Context is Everything in Restrictive Covenants: SCC

Supreme Court of Canada

Supreme Court of Canada

The Supreme Court of Canada has held that non-competition and non-solicitation provisions are enforceable and should be guided by the context in which they were made.

Payette v. Guay Inc. 2013 SCC 45 involves the sale of a crane rental business in Quebec. A negotiated commercial agreement involved a substantial purchase price and parties represented by experienced counsel. The seller, Payette, agreed to be bound by non-competition and non-solicitation restrictions. He worked for Guay Inc. after the sale, negotiated an employment agreement, which and was later terminated without cause, or “without serious reason” as they say in Quebec.

The court found that, in reviewing such restrictions, a court must be guided by the context. The restrictive covenants negotiated between the sophisticated parties in this case represented a significant consideration in return for the purchase price.

“The obligations of non‑competition and non‑solicitation could not be dissociated from the contract for the sale of assets,” the court found.

A party who challenges a restrictive covenant must show on a balance of probabilities that its scope and terms are unreasonable. The Supreme Court gave weight to the particular nature of the crane rental industry. It found that the entire province of Quebec was a reasonable territory scope for the non-competition provision.

Payette offers guidance for parties who want to enforce restrictive covenants. Lack of territorial limits does not necessarily mean that a non-solicitation provision is unreasonable. Non-competition covenants, on the other hand, will not be enforceable unless they contain reasonable territorial restrictions. This is in response to changing economic conditions and the fact that technology blurs traditional territorial lines.

The decision notes that parties negotiating the sale of assets have greater freedom of contract than parties who negotiate an employment contract, given the power imbalance that exists in employer-employee relationships. Determining the reasonableness of restrictive covenants in employment agreements will not rely on the same standard or rigour as in a commercial setting.

Related information:

McMillan LLP

Lawson Lundell LLP

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