Can a five-year non-competition agreement be legally enforceable? If it is attached to the sale of a part of your business it can be, says the Supreme Court of Canada.
In the most recent of decisions from the highest court concerning non-competition agreements and restrictive covenants, Payette v. Guay inc., 2013 SCC 45, released September 12, 2013, the Supreme Court of Canada affirmed that non-competition agreements negotiated in the context of a sale are different from non-competition agreements included in a simple employment agreement.
As explained in the headnote to the case:
Writing on behalf of the Court, the Honourable Justice Wagner held that:
In resolving that the court had to have regard for the context in which the agreement was negotiated, Justice Wagner held that:
Although decided with reference to Quebec law, the decision is important on this side of the Ottawa River, meaning Ontario, as well. What the case affirms is two things. First, in the context of a commercial transaction, non-competition and non-solicitation agreements will be reviewed with substantially more deference to the parties. Second, in the context of an employment agreement, the court will recognize a power imbalance between the parties and extra scrutiny will continue to be employed.
Also, the case highlights the care that must be exercised by vendor/employees in such cases. Typically, the reason that a non-competition agreement will be held to be unenforceable as against an employee is because the employee failed to receive sufficient consideration for the agreement. In the case of an asset sale, however, actual consideration is typically received. In Mr. Payette's case that consideration was several million dollars.
Therefore, vendors must be mindful of the agreements that they are making. While most are familiar with the Latin expression Caveat emptor, ("let the buyer beware") cases such as Payette illustrate the point of the lesser-known saying of Caveat venditor ("let the seller beware.")
If you are a business owner contemplating a sale of all or a part of your business, the business lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to you. Our firm provides a full range of business services, including providing legal advice with respect to employment law issues and non-competition and non-solicitation agreements whether you're the vendor or the purchaser. Please consider affording us the opportunity to assist you with ensuring that your transaction goes smoothly and that your future interests are protected as well.
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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation and it is always prudent to seek professional legal advice before taking any decisions on one’s own case.
Sean Bawden, publisher of the law blog for the suddenly unemployed, can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP, and part-time professor at Algonquin College teaching Trial Advocacy for Paralegals. He is a trustee of the County of Carleton Law Association for 2013.
In the most recent of decisions from the highest court concerning non-competition agreements and restrictive covenants, Payette v. Guay inc., 2013 SCC 45, released September 12, 2013, the Supreme Court of Canada affirmed that non-competition agreements negotiated in the context of a sale are different from non-competition agreements included in a simple employment agreement.
What Happened
As explained in the headnote to the case:
Guay inc., a commercial enterprise, acquired assets belonging to corporations controlled by Payette. The agreement for the sale of assets between the parties contained non‑competition and non‑solicitation clauses. To ensure a smooth transition in operations following the sale, the parties also agreed to include a provision in their agreement in which Payette undertook to work full time for Guay as a consultant for six months. The parties also reserved the option of subsequently agreeing on a contract of employment under which Payette would continue to work for Guay. At the end of the transitional period, the parties agreed on a contract of employment, originally for a fixed term and subsequently for an indeterminate term. A few years later, Guay dismissed Payette without a serious reason. Payette then started a new job with Mammoet Canada Eastern Ltd., a company that is a competitor of Guay.The actual wording of the non-competition read as follows:
[TRANSLATION]In the Superior Court of Quebec, Guay’s motion for an injunction compelling Payette to comply with the restrictive covenants in the agreement for the sale of assets was dismissed. The Quebec Court of Appeal set aside the Superior Court’s judgment and ordered a permanent injunction, requiring Payette and Mammoet to comply with the restrictive covenants at issue. The Supreme Court of Canada agreed with the Quebec Court of Appeal.
Non‑competition ‑ In consideration of the sale that is the subject of this offer, each of the Vendors and the Interveners covenants and agrees, for a period of five (5) years from the Closing date or, in the case of the Interveners, for a period of five (5) years from the date on which an Intervener ceases to be employed, directly or indirectly, by the Purchaser, not to hold, operate or own, in whole or in part, directly or indirectly and in any capacity or role whatsoever, or in any other manner, any business operating in whole or in part in the crane rental industry, and not to be or become involved in, participate in, hold shares in, be related to or have an interest in, advise, lend money to or secure the debts or obligations of any such business or permit any such business to use the Vendor’s or the Intervener’s name in whole or in part. The territory to which this non‑competition clause applies for the above‑mentioned period of time is the province of Quebec.
Reasons for the Supreme Court of Canada's Decisions
Writing on behalf of the Court, the Honourable Justice Wagner held that:
[2] The interpretation of restrictive covenants requires the application of different rules depending on whether the covenants are found in commercial agreements or in contracts of employment. These rules will be more generous in the commercial context, but much stricter in the context of contracts of employment or service.At issue in the case was an interpretation of certain sections of the Quebec Civil Code, an issue into which I will not delve. Suffice to say, the question was whether Payette should be treated, for the purposes of the non-competition agreement, like an employee or like a vendor of goods.
[3] The scope of a restrictive covenant depends on the context in which the covenant was negotiated. This has long been recognized in positive law. For example, the legal framework applicable to contracts of employment takes account of the imbalance of power that generally characterizes an employer‑employee relationship, and it is designed to protect employees. In relationships between vendors and purchasers in the commercial context, on the other hand, there is ordinarily — with some exceptions — no such imbalance. In such cases, much more flexibility and latitude is required in interpreting restrictive covenants in order to protect freedom of trade and promote the stability of commercial agreements.
In resolving that the court had to have regard for the context in which the agreement was negotiated, Justice Wagner held that:
[9] I am of the opinion that, in a commercial context, restrictive covenants such as these are lawful and must be interpreted in a manner consistent with the intention of the parties and the obligations to which the covenants give rise, unless it is shown that they are contrary to public order, for example because they are unreasonable with respect to one of the parties. 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 intention of the parties.With respect to the reasonableness of the agreement Justice Wagner held that the following will be relevant to any consideration of the same:
[61] In a commercial context, 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. 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.With respect to the term of the non-competition agreement, Justice Wagner noted that in the case of a sale of assets between well‑informed persons who are represented by competent counsel, it is likely, although there may be exceptions, that the clause so negotiated is reasonable. In assessing these factors, the Quebec courts have found non‑competition clauses in commercial contracts that applied for as long as 10 years to be valid.
Commentary
Although decided with reference to Quebec law, the decision is important on this side of the Ottawa River, meaning Ontario, as well. What the case affirms is two things. First, in the context of a commercial transaction, non-competition and non-solicitation agreements will be reviewed with substantially more deference to the parties. Second, in the context of an employment agreement, the court will recognize a power imbalance between the parties and extra scrutiny will continue to be employed.
Also, the case highlights the care that must be exercised by vendor/employees in such cases. Typically, the reason that a non-competition agreement will be held to be unenforceable as against an employee is because the employee failed to receive sufficient consideration for the agreement. In the case of an asset sale, however, actual consideration is typically received. In Mr. Payette's case that consideration was several million dollars.
Therefore, vendors must be mindful of the agreements that they are making. While most are familiar with the Latin expression Caveat emptor, ("let the buyer beware") cases such as Payette illustrate the point of the lesser-known saying of Caveat venditor ("let the seller beware.")
Business Services Provided by Ottawa's Kelly Santini LLP
If you are a business owner contemplating a sale of all or a part of your business, the business lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to you. Our firm provides a full range of business services, including providing legal advice with respect to employment law issues and non-competition and non-solicitation agreements whether you're the vendor or the purchaser. Please consider affording us the opportunity to assist you with ensuring that your transaction goes smoothly and that your future interests are protected as well.
--
As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation and it is always prudent to seek professional legal advice before taking any decisions on one’s own case.
Sean Bawden, publisher of the law blog for the suddenly unemployed, can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP, and part-time professor at Algonquin College teaching Trial Advocacy for Paralegals. He is a trustee of the County of Carleton Law Association for 2013.
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