A) Rules that apply in respect of termination of employment
The Civil Code of Québec states the following rules:
2088. The employee is bound not only to carry on his work with prudence and diligence, but also to act faithfully and honestly and not to use any confidential information he may obtain in carrying on or in the course of his work.
These obligations continue for a reasonable time after cessation of the contract, and permanently where the information concerns the reputation and private life of another person.
2089. The parties may stipulate in writing and in express terms that, even after the termination of the contract, the employee may neither compete with his employer nor participate in any capacity whatsoever in an enterprise which would then compete with him.
Such a stipulation shall be limited, however, as to time, place and type of employment, to whatever is necessary for the protection of the legitimate interests of the employer.
The burden of proof that the stipulation is valid is on the employer.
2095. An employer may not avail himself of a stipulation of non-competition if he has resiliated the contract without a serious reason or if he has himself given the employee such a reason for resiliating the contract.
B) Payette v. Guay inc., 2013 SCC 45
Non-competition, non-solicitation: the SCC speaks
The Supreme Court has just released a much awaited decision concerning non‑competition and non-solicitation clauses in an agreement for the sale of assets, in the situation where the purchaser undertakes to the vendor to employ the vendor after they enter into the sale contract.
In this case, the Supreme Court analyzed (i) the applicability of article 2095 of the Civil Code of Québec (“C.C.Q.”) to a non-competition clause in that situation, and (ii) the reasonable scope of the non-competition and non-solicitation clauses in a contract of that nature.
In October 2004, the respondent Guay inc., which operates a crane rental business, purchased the assets of another business in the same field, formerly the business owned by the appellant Payette and his partner. The agreement for the sale of assets provided that the appellant and his partner would work for six months to facilitate the transition after the sale. The agreement also included non-competition and non-solicitation clauses. The non-competition clause prohibited the appellant from engaging in any business activity related to crane rentals for a period of five years, throughout the territory of the province of Quebec. The non-solicitation clause had essentially the same scope.
At the end of the six-month transitional period, the parties agreed on a contract of employment for a fixed term that was subsequently renewed for an indeterminate term. In August 2009, the appellant Payette was dismissed without a serious reason.
Less than a year later, the appellant Payette found a new job with a competitor.
The respondent then sought an interlocutory injunction from the Superior Court requiring the appellant Payette to comply with the agreement signed by the parties and comply with the restrictive covenants in the agreement for the sale of assets.
Lemelin J. dismissed the respondent’s action, concluding that the restrictive covenants arose from the appellant’s contract of employment, and consequently the rules applicable to employment contracts (article 2095 C.C.Q.) had to be applied. Accordingly, because the appellant had been dismissed without serious reason, the non-competition clause could not be applied.
Court of Appeal
The Court of Appeal reversed the decision of the Superior Court. Disagreeing with the Superior Court, it concluded that the obligations created by the restrictive covenants were created because of the agreement for the sale of assets, and more specifically to protect the substantial investment made by the respondent, not because of the contract of employment between the parties. Consequently, the Court of Appeal concluded that the appellant did not enjoy the protection afforded by article 2095 C.C.Q.
The Court also held that in light of the legal principles applicable to the sale of a business, which are less restrictive than in the case of a contract of employment, the restrictive covenants in issue were reasonable.
Judgment of the Supreme Court delivered by Wagner J.
Protection of article 2095 C.C.Q.
The Court began by stating that the rules applicable to non-competition and non-solicitation clauses differ depending on whether the restrictive covenants arise from an agreement for the sale of assets or a contract of employment.
The restrictions relating to such clauses apply much more stringently when they appear in a contract of employment because of the imbalance of power generally found in an employer-employee relationship.
The Court therefore concluded that article 2095 C.C.Q. must be narrowly construed and may be relied on only where the court determines that the clauses are linked to a contract of employment.
Having regard to the foregoing, and in order to determine the validity of the restrictive covenants, the Supreme Court then had to determine whether, in this case, the non-competition and non-solicitation clauses arose from the agreement for the sale of assets or the respondent’s contract of employment. To do that, the Court considered the rationale for the clauses.
After examining the wording of the clauses and the context of the transaction, the Supreme Court concluded that they were related to the conditions for the sale of the business and that, accordingly, they were linked to the agreement for the sale of assets.
It is also interesting to note that in its analysis, the Court took into consideration the fact that the appellant Payette was no longer working for the respondent under the purchase contract; rather, he was doing so under a new contract of employment that did not contain non-competition and non-solicitation stipulations. In the opinion of the Court, this, in a way, revealed the intention of the parties to continue to apply the rules in the purchase contract in relation to the non-competition clause.
Reasonableness of the restrictive covenants
Having concluded that the restrictive covenants were an integral part of the agreement for the sale of assets, the Court then analyzed them under the rules that govern commercial law.
On the non-competition clause, the Court stated that the circumstances surrounding the parties’ negotiations, the parties’ level of expertise and experience and the outside resources to which they had access are factors that must be weighed when the Court analyzes the reasonableness of the clauses.
Wagner J. concluded that in view of the very specialized nature of the business’s activities, a five-year non-competition clause under which the appellant Payette would not compete with the respondent throughout the territory of Quebec was valid and reasonable.
On the non-solicitation clause, Wagner J. wrote that in a commercial context, the validity of this kind of clause is not generally subject to a territorial limitation and may apply to the business’s customers in general. He therefore concluded that the non-solicitation clause in this case was valid, even though it did not include any territorial limitation. In his opinion, the courts should not interfere excessively in a contractual agreement entered into by the parties when they have decided to create two separate clauses.
It is also interesting to read the comments of the Supreme Court affirming what the Court of Appeal said regarding the use of the date of termination of the employment to determine the term of the non-solicitation and non-competition clauses in an agreement for the sale of assets. The non-competition and non-solicitation clauses were assumed and agreed to in the context of a sale of assets and the reference to termination of employment did not have the effect of associating the restrictive covenant linked to an agreement for the sale of assets.
The highest court in the land has thus reminded us that caution should be our watchword, and that the protection afforded by article 2095 C.C.Q. does not apply to a non-competition clause when it arises from an agreement for the sale of assets and is thus intended to protect the purchasers’ interests. The Supreme Court has confirmed that undertakings not to compete and not to solicit customers must be interpreted less restrictively than in the context of a contract of employment.
C) Territorial limitation of non-competition clauses
For some years, the Quebec courts have recognized the validity of non-competition clauses with increasingly broad scope in the knowledge industry.