On September 12, 2013, the Supreme Court of Canada issued its
decision in Payette v. Guay Inc. Although this decision
originated in the Quebec courts and involved the application of the
Civil Code of Quebec, the Court's decision also dealt
with common law principles and so this case is applicable
throughout the common law provinces.
This decision is noteworthy for anyone dealing with restrictive
covenants in the context of the sale of a business and is welcome
news for businesses seeking to endorse restrictive covenants in
order to protect their interests.
The key points made by the Court are as follows:
The rules applicable to restrictive covenants relating to
employment will differ depending on whether those covenants are
linked to a contract for the sale of a business or to a contract of
employment. This reflects the imbalance of power that generally
characterizes the employer-employee relationship. No imbalance of
power is presumed to exist in the vendor-purchaser relationship and
so these rules will not have an equivalent in the commercial
The common law rules for restrictive covenants relating to
employment do not apply with the same rigour or intensity where
those obligations are assumed in the context of a commercial
contract, particularly where the parties negotiated on equal terms,
were advised by competent professionals and the contract did not
create an imbalance between them.
In order to determine whether a restrictive covenant is linked
to a contract for the sale of assets or to a contract of
employment, it is important to clearly identify the reason why the
covenant was entered into. The goal of the analysis is to identify
the nature of the principal obligations under the master agreement
and determine why and for what purpose the accessory obligations of
non-competition and non-solicitation were assumed.
A restrictive covenant in the commercial context is lawful
unless it can be established on a balance of probabilities that its
scope is unreasonable. Thus the burden of proof will be on the
vendor to prove that the restrictive covenant is unreasonable.
An acknowledgement by the parties subject to the restrictive
covenant that the covenant is reasonable is not determinative, but
it is a relevant factor and indicator that the Court will consider
when determining whether the covenant is reasonable.
In the commercial context, a non-competition covenant will be
found to be reasonable and lawful provided that it is limited, as
to its term, territory and applicable activities, to whatever is
necessary for the protection of the legitimate interests of the
party in whose favour it was granted. The factors that may be
considered include the sale price, the nature of the business'
activities, the parties' experience and expertise, and the fact
that the parties had access to the services of legal counsel and
While in the case of a non-competition covenant, the applicable
territory must be identified, a non-solicitation covenant may be
considered reasonable and lawful absent a territorial limitation.
In the modern economy, with new technologies and customers who are
no longer geographically limited, territorial limitations in
non-solicitation clauses have generally become obsolete.
Ultimately, on the facts before it, the Court found that the 5
year non-competition covenant with an expansive territory and 5
year non-solicitation clause were reasonable given the highly
specialized and mobile nature of the purchaser's business
activities (crane rentals).
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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. Specific Questions relating to
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