The Supreme Court of Canada recently addressed the issue of the
enforceability of restrictive covenants where the purchaser of a
business offered employment to the business’s previous owners
(Payette v Guay Inc. 2013 SCC 45). In this
case, the Supreme Court of Canada put to rest a long-standing
inconsistency in the law regarding how broad a restrictive covenant
can be when it is entered into in the context of both an agreement
for sale of a company and a subsequent employment contract for some
of the vendor’s primary employees.
Payette v Guay Inc. confirms
that where an agreement for sale of a company gives rise to both a
commercial contract and an employment contract, that context can be
used to interpret the wording of the restrictive covenant.
Specifically, the Court may apply the broader principles used to
interpret such covenants where the parties have equal bargaining
power (such as in the context of a commercial transaction) rather
than the narrow interpretation typically applied in the employment
context, where the unequal bargaining power of the parties requires
narrow interpretations in favour of the employee.
In Payette v Guay Inc.,
Payette had a controlling interest in a crane rental company that
operated primarily in the Montreal area. Guay Inc. entered into an
asset purchase agreement to purchase the company. The terms
of the Agreement included a requirement that Payette remain a
consultant of Guay Inc. for 6 months after closing, and
contemplated employment with Guay Inc. thereafter. The
Agreement also included a non-competition clause and a
non-solicitation clause, both with a duration of 5 years past the
cessation of employment with Guay Inc. The non-competition
clause had a geographical scope that included the entire province
The Supreme Court of Canada unanimously
held that notwithstanding the fact that Payette remained an
employee of Guay Inc. for an additional 4 years after the
termination of his mandatory consultancy, the terms of the
restrictive covenant needed to be interpreted in the context of the
agreement for sale, and on that basis held that both the
geographical scope and the temporal limitations were reasonable, as
insufficient evidence had been adduced to the contrary.
Given this finding, it is now clear
that in this context a restrictive covenant will be held to be
reasonable unless it can be shown that it is broader than what is
necessary to protect the legitimate interests of the parties to the
agreement for sale. This must be determined on the specific facts.
However, the courts in Alberta have shown a propensity to uphold
the agreement of the parties unless there is strong evidence that
there is a legitimate reason not to do so: see Senos v
Pacesetter Performance Drilling Ltd. 2010 ABQB 533, Ensign
Drilling Inc. v Lundle 2007 ABQB 357 and Spartek Systems
Inc. v Brown 2014 ABQB 526.
Further, the Supreme Court of Canada in
Payette v.Guay Inc. was willing to acknowledge
the clause of the contract in which the parties expressly agreed
that the covenants were reasonable. The Court affirmed that it is
not bound by such an acknowledgment; however, the Court held that
such a term is indicative of the reasonableness of the covenants
(particularly where the parties are sophisticated parties acting on
This case may signal a move toward a
more liberal interpretation of restrictive covenants and an
acknowledgment of the freedom of parties to contract based on their
commercial interests. However, the Court’s emphasis on the
need to investigate the specific facts of each case also affirms a
continuing requirement that a restrictive covenant must not be
unnecessarily broad, and that it must be clearly tied to a broader
commercial transaction to increase the likelihood of
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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While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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