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 prohibited.
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 business.
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