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Supreme Court of Canada: Restrictive Employment Covenants in Quebec are Enforceable When Linked to an Asset Sale

The Supreme Court of Canada has released a decision (Payette vs. Guay Inc. 2013, SCC 45),  upholding a decision of the Quebec Court of Appeal which granted a permanent injunction to enforce a restrictive employment covenant.

Guay Inc. acquired assets belonging to corporations controlled by Mr. Payette. The agreement for the sale of the assets contain non-competition and non-solicitation clauses. To ensure a smooth transition after the sale, the parties agreed that Mr. Payette would work full-time for Guay as a consultant. At the end of the transition period the parties entered into a contract of employment originally for a fixed term and then for an indefinite term. A few years later Guay fired Mr. Payette without a “serious reason”.  Mr. Payette then started a new job with a company that was a competitor of Guay.

The Quebec Superior Court dismissed Guay’s motion for an injunction compelling Mr. Payette to comply with the restrictive covenants in the agreement for the sale of assets. The Quebec Court of Appeal set aside that judgment and ordered a permanent injunction (for the duration of the period of the non-competition).

Mr. Justice Wagner wrote the decision for the Supreme Court.  He held that the permanent injunction should be enforced. The rules applicable to restrictive covenants related to an employment differ depending on whether the covenants were linked to a contract for the sale of a business or to a contract of employment. The employer-employee rules have no equivalent in the commercial context since those rules were a response to the imbalance of power that generally characterizes the employment relationship. In the commercial context an imbalance of power is not presumed to exist.

Parties negotiating the sale of assets have greater freedom of contract than do parties negotiating contracts of employment, both at common law and in the civil law of Quebec. To ameliorate the imbalance that often characterizes the employer-employee relationship, the Quebec legislature enacted rules that apply only to contracts of employment and are intended to protect employees. Accordingly where an employer has fired the employee without a serious reason, the employer may not avail himself of a non-competition covenant.

To determine whether a restrictive covenant is linked to a contract for the sale of assets or a contract of employment it is important to clearly identify the reason why the covenant was entered into. In this case, the non-competition and non-solicitation clauses could not be disassociated from the contract for the sale of assets. As a result, the scope of these clauses had to be interpreted on the basis of commercial law rules and the protection provided the employees by the Civil Code of Quebec did not apply.

In the commercial context a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable having regard to the context in which it was negotiated. A non-competition covenant will be reasonable and lawful provided that it is limited as to its term and to the territory and activities to which it applies to whatever is necessary to the protection of the legitimate interests of the party in whose favour it was granted. In this case, there was no evidence that the five year period was unreasonable having regard to the highly specialized nature of the business activities involved.

In addition, Justice Wagner found that, while in the case of non-competition covenants, the territory to which the covenant applies must be identified, a determination that a non-solicitation covenant is reasonable and lawful does not generally require a territorial limitation. In this case, the parties’ failure to include a territorial limitation in the non-solicitation clause did not make it unreasonable and therefore unenforceable