The highest Court in the Country has examined the rules applicable to restrictive covenants when the seller becomes an employee of the purchaser in the context of an asset sale.

The Supreme Court confirmed that only a non-competition clause relating to an employment agreement justifies the application of articles 2089 and following of the Civil Code of Quebec, which provides rules relating to the validity of non-competition provisions, including the inapplicability of such clause in the event of termination without cause.

The Supreme Court thereby confirmed the validity of a non-compete clause contained in an asset purchase agreement in which the duration of the clause extended for a period of five (5) years post-termination of employment, as well as a non-solicitation clause without any territorial limit.  

Factual Background

In this case, the asset purchase agreement was entered into between Mr. Payette, Mr. Lafortune and Mammoet Crane Inc. (sellers), and Guay Inc. (purchaser). Non-competition and non-solicitation commitments had been undertaken in the Asset Purchase Agreement by Mr. Payette to the benefit of the purchaser.

During the transaction, it was also agreed that Mr. Payette and Mr. Lafortune would work for the successor following the transaction. However, Mr. Payette was dismissed.

The Supreme Court Decision

According to the highest court in the country, in order to determine whether a restrictive covenant relates to an Asset Purchase Agreement or to an employment agreement, the reason for which the clause was entered into must be examined. The "bargain" that had been reached between the parties must be appreciated, taking into account the wording of the obligations and the circumstances in which they were agreed upon.

In the present case, the Supreme Court confirmed that restrictive covenants cannot be separated from the Asset Purchase Agreements and therefore, the rules provided in articles 2089 and following of the Civil Code of Quebec are not applicable.

The Supreme Court restated however that a non-compete clause, even in a commercial context, must be limited and reasonable as to its duration, territory, activities covered and to that which is necessary in order to protect the legitimate interests of the party to whom it benefits.

In a commercial context, the Supreme Court rejected the theory that a non-solicitation clause that prohibits "doing business with clients" amounts to a  hybrid non-competition clause. The Supreme Court also confirmed that such types of restrictions remain non-solicitation covenants and that in the context of an asset sale, the failure to include a territorial limit in a non-solicitation clause does not render the clause unreasonable.

It will be interesting to see if the courts will adopt the same approach when the non-solicitation clause is contained in an employment agreement.

Finally, the Supreme Court confirmed the comments of the Court of Appeal as to the use of the date of termination of employment to determine the duration of restrictive covenants in an Asset Purchase Agreements. Thus, the undertakings remain valid despite the reference to the termination of employment date of Mr. Payette to determine the duration of the obligations of non-compete and non-solicitation This reference does not alter the conclusion that the commitments were undertaken due to the asset sale.