Canada: Agreement For Sale Of Assets Or Contract Of Employment

On September 12, 2013, the Supreme Court of Canada rendered its unanimous decision in Payette v. Guay inc.1. The judgment dismissed the appeal from the decision of the Quebec Court of Appeal2 and completed the holdings of the 2009 decision in Shafron v. KRG Insurance Brokers (Western) Inc.3 by specifying the method to be used in determining the legal framework applicable to restrictive covenants relating to employment, whether they are linked to an agreement for sale of assets or a contract of employment.

The Facts and the Judicial History

Respondent Guay inc. (the "Buyer") is a crane rental company operating some twenty establishments across Quebec. In October 2004, the company purchased the assets of several businesses engaged in the same field ("Groupe Fortier"), controlled by the Appellant, Yannick Payette ("Payette") and his partner.

In their agreement for sale of assets, the parties agreed that Payette and his partner would continue working as full time consultants for Guay inc. for a six-month period and that they would be subject to non-competition and non-solicitation clauses. Under those provisions, Payette undertook not to compete with the Buyer anywhere in Québec for a period of five years following the termination of his employment. He also assumed the obligation of not soliciting the employers of the Buyer or of Groupe Fortier for the same period, but without specifying the territory covered.

At the end of this transitional period, in May 2005, the parties concluded a contract of employment providing that Payette's employment as operating manager for Groupe Fortier was to continue until August 31, 2008, at which date the contract would be renewed for an indeterminate term.

In August 2009, Payette was dismissed without serious reason and, on March 15, 2010, he began a new job as operations manager of Mammoet Crane Inc. ("Mammoet" ), a competitor of Guay inc. After having lost seven of its employees to Mammoet , the Buyer filed a motion in the Quebec Superior Court for a provisional interlocutory injunction, ordering Payette to comply with the restrictive covenants contained in the agreement for sale of assets by ceasing to work for Mammoe. The order was granted and renewed until the hearing of the motion for a permanent injunction on its merits.

The Superior Court held that a contract of employment had been concluded at the closing date of the October 2004 transaction. Thus, Article 2095 of the Civil Code of Québec ("C.C.Q."), providing that an employer cannot benefit from a non-competition clause where he dismissed his employee without sufficient cause, precluded Guay inc. from availing itself of the non­competition covenant to which the parties had agreed. The trial judge also ruled on the validity of the non­-competition clause under Article 2089 C.C.Q., requiring that a non-competition stipulation be limited "as to time, place and type of employment, to whatever is necessary for the protection of the legitimate interests of the employer."4 Therefore, it was held that the non-competition clause, which would be in effect for a duration of five years and cover the whole Province of Quebec, was unreasonable with regards to its territorial scope, as it applied outside the territory in which Groupe Fortier actually operated. The trial judge also concluded that the non-solicitation clause was a "hybrid" non-competition and non-solicitation clause, and was therefore unlawful because of the absence of a geographic limitation. This determination that it was a "hybrid" clause came from the use of the words "do business or attempt to do business" in the clause.

The first instance judgment was reversed by a majority of the Quebec Court of Appeal and a permanent injunction was issued, enjoining Payette and Mammoet to comply with the non-solicitation and non-competition covenants. In support of that decision, Mr. Justice Chamberland, writing for the majority, held that the obligations created by those clauses, which were intended to protect the $26 million invested by the Buyer in purchasing the assets of Groupe Fortier, were related to the agreement for the sale of those assets and not to the contract of employment. Consequently, in the light of the rules applicable to the agreement for the sale of assets, the Court concluded that the restrictive covenants were valid, and that the vast territory covered by the non­competition clause was justified by reason of the mobility of the equipment used in the crane rental industry. As for the non-solicitation covenant, the Court of Appeal rejected the "hybrid" clause characterization given it by the trial judge, attributing to it instead the scope that the parties intended it to have. The Court of Appeal therefore concluded that the restrictive covenants applied until August 3, 2014, i.e. for a term of five years following Payette's dismissal.

It is interesting to review the dissident opinion of Madam Justice Thibault, which is based on the conclusion of a contract of employment at the end of the six-month mandate initially granted following the purchase of the assets of Groupe Fortier. By reason of that new contract governing the employer-employee relationship between the parties, she held that the non-competition and non-solicitation covenants should be construed under the rules relating to contracts of employment. Thibault J.A. stressed that each party was protected by the contractual undertakings assumed: on the one hand, the Buyer was protected for five years following its purchase of the assets; and on the other, Payette, pursuant to his contract of employment, was protected in the event of dismissal without just and sufficient cause. Consequently, Thibault J.A. concluded that by reason of the abusive nature of the dismissal, the restrictive covenants were not applicable under Article 2095 C.C.Q. It is noteworthy, however, that the contract of employment signed in May 2005 contained no restrictive clauses.

The Decision of the Supreme Court of Canada

The appeal of the Court of Appeal's decision was dismissed by a unanimous bench, in a judgment written by Mr. Justice Wagner. The Supreme Court first dealt with the issue of the applicability of the protection provided by Article 2095 C.C.Q. to the facts at issue. The Court then analyzed the reasonableness of the non-competition and non-solicitation undertakings provided for in the agreement for the sale of assets.

Regarding the first issue, Wagner J. outlined the process to be followed in determining the legal framework applicable to non-competition or non-solicitation clauses:

"Article 2095 C.C.Q. is applicable to a non-competition clause only if the clause is linked to a contract of employment. This means that, before enquiring into whether a non-competition clause or a non-solicitation clause is valid, the court must identify the type of juridical act to which the clause in question is linked."4

Justice Wagner reviewed the principal distinction in the analytical process followed by the majority in the Court of Appeal and that followed by Thibault J.A. On the one hand, the majority took a contextual approach, analyzing the circumstances in which the agreement was concluded, including the intention of the parties. On the other hand, Thibault J.A. adopted a literal approach, discounting the intention of the parties and the circumstances surrounding the signing of the agreement. The Supreme Court indicated that the first approach was the proper one. For that reason, the Court held that the restrictive covenants were linked to the contract for the sale of the assets and not to the contract of employment. Accordingly, Justice Wagner added that in order to determine to what type of contract such clause is linked, "the 'bargain' negotiated by the parties must be considered in light of the wording of the obligations and the circumstances in which they were agreed upon. The goal of the analysis is to identify the nature of the principal obligations under the master agreement and to determine why and for what purpose the accessory obligations of non-competition and non-solicitation were assumed."5

In this case, such analysis revealed three factors that allowed the Court to conclude that Payette had assumed the non-competition and non-solicitation obligations in the context of the sale of the assets of his business, and not as part of the contract of employment which followed the transaction. Had there been no sale of assets, Payette would never have agreed to the restrictive covenants.
In the first place, the wording of the covenants expressly provided for the obligations to be assumed "[i]n consideration of the sale that is the subject of this offer"6 and "having regard to the consideration provided for herein"7. It was not Payette's potential employment status which caused him to acknowledge the reasonableness of these clauses and to agree to be bound by them, but rather the benefits conferred on him by the sale of assets.

The second factor taken into account was the context of the sale of the assets. Wagner J. held: "The main point of the sale transaction for the respondent was to acquire the vendors' goodwill, skilled employees and customers. If the respondent had not obtained the protection in question, the transaction would never have taken place. There is therefore a direct causal connection between the restrictive covenants and the sale of the assets."8  Wagner J. regarded this linkage as even clearer given the absence of any restrictive covenants in the contract of employment of May 2005. That showed that those covenants "were negotiated essentially in connection with the sale of Groupe Fortier's assets and must therefore be interpreted on the basis of commercial law."9

The third element related to the mention of termination of employment in the restrictive clauses. The Supreme Court held that that reference did not change the commercial nature of the restrictive covenants, but was limited to determining the start of the period when the non-competition and non-solicitation covenants were to be in effect.

Finally, after concluding that the rules governing the restrictive covenants were those applicable to commercial contracts, the Court addressed the issue of the reasonableness of the covenants, holding that: "Whether a non-competition clause is valid in such a context depends on the circumstances in which the contract containing it was entered into. 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. Each case must be considered in light of its specific circumstances."10 The Court emphasized that a restrictive covenant will be valid, unless its scope is shown to be unreasonable on a balance of probabilities. In the case at bar, the study of the context of the transaction led the Court to acknowledge the reasonableness of the temporal and territorial restrictions, particularly having regard to: the substantial value of the transaction, the experience of the parties involved, the professionals hired to advise them and the balance of their bargaining power.

With respect to the non-solicitation covenant in particular, the Supreme Court dismissed the arguments of the appellants to the effect that in order for the clause to be valid, it had to have a territorial limitation. Among other reasons, Wagner J. found that for the clause to be valid, it was sufficient that it be limited to target customers.

The Impact of the Decision

On a practical level, this new Supreme Court decision clarifies the analytical process to be followed in determining the scope of the protection afforded by non-competition and non-solicitation obligations assumed as terms of a commercial contract to which a contract of employment is accessory. We believe that this clarification is fitting coming as it does at a time when a jurisprudential trend has developed, acknowledging that restrictive covenants contained in shareholders agreements, or in contracts for the sale of businesses, may be governed by provisions relating to employment contracts (including articles 2089 and 2095 C.C.Q.). It is now to be expected that courts will read attentively the reasons of the Supreme Court in Payette v. Guay inc. before taking a position on that subject.

Footnotes

1. 2013 SCC 45.

2. Guay inc. c. Payette, 2011 QCCA 2282.

3. 2009 SCC 6

4. Payette v. Guay inc., 2013 SCC 45, para. 42.

5. Ibid., para. 45.

6. Ibid., para. 47.

7. Ibid., para. 47.

8. Ibid., para. 49.

9. Ibid., para. 51.

10. Ibid., para. 61.

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