Ibolya entered into an employment contract with a Toronto advertising firm, VertaNet Ltd. The agreement included a non-competition clause that prevented her from participating in the advertising field in Toronto for five years after termination of her employment. In the event of a breach, the contract provided that Ibolya would have to pay VertaNet the sum of $500,000 as liquidated damages. Ibolya worked for VertaNet for a period of time, then took another job in Vancouver where she worked for four and half years. Six months before the expiry of the five-year period in her VertaNet contract, Ibolya returned to Toronto to take a part-time position at a small advertising firm. Although VertaNet did not suffer any damage, VertaNet sued Ibolya claiming $500,000. What is the likely outcome?
A) The non-competition clause is likely a penalty and therefore unenforceable.
B) Although the amount claimed is unconscionable, the clause will be enforced as it is writing.
C) Non-competition clauses generally are void as not being in the public interest.
D) Liquidated damages clauses are illegal and therefore void.
E) Unless the $500,000 had been prepaid, Ibolya has no good defence.

Question

Quizplus · Accepted Answer

The non-competition clause is likely to be considered a penalty because it imposes a significant financial burden ($500,000) on Ibolya without any actual damages suffered by VertaNet. Courts often scrutinize such clauses for reasonableness in terms of duration, geographic scope, and the interests being protected. A clause that imposes an excessive financial penalty, especially when no harm is demonstrated, can be deemed a penalty rather than a genuine pre-estimate of loss, making it unenforceable.

Ibolya Entered into an Employment Contract with a Toronto Advertising