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
[email protected]
@MikeHookLaw