Non-Competition Agreements in Business Transactions

When looking at buying a business, buyers will often request that the sellers refrain from competing with the business for a period of time after completion of the sale. We often include these type of provisions in purchase agreements or as stand-alone agreements for our clients.

These provisions must be reasonable to be enforceable. This is because they are a restriction on trade which is contrary to a free market and public policy. Courts will consider them reasonable if they meet certain criteria including that they are not overly broad in terms of either the geographic area that they cover or their duration.

If they are found to be overly broad, the courts often simply strike them down meaning they become unenforceable. That is great if the seller wants to go out and carry on a similar business but can be detrimental to a purchaser who may now find that they are competing with someone who has a stellar reputation and numerous contacts in the industry – something they specifically tried to avoid when they negotiated the terms of their business purchase.

A recent case from the Alberta Court of Appeal sheds new light on an old legal principal that takes a more precise approach than simply striking down the entire non-competition provision or agreement.

In the case of City Wide Towing and Recovery Service Ltd v Poole, 2020 ABCA 305, the court severed the portion of the non-competition agreement that was overly broad so that the parties were still bound by the non-competition provision, but in its modified version.

The non-competition agreement in this case included a provision that specifically stated that the parties agreed that a court could sever the portions of the agreement necessary to make it valid. However, it is not clear whether the court relied on this provision in coming to its decision.

The take-away for buyers wanting non-competition agreements to be enforceable is to always make sure that the provision is as reasonable as possible and focus on the business that is being purchased when looking at the criteria of geographic and temporal scope. It may also be beneficial to request the inclusion of a provision stating that the parties agree that a court should sever any provisions necessary to keep the rest of the agreement valid.

For a seller of a business, it may be worth pushing back on any provision that states that the parties agree that a court may sever offending provisions. Thus, if the parties end up in a court battle the seller may have a stronger argument that the court should default to the generally accepted practice that the entire non-competition agreement should be found unenforceable rather than request that a court try to save a portion of it.

At the end of the day, the City Wide case does not change the general state of the law, nor the advice that parties should try to come to a reasonable solution when negotiating the terms of any business transaction. However, you should be alert to the fact that a Canadian appeal’s court has recently opted to modify an unenforceable provision in a non-competition agreement rather than determine that the entire agreement is unenforceable.

Paul Tonita is a solicitor practicing in the areas of business law, real estate, estate planning and estate administration.  His business experience includes assisting clients right from the beginning by discussing the different business structures, incorporating, buying and selling businesses, assisting with lending or financing needs, drafting and advising on contracts, and providing general advice to business owners.

For more information please contact Paul Tonita at 250-869-1126 (direct line) or email him at [email protected].