May 2014

The importance of a thorough non-competition clause

By Pascal Comeau Lawyer

When acquiring a business, it is strongly recommended that the seller be required to sign a non-solicitation clause of clients and employees and a non-competition clause. The non-competition clause must be limited in its duration and in relation to the applicable territory. It must also be limited insofar as the prohibited activities and/or types of businesses in which the seller may become involved following the sale. It is imperative that the descriptions of the prohibited activities be drafted in very specific terms. Otherwise, the courts may refuse to apply the non-competition clause.

In a recent Superior Court ruling in 7076576 Canada inc. v. Gellé (2014 QCCS 677), Mr. Gellé (hereinafter the Seller) sold a high-end fish restaurant to 7076576 Canada inc. (hereinafter the Buyer). The non-competition clause to which the parties subscribed to provided that the Seller must abstain from having holding any interests in any business of the same or a similar nature within a 25 km radius for a period of five years. Prior to the end of the five-year period, the Seller opened a restaurant two blocks away from the one he had sold and was then sued by the Buyer for breaching the non-competition clause.

The Superior Court concluded that the expression business of the same or a similar nature was very ambiguous and included all types of restaurants: high or lower end serving fish or any other type of cuisine. The judge concluded that the clause was unreasonable and therefore declared it invalid. The Buyer's recourse against the Seller was therefore dismissed.

Acquiring a business involves several risks, including unfair competition by the seller. Ensuring that the agreement for the sale of a business contains the appropriate provisions is not sufficient: these clauses must be properly drafted, as demonstrated by the ruling in 7076576 Canada inc. v. Gellé. To avoid any such complications, do not hesitate to contact us to assist you in the negotiation and drafting of your legal documents