One Size Fits No-One
It boils down to this:
Non-competition restrictions are:
a. rarely enforceable in employment contracts;
b. often enforceable in shareholders agreements, if drafted carefully; and
c. usually enforceable in agreements for the sale of a business, if drafted carefully.
In every case, if you ask for too much, you get nothing at all. For example, if a restriction granted in respect of a business in Toronto would be perfectly valid if it covered only Southern Ontario but it is drafted to cover all of Canada, it will not even be enforceable to stop the person who signed it from competing across the street from the business in Toronto.
Non-competition clauses will only be enforceable if they are reasonable. This includes the time period and the geography covered, but they must be reasonable in other ways as well. The Ontario Court of Appeal recently refused to enforce a non-competition clause in a shareholders agreement because the shareholder could not complete as long as he was a shareholder, but could not sell his shares unless the corporation's lender approved the sale. The Court of Appeal considered the non-competition restriction to be potentially infinite and therefore invalid.
- One size does not fit all. In order to make a non-competition restriction enforceable, it must be tailor-made to the situation.
I would like to thank Helen Ferrigan, Director of Knowledge Management for Pallett Valo LLP, for her assistance in drafting this edition.
Pallett Valo LLP
Photo by Maureen T. McKay