21 August 2020
Non-competition clauses: their context matters!
By: Zarnab Durrani
Non-competition clauses are commonly implemented in employment agreements or in commercial agreements to restrict a party from competing with the other during and after their agreement is terminated or their transaction is concluded. However, a non-competition clause’s enforceability can be subject to scrutiny by the Courts who interpret them restrictively and may invalidate them in their entirety if they fail to meet strict legal requirements.
The basis of the non-competition provision
First of all, the pillar of a non-competition clause is based on three factors that Courts seek to identify :
- a time limit;
- a geographic area; and
- a restriction on activities.
In the event that a clause is missing one of these elements, the Courts will invalidate it before even evaluating its reasonability.
For instance, a clause that restricts a party from “becoming a shareholder of a company operating in the textile industry in the City of Montreal” would be considered invalid since there is no temporal element associated to it.
In addition, all three of these elements must be clear and specific. In a 2014 judgment by the Superior Court of Quebec, the court deemed that a non-competition clause limiting the restriction to the “territory of Granby” was not specific enough because this limitation can encompass more than the city of Granby. Due to the confusion caused by the use of the word ‘territory”, which is not a defined geographical limitation, the Court invalidated the clause as a whole.
The context of a non-competition provision
Second of all, a non-competition clause must also be reasonable in scope and purpose. This concept differs based on the context in which the restrictive covenant was provided such as in an employment agreement versus in a commercial agreement (i.e. sale of a company or shareholders agreement). The Courts will be much more stringent in their interpretation of restrictive covenants between an employee and their employer due to the perceived imbalance of power and the lack of negotiation opportunities for employees. Further, the right to earn a living means an employer cannot unreasonably restrict a former employee from being able to make a living because of a restrictive covenant in their employment contract. The clause must be limited to what is necessary for the protection of the legitimate interests of the employer.
On the contrary, negotiations between businesspersons with equal leverage and who are both represented by legal counsel during the preparation of a commercial agreement will lead the Courts to allow for a much broader interpretation. Certain factors to consider when interpreting the validity of restrictive covenants in commercial agreements include: the nature of business activities, the location of the business activities, if the agreement was negotiated, the parties’ experience, the value of the commercial agreement, and if the parties had access to legal counsel.
For reference, a 5-year non-competition provision for the entire province of Quebec was upheld in Supreme Court decision Payette v. Guay due to the substantial value of the commercial agreement, the highly-specialized industry in which the parties operated (the crane rental industry), the fact that the parties negotiated on equal terms, and that both parties were advised by legal counsel.
When preparing restrictive covenants, it is essential to:
- include geographical, temporal, and activity limitations; and
- ensure that your non-competition clause is not overly broad and only restricts what is necessary to protect your legitimate business interests;
KRB Lawyers are experienced with the preparation and the interpretation of such provisions. Do not hesitate to reach out to a member of our corporate law team for more information or assistance.