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Contracts - Restraint of Trade

MEDIchair LP v. DME Medequip Inc. (Ont CA, 2016)

In this case the Court of Appeal canvasses the principles applicable to determining whether the court will uphold contractual terms that are in restraint of trade:
[33] The basic principles governing the courts’ approach to the enforceability of covenants in restraint of trade have been set out clearly in two cases from the Supreme Court of Canada, Elsley v. J.G. Collins Ins. Agencies, 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, and most recently, Payette v. Guay, 2013 SCC 45 (CanLII), [2013] 3 S.C.R. 95. Both cases also address the difference in approach when the clause is contained in a contract for the sale of a business versus an employment contract. Although the test is essentially the same, courts will give more scrutiny to the reasonableness of a restrictive covenant in the employment context, while applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business.

[34] The test was described by Dickson J. (as he then was) as follows in the Elsley case, at pp. 923-4:
The principles to be applied in considering restrictive covenants of employment are well‑established. They are found in the cases above-mentioned and in such familiar authorities as the Nordenfelt case, Mason v. Provident Clothing and Supply Co. and Attwood v. Lamont. Of more recent vintage: Scorer v. Seymour-John and Gledhow Autoparts Ltd. v. Delaney. A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants. On the other hand, the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power. In assessing the opposing interests the word one finds repeated throughout the cases is the word “reasonable.” The test of reasonableness can be applied, however, only in the peculiar circumstances of the particular case. Circumstances are of infinite variety. Other cases may help in enunciating broad general principles but are otherwise of little assistance.

It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found, and all of the surrounding circumstances.

The distinction made in the cases between a restrictive covenant contained in an agreement for the sale of a business and one contained in a contract of employment is well-conceived and responsive to practical considerations. A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser that he, the vendor, would not later enter into competition. Difficulty lies in definition of the time during which, and the area within which, the non-competitive covenant is to operate, but if these are reasonable, the courts will normally give effect to the covenant.

A different situation, at least in theory, obtains in the negotiation of a contract of employment where an imbalance of bargaining power may lead to oppression and a denial of the right of the employee to exploit, following termination of employment, in the public interest and in his own interest, knowledge and skills obtained during employment. Again, a distinction is made. Although blanket restraints on freedom to compete are generally held unenforceable, the courts have recognized and afforded reasonable protection to trade secrets, confidential information, and trade connections of the employer. [Footnotes omitted.]
[35] In Payette, at para. 58, Wagner J. concluded that in the commercial context – i.e. the sale of a business – the courts will treat a restrictive covenant as lawful unless it is shown on a balance of probabilities to be unreasonable.

[36] Whether a restrictive covenant in a franchise agreement should be viewed and treated as it is in a contract of employment because of an imbalance in bargaining power, or as it is in the sale of a business is the subject of recent ongoing debate. See Peter J. Klarfeld & Mark S. VanderBroek, “Law on Covenants Against Competition Shifts Toward Greater Enforceability by Franchisors” (Fall 2011) Franchise LJ 76; and Jennifer Dolman, Adam Ship, Rebecca Hall-McGuire & Tyler Wentzell, “Governing Principles & Recent Trends in the Enforcement of Restrictive Covenants in Franchise Agreements” (2014) Advocates’ Q 448.

[37] Although this case involves a restrictive covenant in a franchise agreement, I do not need to decide what level of scrutiny properly applies, because the focus of the inquiry is not the reasonableness of the extent of the temporal or territorial restrictions. Instead, it is whether there is a legitimate interest of the franchisor in this case that is entitled to the protection of the covenant. The requirement of a legitimate protectable interest is common to both levels of scrutiny.

[38] As Wagner J. explained in Payette, the test for reasonableness is whether the clause is “limited, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted”: para. 61 (citation omitted; emphasis added). See also Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2d) 219 (C.A.), at p. 224: “In all the cases the entitlement of a party to a contract to enforce a restrictive covenant is based in the protection of a legitimate or proprietary interest such as the goodwill of a business which has been purchased or the confidential information peculiar to employment.”



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