Canada: Crane Rental Operater Hoisted by Restrictive Covenants

Non-compete and non-solicit clauses are presumptively valid when connected to an agreement for purchase and sale of a business, the Supreme Court confirmed recently. While such sales may also give rise to an employment agreement, the obligations of the parties are usually primarily linked to the commercial contract, and thus any restrictive covenants should be afforded broad interpretation. The decision, Payette v. Guay inc., provides a clear and coherent analysis for determining the rules of interpretation to be applied to restrictive covenants that arise in these hybrid contracts.

The Facts

The respondent Guay operated a crane rental company in locations across Quebec. In October 2004, Guay purchased the assets of the appellant Payette, who controlled several companies that were also in the crane rental business, for $26 million. The agreement for the sale of assets contained non-competition and non-solicitation clauses (the "restrictive covenants"). As well, Payette agreed to work for Guay as a consultant for six months, with the possibility of extending his employment further. At the end of this transition period, the parties agreed on a contract of employment for an indefinite term. A few years later, Guay dismissed Payette without a serious reason. Payette then started a new job with a competitor business, leading Guay to seek enforcement of the restrictive covenants.

Judicial History

In the Quebec Superior Court, Guay's motion for an injunction compelling Payette to comply with the restrictive covenants was dismissed. Justice Lemelin held that the non-solicit and non-compete clauses were linked to the contract of employment, and thus fell under the specific protections of article 2095 of the Civil Code of Quebec. Under that article, a Quebec employer cannot rely on a non-compete clause if he has terminated the employee "without a serious reason". However, the majority of the Court of Appeal set aside this judgment and ordered a permanent injunction, finding that the obligations of the non-solicit and non-compete clauses were assumed by Guay under the commercial sale agreement, not the employment agreement. Under the rules applicable to the sale of a business, and not those applicable to contracts of employment, the clauses were found to be reasonable and lawful. Payette then appealed to the Supreme Court of Canada.

Employment vs Commercial Contract

It has long been accepted that the rules applicable to the enforceability of restrictive covenants differ depending on whether they are linked to a contract for the sale of a business, or to a contract of employment. Restrictive covenants in employment agreements are generally given a rather narrow scope, in response to the imbalance of negotiating power between an employee (who wants the job) and an employer (who has the job to give). Such an imbalance of power is not presumed to exist in a vendor-purchaser relationship, where parties are usually more sophisticated and well informed about the obligations they are undertaking. As such, restrictive covenants in commercial contracts are generally interpreted and enforced more broadly than those in employment agreements. In order to determine whether the restrictive covenants were enforceable, the court thus had to first determine whether they were linked to the purchase and sale of Payette's business, or the resulting employment from which he was terminated.

To Which Contract were the Restrictive Covenants Linked?

In order to determine whether the restrictive covenants were linked to the contract for the sale of assets or to the contract of employment, the court had to identify the reason the covenants were entered into. To do this, they considered two main factors: the wording of the clauses, and the context in which they were agreed upon.

The non-competition clause began with the words "in consideration of the sale that is the subject of this offer". Article 10.4 of the contract, acknowledging the reasonableness of the restrictive covenants, contained the phrase "having regard to the consideration provided for herein". Overall, on a plain reading of the language used, the court held that the restrictive covenants were accepted by Mr. Payette "in consideration of the substantial advantages he would be depriving from the transaction, not of his potential status as an employee".

Secondly, the court examined the context in which these covenants were negotiated. The main motivation for the sale was to enable the respondent Guay to acquire the vendor's goodwill, skilled employees and customers. If he had not obtained the protection of the restrictive covenants, the sale would never have happened, as there would have been nothing to prevent the vendor from simply stealing back their clients and employees the next day under the guise of a new company. Thus, there was a direct causal connection between the restrictive covenants and the sale of the assets, not the subsequent employment.

Finally, the court dismissed the appellant's argument that the covenants were linked to Payette's employment contract simply because they make specific reference to the termination of his employment. Rather, this reference to termination of employment was only a "guidepost" for establishing the period during which the non-competition covenant was to remain in effect. This did not change the essence of the obligation as being one connected to the sale of assets.

Were they Enforceable?

As the Court found that the restrictive covenants were linked to the commercial sale contract, rather than the employment agreement, the Civil Code of Quebec protections did not apply. The burden of proof was therefore on the vendor, Payette, to prove on a balance of probabilities that the scope of the clauses was unreasonable. As discussed above, the reasonableness of a restrictive covenant is more broadly interpreted in the commercial context than in the employment context. Looking to the non-compete clause first, the court stated the test thus:

A non-competition covenant will be found to be reasonable and lawful provided that it is limited, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted.

Factors a court will consider include:

  • Sale price
  • Nature of the business' activities
  • The parties' experience and expertise
  • Whether the parties had access to legal counsel and other professionals
  • The circumstances of the negotiations
  • Extent of the resources to which the parties had access at the time

In this case, the agreement was for $26 million, and followed lengthy negotiations between well-informed businessmen who were on equal terms and were being advised by legal and accounting professionals. Given those factors and considering the highly specialized nature of the business, the court found no evidence that a 5-year term was unreasonable. In fact, the court cited a number of instances in which the Quebec courts have enforced terms twice that length.

The territorial scope of a restrictive covenant must be limited to that in which the business being sold carries on its trade or activities as of the date of the transaction. In this case, the clause applied to the entire province of Quebec. While this is a considerable area, the court found that due to the unique nature of the mobile crane rental business, the territory to which the non-competition covenant applied was not unreasonably broad, and thus was valid.

Turning to the non-solicitation clause, the court explained that such covenants do not generally require territorial limitations to be considered reasonable. The scope of such clauses can generally be ascertained from simply looking to the vendor's client lists. As well, due to changes in technology, customers are often not limited geographically, meaning that such territorial limitations have generally become obsolete. The non-solicit was found to be reasonable and thus enforceable as against the appellant.

In sum, the Court found that the non-solicitation and non-competition clauses arose from the purchase and sale of Payette's business, not his subsequent employment, and were reasonable in all the circumstances. At paragraph 9, Justice Wagner dismissed the appellant's position as untenable, stating:

The effect of disregarding the existence of such clauses solely because they appear in an agreement that preceded the formation of a separate contract of employment would be to negate the foundations of, and the rationale for, the obligations of non-competition and non-solicitation provided for in the clauses, while at the same time discounting the intentions of the parties.

Justice Wagner's reasoning will prove useful to parties seeking to enforce restrictive covenants against a vendor who also becomes an employee in the course of a sale of business. While the dispute arose in the context of a specific Civil Code of Quebec provision, the analysis should prove applicable to disputes under the common law as well.

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