Canada: The Second Opinion: Restrictive Covenants At The Ontario Court Of Appeal

A Commentary On Recent Legal Developments By The Opinions Group Of Mccarthy Tétrault LLP

The Ontario Court of Appeal has released an important new judgment concerning the enforceability of restrictive covenants: Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72.  The decision provides guidance about when a restrictive covenant will be unenforceable owing to its duration and the scope of its prohibited activities, and suggests that a different test for unenforceability will apply where the existence of the covenant is linked to the covenantor's interest in a limited partnership as opposed to a corporation.

The facts in Martin were as follows.  The plaintiff/appellant Martin acquired  minority interests in the two defendant/respondent companies – Concreate and SDF – through his holding company MartinCo.  MartinCo sold those interests to two entities controlled by TriWest LP, a limited partnership, and Martin became the president of SDF (which amalgamated with the TriWest LP entity that acquired it) and of the other TriWest LP entity that acquired Concreate ("Target LP").  As well, Martin became a director of SDF and of the general partners of Target LP and TriWest LP.

As part of the purchase agreement, Martin entered into employment agreements with SDF and Target LP that contained three types of restrictive covenants: (1) a general non-competition covenant; (2) a restriction on soliciting employees, customers, dealers or agents of SDF and Target LP; and (3) a prohibition on the use of any non-public information pertaining to the respondents.  In addition, MartinCo received limited partnership units in TriWest LP.  Two aspects of the restrictive covenants were particularly noteworthy.

First, the duration of the covenants was to extend until 24 months after Martin disposed of his direct or indirect interest in the TriWest LP units.  However, pursuant to TriWest LP's limited partnership agreement, MartinCo could not sell those units without the consent of both the board of TriWest LP's general partner , and of various "Lenders" to the TriWest entities.  These "Lenders" were defined to include not only current lenders, but other lenders that might arise "from time to time".

Second, the activities which Martin was prohibited from pursuing by the non-solicitation clause were extremely broad.  They included communicating with any customers, dealers, agents or distributors of SDF or Target LP, for the purpose of promoting products or services that competed with those of SDF or Target LP, even where: (1) the parties so solicited did not begin conducting business with SDF or Target LP until after MartinCo sold its TriWest LP units, and Martin ceased to be a director of SDF and the TriWest LP and Target LP general partners; and (2) the products or services in question were not offered or planned to be offered by Target LP and SDF at the time of the sale transaction.

The Martin litigation was triggered when Target LP and SDF terminated Martin's employment a short time after the transaction closed, allegedly for cause.  Martin then began a new company that competed with Target LP and SDF, and they brought an action which alleged among other things that he breached the restrictive covenants.  Martin responded by seeking a declaration that the restrictive covenants were unenforceable, which was initially dismissed at first instance.

On appeal, the non-competition and non-solicitation covenants were found to be unenforceable, though the confidentiality covenant was upheld.  Hoy J.A., for a unanimous Court, began by observing that because the covenants in question were given in connection with the sale of a business, the test for determining whether they were reasonable as between the parties (and thereby enforceable) should be applied more leniently than in the case of covenants between employers and employees (paras. 52-54, 62 and 76).  Parenthetically, it should be noted here that Martin's covenants, although given in conjunction with the sale of a business, were nonetheless also suggested by the application judge  to be entered into through the employment agreements (see paras. 78-78 and 89 of the application judgment).  As a result, the argument can be made that the Court should have applied the more rigorous "employment" approach in assessing their enforceability.  This issue is currently before the Supreme Court of Canada in the appeal from Guay inc. c. Payette, 2011 QCCA 2282, which we discussed in previous posts here and here.  That said, because the application judge found that the restrictive covenants were not entered into in an "employment context", and this finding was not appealed, the issue did not arise before the Court of Appeal (see para. 34 of the appeal judgment).

In applying the test – which involves asking whether the covenants were reasonable as to geography, time or prohibited activities at the time when they were entered into – Hoy J.A. found that Martin's restrictive covenants were not ambiguous, nor geographically unreasonable merely because they were national in scope. Nonetheless, Hoy J.A. concluded that the non-competition and non-solicitation covenants were unreasonable as to their duration.  In addition, she held that the non-solicitation covenant was unreasonable as to its prohibited activities.  Accordingly, both covenants were unenforceable, since neither could be saved through the "notional" severance or "blue pencil" approaches.

With respect to duration, Hoy J.A. held that the covenants could extend for an indefinite period of time, since it was not possible to know the identity of the future "Lenders" whose consent might be required before MartinCo could dispose of its TriWest LP units and thereby initiate the running of the 24-month covenant expiry period.  Moreover, those lenders did not owe any contractual duties to Martin or MartinCo to provide their consent promptly or reasonably, and they might have a commercial interest in not doing so in order to limit Martin's competition with the respondents.

Hoy J.A. was also "troubled" by the fact that the duration of the covenants was tied to the period during which Martin held his indirect interests in the units.  She would have preferred that the duration was either calculated from the time of the sale transaction, or that it run until a specified time period after Martin ceased to be a director or officer of the respondents.  In this respect, Hoy J.A. rejected the respondents' arguments that it was necessary to link the non-competition and non-solicitation covenants to MartinCo's continued interest in TriWest, merely because Martin would have access to confidential information about them until that interest was sold.  According to Hoy J.A., this concern was already addressed by the remaining non-confidentiality covenant.

Of particular note, Hoy J.A. also held that because covenants arose in the context of a limited partnership agreement, the test for their reasonableness was different than if they had simply been tied to MartinCo's ownership of shares in a corporation:

Significantly, the Units are units in a limited partnership. In the Partnership Agreement, MartinCo and the other limited partners specifically covenant not to take part in the control or management of the business. Indeed, MartinCo risks losing its limited liability if it takes any part in the control or management of the business. In contrast, in a private company, shareholders can take an active role in the management of the corporation, and, pursuant to a unanimous shareholders agreement can even assume the functions of the directors. The reasonability analysis of a non-competition covenant in a limited partnership agreement is therefore different from that applicable to a non-competition covenant in a unanimous shareholders' agreement. (para. 64)

These comments suggest that the reasonableness of a restrictive covenant whose continued duration is tied to the covenantor's interest in a limited partnership will be approached more strictly by the courts than one that is tied to the covenantor's interest in a corporation.  In a limited partnership context, the covenantor (assuming it is a limited rather than general partner) has less of an ability to meaningfully direct or participate in the business to which its interests relate.  Therefore, a restrictive covenant whose existence is predicated upon the covenantor's continued interest in a limited partnership places unique constraints upon the covenantor's liberty of action, and merits a greater level of judicial scrutiny than one that is merely tied to the covenantor's interest in a corporation.

Finally, in holding the non-solicitation clause was also unreasonable as regards the scope of Martin's prohibited activities, Hoy J.A. focused upon the fact that the specific parties, products and services to which it related were not ascertainable nor contemplated by the parties at the time when the sale of the business occurred.  Relying upon the Ontario Court of Appeal's own earlier judgment in Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 - where a non-competition covenant relating to all of the employer's world-wide customers arising during the employee's 17 period of employment was found unenforceable - she stated:

In my view, while the covenants in this case were entered into in the context of the sale of a business, the analysis in Mason is nonetheless apt. It is not reasonable for a restrictive covenant, given in the context of the sale of a business, to extend to activities neither carried on nor in the parties' contemplation at the time of sale, while the covenantor was involved in the business post-sale, or even while the covenantor had an ownership interest in the business. (para. 76)

In light of Martin, parties drafting restrictive covenants should be careful to ensure that not only the covenant's geographic scope, but also its duration and prohibited activities, are reasonably ascertainable by the covenantor at the time when the covenant is entered into.  Further, the parties should pay particularly close attention to these features of the covenant where its existence is linked to the covenantor's continued interest in a limited partnership, as opposed to a corporation.

My colleague, Earl Phillips, has also written a post on this decision for McCarthy Tétrault's British Columbia Employer Advisor blog which can be found  here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions