When employers are buying other businesses, the question of
non-competes often arises. But a non-competition provision in an
employment contract may not be the answer. According to the Quebec
Court of Appeal in Guay Inc. c. Payette (PDF
- only available in French), you may be better
protected by only having a non-competition covenant in your sales
agreement rather than also including such a clause in your new
employees' employment contracts.
In October 2004, Guay Inc. bought the assets of the company
controlled by Payette for $26 million. Pursuant to the purchase and
sale agreement, Payette was hired as a consultant for a period of
six months. The purchase and sale agreement also included a
non-competition clause prohibiting Payette from competing with Guay
in Quebec for a period of five years after his employment
Six months later, Payette was hired by Guay as a director. His
employment contract with Guay did not include a non-competition
In August 2008, Guay terminated Payette's employment. In
March 2010, Payette was hired by one of Guay's competitors,
where he was followed by seven of Guay's employees.
Guay asked the Superior Court of Quebec to issue an
interlocutory injunction preventing Payette from joining the ranks
of its competitor. The outcome of the case depended on the nature
of the non-competition agreement.
Employment vs. Sales Agreement
There are important distinctions between a non-competition
agreement found in an employment contract and one found in a
purchase and sale agreement.
The first distinction, at least in Quebec, is that the
provisions of the Civil Code of Quebec governing
employment contracts do not apply to sales agreements. As such,
section 2095 of the Code, which prohibits an employer from
benefiting from a non-competition clause if it terminates the
employment contract without a serious reason, does not apply.
Section 2089 of the Code, which imposes on the employer the burden
of proving that the non-competition is valid, will also not apply
to a sales agreement.
The second and more general distinction derives from the
imbalance that exists in an employer-employee relationship which is
not usually found in the buyer-seller relationship. Although to be
valid both types of non-competition agreements need to be limited
in time, in space, and in the restricted activities, courts show
more latitude when the restrictions are contained in a purchase and
Part of an Employment Contract?
In Guay, the Superior Court said that the parties had
the intention to create an employment contract in the purchase and
sale agreement. As such, the non-competition covenant was in fact
part of an employment contract. Because Payette's employment
was terminated without cause, the trial judge ruled that Guay could
not claim the protection of the non-competition agreement which, in
any event, contained limits that were too broad for an employment
Or Part of a Sales Agreement?
The case then proceeded to the Quebec Court of Appeal. It said
that one must determine the reason that motivated the parties to
enter into a non-competition agreement. A non-compete clause would
either have to fall under the regime governing purchase and sale
agreements or under the regime governing employment contracts.
In the case at hand, the Court of Appeal determined that the
real reason behind the non-competition clause was the purchase and
sale agreement. Indeed, Guay's real interest in prohibiting
Payette from competing did not stem from Payette's employment,
but rather from the $26 million investment made by Guay as part of
the purchase and sale agreement. Further, the fact that
Payette's employment contract did not contain a non-competition
agreement was a clear indication that the motivation behind the
non-competition agreement was the sales agreement.
In the end, the Court of Appeal overruled the trial judge and
ruled that the non-compete clause was valid. Payette is now seeking
to appeal to the Supreme Court of Canada.
Recommendations to Employers
If the Supreme Court of Canada agrees with the Court of Appeal,
employers that wish to acquire a competitor's business and
employees may be better protected with only a non-competition
clause in the purchase and sale agreement, rather than by adding
another non-compete clause in an employment contract. Given the
similarity of case law pertaining to non-competition clauses across
the country, this decision might also affect companies looking to
acquire a competitor located outside Quebec.
Unfortunately, reasonable accommodation for employees in the workplace continues to be the source of significant litigation and even today we continue to see outrageous examples of employers behaving badly.
We are now beginning to see reported cases involving charges and subsequent fines laid against employers for failing to provide information, instruction and supervision to protect a worker from workplace violence.
On October 13, 2016, the Supreme Court of Canada denied leave to appeal an Ontario Court of Appeal decision which ordered an employer to pay a former employee 37 months of salary and benefits following termination.
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