Non-Competition Agreements Enforceable When Commercial: SCC

When will Canadian courts enforce non-competition agreements?  The latest Supreme Court of Canada decision in Payette v. Guay Inc. confirms that, in a commercial context, even wide-ranging, lengthy non-competition agreements may be enforceable.

Guay Inc. is a crane rental company.  It purchased a group of crane companies from Payette and his partner for $26 million.  To assist with the transition, Payette and his partner agreed to employment contacts, that contained five year non-solicit and non-competition agreements.  Four years later, Payette was dismissed by Guay and paid an agreed upon sum.  Shortly after that, he began working with a competing crane company and promptly hired seven former employees away from Guay.

Guay brought an application for an injunction to enforce the five year non-competition agreement and the five year non-solicitation agreement.  The Quebec Superior Court dismissed the application.  It held that the non-competition clause was overly brought since it sought to prevent Payette from working anywhere in Quebec, even though the business that had been sold had only operated in the Montreal area.

The Quebec Court of Appeal overturned the lower court ruling and imposed a permanent injunction against Payette.  It held that since the non-competition agreement arose from a commercial contract, its purpose was to protect the assets that Payette had sold to Guay.  The Court of Appel was therefore prepared to uphold a broad geographic scope and time period.  Payette appealed to the Supreme Court of Canada.

The Supreme Court released its decision on September 12, 2013.  It upheld the Quebec Court of Appeal decision.  It emphasized that there is a big difference between the enforceability of a non-competition agreement in an employment context versus in a commercial context.  The Court noted that there is an imbalance of bargaining power in most employment contract situations, which is a factor to be considered when assessing a non-competition agreement.  In a commercial context, however, there is deemed to be much less, if any, of a power imbalance.  The Court went on to say that “in a commercial context, a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable.”  The Court noted that factors to be considered should include “the sale price, the nature of the business’ activities, the parties experience and expertise and the fact that the parties had access to legal counsel and other professionals.”

Given all of these factors, including in particular the specialized nature of the business, five years was not viewed as unreasonable, especially since Payette was paid $26 million.  Further, even though the scope of the agreement might cover areas in which Guay did not operate, this was still permissible as Guay could operate in these areas.  The Court also accepted the submission that the non-solicitation agreement did not need a territorial restriction.  The Court emphasizes the need to enforce the intention of the parties and the need to uphold a fairly negotiated commercial arrangement.

In some ways, this case contrasts nicely with Shafron v. KRG Insurance Brokers (Western) Inc., another commercial type case in which the Supreme Court struck out a non-competition agreement that was overly vague.

Looking at these two decisions together and other Supreme Court of Canada cases, it is fair to say that Canadian courts will now be required to make significant efforts to enforce commercial non-competition agreements.  It also seems to fair to conclude that courts will continue to be wary of non-competition agreements in a purely employment context.  The interesting question will be the extent to which courts take this type of “commercially reasonable” approach when dealing with sophisticated executives and senior management personnel.  The emphasis on the assessment of each side’s respective bargaining power may cause courts to become more willing to enforce non-competition agreements where the employer can demonstrate something closer to equality of bargaining power on the part of an employee.

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