Restrictive Covenants And Non Competes When Selling Or Buying A Business: A Fresh Analysis By The Quebec Court Of Appeal Leads To Anxious Questions

Covenants by the vendor, its former shareholders and/or key employees not to compete post-closing are part of the normal instruments available to protect the purchaser's substantial investment in the purchase of the goodwill and book of business when buying a "business" that is contact and relationship based and driven. However, we have certain restrictive provisions of the Civil Code of Québec ("C.C.Q.") affecting the content and enforceability of non-competes in employment relationships, in particular Arts. 2089 and 2095 C.C.Q.,1 which were supposedly designed to redress the inherent imbalance in negotiating power between employers and employees. These provisions temper significantly and, in the latter case, deny enforceability of the non-compete, when the employee is terminated without cause, ostensibly to thus protect the employees' legitimate right to earn a living post-termination. When, as part of an acquisition, the Vendor's former shareholders and/or key employees continue to work for the purchaser, and are later discharged or resign, what rules govern whatever restrictive covenants may have been executed? Does it matter whether the employees in questions have been provided with "reasonable notice" or not?

Art. 1377 C.C.Q. provides that the general rules set out at Articles 1377-1708 C.C.Q. apply to all contracts, subject to "special rules for certain contracts which complement or depart from these general rules, found in Title Two". Title Two (Arts. 1708 to 2643 C.C.Q.) concerns "nominate contracts", of which the contract of employment (Arts. 2085 to 2097 C.C.Q.) is but one, and the contract of sale, governed by distinct provisions of the C.C.Q., is another. Do the rules set out at Arts. 2089 and 2095 C.C.Q. "depart from" these general rules of contract or do they "complement" them? If they constitute "special" and "exceptional" rules, do they apply restrictively only to non-competes contained in the employment contract itself, (or at most to those found in contracts that are necessarily ancillary thereto), or do they impact non-competes wherever they are found as a consequence of an employment relationship being created and/or ended? What if the employment relationship, and hence the employment contract, is not only ancillary to but results from and constitutes a condition sine qua non of the sale of the business?

Traditionally, courts have been far less reluctant to enforce expansively written non-competes when they are part and parcel of the sale of a business rather than when they arise solely from an employment relationship.2 Where there is continued employment post-closing, for a substantial period of time, and the trigger for the non-compete is the termination, does the paradigm change and if so, how and why? If the commencement of the non-compete is not the date of sale but rather the end of such post-closing employment, does that change the analysis? In enforcement proceedings, is the Court entitled to look beyond where (i.e., in which contract) the restrictive covenant appears so as to take account of its true purpose?

In Guay Inc. v. Payette, 2011 QCCA, a divided panel of the Quebec Court of Appeal addressed some of these issues, but in the view of this practitioner with mixed results!.

The Facts:

In 2004, Appellant bought a business engaged in renting construction cranes throughout Quebec. Respondent was one of two shareholders of the vendor. The Act of Sale contained both non-compete and non-solicitation clauses.3 Respondent Payette, and one Lafortune, the other shareholder of the vendor, intervened personally in the sale so as to guarantee, inter alia, the respect of the restrictive covenants provided therein. Articles 10.1 to 10.4 of the "Acte de Vente" [ Deed of Sale] provided that with respect to the vendor companies, such covenants would run "pour une période de cinq (5) ans à compter de la clôture" – [for a period of five (5) years from the closing date] but with respect to the Interveners they would run "pour une période de cinq ans à compter de la date à laquelle un intervenant cesse d'être à l'emploi, directement ou indirectement, de l'Acheteur." ["for a period of five years from the date that an Intervener ceases to be employed directly or indirectly by the Purchaser,.]. The non-solicitation was phrased to prohibit not only solicitation but also "doing or attempting do to business". Both clauses provided that "le territoire pour lequel cette clause de non-concurrence s'applique pour la période de temps ci haut mentionnée réfère à la Province de Québec." [the territory for which this non-compete clause applies for the period of time mentioned above refers to the Province of Québec] [Author's translation].

Post-closing, Respondent first was required to and did in fact work for a period of six (6) months as a consultant to the purchaser. While his possible employment thereafter was envisaged by the parties, as Thibault J.A., in dissent, pointed out, Respondent Payette could, but was not required to, pursuant to the sale, become an employee of the Appellant at the end of the consultancy. Although not entirely clear from the facts, one might assume, perhaps, that the consultancy was in effect a "workout" of part of the purchase price.

Once the consultancy expired, Respondent was employed initially under a fixed term contract, and, upon its expiry, under an employment contract of indefinite duration, all this from April 2005 to August 2009, when he was discharged "without cause", styled "serious reason" in the Civil Code, from his position as Director of Operations. Neither employment contract contained or made reference to any restrictive covenant. While Payette's discharge in August 2009 was originally characterised by Appellant as being made "for cause", by the following December, the parties apparently settled that part of the issue, Appellant paying Payette and Lafortune, some $150,000 in severance.

Furthermore, while the settlement did not itself contain any additional restrictive covenant, at that time, Payette is said to have asked, Appellant's principal whether he had any objection to Payette working for a firm that used construction cranes but was not itself engaged in renting them out, implicitly recognizing that there were limits on where he could legitimately work.

Some months later, in March 2010, Payette joined a multinational direct competitor to Appellant. More than five (5) years had expired since closing, but only eight (8) months since his discharge. Appellant, in short order, lost seven (7) of its key people as well as a number of clients that Respondent Payette had dealt with.

Appellant sought to enforce the restrictive covenants found in the "Acte de vente" and in the Intervention. It was successful in obtaining first a provisional injunction, and then a safeguard order valid until trial, but was refused final injunctive relief, the Superior Court, applying, inter alia, Art. 2095 C.C.Q., holding that since Payette had been discharged "without cause", the restrictive covenant could not avail.

The Majority Judgment:

In appeal, Chamberland J.A., with whom Fortin J.A. agreed, held that the fact that Respondent's employment subsequent to the sale of the business followed the first period which he acted as Consultant, did not change the paradigm one iota. As he put it:

"[43] Appellant...submits that the restrictive covenants are bound up with the contract of sale of the business...