Canada: Hail The ROFR: Another Non-Compete Bites The Dust At The Ontario Appeal Court

Last January, the Court of Appeal for Ontario (Appeals Court) provided judicial clarity on the interplay between specific real estate documentation and broader commercial agreements in the context of a share purchase transaction. In Goodlife Fitness Centres Inc. v. Rock Developments Inc.,1 the Appeals Court emphatically overturned a lower court's decision, and in clear language pronounced that:

  • in the absence of express wording to the contrary, a specific right of first refusal (ROFR) cannot be superseded by a related and broadly worded non-competition agreement (Non-Compete Agreement); and
  • courts should not rely on evidentiary material from the parties' negotiations when interpreting final executed agreements.

Background

In June 2014, Goodlife Fitness Centres Inc. (GFC), as operator of health and fitness facilities across Canada, entered into an agreement to purchase the shares of a Windsor-based competitor, Lifestyle Family Fitness Centre Inc. (LFF). At the time, LFF's principal was Rocco Tullio (Tullio). In addition, Tullio was an owner and the controlling mind of Rock Developments Inc. (RDI) and of certain other entities. RDI was the registered owner of the property known as 650 Division Rd, Windsor, Ontario (Property 1); the other entities controlled by Tullio owned two other commercial sites in the Windsor area (Property 2 and Property 3, respectively).

Before the closing date of the share purchase deal (November 30, 2014), GFC requested assurances from Tullio that he would not engage in competing fitness club operations in the Windsor area. GFC initially sought to place restrictive covenants on each of Property 1, 2 and 3, prohibiting the use of these properties as health and fitness facilities. Tullio accepted the restrictions on Property 2 and 3, but not on Property 1. Instead of a restrictive covenant on Property 1, Tullio executed a ROFR in favour GFC. Under the ROFR, GFC had the option to lease Property 1 on the same terms as those contained in a lease offer made by a third-party fitness facility operator; if GFC declined to so exercise the option, Tullio could then lease it to the third-party offeror.

On the closing of the share purchase transaction, Tullio also executed an Non-Compete Agreement in favour of GFC, pursuant to which Tullio would be barred from (among other things) having a "business or financial interest" in a fitness-related business, and from "providing ... development services ... to any person engaged in" a fitness-related business. The Non-Compete Agreement had a 5-year term (expiring on November 30, 2019), and designated all of Canada as the restricted territory.

Prior to the expiry of the Non-Compete Agreement, on July 30, 2018, Tullio (via RDI) entered into a lease agreement with a competing gym operator, Movati Athletics Group (Movati), for the leasing and development of a fitness facility on Property 1. In accordance with the ROFR terms, GFC was notified and given the opportunity to lease Property 1 on Movati's terms, but declined to exercise the lease option. Tullio then proceeded to lease Property 1 to Movati, and readied the site for Movati by providing certain grading and landscaping services.

Shortly thereafter, GFC brought an application with the Ontario Superior Court (the Lower Court) to have Movati's lease declared void on the basis that it breached the Non-Compete Agreement, and sought an injunction to stop Tullio from providing services to Movati.

Lower Court's Decision

In its decision,2 the Lower Court allowed GFC's application, declaring Movati's lease void ab initio and granting an injunction requiring Tullio to refrain from providing any further services to Movati.

In its reasoning, the application judge of the Lower Court focused on the parties' negotiations prior to the signing of the Non-Compete Agreement and the ROFR. In so doing, he concluded that the Non-Compete Agreement was paramount over the ROFR and that the ROFR was intended to "supplement" the Non-Compete Agreement by "adding an additional layer of protection" for GFC. For the Lower Court, there was no doubt that when the share transaction closed, the parties' intention was for Tullio to "play no role whatsoever in facilitating the start-up and operation of a fitness facility" on Property 1 during the term of the Non-Compete Agreement. According to the Lower Court, by declining to exercise its lease option under the ROFR, GFC did not forfeit the protection conferred to it by the Non-Compete Agreement in respect of Property 1. Rather, the restrictions in the Non-Compete Agreement would remain intact in respect of Property 1, unless GFC consented or until the Non-Compete Agreement expired. In other words, during the term of the Non-Compete Agreement, the ROFR could only operate to create an opportunity for GFC to purchase Property 1, and not as a mechanism to sidestep the Non-Compete Agreement.

Further, the Lower Court rejected Tullio's alternative argument that, even if the Non-Compete Agreement was paramount, the language of the Non-Compete Agreement itself did not prohibit the lease to Movati or the grading and landscaping services it provided to Movati. Because Tullio was not just collecting rent from Movati, but also preparing Movati's fitness facility to compete with GFC and influencing the schedule of preparations, the Lower Court found the specific leasing arrangement put in place with Movati to be in violation of the overall purpose of the Non-Compete Agreement. Moreover, the Lower Court found the grading and landscaping services Tullio provided to Movati to fall within the meaning of "development services", which were prohibited under the Non-Compete Agreement.

Court of Appeal Ruling

In a unanimous ruling, the Appeals Court unequivocally overturned the Lower Court's decision. More specifically, the Appeals Court took the application judge to task on three fronts.

First, it disagreed with the application judge's finding that the Non-Compete Agreement had paramountcy over the ROFR. According to the Appeals Court, there was no language in either of these documents indicating which had supremacy over the other. On a plain reading, the two documents could and should be read together, as creating concurrent obligations for Tullio: he was required to abide by the Non-Compete Agreement, while at the same time having an independent obligation under the ROFR to give to GFC the option to lease Property 1, which he did. In the Appeals Court's view, nothing more could be derived from the contractual wording as to the interplay between these two agreements.

Second, the Appeals Court held that the application judge made "a palpable and overriding error of fact", by misconstruing the substance of the parties' negotiations, on which he relied for his conclusions. More particularly, the applications judge had omitted from his analysis the correspondence where Tullio's specifically refused to make Property 1 subject to the requested restrictive covenant. According to the Appeals Court, this was a fateful oversight by the Lower Court, as it failed to account for the fact that the ROFR in respect of the Property 1 was agreed to, precisely as a substitute to the requested restrictive covenant.

Third, the Appeals Court found the applications judge to have "erred in relying on the negotiations to interpret the agreements". The Appeals Court noted that in its own rulings over the years, it has frequently discouraged the use of negotiations as an aid to interpreting contracts. From a review of some of the Appeals Court's recent rulings on this point, the overall contractual interpretation principle that emerges is that, while reference may be had to the objective evidence of the "factual matrix" that characterizes contract negotiations, evidence of negotiations generally falls outside the "factual matrix". The Appeals Court concluded that the application judge made findings of fact that were both "erroneous and not open to him", when he relied on negotiations to interpret the ROFR.

Instead, the Appeals Court held that the plain wording of the ROFR must prevail. That wording clearly contemplated Tullio's right to lease Property 1 to a third-party gym operator, if GFC declined to exercise the ROFR (as it did in this case). So long as Tullio acted within the scope of the ROFR, the broader restrictions contained in the Non-Compete Agreement would have no application. Having found the Movati lease to be valid, the Appeals Court also agreed with Tullio's submission that his services to Movati were legitimate, as falling within the scope of what a landlord may ordinarily provide to a tenant. In the Appeals Court's view, it would be a "commercial absurdity" and an indirect "invalidation of the lease" to prohibit Tullio from preparing a site that is being rented pursuant to a valid lease.

Legal Practice and Commercial Implications

Distilled to its essence, some of the key takeaways that emerge from this fresh and emphatic ruling are:

  • Legal practitioners and business principals should be mindful of how interweaving contracts may handicap a Non-Compete Agreement, if they are hoping to rely on one. While Non-Compete Agreements have traditionally attracted judicial disfavour because they tend to impose undue restraints on trade, in this particular case, reliance on the Non-Compete Agreement was unsuccessful due to the existence of another interacting agreement — the ROFR — which provided clear rights that ran counter to the general wording of the Non-Compete Agreement.
  • No agreement in a transaction will be deemed paramount over another unless there is express wording to that effect. In the absence of such wording, the parties' rights and obligations contained in a contract that is narrower in scope (as in the case of a ROFR), will not be negated by the language of a contract that is broader in scope (such as the Non-Compete Agreement).
  • As a general proposition, material pertaining to negotiations will be excluded as an aid to contractual interpretation. This is a welcome clarification for legal practitioners, as it removes a considerable amount of uncertainty that has long been lingering on this point.3
  • There is no substitute for clear and precise contract drafting, if businesses wish to minimize the prospects of costly litigation and undesirable judicial outcomes. At least in Ontario, courts will be reluctant to venture outside the four corners of the agreement if the contract in question provides sufficient commercial certainty.

Footnotes

1 2019 ONCA 58, 2019 CarswellOnt 1034.

Goodlife v. Rock Developments et al., 2018 ONSC 6755, 2018 CarswellOnt 19196.

3 See Geoff R. Hall, Canadian Contractual Interpretation Law, 3rd ed. (Toronto: LexisNexis Canada Inc., 2016) at 101.

About BLG

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 Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions