Provision 3 the parties agreed on initially, the latter could have avoided the entire conflict by fitting the provision in a clearer structure. Provision 3 discusses the following elements:

• Duration
• Effective Date
• Renewal
• Non-renewal

By splitting these concepts in separate provisions, the parties could have avoided the misunderstanding.

If Cogénération’s position was what the parties agreed to, the conflictual provision could have been split as follow:

By splitting the provision in its component parts, and by correctly classifying it within a tried-and-tested contract structure, it becomes easy to:

1. Avoid using the wrong terms (such as substituting a termination notice to a non-renewal notice);
2. Avoid failing to properly describe a mechanism, as such description will have to be detailed in a specific provision;
3. Avoid treating the same matter in different provisions or paragraph, thus ensuring that no contradiction occur between related item.

This clearly illustrates the need for a very structured drafting methodology to avoid overlapping or contradictory provisions. For more information on the best drafting practice, register to our Business Agreements training seminars.

Template

Description

The basic template for a transactionnal contract is a tool intended to be used as a starting point for any type of transactional contract, namely all contracts except partnership agreements. It can be used to draft a very large number of contracts: employment contracts, financing contracts, sales contracts, lease contracts, service contracts, business license contracts, franchise contracts and distribution contracts, to name a few.

This instrument proposes a system for universal storage of the provisions of a transactional contract whose main objective is to end the confusion that prevails in the world of business contracts due to the fact that there are not any generally accepted standards of presentation of this type of legal instrument to date. This storage system based on a set of information modules (known as Parts in the contract), to which a fixed address, i.e. a specific number is assigned in all such contracts to facilitate identifying clauses (termed according to their hierarchy: section, subsection, paragraph or subparagraph) that make up such a module.

This basic model also offers, in order to fill the universal container described in the preceding paragraph, a variety of universal provisions that can be used to specify the contents of each of the parts (information module) and the formulation of such provisions. Some provisions are available in multiple versions. In such case, an alphanumeric indicator (V1, V2) and specific title appears at the beginning of each version so as to distinguish each of them from the others.

Finally, this instrument contains (in its annotated version only), a data sheet listing all the basic legal information regarding such as well as a specific set of annotations for each of the provisions it contains. These annotations can be used either to explain how the storage system found in the basic template works or explain the technical or legal reason for a provisions found in the latter. If applicable, these annotations can also be used to clarify the links between the basic legal information listed in the data sheet and the specific provisions contained therein. Where such annotation exists in a provision, the number of the provision appears after the citation of the law, case law or doctrine, in brackets [ ].

Use

We recommend using the basic transactional template to document any business transaction (other than a partnership) where the law applicable to this contract does not require a mandatory form or text.

The content of this methodological instrument applies to all contracts for business-type transactions regardless of the jurisdiction to which the contract is subject. The storage system proposed in this paper transcends the many jurisdictions which may govern such a contract.

With regard to its legal content, it should be noted that the instrument has been designed according to the law of the province of Quebec, Canada. Any proposed use of this document for a jurisdiction other than the province of Quebec requires validation of its legal content by a lawyer practicing in said jurisdiction.

This lack of methodology itself in part because each contract is seen as unique as regards its subject matter, the style of the author, etc.. The result is a lack of analytical framework, which limits the analysis to the sole knowledge of the analyst.

As memory is at best unreliable, this dependence on individual skills, combined with the specific circumstances applicable to each analysis, yields mixed results, as the quality of the analysis depends solely on the skills of the analyst.

Since such variation is hard to justify in a field supposedly known for its rigorous methodologies, it is important to explore new methods to improve on this lack of rigor. The “Benchmarking” technique is in this respect a very promising method.

“Benchmarking”

This analysis technique is very accessible, as the instrumentation required to implement it is quite simple.

We must first establish a reference point, known as a “Benchmark”. This “Benchmark” is a contract template with detailed and structured content which serves as a reference point. Once selected, the contract template is then used to develop a second document called a “benchmarking grid” designed specifically to record the results of the analysis. This document must include at least three columns of information:

- A first column, titled “BENCHMARK”, is used to reproduce the contents of the benchmark contract;

- A second column, titled “MATCHING PROVISION(S)”, which is empty of content. This area will be used to note which provisions of the analyzed contract are equivalent to the provisions of the benchmark, for comparative purposes;

- A third column, entitled “VARIATIONS/OBSERVATIONS”, completes the benchmarking grid. This is where the user records the significant differences that may exist between the analyzed contract and the benchmark contract;

Once the analyst has access to the required instrumentation, he can easily fill the benchmarking grid by comparing the text of the benchmark contract and the analyzed contract.

Advantages of the technique

The main merit of the technique of benchmarking is to enable the person using it to bring his level of analysis to that of comparative analysis, which is usually richer in information than a simple linear analysis.

The comparative analysis produced from this grid compares favorably with the linear analysis for the following reasons:

- It allows the user to recompile the analyzed contract according to the structure of the template used, which allows the analyst to analyze a contract with a structure he is familiar with;

- It allows the user to see any information deficiencies in the analyzed contract, by identifying the missing provisions for which an equivalent is found in the benchmark contract. If a provision of the benchmark contract is missing in the analyzed contract, this means that there is a hole in the latter. If the missing provision is important, finding this “hole” may be important;

- Conversely, it identifies any gaps in the benchmark contract and facilitates the accumulation of any new knowledge gained from such an analysis. When the bwnchmark contract does not address one of the topics of the analyzed contract, two situations may occur : it may be that the topic is specific to the analyzed contract, in which case there is no need to import it in the benchmark contract, or, if it is a generic topic, the analyst should consider adding the topic to the template contract to make it as comprehensive as possible;

- Finally, it makes it easier to delegate this tasks to subordinates, who can then perform this task with more rigor due to the structure of the benchmarking grid and produce an easier to use final report.

Conclusion

Given the increasing complexity of business agreements, there is no doubt that the current working methods must be adapted accordingly. We believe that the “Benchmarking” technique meets the requirements of the analysis of dense and complicated documents.