Canadian Aero Service Ltd. v. O'Malley et al.

[1972] 1 O.R. 592-608

Trade Offences -- Unfair competition -- Duty of employee to employer -- Employee of company failing to obtain contract for company -- Leaving employment and obtaining contract on own account -- Proposal not based on confidential knowledge -- Whether former employee obligated to former employer.

First two individual defendants, while employed by plaintiff company, attempted to obtain for the company a contract to perform a topographical survey and mapping of part of a country. Subsequently, for personal reasons, these defendants became dissatisfied with their employment, left plaintiff company and with third individual defendant established defendant company. Thereafter the opportunity to obtain the surveying and mapping contract materialized and defendants obtained it but without using secret or confidential information that was the property of the plaintiff company. Held, there is an implied term of the contract of employment that a former employee might not make use of his former employer's trade secrets or entice away his old customers. Other than that he is entitled to enter into competition with his former employer either on his own behalf or as employee of another. First two individual defendants had not breached this obligation. Even had there been a covenant not to compete in respect of possible future contracts as to which they had done promotional work for plaintiff company, such a covenant would be unenforceable where the promotional work of the company was world wide and they would thus be initially prohibited from employing anywhere the skills in which they were trained. Thus, no such prohibition can be implied in their contract. On the facts, even assuming the principle applicable to trustees applied, defendants had done nothing to render themselves liable.

APPEAL from a judgement of Grant, J., 61 C.P.R. 1, dismissing an action for an accounting and payment of profits.

The judgement of the Court was delivered by

[Regal (Hastings Ltd. v. Gulliver et al. (1942), [1967] 2 A.C. 134, [1942] 1 All E.R. 378; Boardman et al. v. Phipps (1966), [1967] 2 A.C. 46; Pre-Cam Exploration & Development Ltd. et al. v. McTavish et al. (1966), 1966 CanLII 61 (SCC), [1966] S.C.R. 551, 57 D.L.R. (2d) 557, 50 C.P.R. 299, 56 W.W.R. 697; Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1894), [1894] A.C. 535; Herbert Morris, Ltd. v. Saxelby (1916), [1916] 1 A.C. 688, distd]

C.L. Dubin, Q.C., R.W. McKimm and R.A. Blair,, for plaintiff,
appellant.

(SECTION)J.P. Nelligan and D.J.Power, for defendants,
respondents, O'Malley, Zarzycki and Terra Surveys Ltd.

Hon. C.H. Locke, Q.C., and K.L.W. Boland, for defendant,
respondent, J.E. Wells.

MACKAY, J.A.:-- This is an appeal by the plaintiffs from a judgement of the Honourable Mr. Justice Grant dismissing the action.

The main issue in the case was whether the defendants were liable to account for and pay to the plaintiff all profits made on a contract between the defendant Terra Surveys Limited and Guyana (formerly British Guiana) for topographical surveying and mapping of part of that country.

The appellant company, (hereinafter referred to as Canaero) was incorporated under the Companies Act, R.S.C. 1952, c.53 [renamed Canada Corporations Act, 1964-65, c.52, s.2; now R.S.C. 1970, c. C-32], with its head office at Ottawa. It was at all times a wholly-owned subsidiary of Aero Service Corporation, an American company which also owned and controlled other subsidiary corporations in other parts of the world. The business of all of these corporations is in the field of topographical surveying and mapping and geophysical surveying throughout the world. Aircraft are used in all of this wor .

In 1961, Aero, together with its subsidiary companies, became a wholly-owned subsidiary of Lytton Industries, Inc., an American corporation with its head office in California.

The defendant O'Malley was employed by Aero in 1936 as a photo lab assistant. He subsequently acquired experience in executive administration and selling. In 1950 he came to Canaero in Ottawa and was general manager and president until he returned to Aero in Philadelphia in 1957. In 1964 he returned to Canaero in Ottawa and was designated as president and chief executive officer until he resigned on August 19, 1966.

The defendant Zarzycki was employed by Canaero in 1953. Shortly thereafter he was name chief engineer and in 1964, executive vice-president and in March, 1965, a director. He had a master's degree in engineering specializing in geodesy (the determining of the horizontal position and elevation of selected points on the earth's surface). He is a doctor of science and engineering specializing in photogrammatry. He has written many articles and lectured extensively and was widely known as an authority in his specialties.

From the time Canaero and its parent company Aero were taken over by Lytton Industries, Inc. no shareholders' or directors' meetings were held by Canaero, as required by the Dominion Companies Act. The defendants O'Malley and Zarzycki were not shareholders of the company and were not appointed to their respective positions of president and vice-president and director by the shareholders or directors. They were entered on the books as holders of these positions on the instructions of a senior official of Lytton. Also on instructions from Lytton they were required to obtain approval from Lytton for any expenditures, including travelling expenses of more than $100. They had no authority to employ or discharge senior personnel.

In these circumstances, in so far as the plaintiff company is concerned I am of the opinion that it is not open to it to say that either of these defendants were in fact either directors or president and vice-president, respectively, of the company:
Wegenast, Law of Canadian Companies (1931), p. 408-9. The Lytton company treated Canaero as a branch office and the relationship of these two defendants to Lytton and Canaero was that of employee and employer with imposing titles but without the authority ordinarily attaching to such titles. This is also borne out by the circumstances that an agreement in writing was entered into in August, 1963, between O'Malley and Lytton relating to an option for the purchase by O'Malley of Lytton stock. The agreement also contained the following clause:

Purchaser further represents, covenants and warrants that he has no contract of employment, written or, formal or informal, with the corporation or any of its subsidiaries or affiliates, and that his employment is terminable at will and without cause by his employer.

One Jacobsen, president of Aero, in his evidence said the employment of both O'Malley and Zarzycki was terminable at will and without cause and that they in turn were entitled to terminate their engagement in the same fashion which I interpret to mean without prior notice as was found by the learned trial Judge.

A large portion of the work in which Canaero and Aero and the other affiliated subsidiary companies controlled by Aero, and in turn by Lytton were engaged was geographical and geophysical surveying and mapping in the underdeveloped countries of the world. This type of work was to a large extent paid for by grants or loans from the governments of other countries, such as the United States and Canada and also the United Nations.

Some time previous to 1966, the American Government adopted a policy that when they supplied the money for such projects that the work should be done by American-owned companies. Canada adopted the same policy that where the project was for the Canadian Government or was to be financed by them, that the contract should go to a Canadian-owned company, unless companies otherwise owned were better qualified to do the work.

The companies engaged in such work (as were Canaero and Aero) would prepare for such underdeveloped countries proposals or briefs for such governments to submit to countries that might be prepared to finance the project the for the purposes of obtaining financing for the work.

Canaero, prior to 1966 had prepared such proposals for a number of countries including Nigeria, Liberia, Saudi Arabia, North-West Australia, Surinam and Guyana. In each case the proposals were prepared by Zarzycki who had gone to Guyana and Nigeria before preparing the proposals for those countries but had not gone to the other countries. In his evidence he said it was not necessary to go to any of the countries for the purpose of preparing such proposals because all the material necessary was available in libraries and from Government departments and that his visits to Guyana for three days in 1962 and four days in July, 1965, were for the purpose of meeting Government officials, the Canaero company's agent in Guyana and examining geographical maps. A proposal for Guyana was prepared by Zarzycki and sent to the Guyana Government in 1965. The contract in controversy in this action was in part for a different area than that covered by the 1965 proposal.

There is no evidence to indicate that Canaero received any contracts as a result of the proposals prepared for the countries I have mentioned.

Turning to the circumstances under which the Guyana contract was awarded to the defendant company. The Guyana Government had approached the Canadian Government for assistance. On July 10, 1966, the Canadian External Aid office of the Government of Canada approved a survey project in Guyana in principle. Cabinet approval was given on August 10, 1966. One of the terms of the agreement was that the Canadian Government would have the right to select the contractor to do the work. In June, O'Malley wrote to the Lytton company setting out his reasons for believing that the plaintiff company could not get the Guyana contract. For some time O'Malley had been dissatisfied with his employment with the plaintiff for a number of reasons. He thought he was entitled to the presidency of Aero in Philidelphia. He learned that he was not to get that appointment. He did not like the limited authority which had been imposed on him in respect of the management of the plaintiff company. Because of the Canadian Government's policy on Government and foreign aid projects he felt that the future prospects for Canaero were not good and that his position with the company, having regard to the provision in his contract for dismissal without notice and without cause, was very insecure. He resigned on August 19, 1966. The learned trial Judge found on the evidence that up to the time of their resignation, O'Malley and Zarzycki had done everything possible to further the interests of Canaero in respect to the obtaining of a contract with Guyana.

On August 6, 1966, there was a social luncheon with the defendants O'Malley, Zarzycki and the defendant Wells, a New Brunswick lawyer who lived in Ottawa and had been employed in Government departments there. He had been a personal friend of O'Malley's for some years and had been a director of the plaintiff company until 1965. He was not otherwise employed by the plaintiff company at any time. He knew that O'Malley and Zarzycki had for some time been dissatisfied with their employment with the plaintiff company. At the luncheon he suggested that O'Malley and Zarzycki should obtain a charter for a company so that it would be available in the event that either of them should later have occasion to use it.

As a result of Well's suggestion they went to Wells' solicitors who applied for and obtained the charter of the defendant company. The original directors and officers of the company were solicitors and secretaries in the solicitors' office. Wells advanced a fee of $400 for the incorporation and was later repaid by O'Malley. The letters patent were issued on August 16, 1966. The capital of the company was 100,000 common shares of no par value and 40,000 perferred shares of a par value of $10. The common stock was issued on September 12, 1966: 25,000 shares each to O'Malley and Zarzycki and one Redford; 24,999 shares to one Turner and one share to Wells.

Subsequently, Wells, on November 6, 1966, made a further investment in the company. On August 19th, O'Malley told Zarzycki and others in the plaintiff company that he had resigned and was forming a company to do survey work. Of these persons, Redford, a consultant, but not an employee of the plaintiff indicated his wish to join the company. Turner, who was an employee of the plaintiff also indicated his wish to join. He had on a number of occasions told both O'Malley and Zarzycki that he was dissatisfied and intended to leave when other work was available. Zarzycki did not decide to join the new company until several days later when he also resigned from the plaintiff company.

On August 22, 1966, O'Malley went to see an official in the External Affairs Department whom he had known for some time and told him that he was organizing a company to do survey work. On August 18, 1966, the Department of Mines and Technical Surveys had written to the Director of External Aid recommending that four companies, including the plaintiff company be invited to submit proposals for the Guyana survey and that arrangements were being made to prepare a briefing session. On the letter, in pencil was an evidently subsequent notation, "general photogramy Terra Ltd.", and the Terra company were subsequently invited to attend the briefing session and submit a proposal.

The briefing session was held on August 29, 1966, at which time the Department of Mines and Technical Surveys made available complete specifications for the project including maps of the area to be surveyed. Both the plaintiff company and Zarzycki, on behalf of the defendant company were amongst those attending the briefing and later submitting proposals. One Thompson, an officer in charge of the external aid projects of the Department of Mines and Technical Surveys had visited Guyana and prepared the specifications for the work to be done.

On September 16th, Thompson made a report (which is set out in full in the learned trial Judge's reasons) giving his reasons for recommending the Terra company proposal. The proposals were for the purpose of selecting a contractor. Following the selection, the contract price and other terms were to be negotiated. The contract was made with the Guyana Government subject to approval by the Canadian authorities.

The submission of counsel for the appellant is that O'Malley and Zarzycki, as chief executive officers of the plaintiff company were in a fiduciary capacity and that they learned of the opportunity to obtain the Guyana contract by reason of their employment and used secret and confidential information that was the property of the plaintiff company to obtain the Guyana contract. As a preliminary to this submission he attacked the learned trial Judge's findings that O'Malley and Zarzycki (1) had up to the time they terminated their employment with the plaintiff used every effort to secure the Guyana contract for the plaintiff; (2) that the opportunity of obtaining the Guyana contract did not materialize until after they had terminated their employment; (3) that they had not obtained the contract by the use of secret and confidential information that was the property of the plaintiff company; and (4) O'Malley and Zarzycki were justified in leaving their employment without prior notice.

Our attention was drawn to the fact that the evidence, particularly that of O'Malley as given at the trial, differed in some respects from his evidence on discovery; that there was a conflict in certain respects between the evidence of the individual defendants and other witnesses. Counsel submitted that in preparing the proposal Zarzycki used material from what was called in evidence the Aslakson Manual and material from other proposals which he had prepared for use by other countries.

On the evidence Zarzycki and many others in this particular field of work were familiar with the manual which was compiled from other material to which anyone in this field of work had access. It had been distributed to others engaged in this field of work and lectures on the manual had been given by the author Aslakson and published in scientific journals.

As to Zarzycki having used materials from other proposals prepared by him, it was not confidential knowledge that was the property of the plaintiff company that enabled the defendants to submit a proposal and obtain the Guyana contract, it was the personal knowledge of the two defendants O'Malley and Zarzycki, particularly that of Zarzycki by reason of his extensive qualifications, education and experience that enabled these two defendants on behalf of the defendant company to submit a proposal and subsequently obtain the contract for the defendant company. The opportunity to obtain the Guyana contract only arose when the Canadian Government decided to finance the project and invited all of the companies operating in Canada in this field to submit proposals. At this stage the opportunity was not exclusive to the plaintiff, it was common knowledge to all companies engaged in this field of work.

The learned trial Judge accepted the evidence of all the individual defendants as given at the trial, including the explanations by Zarzycki as to how and what material he had used in preparing the proposal for the contract in question. The learned trial Judge is a very experienced trial Judge and I am not prepared to disagree with his findings of fact or credibility.

Counsel for the plaintiff relied mainly on the cases of Regal (Hastings) Ltd. v. Gulliver et al. (1942), [1967] 2 A.C. 134, [1942] 1 All E.R. 378; Boardman et al. v. Phipps (1966), [1967] 2 A.C. 46, and Pre- Cam Exploration & Development Ltd. et al. v. McTavish et al. (1966), 1966 CanLII 61 (SCC), [1966] S.C.R. 551, 57 D.L.R. (2d) 557, 50 C.P.R. 299.

The author of Hanbury's Modern Equity, 9th ed. (1969), at pp. 372-4, adopts the statement of Clauson,J., in Re Thomson, [1930] 1 Ch. 203, as follows:

" ... an executor and trustee having duties to discharge of a fiduciary nature towards the beneficiaries under the will, ... shall not be allowed to enter into any engagement in which he has or can have a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

. . . . .

" ... The rule has been applied to agents, soliciors, company directors, company promoters, tenants for life, partners, confidential employees, ... But it is not safe to make the attractive over-simplification of saying that a fiduciary must always account for all gains which come to him by reason of his fiduciary position."

Essentially the problem is one of determining the limits of the rule. "Rules of equity have to be applied to such a great diversity of circumstances that they may be stated only in the most general terms and applied with particular attention to the exact circumstances of each case."

. . . . .

But this still leaves open the question, to be determined on the facts of each case, whether the opportunity for profit arose by reason of the fiduciary position.

In 84 L.Q.R. pp. 472-502 (1968), Gareth Jones in an article entitled "Unjust Enrichment and the Fiduciary's Duty of Loyalty" discusses the leading cases in England, the United States and Canada. Also of interest are articles by L.S. Sealy in the Cambridge L. Jo. pp. 69-80 (1962), and by A.J. McClean in 7 Alta. Law Rev. p. 218-38. (1969).

In the Regal (Hastings) case, supra, directors formed a subsidiary company for the purpose of acquiring the leases on two cinemas so that they could sell together with the leased cinemas, a cinema owned by the Hastings company. The Hastings company did not have enough capital to take up the shares in the subsidiary company so the directors and the solicitor of Hastings took up the balance of the shares. Both companies were sold resulting in a substantial profit on the shares of the subsidiary company. The four directors including the president and the solicitor each undertook to subscribe for 500 shares. The president allotted his 500 shares to other companies in which he held a shareholder interest. The directors, aside from the president, were held to be liable to account for the profits made by them on the shares they had subscribed to in the subsidiary company although on the evidence the Regal (Hastings) company could not themselves have taken up the shares and therefore suffered no damage. The president was held not liable, he having alloted the shares to which he was to subscribe to other companies in which he had an interest. The solicitor, although he was privy to the entire transaction and obtained his knowledge of it only by reason of his position as solicitor to the Hastings company and not by reason of his personal knowledge was also held not liable to account for his profits.

The grounds on which liability was founded in the Regal (Hastings) case were stated by Lord Russell of Killowen at p. 147: "[that the directors had acquired the shares] by reason, and only be reason of the fact that they were directors of Regal, and in the course of their execution of that office". Lord Macmillan at p. 153 said that the directors were accountable for any profit which they made if it was by reason and in virtue of their office. Lord Porter at p. 158 said "that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does, he must account for the profit so made".

Lord Wright went further; at p. 154 he said:

... whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in a fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it ... The most usual and typical case of this nature is that of principal and agent. The rule in such cases is compendiously expressed to be that an agent must account for net profit secretly
(that is, without the knowledge of his principal) acquired by him in the course of his agency.

In Boardman et al. v. Phipps, supra, the defendants were the solicitor to a trust and one of the beneficiaries. The trust held a large block of shares in a company. On the advice of the defendants and by reason of inquiries made by them in the course of their duties respecting the trust they learned that the shares in the company had a greater value than was warranted by the dividends and advised the trust to purchase a majority holding in the company. This the trust refused to do and the two defendants then themselves purchased shares which would enable them, together with the shares held by the trust, to control the company. Although they were held to have acted honestly and in good faith, and it was held that the trust had not only suffered no loss but had received a benefit by reason of the actions of the defendant in that the value of the shares held by the trust were increased. Nevertheless, the House of Lords in a three to two decision held the defendants accountable for the profits they had made on the ground that they had obtained the information upon which they acted by reason only of their position and which they would not otherwise have obtained.

In the Pre-Cam case, supra, the company was employed to do exploratory work on 15 mineral claims owned by the plaintiff Murtack and "to follow-up any anomalous conditions that might be found to extend from this block of claims in any direction". The defendant McTavish as an employee of Pre-Cam was engaged in this work and in the course of it found that the mineralized zone extended beyond the claims. He terminated his employment with Pre-Cam and staked the adjoining mineralized area in his own name. Before trial Murtack was added as a plaintiff.

Judson, J., at p. 555 S.C.R., pp. 560-1 D.L.R., said:

Neither Pre-Cam nor McTavish, its servant, could acquire these connected claims against the interest of Murtack. ....I think that it was a term of his employment, which McTavish on the facts of this case understood, that he could not use this information for his own advantage.... The constructive trust is imposed in a case of this kind because of the mere use of confidential information for private advantage against the interest of the person who made the acquisition of the information possible.

The author of Hanbury's Modern Equity, supra, at p. 377 and Gareth Jones in his article at p. 486 L.Q.R., supra, both criticize the judgment in the Boardman case, supra, and prefer the reasoning of the dissenting judgment of Lord Upjohn. Jones points out that this decision is in conflict with the decision of the Supreme Court of the United States in Manufacturer's Trust Co. v. Becker, 338 U.S. 304. He also is of the view that the English Courts have gone much further in applying to other relationships the doctrine applicable to trustees in imposing liability, than the American or Canadian Courts.

The present case differs from both the Regal (Hastings) case and the Boardman case in a number of respects. In both those cases the defendants entered into and completed the impugned transactions while still retaining their positions as directors in the Regal (Hastings) case and as solicitor to the trust and beneficiary in the Boardman case; they acquired their knowledge of the opportunity and of the necessary information enabling them to take advantage of the opportunity only by reason of their respective positions and not by reason of their own personal skills and knowledge.

In the Pre-Cam case the defendant was in breach of his contractual duty as an employee of Pre-Cam. Pre-Cam suffered no loss, however, on the facts he also owed a duty in equity arising out of his contract of employment to Pre-Cam's co- plaintiff Murtack and on the equitable principles applicable in the trustee cases he was held to be a trustee for Murtack of the claims he had staked.

For the reasons that I have stated I am of the opinion, as was the learned trial Judge, that even if the individual defendants had fallen within the classification of persons to whom the principle applicable to trustees applied that the plaintiff in the present case has failed on the facts to establish that what the defendants did, brought them within the principle of the Regal (Hastings) case and that on the facts they cannot be found liable under that principle.

I am also of the view that the proper principles to be applied in the circumstances of this case are those that are applicable in the case of an employer and employee rather than that of trustee. The common law implies as a term of the contract of employment, that a former employee may not make use of his former employer's trade secrets or entice away his old customers. Other than that he is entitled to enter into competition with his former employer either on his own behalf or as employee of another.

I propose to refer to only a few of the leading cases. Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1894), [1894] A.C. 535, and Herbert Morris, Ltd. v. Saxelby (1916), [1916] 1 A.C. 688, were both cases involving restrictive covenants: in the Nordenfelt case, a covenant by the vendor of a business and in the Saxelby case, a covenant by an employee. In the Nordenfelt case Lord Macnaghten traces the history of the cases feeling with such covenants to the time of Queen Elizabieth I and points out the differing considerations that apply to a covenant by a vendor and a covenant by an employee.

In the Saxelby case the defendant was an engineer who had been employed by the plaintiff company for many years. The covenant was in very wide terms; cls. 6 and 7 were as follows [at p. 690]:

"6. The employee shall not during his employment nor at any time afterwards divulge nor communicate to any person corporation or firm any information which he may receive or obtain in relation to the company's affairs and customers and all instructions drawings notes and memoranda made by the employee or which may come into his possession while engaged as aforesaid shall be the exclusive property of the company.

"7. In consideration of the agreement hereinbefore contained the employee covenants and agrees with the company their successors and assigns that he will not at any time during a period of seven years from the date of his ceasing to be employed by the company whether under this agreement or otherwise howsoever either in the United Kingdom of Great Britain or Ireland carry on either as principal agent servant or otherwise alone or jointly or in connection with any other person firm or company or be concerned or assist directly or indirectly whether for reward or otherwise in the sale or manufacture of pulley blocks, hand overhead runways, electric overhead runways, hand overhead travelling cranes or any part thereof or be concerned or assist as aforesaid in any business connected with such sale or manufacture."

Saxelby left his employment with the plaintiff and obtained employment with a competitor engaged in the same specialized business as the plaintiff. In his employment with the plaintiff he had access to and obtained knowledge of numerous charts of the plaintiff which gave details of the manufacture of their specialized products and the strengths of the materials employed. They also contained a large amount of technical information as a result of experiments made by the appellants and their employees; also tables and curves indicating the strength and composition of the materials for any particular job. All these documents were treated as confidential and although handed out to employees, precautions were taken to insure their return.

At p. 698, Lord Atkinson said:

It will be observed that there is no clause in covenant No. 6 prohibiting the "using" of information, as distinct from the divulging or communicating of it, and Joyce J. points out that nothing but an express provision against "using" the information would justify such an injunction as is claimed. The matter, though to a great extent immaterial, since the appellants admit they cannot establish that any breach of this covenant was committed by the respondent, or even threatened, is not without some significance inasmuch as it tends to show that what the appellants desired from the first was that the respondent should be restrained from using in the service of some other employer that skill and knowledge which he had acquired by the exercise of his own mental faculties on what he had seen, heard, and had experience of in the employment of the appellants themselves. At p. 699, he quotes from the jugement of Lord Macnaghten in the Nordenfelt case, supra, as follows:

"The true view at the present time, I think, is this: The public have an interest in evey person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case."

And at p. 701 [quoting James, V.-C., in Leather Cloth Co. v. Lorsont (1896), L.R. 9 Eq. 345]:

"The principle is this: Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labour, skill, or talent, by any contract that he enters into."

And on pp. 701-2, after discussing covenants by the vendor of a business, he continues:

Restrictions on freedom of trading are in both classes of case imposed, no doubt, with the common object of protecting property. But the resemblance between them, I think, ends there.

In all cases such as this, one has to ask oneself what are the interests of the employer that are to be protected, and against what is he entitled to have them protected.

He is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use. He is also entitled not to have his old customers by soliciation or such other means enticed away from him. But freedom from all competition per se apart from both these things, however lucrative it might be to him, he is notentilled to be protected against. He must be prepared to encounter that even at the hands of a former employee.

And at pp. 703-4:

It is claimed, however, by the appellants that this organization and general method of business are trade secrets which the respondent is not entitled either to divulge to another, or use his knowledge of them in the service of any persons other then themselves.

The respondent cannot, however, get rid of the impressions left upon his mind by his experience on the appellants' works; they are part of himself; and in my view he violates no obligation express or implied arising from the relation in which he stood to the appellants by using in the service of some persons other than them the general knowledge he has acquired of their scheme of organization and the methods of business.

He then, at p. 704 refers to and adopts the statement of Farwell, L.J., in Sir W.C. Leng & Co. Ltd. v. Andrews (1908), [1909] 1 Ch. 763 at p. 773: "The argument which has been addressed to us on behalf of the respondents does not bring the case within that doctrine. That doctrine does not mean that an employer can prevent his employee from using the skill and knowledge in his trade or profession which he has learnt in the course of his employment by means of directions or instructions from the employer. That information and that additional skill he is entitled to use for the benefit of himself and the benefit of the public who gain the advantage of his having had such admirable instruction. The case in which the Court interferes for the purpose of protection is where use is made, not of the skill which the man may have acquired, but of the secrets of the trade or profession which he had no right to reveal to any one else ..."

Lord Parker at p. 707, after referring to Lord Macnaghten's opinion in the Nordenfelt case and referring to the condition that any restrictive covenant must be reasonable in the interests of the contracting parties, said:

With regard to the former test, I think it clear that what is meant is that for a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed.

And at p. 709:

It is quite different in the case of an employer taking such a covenant from his employee or apprentice. The goodwill of his business is, under the conditions in which we live, necessarily subject to the competition of all persons
(including the servant or apprentice) who choose to engage in similar trade. The employer in such a case is not endeavouring to protect what he has, but to gain a special advantage which he could not otherwise secure. I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the Court. Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilize information confidentially obtained.

And at pp. 709-10:

If a covenant restraining competition by an employee were in itself reasonable, it is difficult to see why the Court has considered in almost every case whether such covenant could be justified as no more than sufficient to protect trade connection and trade secrets.

The point did not arise for actual decision until Sir W.C. Leng & Co. v. Andrews, [1909] 1 Ch. 763. In that case the covenantor was a newspaper reporter. He did not in the course of his employment come across the covenantee's customers, nor was he entrusted by his employers with any confidential information whatever. The effect of the covenant, therefore, was merely to prevent him using his personal skill and knowledge within the limited area mentioned in the covenant; in other words, it was merely to preclude competition. In these circumstances it was unanimously held that the covenant was bad.

In Mason v. Provident Clothing and Supply Co., [1913] A.C. 724 it was argued, apparently for the first time in this class of case, that an employer might reasonably say "I will not have the skill and knowledge acquired in my employment imparted to my trade rivals," and that the validity of the restraint did not depend upon personal contact with the employer's customers, but upon the fact that the employee gained that general knowledge which put him into a position to compete with his master and made him a source of danger, against which the master was entitled to protect himself.

This argument was rejected by your Lordships' House, and the restraint in question was held bad, as being wider than was necessary to protect the employer from injury by misuse of the employee's acquaintance with customers or knowledge of trade secrets. In fact the reason, and the only reason , for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is -- having regard to the duties of the employee -- reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business.

The judgement of McRuer, C.J.H.C., in Detroit Football Do. v. Dublinski (1956), 1956 CanLII 134 (ON SC), [1956] O.R. 744, 4 D.L.R. (2d) 688 [reversed (1957), [1957] O.R. 58, 7 D.L.R. (2d) 9], contains an exhaustive review of the cases on restrictive or negative covenants in contracts for personal services. In concluding his judgment he said [at p. 768 O.R., p. 709 D.L.R.]:

All through the cases runs the thread of the principle that a Court of equity will only protect a plaintiff for a reasonable period against likely damage by reason of the breach of a negative covenant, express or implied, whether it be attached to a contract for personal services, a partnership or the sale of a business. The Court does not act with the same vigilance where the covenant is attached to a contract for personal services as it does where the covenant is attached to a contract for the sale of a business.

In the present case, the relationship of the defendants O'Malley and Zarzycki with the plaintiff was that of employer and employee. The contract between them was for personal services. There was no covenant entered into by either O'Malley or Zarzycki restricting their activities after leaving their employment with the plaintiff and on the evidence in this case there can be no implied covenant that would prevent them from competing with the plaintiff and others in obtaining the Guyana contract. A comparison of the Regal (Hastings) case and the Boardman case with the Saxelby case illustrates the different principles that are applicable in the case of a trustee relationship as opposed to that of the employer and former employee relationship. In the trustee cases it is unnecessary for the plaintiff to prove that the trust or the shareholders or the principal in an agency case suffered any loss. Liability is imposed as a penal sanction for the misconduct of the trustee, director or agent and they are required to account for and pay to the trust or the company or their principal all profits made by them in respect of the impugned transaction on the ground either of unjust enrichment or that they are constructive trustees and that to allow them to retain the profits would be contrary to public policy. On the other hand, an action by an employer against a former employee is based on the contractual relationship and is for a breach by the employee of his duty, express or implied, to his employer and damages or an injunction are given to compensate the employer for a loss suffered by the employer by reason of the conduct of the employee in making use of his employer's secret processes or confidential lists of customers or an injunction to prevent anticipated loss or damage, and the employer must prove the loss or the probable loss.

In the contract cases it is always open to an employer to require a restrictive covenant from an employee as a term of his employment as was done in the Saxelby case. It is not open to a cestui que trust, who does not appoint the trustee nor to the shareholders of a company who elect directors to obtain this form of protection by contract. This being so the equitable rules of conduct applying to trustees and directors were defined by the Courts of equity, and while in some cases the conduct may be both a breach of contract and a breach of the rules of equity, other cases, depending on the facts, fall into only one category or the other.

Even if there had been an express term in the contract of employment of O'Malley and Zarzycki, that on their employment they would not, either on their own behalf or on behalf of other employers compete in respect of possible future contracts in respect of which they had done promotional work for the plaintiff, such a covenant would be unenforceable because the promotional work of the company was world wide and they would thus be initially prohibited from employing anywhere the skills in which they were trained; they would be banned indefinitely in regard to any such contracts because their promotions might not come to fruition for years; other competitors of Canaero were engaged in such promotional work. These circumstances, together with the provision for the peremptory termination of their employment would render such a provision unreasonable and unjust.

For the same reasons no such prohibition can be implied in their contracts.

Also, in the present case Guyana was not a customer of the plaintiff, it was at best a potential customer, and even as a potential customer not one that was exclusive to the plaintiff. It was open to anyone to solicit or do promotional work to endeavour to obtain a contract for any prospective survey work. Moreover, the defendants and all other companies engaged in this work, learned of the opportunity for obtaining the contract by being invited by a department of the Canadian Government to attend a briefing session and submit proposals and as held by the learned trial Judge the defendants were enabled to obtain the Guyana contract by use of their personal education, skills and knowledge together with the information obtained by them at the briefing session rather than by any secret or confidential knowledge belonging exclusively to the plaintiff. The appellant in this case does not allege that if the defendants had not obtained the Guyana contract that they could have done so, so they have not proved any loss or damage. As to the defendant Wells, he had never been employed by the plaintiff, he had been a director but no directors, meetings were held after the Lytton Company took over control of the plaintiff company in 1961 and he resigned in 1965. His advice as to forming the defendant company was that of a friend of O'Malley. Any liability as to Wells had to be founded on the allegation of a conspiracy with the other defendants and as found by the learned trial Judge, the evidence did not support a finding of conspiracy.

As to the other allegations and claims against the defendants, I adopt the findings and reasons of the learned trial Judge.

I would dismiss the appeal with costs.

Appeal dismissed