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Business Purchaser Comes Out On Top: The Supreme Court Weighs in on Non-Compete and Non-Solicit Provisions

Sep 30th, 2013

By Seth B. Abbey

If you are contemplating buying a business you can breathe a little easier after the highest court in Canada unanimously upheld the non-compete and non-solicit clauses in a contract for the sale of a business in its recent decision, Payette v. Guay inc.

Non-compete and non-solicit clauses are restrictive covenants that prohibit a past employee from competing with their previous employer, either as an employee of another business or as a business owner themselves, or soliciting clients (or sometimes potential clients) of the previous employer.

Click here  for tips on drafting non-compete and non-solicit clauses based on the Payette decision.

The facts are summarized as follows:

The acquiring company (AcquireCo), a business, acquired assets belonging to corporations controlled by an individual, X. The agreement for the sale of assets between the parties contained non‑competition and non‑solicitation clauses whereby X could not compete with or solicit clients from AcquireCo for 5 years.

To ensure a smooth transition in operations following the sale, the parties also agreed to include a provision in their agreement in which X undertook to work full time for AcquireCo as a consultant for six months.

The parties also reserved the option of subsequently agreeing on a contract of employment under which X would continue to work for AcquireCo.

At the end of the transitional period, the parties agreed on and then entered into a second contract, being a contract of employment, originally for a fixed term and subsequently for an indeterminate term.

About 5 years later, AcquireCo dismissed X without a serious reason. X then started a new job with a competitor of AcquireCo.

In Quebec, pursuant to article 2095 of the Civil Code of Quebec, an employer cannot use the protection from a non-compete clause where the employer terminated the contract of employment without a serious reason. This is to restore a balance of power between the employer and employee that is frequently negated or jeopardized by the respective economic power of each party.

In general, the same principal does not apply to a contract of sale of an enterprise where the parties are on more equal footing as they negotiate on equal terms and are advised by competent professionals.

In Payette, the Supreme Court found the non-compete and non-solicit provisions were valid since they could not be dissociated from the contract for the sale of assets. The conclusion was supported by both the wording of the obligations at issue and by the factual context that explains and justifies the acceptance of such obligations. The Supreme Court states at paragraph 46, “the reason why the appellant Payette agreed to the obligations of non‑competition and non‑solicitation related to the sale of his business to Guay inc. [AcquireCo] (contract for the sale of assets), not to his post‑sale services as a consultant for or employee of Guay inc. [AcquireCo] (contract of employment).”

This blog post highlights tips for drafting the non-compete and non-solicitation clauses in this context.

Seth B. Abbey, a corporate lawyer at Spiegel Sohmer with a focus on mergers and acquisitions, private equity financing and tax-driven reorganizations, is available to answer your questions about this and other topics.