Business Law

Purchase or Sale of a Business: Supreme Court Of Canada Rules on Non-Competition and Non-Solicitation Clauses

Nov 6th, 2013

By Daniel Frajman

When purchasing or selling a business, there has always been a push and pull between the freedom to contract (a principle that would uphold non-competition and non-solicitation clauses), and the view that no person should be unduly restrained from earning a living (a principle leading to such clauses sometimes being held as being too wide and therefore null).

Similar considerations also apply in a different context, namely employment contracts, where it is clear (see article 2089 of  the Civil Code of Quebec) that such clauses will be invalid if they are not limited “as to time, place and type of employment, to whatever is necessary for the protection of the legitimate interests of the employer.”

The Supreme Court of Canada (the “SCC”) has just ruled on non-competition and non-solicitation clauses in the context of the sale of a business, in the case of Payette v. Guay Inc., 2013 SCC 45 (the French language citation is Payette c. Guay inc., 2013 CSC 45). This case concerned the sale of a crane rental business. The shareholder selling agreed to not work in the business anywhere in Quebec for five years (non-competition), and not to solicit, essentially anywhere, the customers and workers of the business for five years (non-solicitation). The SCC upheld this as valid, and noted that such clauses are more easily uphold in the sale of a business context (i.e., their scope as to time, place, and object can be wider than when an employee simply signs on to such clauses).

The SCC also noted that you look at the agreement for the sale of the business “analytically”, rather than literally, to see whether these clauses (even if signed a few years after the sale) are part of the sale agreement (where the clauses are more easily upheld), or part of a later employment agreement (where the clauses are more easily null). As for other points made by the SCC, the following are notable:

  • A vendor of a business has the burden to prove that the clauses are unreasonable (whereas for an employee signing on to such clauses, the burden is basically shifted and the employer has the burden to show the clauses are reasonable);
  •  “A non-competition clause in a [sale of business] contract must of course be limited as to time, or it will be found to be contrary to public order and a court will refuse to give effect to it… The Quebec courts have [sometimes] found non-competition clauses in [sale of business] contracts that applied for as long as 10 years to be valid.”
  •  “The territorial scope [in this case, all of Quebec] of the non-competition clause is not excessive [in this case]… Cranes are mobile. They go where the construction sites are.”
  • “A determination that a non-solicitation clause is reasonable and lawful does not generally require a territorial limitation… In the context of the modern economy, and in particular new technologies, customers are no longer limited geographically, which means that territorial limitations in non-solicitation clauses have generally become obsolete.”

Therefore, and as I have seen time and time again, when a client sells or purchases a business, these factors must be taken into account when properly drafting the non-competition and non-solicitation clauses. Feel free to be in touch with me on these issues when selling or buying.

For further analysis of this case, see Seth Abbey’s recent post.

Daniel Frajman negotiates and drafts contracts for business and real estate sales and purchases, leases, debt and equity financings, shareholders’ agreements, trusts, wills, and for non-taxable non-profit and charitable businesses.