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 abreach, 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 as a small advertising firm. Although VertaNet did not suffer any damage, VertaNet sued Ibolya claiming $500,000. What is the likely outcome?
A) Although the amount claimed is unconscionable, the clause will be enforced as it is writing.
B) Unless the $500,000 had been prepaid, Ibolya has no good defence.
C) Liquidated damages clauses are illegal and therefore void.
D) The non-competition clause is likely a penalty and therefore unenforceable.
E) Non-competition clauses generally are void as not being in the public interest.

Question

Quizplus · Accepted Answer

The non-competition clause is likely a penalty and therefore unenforceable. The amount of $500,000 is high and does not reflect the actual damages that VertaNet would suffer if Ibolya were to breach the non-competition clause. The clause is most likely a penalty designed to deter Ibolya from competing with VertaNet rather than to compensate VertaNet for any actual loss suffered. Therefore, the clause is likely unenforceable as a penalty clause.

Ibolya Entered into an Employment Contract with a Toronto Advertising