October 08, 2013

Restrictive Covenants in the Commercial Context: Payette v. Guay Inc., 2013 SCC 45

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In Payette v. Guay Inc. 2013 SCC 45, the Supreme Court of Canada distinguished between the interpretation of a restrictive covenant negotiated in the sale of a business and one found in an employment contract. In the commercial context, a restrictive covenant is lawful unless it can be established by the employee/vendor that its scope is unreasonable. In contrast, a restrictive covenant in an employment contract is presumed to be unenforceable unless the employer can establish it is reasonable in the circumstances.

In this case, the employee/vendor, Payette, sold the assets of his crane-rental company and agreed to work as a consultant for the purchaser, Guay Inc. Payette’s initial six-month term with Guay Inc. was extended several times. After four years of employment, Payette was terminated without cause. Payette then began working for a competitor, which resulted in Guay Inc.’s action to enforce the restrictive covenants agreed to by the parties.

The Court determined that in the sale of a business, the interpretation of restrictive covenants is “based on the rules of commercial law rather than on those applicable to contracts of employment.” More flexibility and latitude is required in the interpretation of restrictive covenants in a commercial context due to the presumed equal bargaining power of the parties and the need to protect the purchaser’s investment.

The Court held that Payette had failed to prove that the covenants were unreasonable, and thus, he had not discharged his burden of proof. In assessing the validity of the restrictive covenants, the Court first considered a clause within the agreement acknowledging that the covenants were reasonable. Although the Court was not bound by Payette’s acknowledgement, this was considered by the Court to be an indicator of reasonableness. The Court also considered the sale price, the nature of the business’s activities, the parties’ experience and expertise, and access to legal advice in reaching the agreement.

The non-competition clause in question prohibited Payette from competing with Guay Inc. within the province of Quebec for a five-year period following the termination of his employment. The specialized nature of the business weighed in favour of upholding the clause for a period of five years, while the mobility of the crane rental business justified the large geographic territory.

The non-solicitation clause prevented the solicitation of employees and customers for a five-year period, but it was not geographically restricted. The Court concluded that a territorial limitation was not required in this case, and stated that due to advancements in technology in the modern economy, territorial limitations in non-solicitation clauses have “generally become obsolete.”

This decision signals clearly that the Courts are more willing to enforce restrictive covenants in a sale of business situation than in an employment context, thus providing greater protection to buyers and the investment they make in purchasing a new business. The Court emphasized that restrictive covenants in commercial agreements will continue to be carefully assessed for reasonableness; however, “the parties negotiating the sale of assets have greater freedom of contract than parties negotiating a contract of employment.”

For more information, please contact Meaghan Hughes at coxandpalmer.com.


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