Canada: Commercial Restrictive Covenants Enforceable

Last Updated: September 23 2013
Article by George Waggott and Robert E. Boyd

New life has been injected into efforts to enforce restrictive covenants negotiated as part of business deals following a recent decision by the Supreme Court of Canada (SCC). In its reasons in Payette v Guay Inc. 2013 SCC 45, the SCC upheld restrictions negotiated in the context of a sale of business.

Background facts

Guay Inc. is a leading company in the crane rental business in the province of Quebec. Yannick Payette and his business partners owned a group of businesses in the same area. In 2004, Guay Inc. negotiated to purchase the assets of their crane rental businesses. As is common in transactions of this nature, Payette agreed to be bound by non-competition and non-solicitation restrictions. The specific provisions, granted in the context of a transaction valued in excess of $25 million, applied for a period of five years following closing of the purchase. Also, the non-competition provision restricted Payette's activities in the crane rental industry throughout the province of Quebec.

To ensure a smooth transition in operations following the sale, the parties also agreed to provisions in their purchase agreement in which Payette undertook to work full time for Guay Inc. as a consultant for six months. An employment contract was also eventually agreed at the end of this transitional term.

Several years later, Payette's employment was terminated without cause, which under Quebec employment law is often referred to as "without serious reason". Payette then proceeded to accept a position with a direct competitor of Guay Inc.

Injunction granted

The initial attempt by Guay Inc. to obtain an injunction to enforce Payette's non-competition provision was unsuccessful. In siding with Payette, the Quebec Superior Court held that the Civil Code of Quebec prevents the enforcement of restrictive covenants in a contract of employment when an employer has terminated an employee without serious reason. Essentially, the employer's termination without cause amounted to a breach of contract which prevented the company from relying on the restrictive covenants.

The Quebec Court of Appeal overturned the Superior Court decision and ordered a permanent injunction. The relevant provision of the Civil Code of Quebec was held to be limited to those instances where the relevant restrictive covenant is linked to a contract of employment. In Payette's case, the restrictions were enforceable because they had been negotiated in the context of a commercial transaction.

SCC: Context for covenants is key

The SCC affirmed the decision of the appeal court and held that the non-competition and non-solicitation provisions were enforceable. The approach to be followed in reviewing the restrictions, must, said the Court, be guided by the context, which in this case was a negotiated commercial agreement involving a substantial purchase price and parties represented by experienced counsel. Also, the restrictive covenants were clearly a significant consideration granted in return for the purchase price.

In the commercial setting, a restrictive covenant is lawful unless it can be established by the party challenging it that its scope is unreasonable. For Payette, this meant that he had the onus of proving that the relevant terms were unreasonable. In siding with the company, the SCC had regard for the unique and specialized nature of the crane rental industry. More specifically, the SCC emphasized that cranes are mobile, and the activities of the crane rental business depend more on the location of customers' sites than on the company's place of business. Therefore, in this case, the entire province of Quebec was considered by the SCC as a reasonable territory scope for the non-competition provision.

Key points for corporations

The Payette decision provides helpful guidance for parties seeking to enforce restrictive covenants both within and outside of Quebec. In support of the enforcement of commercial provisions, the SCC noted that parties negotiating the sale of assets have greater freedom of contract than parties negotiating a contract of employment, both at common law and in the civil law of Quebec, because of the imbalance of power generally characterizing the employer-employee relationship. As a result, the scrutiny applied to determining the reasonableness of the scope of restrictive covenants relating to employment will not be applied with the same rigour or intensity in the commercial context.

A further point of clarification arising from this case relates to the territorial scope of restrictive covenants. In particular, the SCC found that, especially having regard to the modern economy and in the face of new technologies where the clients are not necessarily limited geographically, the lack of territorial limitation does not automatically result in a non-solicitation provision being unreasonable. This contrasts with non-competition covenants, which will not be enforceable without express and reasonable territorial restrictions.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

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Authors
George Waggott
Robert E. Boyd
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