The common law distinguishes between the enforceability of restrictive covenants arising out of a sale of business and covenants in the employment context. Courts have generally given greater deference to the reasonableness of restrictive covenants arising from a sale of business, as parties to a commercial transaction are typically perceived as being more sophisticated and equal in bargaining power.
However, the Ontario Court of Appeal’s recent decision in Martin v. ConCreate USL Limited Partnership 2013 ONCA 72 signals a willingness by courts to more closely scrutinize restrictive covenants contained in commercial transactions.
Derek Martin held a minority interest in the vendor, ConCreate USL Ltd., a company for which he had worked for 20 years. When the company was sold to TriWest, he was granted a number of “limited partnership units” of TriWest, and retained by TriWest as the President of ConCreate. Martin entered into an employment agreement which contained a non-competition covenant and a non-solicitation covenant.
Shortly after the transaction Martin’s employment was terminated for cause and Martin brought an application to declare the covenants unenforceable.
The Ontario Court of Appeal affirmed that the test for assessing the enforceability of restrictive covenants is the same in both the employment and commercial context. For a covenant to be upheld it must be both reasonable and in the interests of the public in discouraging restraints on trade. To be enforceable, the covenants must not be ambiguous and must be reasonable in terms of their:
- geographic scope;
- duration, and;
- scope of the activities being restricted.
Although the court recognized that covenants arising from a sale of business should be given greater deference, covenants must still be analyzed to ensure they are reasonable.
The geographic scope of the covenants in Martin’s employment agreement were Canada-wide. The court found that the geographic scope of the covenants was reasonable because the parties clearly expected the business to be national in scope going forward (even though it was not national at the time of the transaction).
However, the covenants were found to be unenforceable because there was no “fixed, outside limit” to their duration. The covenants expired two years after Martin disposed of his units of TriWest, which was subject to approval by TriWest’s board of directors and unspecified lenders. Since it was unknown whether the lenders would approve, or even who the lenders would be at the relevant time, the covenants might continue indefinitely, which the court found unreasonable.
Of note, Martin’s employment agreement included provisions stating that the covenants were reasonable; that the parties had received independent legal advice, and had negotiated on an equal footing. However, the Court concluded that “. . . while these are important factors, they do not entirely immunize the clause from scrutiny.”
The decision of the Court signals that the equality of bargaining power between two parties to a commercial transaction will not prevent a court from assessing the reasonableness of a restrictive covenant arising from that transaction. All covenants must be unambiguous and reasonable with respect to geographic scope, duration, and the activities being restricted.
In particular, employers should be careful to ensure that the duration of a restrictive covenant is clear. A covenant whose expiry is conditional on future events will likely not be enforced, unless it is very clear that those events must occur within a specified, reasonable period of time.