The court decisions of Yannick Payette et al. and Guay Inc. (Supreme Court of Canada, September 12, 2013) and Martin v. ConCreate USL Limited Partnership (Ontario Court of Appeal, February 5, 2013) were two of thirteen cases that were reported in the Canadian Institute of Chartered Business Valuators’ (CICBV) July 2014 edition of The Valuation Law Review. I obtained permission from the CICBV to provide the attached excerpt from the Review on the case.
In Yannick, the Court upheld a 5 year non-competition agreement as it was tied to the commercial sale of a business involving a substantial purchase price. In Martin, the Court held that a 24 month non-competition agreement from the date of the disposition of shares, where the sale of the shares required the approval of third party lenders was unreasonable and therefore unenforceable.
THE VALUATION LAW REVIEW — Corporate/Securities Decisions and Certain Canadian Regulatory Developments
Volume 21, Issue 2 — July 2014
The following has been reprinted with permission from the Canadian Institute of Chartered Business Valuators, 2011. Unauthorized copying or reproducing in any way is strictly prohibited.
Yannick Payette et al. and Guay Inc.
Supreme Court of Canada
2013 SCC 45
September 12, 2013
The Supreme Court of Canada upheld non-competition and non-solicitation restrictions which prevented a vendor of a crane rental business from competing in the province of Quebec for a period of five years.
The Facts and Lower Level Decisions
Yannick Payette and his partner, Louis Pierre Lafortune controlled several companies that were in the crane rental business. In October 2004, a competitor, Guay Inc., purchased the assets of those companies for $26 million. The terms of the purchase agreements included non-competition and non-solicitation clauses which would apply for a period of five years running from the date on which Payette and his partner ceased to be employed directly or indirectly by the purchaser. The non-competition clause precluded Payette from being employed or otherwise involved in the crane rental industry anywhere in the province of Quebec throughout the five year period. In contrast, the non-solicitation clause precluded Payette from soliciting or doing business or attempting to do business with any former customer or the customers of Guay Inc. during the same period.
As part of the transaction, Payette and his partner were to be consultants for Guay Inc. for a period of six months. On May 26, 2005, at the end of the six month transitional period, Payette and Guay Inc. agreed upon an employment contract for Payette to be the operations manager.
On August 3, 2009, Guay Inc. dismissed Mr. Payette without a serious reason. On March 15, 2010, Payette commenced a new job as operations manager with Mammoet Crane Inc., a competitor of Guay Inc.
On April 27, 2010, Guay Inc. attempted to obtain an injunction to enforce Payette’s non-competition provision; however, it was unsuccessful as the Quebec Superior Court held that the Civil Code of Quebec prevents the enforcement of restrictive covenants in an employment agreement where an employer has terminated the employee without serious reason.
In a subsequent appeal, the Quebec Court of Appeal overturned the Superior Court decision and ordered a permanent injunction on the basis that the restrictive covenants agreed to by Payette were in the context of a commercial transaction and not an employment situation.
The Supreme Court of Canada Decision
In dismissing the appeal, the Supreme Court of Canada held that the non-competition and non-solicitation provisions were enforceable as they were considered reasonable given the specific context of a commercial sale of a business involving a substantial purchase price with terms negotiated by parties with similar bargaining power who were aided by experienced legal counsel.
In particular, the Court held:
• The rules applicable to restrictive covenants relating to employment differ depending on whether the covenants are linked to a contract for the sale of a business or to a contract of employment
• The application of different rules in the context of a contract of employment is a response to the imbalance of power that generally characterizes the employer–employee relationship when an individual contract of employment is negotiated, and its purpose is to protect the employee
• The inclusion of non-competition and non-solicitation clauses in a contract for the sale of a business is usually intended to protect the purchaser’s investment. In limiting the vendor’s right to compete with the purchaser and preventing the vendor from working for a competitor of the purchaser for a certain time after the transaction, such clauses enable the purchaser to protect its investment by building strong ties with its new customers without fearing, for a given period, completion from the vendor which had previously established a relationship with its customers, suppliers and employees
Justice Wagner confirmed that the “common law rules for restrictive covenants relating to employment do not apply with the same rigour or intensity where the obligations are assumed in the context of a commercial context. This is especially true where the evidence shows that the parties negotiated on equal terms and were advised by competent professionals, and that the contract does not create an imbalance between them.”