The Second Opinion: Restrictive Covenants And The Sale Of A Business

Since the seminal judgment in Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, Canadian courts have applied the rules for determining the validity of a restrictive covenant more strictly in the employment context than where the covenant accompanies the sale of a business. However, it can frequently be difficult to identify which category a covenant falls into where a business is sold as part of a hybrid agreement that contemplates the vendor will also become the purchaser's employee. In Payette v. Guay inc., 2013 SCC 45, the Supreme Court of Canada weighed in on this issue, and held that the answer depends upon the nature of the principal obligations assumed under the master agreement, together with the rationale for the restrictive covenant itself. Along the way, the Court also clarified the test for the validity of restrictive covenants in the commercial context, and drew an important distinction between non-competition and non-solicitation covenants.

Background

As my colleague Angela Juba discussed in a previous post, the facts in Payette involved a transaction by which the appellant, who co-owned several companies in the crane rental business, agreed to sell the assets of those companies to the respondent, the crane rental leader in Quebec. The agreement of sale contained a provision requiring the appellant and his partner to work as the respondent's full-time employees for a six month transitional period, after which the parties would have the option to negotiate a new employment contract. The agreement of sale also contained two restrictive covenants:

a non-competition covenant, which prohibited the appellant from acquiring an interest or otherwise participating in any business involved in the crane rental industry for 5 years from the end of his employment period in the province of Quebec; and a non-solicitation covenant, which prohibited the appellant from, inter alia, soliciting or doing business with any of the respondent's customers for a period of 5 years from the end of his employment, whether in Quebec or elsewhere. The parties proceeded to enter into a new employment contract at the end of the six month period, which was separate from the agreement of sale, but several years later the respondent dismissed the appellant without a serious reason. A few months later, the appellant accepted employment with the respondent's competitor in Montréal, and the respondent sought a permanent injunction to compel the appellant to observe the restrictive covenants. The injunction was initially denied by the Quebec Superior Court, but later granted by the Quebec Court of Appeal.

The Decision

The Supreme Court of Canada...