The non-competition clause: not just for the employment contract
A non-competition clause is a versatile and indispensable tool, which is found more particularly in two situations: (i) in employment contracts and (ii) in commercial transactions. However, although such clause bares the same name in both cases, the rules governing its drafting will be different depending on the context of their use. Moreover, these differences are mainly explained by the presumed imbalance of power between the parties negotiating such a clause, and a person’s fundamental right to earn a living when it comes to an employment contract.
- With regard to employment contracts
The employment contract is defined in article 2085 of the Civil Code of Québec:
“2085. A contract of employment is a contract by which a person, the employee, undertakes, for a limited time and for remuneration, to do work under the direction or control of another person, the employer.”
By definition, the employment contract implies that there is a subordinate relationship between the employee and his employer. This alleged imbalance of power between the parties leads to a stricter legal framework for non-compete clauses than in commercial matters.
In doing so, article 2089 of the Civil Code of Quebec is clear:
“2089. The parties may stipulate in writing and in express terms that, even after the termination of the contract, the employee may neither compete with his employer nor participate in any capacity whatsoever in an enterprise which would compete with him.
However, the stipulation shall be limited as to time, place and type of employment, to what is necessary for the protection of the legitimate interests of the employer.
The burden of proof that the stipulation is valid is on the employer.”
The Code therefore indicates the three fundamental criteria in order for such a clause to be valid in employment matters, namely:
(a) It must be limited as to the duration during in which the clause will be effective;
(b) It must be limited as to the activities covered by the non-competition undertaking;
(c) It must be limited as to the territory in which the prohibition to carry out the activities defined in the previous point.
It should be noted that all three criteria must be met at all time for the clause to be enforceable.
Indeed, if one of the criteria is too broad or too vague, the entire clause will fall, not even a civil court will be able to compensate for a possible failure to adequately circumscribe the scope and extent of any of these criteria.
Moreover, it will be the employer’s burden to demonstrate the validity of such a clause. Hence the crucial importance of having it reviewed by a legal counsel who can accurately guide you.
We will now explore how these clearly codified criteria in employment contracts do not have their counterparts in commercial matters.
- In commercial matters
In the context of a business transaction, it is essential to include both non-competition and non-solicitation clauses in order to protect the company against its former shareholders or business partners (we will discuss the distinction between these two types of clauses in a subsequent publication).
The writer of such a non-competition clause must understand the circumstances in which it is drafted, in order to adjust its scope and content.
Given the absence of a presumed imbalance of power between the contracting parties partaking in a commercial transaction and the specific needs which may vary by industry, it is only natural that the drafting of such commercial clauses is not as strictly regulated as in employment matters.
For example, the scope of a non-compete clause in a sale of a website shall necessarily be broader than the one following the sale of a local dentist office.
This type of clause therefore gives rise to negotiation between the parties insofar as a counterpart could be requested by the seller of the company if he has to force himself for a fixed period not to compete with his buyer.
We therefore understand that such a balance of power cannot exist in employment matters, where the employer will have a disproportionate force compared to the employee to impose the guidelines of such a clause, all with the sole purpose of protecting himself against competitors wishing to use the services of that same ex-employee.
In conclusion, this is only an overview of the main rules applicable with respect to non-competition clauses taught by the highest court in the country in Payette v. Guay.
Therefore, an informed reader will understand that it is most prudent to consult a legal counsel when drafting, revising or negotiating such clauses, whether in an employer-employee or commercial context.
By Me Jean-Philippe Ponce, M.B.A.
Ponce Lawyers Inc.
This article does not constitute legal advice, to obtain a solution adapted to your needs, please consult a lawyer.