Non-competition clauses are often found in employment and consulting contracts. Generally speaking, these clauses have to be as narrow as possible, covering only the geographic area, time period, and type of work needed to protect the legitimate interests of the employer. Courts will usually not enforce clauses that make it difficult for the employee to earn a living when they leave the job. Five years would likely be too long in most cases.
Sale of a Business
But non-competition clauses are also found in contracts for the sale of a business. Once you have sold your business, how long can you be required to wait before you can open another business to compete with the one you sold? This question was considered by the Supreme Court of Canada, in a situation where the former owner also became an employee of the new business owner. (Payette v. Guay Inc., 2013 SCC 45) Guay was a crane rental company which purchased assets from another crane rental business owned by Payette. As part of the agreement the parties agreed that Payette would work for Guay for six months and was, thereafter, to be bound within the province of Quebec by a non-solicitation and non-competition clause for 5 years. Payette worked for the Guay for over four years until being fired and then began to work for a competitor. Shortly after, several of Guay’s most experienced employees followed and began working for the competitor as well.
The Court considered several factors, including the sale price of the business, the access to legal guidance and the parties’ expertise and experience. The Court found that the parties had negotiated on an equal footing as informed businesses and the sale was of substantial value. The Court held the 5-year restrictive clause was reasonable because of the specialized nature of the crane business, and that the large geographic location was reasonable because of the mobility of the crane rental business.
As the owner of a business, you are unlikely to be able to require your employees not to compete for 5 years after they leave the job, but if you sell your business and then work for that business, it is much more likely that 5 years would be an enforceable time period, depending on the nature of the business. This is because the courts recognize that when you sell your business, the purchaser is paying for the goodwill of that business, and for the right to carry on that business without competition from you.
- non-competition clauses in sale of business agreements are likely to be enforceable if the businesses negotiated on an equal footing
- non-competition clauses in employment contracts must be limited to only what is needed to protect the legitimate business interests of the employer
- the reasonableness of the time, geographic, and work restrictions on competition will depend on the circumstances of each contract