Non-Competition Agreements in the sale of a business

So, there I was, the dapper lawyer at the cocktail party, entertaining everyone with tales of legal derring-do. All were enthralled by my war story about finding a type-o on page 64 of a contract. “Tell us another!” shouted one. “Yes! Yes! Tell us a tale about something exotic! Something like… non-competition agreements!” demanded another, excitedly. I couldn’t help but to oblige.

Lucky for them, I’d just read the recent decision of the Ontario Court of Appeal where they’d just clarified the law about what makes a non-competition agreement enforceable after a business has been sold. (If you’re a nerd like me, you can read the whole decision here: Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72).

This decision laid out the law on what makes for an enforceable non-compete agreement very clearly. Here are the basics:

  • We start with the presumption that a non-competition agreement is not enforceable, because it’s designed to restrict someone’s freedom to practice their trade.
  • Whoever is trying to enforce a non-compete has to show that it’s a reasonable agreement between the parties.
  • Non-competes in the sale of a business will be less scrutinized than those between employers and employees, as there’s usually equal bargaining power in a sale of a business.
  • Agreements that are signed by people who had legal advice on the agreement before signing it are more likely to be enforceable.
  • Just because it’s a sale of a business and both parties had legal advice doesn’t mean that an unreasonable agreements will be enforceable
  • A reasonable non-competition agreement will be clear, and unambiguous in three major areas:
    • The geographic scope, or area in which the non-compete applies, must be defined clearly
    • The time period that the agreement covers must be reasonable, and have a clear start and end point – and not be tied to a future event that is outside the power of the parties to control (or may never happen…)
    • The activities that are prohibited must be clear and reasonable – only what’s necessary to protect the business interests of the purchaser

A non-compete is a valuable tool to protect a new purchaser from having to fight for business against someone who has insider information on how the purchased business is run. Theoretically, if the vendor is allowed to start a new business in the same area that’s a little leaner, they could undercut the purchaser and put them out of business. The non-compete is designed to prevent this – but is only to the minimum extent necessary.

Of course, I explained to the spellbound crowd, what’s “reasonable” in any case really depends on the circumstances. Non-competition agreements or clauses are the type of thing you should get legal advice on before sticking them in any agreement – especially the sale of a business!

I’m available for legal advice or children’s parties, should ever you need me.

Happy Thanksgiving!

Mike Hook
Intrepid Lawyer
mike@intrepidlaw.ca
@MikeHookLaw

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2 thoughts on “Non-Competition Agreements in the sale of a business

  1. Mike I had a question I sold
    My small design firm 2 years ago and had an employment contract with the company I sold after 2 years the owners and I just did not see eye to eye and
    Left the company to work for someone else in another field but to this day the company has not fully paid for the purchase of my company how does that affect my non compete

    • Hi Jim. The answer to that would really depend on the wording of the purchase and sale agreement for the business, the employment contract, and any paperwork that surrounded your departure from the business. Generally speaking, one party breaching a contract (the buyer not paying the full purchase price for the business) doesn’t give the other party a right to breach another part of the contract… but it’s hard to say without seeing the documents.

      If you’re interested in looking into this in more detail, drop me a line at mike (at) intrepidlaw.ca

      Cheers,

      Mike

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