A recent decision of the Ontario Court of Appeal provides guidance regarding the enforceability of restrictive covenants in the context of a business sale.
In Martin v. ConCreate USL Ltd. Partnership, Martin sold his interest in a business and continued on as an employee. In conjunction with the sale, Martin entered into agreements containing restrictive covenants (a non-competition and non-solicitation clause). The issue on appeal was whether the restrictive covenants were unreasonable.
The court affirmed that the party seeking to enforce a restrictive covenant must demonstrate that the covenant is reasonable with regards to its duration, geographic scope and prohibited activities. Unreasonable or otherwise ambiguous covenants are unenforceable. The court also affirmed that a less rigorous test is generally applied in respect of a covenant given in connection with the sale of a business, than in the employment context.
Despite applying the less rigorous standard, the court concluded both covenants were unreasonable. Firstly, both covenants were of unreasonable duration. While the covenants were to expire 24 months after the sale of Martin’s interest in the business, the timing of the sale was contingent upon consents from unidentified third parties. Accordingly, the duration of the covenant was potentially indefinite with no fixed, outside time limit.
The non-solicitation clause was also held to be unreasonable with respect to prohibited activities as it went far beyond what was required to protect the goodwill of the purchased business. In particular, it was not reasonable for the covenant to extend to activities that were not carried on by the business, or that were even in the parties’contemplation, at the time of the sale.
This decision makes clear that even where sophisticated parties enter into restrictive covenants in the context of a business transaction, the covenants must be reasonable and unambiguous.
For more information about this decision, please contact Scott McCann, Partner.