July 18, 2024
When is a restrictive covenant an unlawful restraint of trade?
THE CASE
The Ontario Court of Appeal takes a deep dive into the issue in 7868073 Canada Ltd. v. 1841978 Ontario Inc. and provides some guidance, but ultimately leaves the question open for another day.
Why do they do that?
Because even if a clause is a restraint of trade, it is valid and enforceable if it is reasonable in the circumstances, which is what the Court decided was the answer in this case.
The clause in this case was contained in a license agreement, which gave the licensee the exclusive rights to use a manufacturing process. The restrictive covenant prevented the inventor from working for any competitor during the term of the license. In breach of the term, the inventor started a competing business.
Finding the clause unenforceable would allow the scoundrel to profit. Courts believe in enforcing contracts, not in assisting scoundrels.
TAKEAWAYS
What do we learn about restrictive covenants in this decision?
- Covenants in restraint of trade are contrary to public policy because they interfere with individual liberty and the exercise of trade. They are unenforceable unless shown to be enforceable. A covenant will only be upheld if it is reasonable in reference to the interests of the parties concerned and the interests of the public in discouraging restraints on trade.
- Covenants that form part of a commercial transaction, such as a license, are more likely to be enforceable than employment agreements.
- Commercial transactions may include licensing agreements, not just the outright sale of a business.
- Greater deference is given to the freedom of contract between knowledgeable parties of equal bargaining power than where there is a power imbalance (such as often exists between employer and employee)
- But even clauses in employment contracts may be reasonable in some cases.
- Restrictions during the term of the contract, including an employment contract, are more likely to be enforceable- competition after termination of the contract is fair, but not during the term.
- The party that seeks to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties. The party seeking to avoid enforcement of the covenant bears the onus of demonstrating that it is not reasonable with respect to the public interest.
WHAT WEILERS LLP CAN DO FOR YOU
The commercial and employment lawyers at Weilers LLP are adept at helping clients draft agreements, whether commercial purchase and sales; licenses; or employment contracts; which are enforceable.
If you have a dispute over a clause in an existing agreement, our litigation team has the experience and skills to bring the litigation to a conclusion in the least painful and least expensive fashion possible.
So, whether you need to get it in writing, or need advocacy after the fact, call us. Weilers LLP might be the right lawyers for you.