Canada’s economic and commercial system seeks to encourage entrepreneurial competition and innovation. However, the law is not blind to the pitfalls of unfettered commercial activity amongst market players. Thus, it is often the case that business purchase and sale agreements include limitations on a vendor’s future activities upon a sale of business. In legal parlance, such limitations are called “restrictive covenants.” Generally speaking such covenants are considered by the courts as a restraint on trade and, as such, as against public policy. However, what if upon the sale of a business, the vendor opens another business of a similar kind to the one sold? The possibility exists for the purchaser to apply to the court to enforce the covenant (if one exists) so as to stop the vendor from inflicting economic harm on the purchaser.
The enforceability of these restrictive covenants is assessed on a case-by-case basis in accordance with the following considerations in mind:
- The party protected by the restrictive covenant must have a proprietary interest that warrants protection. In other words, a party seeking to enforce the covenant must be able to show that the scope of the prohibited activity is not overly road.
- The spatial and temporal protections must not be too broad. This means that an unreasonable limitation on how long the restrictions can last and how far, geographically, they can reach, will not be enforceable. Each case will turn on its own facts.
- The covenant must not be unenforceable as being against competition generally.
Restrictive covenants in a commercial context – for example, between two parties seeking to complete a transaction of a purchase and sale of a business – are viewed by the courts as more enforceable than restrictive covenants in an employment setting. This is because the law views the former scenario to involve parties of equal bargaining power. In an employment context, however, employees are usually viewed by the law as vulnerable individuals warranting of extra protection.