This winter, the SCC will have the opportunity to clarify how
the courts should go about determining how strictly to interpret
restrictive covenants where they relate to both an employment
agreement and the sale of a business. The opportunity arises from
the Supreme Court's decision to grant leave in Guay Inc. c. Yannick Payette et autres, where
the Québec Court of Appeal upheld the enforceability of
broadly-framed non-competition and non-solicitation clauses (or
restrictive covenants), despite findings by the trial judge below
that the employee, Mr. Payette, had been wrongfully terminated and
that the restrictive covenants were too broad to be enforced. The
Court of Appeal reasoned that the clauses were enforceable because
they formed part of the contract for the sale of Mr. Payette's
In October 2004, Guay Inc. ("Guay") purchased the
assets of companies controlled by Mr. Payette for $26 million. Mr.
Payette's companies were in the business of leasing cranes. The
contract of sale for Mr. Payette's business included a clause
requiring Mr. Payette to work for Guay as a consultant for a period
of six months after closing, following which time the parties could
continue an employment relationship on terms to be negotiated.
Employment after the initial six month consultation period was
The contract included non-solicitation and non-competition
clauses which were valid for a period of five years after the date
of closing, or five years beginning as of the date by which Mr.
Payette ceased to be an employee of Guay. The clauses prevented
competition in the crane leasing industry and solicitation
throughout the province of Quebec.
Mr. Payette remained employed by Guay throughout the consulting
period until August 2009, when he was dismissed. Seven months later
Mr. Payette began working for a competitor.
Guay sought and was granted an injunction before trial. The
trial judge found that Mr. Payette had been wrongfully dismissed
and refused to enforce the restrictive covenants on the basis that
they were too broad.
The majority of the Court of Appeal (reasons by Chamberland
J.A.) reversed the trial judge's decision on the basis that the
restrictive covenants formed part of the contract for the sale of
Mr. Payette's business, and that they were reasonable when
viewed as part of the sale transaction. The employment contract was
relevant only for the purposes of determining the commencement of
the five-year period of non-competition and non-solicitation.
Thibault J.A. dissented – in her view, there was no
reason to conclude that new employment agreement (formed after
completion of the initial six month consulting period) should
include the same restrictive covenants as the contract of sale, and
to thereby deny Mr. Payette the protections he would otherwise have
been afforded as an employee.
The SCC's judgment in this appeal is expected to clarify the
rules relating to the enforceability of restrictive covenants in
circumstances where the sale of a business intersects with an
employment relationship, and where an employee has been wrongfully
The test for upholding a restrictive covenant in an employment
contract is much more stringent than the test for upholding a
similar clause in the context of the sale of a business, because
the courts consider that there is a power imbalance between
employees and employers, and because a sale of a business often
involves a payment for goodwill (whereas no similar payment is made
to an employee leaving his or her employment): Shafron v. KRG Insurance Brokers (Western)
Where there has been both the sale of a business and an
employment relationship, the difficulty lies in determining whether
the restrictive covenant should be construed as relating to the
business transaction or to the employment contract. This appeal
will provide the SCC with an opportunity to clarify how the courts
should go about making this determination.
The hearing of the appeal is tentatively set to take place on
January 23, 2013.
In a policy statement released early last month, the Ontario Human Rights Commission clarified its position on the scope of medical documentation that employees need to provide when making disability-related accommodation requests.
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