Derek Martin had worked for ConCreate USL for 20 years. The company was sold to entities controlled by TriWest Construction Limited Partnership. As part of the sale to TriWest, Martin acquired an indirect interest in the business and entered into a non-competition and non-solicitation agreement with the purchaser. The restrictive covenants provided that Martin could compete with the business after 24 months from the time he disposed of his interest. The sale of his interest had to be approved by the board of TriWest’s general partner and other third parties (of whom more in their place). Martin later applied to the Ontario Superior Court to have the restrictive covenants declared unenforceable. Perell J thought that the covenants were unambiguous, as well as reasonable in terms of geographic scope, duration and range of prohibited activities.
The Ontario Court of Appeal (commending Justice Perell for his usual careful and comprehensive overview of the relevant law) agreed about the lack of ambiguity and the geographic coverage (all of Canada), but not about duration or prohibited activities: Martin v ConCreate USL Limited Partnership, 2013 ONCA 72. The end date of the restrictive covenant depended on the consent of third parties, only some of whom were ascertainable at the time of contracting: there was the TriWest GP’s board, but also TriWest’s bank, bonding company and lenders – and the last three as they existed ‘from time to time’. These third parties were therefore unascertainable at the time the contract was signed, and furthermore owed Martin no contractual duty to act promptly or reasonably. Some of them – lenders, in particular – might have reasons to want to limit Martin’s competition with the business, and Martin had no way to influence them. Martin’s interest in the business was also indirect, in the form of limited partnership units. Hoy JA was troubled by the fact that the covenants were tied to the disposition of an indirect holding, rather than the date of the original transaction or from ceasing to be a director or officer, as is more usual. As a holder of limited partnership units, Martin’s ability to have a say in the management of the business was restricted (unless he wanted to be exposed to unlimited liability), which in Justice Hoy’s view made the analysis different from the typical scenario. Martin was also prohibited from using non-public information about the business, for as long as that business was carried on. This, together with a term for the non-compete and non-solicit provisions that was tied to divestiture of limited partnership units rather than from the date of the sale to TriWest or the time Martin ceased to be actively involved in the business, made the restrictive covenants unreasonable and unenforceable. The scope of prohibited activities was also too broad.
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