Less Restrictive View: Restrictive Covenants in the Sale of Business
It is increasingly common to find post-employment restrictions for employees in employment contracts. These restrictions often include attempts by the employer to limit an employee's ability to compete against its business or to lure away their customers and employees. These restrictive promises are also found in agreements of purchase and sale, where the selling party agrees to a period of employment following the sale of the business. As clarified in the Supreme Court of Canada's recent decision in Payette v. Guay Inc., 2013 SCC 45, covenants made between a vendor and purchaser will be more readily enforced.
In that case the Appellant sold his crane rental business to the Respondent in 2004 for $26 million. The parties agreed in the sale agreement that the Appellant would work full-time as a consultant for 6 months. At the end of the 6 month contract, they agreed to a 3-year employment contract, and then finally to an indefinite term employment contract. The Appellant's employment was terminated without cause on August 3, 2009.
The Agreement of Purchase and Sale included the following terms:
- a non-competition undertaking that Payette would not be engaged in a crane rental business operating in the Province of Quebec; and
- a non-solicitation agreement stating that he would not solicit any of Guay Inc.’s customers in any place.
Both restrictions applied for a period of 5 years after the end of his employment.
The Supreme Court upheld the enforceability of the post-employment restrictions.
The Court emphasized that there is a clear difference between restrictive covenants in employment agreements, and those negotiated in the course of a sale of business. Courts will be less reluctant to enforce restrictive covenants negotiated during a sale of business, since there is less likely to be an imbalance in bargaining power between parties. In determining whether an agreement is in relation to a sale or to employment, the Court explained that it is important to clearly identify the reason that the covenant was entered into. In doing so, it is useful to examine the wording of the obligation, and the factual context surrounding the agreement. Simply because a restrictive covenant refers to termination of employment does not mean that the promise is made in the context of the employment.
When assessing the reasonableness of a restrictive covenant, the Court points to a series of factors for consideration, including:
- the sale price
- the nature of the business
- the parties’ experience and expertise
- access to legal counsel and other professionals
- the level of resources in the negotiations
Additionally, the Court noted that a non-solicitation clause does not necessarily require a territorial limitation in order to be valid.
It is clear that courts will take a less restrictive view of restrictive covenants between a vendor and purchaser in the course of a sale of business than they will with covenants made in the employment relationship.