Article Content
By: Ben Hanuka
Edited by: Rebecca Colley
In my practice, I often advise business owners about the enforceability of non-compete restrictions in commercial agreements. A non-competition restriction in a commercial agreement is a form of restrictive covenant that seeks to restrain a party’s ability to directly or indirectly establish, operate, or engage in a business that competes with the other party to the agreement. These restrictive covenants are commonly found in commercial agreements for the sale of a business or among shareholders.
If properly drafted, they should be legally enforceable to safeguard businesses from competition by a departing shareholder or the seller of a business. If too broad, unclear or commercially unreasonable, they will likely be void and unenforceable.
Often, I come across non-competition restrictions that are poorly drafted. For example, restrictions that are not specific enough to the circumstances, are likely too vague, and restrictions that overreach the minimum that is required to genuinely protect a business’s interests are likely commercially unreasonable.
Keep in mind that, in the franchising context, the legal analysis is more restrictive – see an earlier blog article, When Are Non-Competition Restrictions Invalid in Franchising?
The legal standard
The legal enforceability of non-competition agreements in Canada involves navigating complex legal standards. Each case is unique to its facts. In a dispute, the court will consider all relevant circumstances surrounding the non-competition agreement.
Based on earlier decisions of the Supreme Court of Canada in interpreting the enforceability of non-competition restrictions in the commercial context, the legal analysis is pragmatic and has to take into account the wording of the non-compete covenant, as well as the broader terms of the agreement that contains the non-compete clause, and all the surrounding circumstances. That is a fairly broad test.
Just as important, the Supreme Court wrote in the 2013 case, Payette v. Guay Inc., that non-competition restrictions in the commercial context need to be interpreted in a more flexible manner to “promote the stability of commercial agreements” – in other words, with a view to legally enforcing those restrictions.
The Supreme Court also wrote that the reasons underlying the non-competition were important:
4.5 The ‘bargain’ negotiated by the parties must be considered in light of the wording of the obligations and the circumstances in which they were agreed upon. The goal of the analysis is…determine why and for what purpose the accessory obligations of non-competition and non-solicitation were assumed.
Elements of an enforceable non-compete covenant
To withstand legal challenges, a non-compete clause in a commercial context must have these three legal elements:
- Nature of a Competing Business: clearly define the type of business activities that constitute competition and that are restricted.
- Time Period: specify a time period for the restriction that is commercially reasonable, i.e., that does not go beyond what a party needs to legitimately protect its interests. For example, in some situations, a two-year period may be deemed reasonable, but a five-year restriction can be viewed as excessive and unreasonable.
- Geographic Territory: provide for territory for the restriction that is similarly commercially reasonable, i.e., that does not extend beyond what a company genuinely needs to protect its interests. A smaller radius increases the likelihood of the restriction being considered valid.
In a 2022 decision of the Ontario Superior Court, Revel Realty Inc. v. Costabile et al, the court dismissed an injunction application by a real estate brokerage against eight of its former real estate agents who left to set up a competing real estate office. Among other reasons that led to the dismissal, the court held that the territory description in the non-compete restriction was ambiguous, and the time limitations were unreasonable.
More specifically, the territory restriction was referred to as “Brantford Peninsula”, but there was no such geographical area. The time periods in the non-competition restrictions were five years for some of the agents and three years for other agents. The court found that these restrictions were excessive and commercially unreasonable. The relevant context was that the real estate brokerage had already taken steps to restrict the ability of those agents to operate when it brought on board another team without consulting with any of those agents (which ultimately led them to leave the brokerage).
Conclusion
It is important for parties to commercial agreements to evaluate the commercial reasonableness of restrictive covenants and the circumstances of what the parties intended and what is happening on the ground that is allegedly in breach of the restrictive covenant.
—
The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.
The Law Works website offers a vast number of resources by way of blog articles, courses and webinars about franchise, commercial and real estate disputes. Subscribe to our newsletters to stay up to date on the latest information from us.
Law Works offers complimentary initial 15-20 min telephone consultations, which you can book online.
Table of Contents
Ben Hanuka
JD, LLM, CS (Civ Lit), FCIArb, of the Ontario and BC Bars
Highlights:
- JD, LLM (Osgoode '96, '15), C.S. in Civ Lit (LSO), Fellow of CIArb, member of the Bars of Ontario ('98) and BC ('17)
- Principal of Law Works PC (Ontario)/LC (British Columbia)
- Acted as counsel in many leading franchise court decisions in Ontario over the past twenty-five years, including appellate decisions.
- Provided expert opinions in and outside Ontario
- Presented at and chaired numerous franchise and civil litigation CPD programs for over 20 years
- Chair of OBA Professional Development (2005-2006) - overseeing all PD programs
- Chair of Civil Litigation Section, OBA (2004-2005)
Notable Cases:
Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471
1159607 Ontario v. Country Style Food Services, 2012 ONSC 881 (SCJ)
1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (2006), 150 A.C.W.S. (3d) 93 (SCJ, Commercial List)
Bekah v. Three for One Pizza (2003), 67 O.R. (3d) 305, [2003] O.J. No. 4002 (SCJ)
