The Supreme Court Rules on Non-Competition and Non-Solicitation Clauses

The Supreme Court of Canada recently handed down a highly anticipated decision concerning non-competition and non-solicitation clauses in a case where the clauses were included in an asset-sale agreement pursuant to which the purchaser undertook to employ a principal of the vendor following the closing of the sale. 

In this matter, Payette v. Guay Inc., the Supreme Court analyzed (i) the applicability of Article 2095 of the Civil Code of Québec (the “CCQ”) to non-competition clauses in such a context, and (ii) the reasonableness of the scope of the non-competition and non-solicitation clauses in that context. 

The facts 

In October 2004 the respondent Guay Inc., a major player in the crane rental business in Quebec, purchased the assets of another group of companies operating in the same field that was controlled by the appellant Payette and his partner. The asset-sale agreement provided that the appellant and his partner were to be employed by the respondent for a period of six months following the sale, in order to facilitate the transitioning of the assets being purchased. That provision was accompanied by non-competition and non-solicitation clauses. The non- competition clause prohibited the appellant from engaging in any activities involving the crane-rental business, anywhere in Quebec, for a period of five years. The scope of the non-solicitation clause was essentially the same. 

At the end of the six-month transitioning period, the appellant and the respondent entered into an employment contract for an indeterminate term. In August 2009, the appellant was dismissed without cause. 

Within a year after his dismissal, the appellant began working for a competitor. 

The respondent then petitioned the Superior Court for an interlocutory injunction forcing the appellant to respect the restrictive covenants in the asset-sale agreement. 

Decision of the Court of Appeal 

The Court of Appeal overturned the decision of the Superior Court, concluding that the obligations created by the restrictive covenants were part and parcel of the asset sale agreement rather than the subsequent employment agreement, and were designed to protect the respondent’s substantial investment in purchasing the assets. The Court of Appeal accordingly concluded that the appellant was not entitled to the protection afforded by Article 2095 CCQ. 

The Court of Appeal also concluded that because the legal rules applicable to asset sales were less onerous than those applying to employment agreements, the restrictive covenants at issue were reasonable. 

Unanimous decision of the Supreme Court of Canada, drafted by Justice Wagner
Protection afforded by Article 2095 CCQ  

The Court first of all pointed out that the application of the rules governing non-competition and non-solicitation clauses differed depending on whether the restrictive covenants involved were part of an asset-sale agreement or an employment agreement. 

In the case of an employment agreement, the Court noted that such clauses are applied much more strictly because of the inequality of bargaining power that generally characterizes the employer-employee relationship. 

The Court accordingly concluded that Article 2095 CCQ is to be narrowly construed such that it only applies when the restrictive covenant in question is part of an employment contract. 

Thus, in order to determine whether the restrictive clauses at issue were valid, the Court had to determine whether they were part of the asset-sale agreement or the appellant’s contract of employment. This required the Court to inquire into the raison d’être of the covenants. 

After examining the wording of the provisions and the context in which they were negotiated, the Court concluded that they were among the conditions for the sale of the assets and therefore an integral part of the asset-sale agreement. 

It is interesting to note that in its analysis, the Court took into consideration the fact that the appellant had not entered the employ of the respondent by virtue of the asset-sale agreement, but pursuant to a subsequent employment agreement that did not contain any non-compete or non-solicitation clauses. According to the Court, that was an indication of the parties’ intention that the non-compete clause would continue to be governed by the asset-sale agreement. 

Reasonableness of the restrictive covenants 

Having concluded that the restrictive covenants were an integral part of the asset-sale agreement, the Court went on to determine whether they were reasonable in light of the rules governing commercial law. 

With respect to the non-compete clause, the Court found that the circumstances surrounding the negotiations between the parties, the parties’ experience and expertise and whether or not they had access to the services of legal counsel and other professionals all had to be taken into account in determining the reasonableness of the covenant. 

The Court concluded that in light of the highly specialized nature of the crane-rental business, a five-year non-compete clause whereunder the appellant could not compete with the respondent anywhere in Quebec was reasonable and therefore valid. 

Regarding the non-solicitation clause, Justice Wagner stated that in a commercial context the validity of such a clause was not generally subject to a territorial limitation and could apply to the entire clientele of the business. He therefore concluded that the non-solicitation clause at issue was valid despite not having a territorial limitation. He also stated that the courts must be more deferential towards the balance sought to be achieved in a commercial contract wherein the parties decided to create two distinct restrictive covenants. 

It is also interesting to note the Court’s confirmation of the Court of Appeal’s observations regarding the use of the date of termination of employment in determining the duration of the non-competition and non-solicitation clauses contained in an asset-sale agreement. The non-competition and non-solicitation obligations were assumed pursuant to a sale of assets, and a reference to termination of employment does not entail associating those obligations with an employment contract rather than with the agreement of sale. 

Conclusion 

With this decision, the country’s highest court has shown us that caution is to be exercised in construing non-competition clauses, as the protection afforded by Article 2095 CCQ does not apply when such a clause is stipulated in an asset-sale agreement in order to protect the legitimate interests of the purchaser. The Court has thus confirmed that in a commercial context, non-competition and non-solicitation clauses are to be construed less restrictively than in the context of an employment agreement.