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SCC to Weigh-In on the Enforceability of Restrictive Covenants Where an Employment Relationship Follows the Sale of a Business

Posted in Case Previews, Contracts, Labour and Employment
Angela Juba

This winter, the SCC will have the opportunity to clarify how the courts should go about determining how strictly to interpret restrictive covenants where they relate to both an employment agreement and the sale of a business. The opportunity arises from the Supreme Court’s decision to grant leave in Guay Inc. c. Yannick Payette et autres, where the Québec Court of Appeal upheld the enforceability of broadly-framed non-competition and non-solicitation clauses (or restrictive covenants), despite findings by the trial judge below that the employee, Mr. Payette, had been wrongfully terminated and that the restrictive covenants were too broad to be enforced. The Court of Appeal reasoned that the clauses were enforceable because they formed part of the contract for the sale of Mr. Payette’s business.

Background

In October 2004, Guay Inc. (“Guay”) purchased the assets of companies controlled by Mr. Payette for $26 million. Mr. Payette’s companies were in the business of leasing cranes. The contract of sale for Mr. Payette’s business included a clause requiring Mr. Payette to work for Guay as a consultant for a period of six months after closing, following which time the parties could continue an employment relationship on terms to be negotiated. Employment after the initial six month consultation period was entirely optional.

The contract included non-solicitation and non-competition clauses which were valid for a period of five years after the date of closing, or five years beginning as of the date by which Mr. Payette ceased to be an employee of Guay. The clauses prevented competition in the crane leasing industry and solicitation throughout the province of Quebec.

Mr. Payette remained employed by Guay throughout the consulting period until August 2009, when he was dismissed. Seven months later Mr. Payette began working for a competitor.

Decisions Below

Guay sought and was granted an injunction before trial. The trial judge found that Mr. Payette had been wrongfully dismissed and refused to enforce the restrictive covenants on the basis that they were too broad.

The majority of the Court of Appeal (reasons by Chamberland J.A.) reversed the trial judge’s decision on the basis that the restrictive covenants formed part of the contract for the sale of Mr. Payette’s business, and that they were reasonable when viewed as part of the sale transaction. The employment contract was relevant only for the purposes of determining the commencement of the five-year period of non-competition and non-solicitation.

Thibault J.A. dissented – in her view, there was no reason to conclude that new employment agreement (formed after completion of the initial six month consulting period) should include the same restrictive covenants as the contract of sale, and to thereby deny Mr. Payette the protections he would otherwise have been afforded as an employee.

Significance

The SCC’s judgment in this appeal is expected to clarify the rules relating to the enforceability of restrictive covenants in circumstances where the sale of a business intersects with an employment relationship, and where an employee has been wrongfully terminated.

The test for upholding a restrictive covenant in an employment contract is much more stringent than the test for upholding a similar clause in the context of the sale of a business, because the courts consider that there is a power imbalance between employees and employers, and because a sale of a business often involves a payment for goodwill (whereas no similar payment is made to an employee leaving his or her employment): Shafron v. KRG Insurance Brokers (Western) Inc.

Where there has been both the sale of a business and an employment relationship, the difficulty lies in determining whether the restrictive covenant should be construed as relating to the business transaction or to the employment contract. This appeal will provide the SCC with an opportunity to clarify how the courts should go about making this determination.

The hearing of the appeal is tentatively set to take place on January 23, 2013.

This issue is also discussed in a two-series post, by my colleague, Donovan Plomp.

Case Information

Guay Inc. c. Yannick Payette et autres, 2011 QCCA 2282 (CanLII)

SCC Docket No.: 34662

Date Leave Granted: May 17, 2012