Top Court Enforces 5 Year Restrictive Covenant!

Signing a contract

In Payette v. Guay inc. the Supreme Court of Canada determined that whether a restrictive covenant will be enforced depends on the reasonableness of the terms and the type of relationship that existed between the contracting parties. If the relationship is an employee-employer relationship, where an imbalance of power traditionally exists, then stricter rules will apply to determine enforceability of the restrictive covenant. However, in the commercial context, where the parties are usually negotiating on more equal terms, a restrictive covenant is more likely to be enforced and there is greater freedom to negotiate more burdensome terms.

In Payette v. Guay inc, Guay inc. purchased the assets of a company owned by Yannick Payette (“Mr. Payette”). As part of the terms of purchase and to assist with the transition, Mr. Payette agreed to work for Guay inc. as a consultant for a period of 6 months. The agreement of sale for the purchase of assets included non-solicitation and non-competition clauses, each for a period of 5 years from which Mr. Payette ceased to be employed by Guay inc. At the end of the 6 month period, a new employment agreement was entered into between Mr. Payette and Guay inc. which did not contain any restrictive covenants. A few years later, Mr. Payette’s employment was terminated by Guay inc. without cause. Mr. Payette commenced new employment with a competitor shortly thereafter, prompting Guay inc. to initiate legal proceedings against Mr. Payette to enforce the restrictive covenants’ contained in the agreement of sale for the purchase of assets.

In rendering its decision, the Supreme Court of Canada noted that different rules apply to the interpretation of restrictive covenants depending on whether the covenants are linked to a contract for the sale of a business or to a contract of employment. The reason for this is due to the different nature of the relationship that exists and the differences in bargaining power between the negotiating parties in the commercial context versus the employment context. The strict rules that apply to restrictive covenants in the employment contract do not apply in the commercial context were there is evidence that the parties negotiated on equal terms, each had the benefit of professional advice and the contract does not create an imbalance between the parties. Although the nature of the relationship changed between Mr. Payette and Guay inc. from a commercial relationship to an employment relationship, the restrictive covenants themselves were linked to the agreement of sale for the purchase of assets, being a commercial contract. Accordingly, despite the fact that the covenants were for a period of 5 years from Mr. Payette’s departure, they were viewed to be reasonable in the circumstances, considering the small size of the industry and the intentions of the parties at the time of contracting, being the protection of Guay inc.’s investment. Accordingly, the restrictive covenants were upheld in favour of Guay inc. and against Mr. Payette.

Impact of Decision on Employers

Employers should make sure that the terms of non-competition and non-solicitation clauses that are meant to be binding on employees are reasonable to ensure that they will be enforced by the Courts. Terms that may be upheld in a commercial context may not be similarly enforced if the parties are in an employer-employee relationship. However, if restrictive covenants can be linked to a contract for the sale of assets that transpired prior to the development of an employment relationship, it is possible for terms to be upheld that would otherwise be viewed as being too broad in the employment context. Employment Law Lawyers can assist in drafting restrictive covenants to ensure that they will be enforced by the Courts if and when required.

Impact of Decision on Employees

Employees should be aware that restrictive covenants may not always be enforced by the Courts if they are unreasonable when viewed in the context of an employment relationship. However, a restrictive covenant that is entered into by parties of equal bargaining power may be enforced by the Courts even if the terms appear to be overly broad at first glance. It is always best to consult with an experienced lawyer prior to agreeing to the terms of a written contract.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. Whether you are an employer or employee, we can help. Contact us to see how.

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