Karavos v Smith, 2021 ABQB 714

Court of Queen’s Bench of Alberta Citation: Karavos v Smith, 2021 ABQB 714 Date: 20210907 Docket: 2104 00127 Registry: Grande Prairie Between: Matthew Karavos and Matthew Karavos Professional Dental Corporation Applicants - and - Curtis Smith and Curtis D.P. Smith Professional Corporation Respondents _______________________________________________________ Reasons for Decision of the Honourable Madam Justice M.H. Hollins _______________________________________________________ [ 1 ] Dr. Curtis Smith is a dentist in Grande Prairie, Alberta and has practised there for many years. Dr.

Karavos is a dentist who purchased Dr. Smith’s dental practice, known as Northern Dental in 2017 as part of Dr. Smith’s plan to begin winding down his active involvement in dentistry. I will refer to them only by their names even though their professional corporations are respectively parties as well. [ 2 ] As part of the sale to Dr. Karavos, Dr. Smith agreed to continue working at Northern Dental for a period of three years.

He also agreed that, after leaving and for five years thereafter, he would not practice dentistry within a 5-kilometre radius of the Northern Dental clinic and would not solicit any patients of that practice.

[3] Dr. Smith had hoped to stay on past the 3-year mark, but was advised in August of 2020 that Dr. Karavos did not intend torenew his contract. Dr. Smith has alleged that misrepresentations were made to him about his ability to remain with Northern Dental untilhe fully retired, but those need not be dealt with on this application. [4] Shortly after leaving Northern Dental, Dr. Smith joined a dental practice said to be “across the street” from Northern Dentaland certainly within a 5-km radius, apparently in reliance on legal advice that the restrictive covenants were not enforceable. [5] Dr.

Karavos has applied for an interim injunction to enforce the terms of the non-competition and non-solicitation covenantssigned by Dr. Smith until the full hearing of this matter. Dr. Karavos maintains that he has satisfied all three arms of the test for aninterim injunction. Dr. Smith disagrees. [6] For the reasons that follow, the application of Dr. Karavos for an interim injunction is granted. The Law [7] There was no dispute as to the general three-part test to be applied; RJR - MacDonald Inc v Canada, (SCC), [1994] 1 SCR 311 at p 334: 1. Is there a serious issue to be tried? 2.

Is the Applicant likely to suffer irreparable harm if the injunction is not granted? 3. Does the balance of convenience favour the granting or the refusal of the injunction? Serious Issue to be Tried A. These are Commercial Restrictive Covenants [8] The Share Purchase Agreement (“SPA”) provided that Dr. Karavos would purchase all the shares of Dr. Smith’s dentalcompany for $3.1M. As part of the SPA, Dr. Smith promised to sign an Associate Agreement pursuant to which he would work as anassociate of Northern Dental for three years.

He also promised that, for five years following the termination of his association withNorthern Dental, he would not work for any other dental practice within five kilometres of Northern Dental and would not solicit anypatients. Both parties had legal representation in this transaction. [9] Dr. Karavos will be seeking to enforce these covenants at trial or hearing. Dr. Smith intends to argue that the non-competition covenant is unreasonable and therefore unenforceable and further that the non-solicitation covenant, while reasonable, hasnot been breached. [10] The parties disagreed about whether Dr.

Karavos need only prove a serious issue to be tried or the more onerous “strongprima facie case”. Specifically, if the restrictive covenants at issue are related to Dr. Smith’s employment, Dr. Karavos would berequired to prove the latter; City Wide Towing and Recovery Service Ltd v Poole, 2020 ABCA 305 at para 26 [City Wide]. [11] The rationale for this distinction between commercial and employment restrictive covenants was discussed in Payette v Guay,2013 SCC 45 [Payette]. Mr. Payette sold his crane rental business to Guay Inc in late 2004. As part of the sale and purchase agreement,Mr.

Payette agreed to a 5-year non-competition and non-solicitation prohibition and to remain employed with Guay Inc for six monthsfollowing the sale. At the end of that six months, a further employment agreement was signed. Mr. Payette ended up working for GuayInc for almost five years, until August, 2009. When he left, he immediately began working for a competitor and Guay Inc applied forinjunctive relief. [12] The hearing judge found that the restrictive covenants were intended to run for five years from the date of Mr. Payette’stermination in August of 2009.

While he found that the temporal duration was reasonable, he dismissed the application because thegeographical scope was not reasonable. The majority of the Quebec Court of Appeal allowed the appeal and ordered a permanentinjunction, finding that the covenants were central to the sale of the business rather than to Mr.

Payette’s employment and that both thetemporal and geographical parameters of the covenants were reasonable. [13] Wagner, J writing for a unanimous Supreme Court of Canada that upheld the Quebec Court of Appeal, said as follows: In this Court’s decision in Shafron, my colleague Rothstein, J referred to what is now a cardinal rule, that parties negotiating the sale ofassets have greater freedom of contract than parties negotiating a contract of employment.

He made the following comment: The absence of payment for goodwill as well as the generally accepted imbalance in power between employee and employer justifiesmore rigorous scrutiny of restrictive covenants in employment contracts compared to those in contracts for the sale of a business [para23] Thus, the common law rules for restrictive covenants relating to employment do not apply with the same rigour or intensity where theobligations are assumed in the context of a commercial contract.

This is especially true where the evidence shows that the partiesnegotiated on equal terms and were advised by competent professionals and that the contract does not create an imbalance between them;paras 38-39. [14] While our Alberta Court of Appeal in City Wide (para 26) expressly left open whether or not the more stringent “strong primafacie case” threshold applied to restrictive covenants entered into as part of a commercial transaction, Wagner, J’s comments in Payette

certainly suggest that a distinction should be made between commercial covenants and employment covenants. In my view, if that distinction is going to apply at trial, it necessarily becomes part of assessing the strength of the plaintiff’s case on the interim injunction application. [ 15 ] Were Dr. Smith’s covenants primarily related to his selling the business or to his remaining on as an associate?

In Payette , the approach taken by the Supreme Court of Canada was as follows: To determine whether a restrictive covenant is linked to a contract for the sale of assets or to a contract of employment, it is, in my view, important to clearly identify the reason why the covenant was entered into. The “bargain” negotiated by the parties must be considered in light of the wording of the obligations and the circumstances in which they were agreed upon.

The goal of the analysis is to identify the nature of the principal obligations under the master agreement and to determine why and for what purpose the accessory obligations of non-competition and non-solicitation were assumed; para.45 [ 16 ] I find, as did the Court in Payette , that Dr. Smith’s obligations to forego competing against or soliciting the patients of Dr. Karavos were central to the share purchase. The Associate Agreement, which was envisioned as part of the Share Purchase by virtue of its inclusion in the SPA, only existed to facilitate the preservation of the goodwill purchased by Dr.

Karavos. [1] B. The Covenants are not Unreasonable [ 17 ] Having found that the restrictive covenants here were central to the commercial transaction, those covenants are assumed lawful unless Dr. Smith can establish on a balance of probabilities that the scope of these covenants is unreasonable; Payette at para 58 . [ 18 ] As mentioned, Dr. Smith argues that there is no evidence that he is soliciting patients away from Dr. Karavos. I do not agree that there is “no” evidence but agree that what does exist is thin. That is perhaps not surprising at this stage of proceedings and given the nature of the dispute.

Customers who have opted to leave one service provider for another have little interest in becoming witnesses in any legal dispute between those service providers. Further, claimants generally understand that forcing evidence out of “defecting customers” will more likely alienate them rather than restore lost goodwill. In any event, because of the admitted prima facie breach of the non-competition clause, I need not examine the issue of non-solicitation further. [ 19 ] Dr. Smith admits that he is practising dentistry within a 5-kilometre radius of Northern Dental in contravention of Clause 3.3(

a) of the SPA. He maintains that both the five year and the 5-kilometre features of that covenant are unreasonable and therefore unenforceable. Reiterating that this is an interim application and no judge who ultimately adjudicates this matter is bound by my findings, I disagree with Dr. Smith. [ 20 ] Dr. Smith admits that, when he signed the SPA and the Associate Agreement, he knew that all of the existing dental practices within Grand Prairie were within the five km prohibition.

Further, as a practical matter, dentists competing within five kilometres of each other – which is no more than a few minutes’ drive – are clearly competing for the same customer base. For Dr. Karavos to buy a dental practice and then have the vendor set up shop so close in proximity would not make sense and indeed is exactly what Clause 3.3(

a) was designed to prevent. [ 21 ] Dr. Smith also argues that the 5-year prohibition on practising dentistry in Grande Prairie is unreasonable, in part because it the five years does not begin to run until the end of his association with Northern Dental, making it effectively an 8-year prohibition. [ 22 ] In Payette , the Supreme Court of Canada held that the original restrictive covenant began to run after the vendor’s employment ended even though he was employed for 5 years, long beyond the compulsory period in that sale agreement. Similarly, the protection Dr.

Karavos bargained and paid for is not needed until Dr. Smith leaves Northern Dental. It is not only a clear contractual obligation, it is reasonable in the context of the sale of a business, particularly one that many or most patients only visit occasionally. [ 23 ] On a balance of probabilities and at this interim stage, I do not agree that Dr. Smith has established that the non-competition covenant will ultimately be unenforceable.

Irreparable Harm [ 24 ] In City Wide at paragraph 28 , our Court of Appeal confirmed that “Where there is evidence of a clear breach of an enforceable covenant, irreparable harm and the balance of convenience still need to be considered, though they may attract less weight; 364661 Alberta Ltd v 735608 Alberta Ltd , 2010 ABCA 6 at para.8; Renfrew [Insurance Ltd v Cortese , 2014 ABCA 203 ] at para. 14” [ 25 ] Establishing irreparable harm was clearly the biggest challenge facing Dr. Karavos in his request for injunctive relief. Dr. Smith says that, as we are able to identify former patients of Dr.

Karavos that have gone across the street to Dr. Smith, an accounting for the profits made on those patients should suffice. Further, the SPA itself contained a “genuine estimate of damages” for breach of the non-solicitation covenant of $750 per patient. [ 26 ] Notwithstanding this, I am still in agreement with Dr. Karavos that the nature of some of the losses he has suffered and will continue to suffer in the absence of an interim injunction are likely to be irreparable. [ 27 ] “Irreparable” refers to the nature of the harm suffered rather than its magnitude.

It is harm which either cannot be quantified in monetary terms or which cannot be cured, usually because one party cannot collect damages from the other. Examples of the former includes instances where...one party will suffer permanent market loss or irrevocable damage to its business reputation; RJR-MacDonald Inc at para 59 [ 28 ] It is also well established now that harm is not reparable just because money damages may be available. Irreparable harm is that for which “fair and reasonable redress” may not be available; Ominayak v Norcen Energy Resources Ltd 1985 ABCA 12 at paras

30-31 [ Ominayak ]. Further, the Court of Appeal in Ominayak explained that the requirement for irreparable harm and the requirement that the balance of convenience favour the applicant are predicated on the nature of pre-trial remedies: First one must establish that the cause of action is not frivolous; next, one must establish that there would be no fair and reasonable redress available if there were no interim relief; third, the balance of convenience, having regard to all relevant factors, must favour an injunction. We think that the courts should not forget that an interim injunction is emergent relief.

The claimant seeks a remedy without proof of his claim. This inversion should only be considered in cases where the harm is of such seriousness and of such a nature that any redress available after trial would not be fair or reasonable . This hurdle must be met before the balance of convenience is weighed [emphasis added]; para 33. [ 29 ] As discussed, where an applicant has presented compelling proof that the respondent is in fact breaching a contractual covenant that he previously agreed to, he is not actually seeking relief “without proof of his claim”.

This is in keeping with the above passage from City Wide . [ 30 ] If the only harm alleged here was related to solicitation of identified patients away from Dr. Karavos’ practice, irreparable harm would have been more difficult to establish, although even the genuine estimate of damages is, as described, an estimate. It is apparent from the few invoices attached to Dr. Karavos’ Affidavit that many if not most single visits to a dentist exceed $750.

Further, as pointed out in argument, existing patients are sources of referrals for new patients, the origins of which could be difficult to trace, particularly over time. [ 31 ] The even more difficult harm to assess is that arising from the breach of the non-competition covenant. That particular covenant was intended to prevent new or potential patients from choosing Dr. Smith as a convenient alternative to Dr. Karavos. While we know how many of Dr. Karavos’ existing patients have switched to Dr. Smith, there is no way of knowing how many people have chosen or will choose Dr. Smith simply because he is there.

That is essentially the anticipated permanent loss of market share that cannot be easily accounted for and for which fair and reasonable redress will be difficult. Balance of Convenience [ 32 ] Dr. Smith argues that the balance of convenience favours him based on two arguments; the impact on his ability to work and the effect on the public. [ 33 ] Given the size of Grand Prairie, there are no dental clinics inside the city that are also five kilometres away from Northern Dental. There are two that are roughly 20 and 40 kilometres away and more clinics beyond that distance. Dr.

Smith did not apply to these clinics. While the parties seem to have spent a lot of time discussing why or why not, the fact remains that Dr. Smith demonstrated no interest in having to commute an hour or so each way to work. [ 34 ] While that is legitimate and understandable, it is not particularly compelling. When Dr. Smith signed the SPA and collected his purchase price, he knew that there were no existing clinics in Grand Prairie at which he could work after his association with Northern Dental ended.

Whether he believed he could negotiate an extended contract with Northern Dental or was content to face retirement within a few years, nothing has changed in the Grand Prairie dental landscape in that time. [ 35 ] Secondly, Dr. Smith is working approximately four to six days per month at the competing clinic, apparently not wanting to completely give up his practice but content to decrease his work as he moves toward full retirement. No one is faulting him for that, but his losses, should his position ultimately be successful, will be relatively minimal and covered by Dr.

Karavos’ Undertaking as to Damages. [ 36 ] The other argument raised by Dr. Smith is that an interim injunction would inappropriately deprive dental patients in Grand Prairie of their right to choose their dentist. I reject that argument. The Associate Agreement itself contained Dr. Smith’s express recognition that the restrictive covenants were reasonable and would “not affect the level of dental care available in the community”. Indeed, from the evidence of the number of clinics within city limits, it seems apparent that dental patients have a number of service providers to choose from.

If his patients are so loyal to Dr. Smith that he does not need to do any solicitation to secure their business, then presumably they are also prepared to drive a bit farther to see him. Conclusion [ 37 ] I am satisfied that Dr. Karavos has met the requirements of the tri-parte test for interim injunctive relief. There will be an interim injunction against the Respondents which incorporates Clauses 3.3(

a) and 3.3(

c) of the SPA, to be effective one week following the issuance of this judgment in order to allow Dr. Smith to inform his patients and transition them if necessary. Further, there will be an Order that the Respondents provide an accounting of all services provided and profits earned by Dr. Smith from August 30, 2020 to date, the mutual and regular disclosure obligations of both parties to run from that point. [ 38 ] Costs may be spoken to if counsel cannot agree. Heard on the 30 th day of August, 2021.

Dated at the City of Calgary, Alberta this 7 th day of September, 2021. M.H. Hollins J.C.Q.B.A. Appearances: Mr. Jerrett Strueby for the Applicants Mr. Blair Yorke-Slader for the Respondents