In a September 12, 2013, decision, the Supreme Court of Canada
has enforced the restrictive covenants flowing from the sale of a
business for a 10-year period post-closing.1 The
decision is particularly noteworthy as it indicates a different
approach from that adopted by the Ontario Court of Appeal in a
similar case earlier this year.2 While the Ontario
Court of Appeal began with the principle that covenants in
restraint of trade are prima facie unenforceable and then
closely scrutinized the drafting of restrictive covenants founded
in the sale of a business, the Supreme Court of Canada presumed
them to be lawful requiring interpretation consistent with the
intention of the parties and the obligations to which the covenants
give rise, unless it is shown they are contrary to public policy.
The Supreme Court of Canada's approach should provide
commercial parties with comfort on how their agreements will be
interpreted and enforced judicially, should this become
The particular case at issue arose out of the sale of the assets
of a crane rental business in Quebec for $26 million. The partners
in that business agreed to both a non-competition and a
non-solicitation covenant. The non-competition clause precluded the
partners from involvement with another business in the crane rental
industry within the province of Quebec for five years from the date
on which their employment ceased. The non-solicitation clause
operated for the same five year post-termination of employment
period and precluded the partners from both soliciting and either
doing business or attempting to do business in any manner
whatsoever on behalf of a crane rental business with both the
customers of the business sold and customers of the purchaser's
business. The non-solicitation clause also contained an open-ended
non-solicitation of employees and consultants of the business sold
and the purchaser's business.
The partners initially were retained as consultants for a
six-month transitional period following the closing. Thereafter,
one of the partners, Mr. Payette, was employed as operations
manager for a further period four years. A few months after his
dismissal, Mr. Payette entered into an agreement resolving the
termination of his employment. At the time he signed the
agreement, Mr. Payette sought and then received approval from his
former employer to accept employment in a non-competitive industry.
Approximately, three months later, Mr. Payette actually began
employment as operations manager with a competitive crane rental
business in Quebec. His former employer quickly obtained an
interlocutory injunction until trial requiring compliance with the
restrictive covenants that were part of the sale.
At trial, the court dismissed the application for a permanent
injunction authorizing Mr. Payette to compete with his former
employer. The Quebec Court of Appeal set aside this decision and
ordered a permanent injunction requiring compliance with the
non-competition and non-solicitation clauses. The Supreme Court of
Canada dismissed the appeal and affirmed the decision of the Quebec
Court of Appeal.
Important findings from the Supreme Court of Canada's
decision include the following:
The reason why the covenant was entered into is the first step
in the analysis to determine whether the covenant is properly
linked to a contract for the sale of a business or a contract of
employment. In this case, the restrictive covenants properly were
viewed within the context of the sale, not employment, because this
is the reason why the parties entered into them.
In a commercial context, a non-competition covenant will be
reasonable and lawful, provided it is limited in term, territory
and the activities to which it applies are necessary to protect the
legitimate interests of the party in whose favour it is granted. To
determine validity, factors to be considered include: sale price,
nature of the business's activities, the parties experience and
expertise, and legal and other professional advice.
Territorial limitations in non-solicitation clauses are
unnecessary and obsolete in the context of the modern economy.
The Supreme Court of Canada's approach is a welcome one for
the purchasers of business who seek to protect the value of those
businesses following closing and the end of their relationships
with the former principals of the vendor.
1Payette v. Guay Inc.,2013
SCC 45 (CanLII).
2Martin v. ConCreate USL Limited
Partnership, 2013 ONCA 72 (CanLII).
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