Restrictive Covenants and a Contract for the Sale of a Business: The Supreme Court Confirms that the Rules Set Forth Under the Civil Code of Québec for Contracts of Employment Do Not Apply

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On September 12, 2013, the Supreme Court of Canada rendered an important decision confirming the principles applicable to evaluating the reasonable nature of restrictive covenants negotiated within the context of a commercial transaction. In doing so, the Court appears to have resolved the uncertainty that had existed regarding the validity of non-solicitation clauses in contracts of employment that did not contain a territorial limitation (Payette v. Guay Inc., 2013 SCC 45). Heenan Blaikie successfully represented the respondent Guay Inc. in this matter.

The Facts

The story begins in September 2004, when Guay Inc. (“Guay”), a company specialized in crane rentals, purchased the assets of a competing company, Groupe Fortier (“Fortier”).

The agreement for the sale of assets included undertakings on the part of the shareholders of Fortier, Mr. Yannick Payette (“Payette”) and Mr. Louis Pierre Lafortune, not to compete or solicit.

As often occurs in the case of a sale of a business, it was also provided that Payette would be employed by Guay as a consultant for a certain period of time in order to allow for a seamless transition, after which time the employment relationship could continue depending on the willingness of the parties. In reality, Payette was employed until August 3, 2009, the date on which he was terminated.

On March 29, 2010, Payette entered into a contract of employment with a company that was in competition with Guay. Guay then instituted injunction proceedings in order to force Payette to respect the undertakings of non-competition and non-solicitation that were contained in the agreement for the sale of assets. The restrictive covenants at issue were to be in effect for a period of five years following the end of Payette’s employment with Guay.

The Decision of the Quebec Superior Court and the Court of Appeal of Quebec

The Quebec Superior Court refused Guay’s motion for an injunction. The judge determined that the non-competition clauses could not apply as Payette had been terminated without serious reason. The judge then applied article 2095 of the Civil Code of Québec, which sets forth that the employer may not avail itself of a non-competition clause if it has terminated the contract of employment without serious reason.

The Court of Appeal of Quebec reversed the decision of the Superior Court, deciding that the undertakings of non-competition had been agreed to in exchange for the sale of assets and not in exchange for the employment that had been carried out by Payette. The Court of Appeal held that the Superior Court had committed an error in applying the rules contained in the Civil Code of Québec relating to restrictive covenants applicable to contracts of employment, which are much more rigorous. The Court of Appeal held that the analysis to be made should be based upon those principles that were applicable within the context of a commercial transaction. Further, the restrictive covenants were not unreasonable.

The Decision of the Supreme Court of Canada

In a unanimous decision delivered by Justice Wagner, the highest court in the land arrived at the conclusion that it was because of the sale of Fortier’s assets that Payette had undertaken to not compete with Guay. In this context, the criteria set forth under the Civil Code of Québec relating to the validity of restrictive covenants in contracts of employment were not applicable.

Within the context of a commercial transaction, a restrictive covenant is valid unless one can establish, by a preponderance of evidence, that its scope is unreasonable taking into account the context under which it was negotiated. According to the Supreme Court, Payette had not demonstrated that the clause was unreasonable in light of the circumstances.

Finally, the Supreme Court appears to have put an end to the uncertainty which had prevailed relating to the legality of a non-solicitation clause in a contract of employment that did not contain a territorial restriction. Indeed, the comments made by the Supreme Court to the effect that it is not necessary to include a territorial limitation in a non-solicitation clause, appear to us to be equally applicable to clauses of this nature contained in contracts of employment. In this regard, the Court rejected the approach that had been previously suggested by the Court of Appeal of Quebec, including, in particular, the approach set forth in a scholarly article written by the Honourable Justice Marie-France Bich (while she was a professor at the Faculty of Law at the University of Montreal) relating to the validity of restrictive covenants contained in contracts of employment.

Therefore, in our opinion, employers in Quebec have good reason to be pleased with this decision. Over the last few years, whether in theory or in practice, the drafting of non-solicitation clauses containing a territorial limitation had been rendered very complicated as a result of the commercial reality of any given situation.

While we expect that some may attempt to distinguish this decision on the basis that it analyzed the validity of restrictive covenants in an agreement for the sale of assets, we believe that a complete reading of the decision and the comments made by the Supreme Court of Canada will lead to the conclusion that the Court’s position is equally applicable to non-solicitation clauses contained in contracts of employment.