In a decision released on September 12, 2013 the Supreme Court
of Canada provided some interesting observations and conclusions in
respect of restrictive covenants. The covenant in question arose
out of the sale of a business and prevented the vendor's
principal from competing with the purchaser for five years after
the end of his consulting employment with the purchaser which
followed the sale. This covenant was limited to the province of
Quebec. It also contained a non-solicitation agreement which
prevented solicitation of both customers and employees of the
purchaser for a similar five-year period and that was without
The Court concluded that, in a sale of business scenario, the
onus is on the employee to show that the covenants are
unreasonable, as opposed to the employer proving them to be
reasonable. It emphasized that courts are much more willing to
uphold clauses in a sale situation, as compared with a simple
employment situation. On the facts of the case, although the
covenant in question was actually part of an employment contract,
the motivation for the covenant was found to be the sale of the
business. That meant that the more receptive position applied.
What factors did the Court consider relevant in assessing
whether the covenants were reasonable? First, it noted: "The
factors that can be taken into consideration include the sale
price, the nature of the business's activities, the
parties' experience and expertise and the fact that the parties
had access to the services of legal counsel and other
professionals." Secondly, the Court accepted that it was a
relevant factor that the agreement in question contained an
agreement that the covenant was reasonable.
In the case, the Court put particular emphasis on the nature of
the business and its specialized nature because that showed a need
for protection from competition. However, in its analysis, the
court provided somewhat of a green light for broad covenants with
the general observation that: "For example, in the case of a
sale of assets between well informed persons who are represented by
competent counsel, it is likely, although there may be exceptions,
that the clause so negotiated is reasonable."
Because there was conflicting authority before, it is helpful
that the decision also recognized another point. In a recognition
of the nature of modern commerce, the Court confirmed that a
geographic limitation was not required for an enforceable
non-solicitation covenant although a reasonable geographic limit
was required for an enforceable non-competition covenant.
The case contains other conclusions that are pertinent to the
law of Quebec but these general conclusions by the Court are of
assistance and apply to Canada's common law jurisdictions.
Restrictive covenants have to be carefully drafted so that they
provide reasonable protection for a purchaser or they will be void.
Each circumstance requires careful assessment. One restriction
could be reasonable on certain facts but not in other situations.
However, this case provides encouragement for substantial
restrictions in sale situations and hope that broad and lengthy
covenants will be enforced.
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.
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