First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

Five-year commercial restrictive covenant upheld

Usually, when we write about restrictive covenants, it’s in the context of an employment agreement that limits the type of competitive activities an employee can pursue outside of the contract. These non-competition and non-solicitation agreements are fairly common, but courts also commonly find them to be unenforceable due to unreasonable or unclear restrictions. When parties negotiate a restrictive covenant in the context of a transfer of a business, however, the rules are different, even where the seller of the business agrees to work for the buyer. The Supreme Court of Canada recently dealt with a case like this.

In 2004, Yannick Payette and his partner Louis Pierre Lafortune sold their crane rental business to Guay Inc. The sale contract included con-competition and non-solicitation provisions that prohibited Payette and Lafortune from operating competing businesses and soliciting Guay’s clients or employees for a period of five years, starting from the day they “cease to be employed, directly or indirectly” by Guay. The non-compete clause was limited to Quebec. The non-solicit clause did not include a territorial limit.

Payette and Lafortune took jobs with Guay, but in 2009, the employer terminated Payette without cause. In 2010, Payette joined Mammoet Crane Inc. as operations manager. Soon thereafter, a number of Guay employees joined Mammoet. Guay called for an injunction against Payette, which the Quebec Superior Court initially granted, but after a hearing, the court dismissed Guay’s case on two grounds:

  1. The territory of the non-compete clause was too broad. Payette and Lafortune’s previous crane rental business was limited to the Montreal area, but the clause prohibited the two from competing anywhere in the province of Quebec.
  2. Lacking a territorial limitation, the non-solicit clause was unacceptable as written. The court found it was a “hybrid” non-solicit/non-compete clause, which does in fact require a territorial limit.

According to the court, the restrictive covenants were void and Payette was free to compete with his former employer.

The Supreme Court of Canada disagreed. The restrictive covenants were part of an asset purchase agreement, not an employment agreement, and different rules applied as a result. It was not inappropriate to prohibit competition to the boundaries of the province of Quebec, and the non-solicitation clause did not require a territorial limitation.

The reason different rules apply to employment contracts and asset purchase agreements is that in the parties to a sale of a business are assumed to have essentially equal bargaining power. In an employer-employee relationship, the employer is presumed to have more power than the employee; the law discourages exploitation of employees and the courts will generally interpret the law in employees’ favour.

Adam Gorley
First Reference Internal Controls and Compliance Editor

Follow me

Adam Gorley

Editor at First Reference
Adam Gorley, B.A. (Phil.), is a researcher, content provider and editor. He contributes regularly to First Reference Talks and Internal Control blogs, HRinfodesk and other First Reference publications. His areas of focus include broad human resources issues, corporate social responsibility, corporate governance and government policies, information technology and labour market trends.Read more
Follow me
Send to Kindle

, , , , , , , , , , , , , , , , , , , , ,

Comments are currently closed.