In its recent decision in Martin v. ConCreate USL Limited Partnership, the
Ontario Court of Appeal confirmed that a restrictive covenant
entered into in the context of a sale of a business is not
immunized from scrutiny by the fact that it was part of a
commercial transaction or that the individual agreeing to the terms
of the covenant acknowledged its reasonableness and was represented
by counsel. While confirming that it remains appropriate to give
"greater deference" to the freedom of contract of
knowledgeable persons of equal bargaining power, the Court held
that the broader restraints of trade justifiable in the context of
a sale of business must nevertheless be reasonable within that
context and that the factors relevant in determining whether a
restrictive covenant is reasonable in the context of the sale of a
business and an employment agreement are essentially the same: the
geographic reach of the covenant, the time period during which the
restrictions operate and the scope of the activities
In its review of the lower court decision, the Court of Appeal
agreed with the application judge's finding that the covenant
was reasonable with respect to its geographic scope but held that
it was not reasonable in respect of its duration or with respect to
the scope of the prohibited activities. With respect to duration,
the clause was found to be unreasonable because while it started
running at the time of the sale, its end date depended on when Mr.
Martin disposed of his interest in the business, which in turn
depended on the consent of certain third parties, including the
company's lenders. Because of these unique features of the
defined term "prohibited period" in the agreement Mr.
Martin had signed, the Court concluded that the covenant failed
because there was no fixed time limit.
The Court of Appeal went on to find that the scope of the
prohibited activities contained in the restrictive covenants was
also unreasonable. The Court's difficulty with this part of the
restrictive covenants negotiated between Mr. Martin and the buyer
concerned the breadth of the non-solicitation restrictions which
extended, among other things, to any persons who were customers,
dealers, agents or distributors not just at the time of the sale
transaction and while Martin was involved with the business but
after his involvement with the business ended. Similarly, the
clause overreached by covering products and services that the
company did not offer until after he ended his involvement in the
business. Citing its seminal 2011 decision concerning the
unenforceability of a worldwide restrictive covenant in an
employment agreement (see Mason v. Chem-Trend Limited Partnership), the Court
confirmed that it was not reasonable for a restrictive covenant to
extend to activities engaged in by the company after the
individual's involvement in the business ends.
Therefore, while the Court confirmed some of the established
principles with respect to the analysis of restrictive covenants
that are negotiated in the context of the sale of a business, it
also affirmed that the strong public interest in discouraging
restraints on trade nonetheless requires that the Court conduct
some level of independent analysis of the reasonableness of these
covenants, looking at their geographic and temporal scope and the
scope of the activities covered.
In summary, parties negotiating restrictive covenants in the
context of a sale of a business must turn their mind to the
reasonableness of the covenants in light of the circumstances
existing at the time that the covenants are made. First, the
geographic scope of a covenant must be established by reference to
where the business is being carried on at the time of the
transaction (and the parties' reasonable expectations about the
future activities and marketplace of the business). Second, the
restrictions must be applicable for a fixed and certain period of
time. Third, the scope of the activities covered must not extend
beyond activities that the individual engages in or would
reasonably be expected to engage in during his involvement with the
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