Enforcement Of Restrictive Covenants In Commercial Transactions

Restrictive covenants are often a key mechanism by way of which the buyer of a business is able to protect the value of their purchase. Indeed, in a 2017 review of legal trends in Canadian private M&A, Thomson Reuters has reported that non-competition covenants were found in 52% of the closing conditions of share acquisition transactions.

While such covenants are common, their enforcement has remained an ongoing concern due to the strict reasonableness requirements imposed by the Supreme Court of Canada in JG Collins Insurance Agencies Ltd. v Elsley, [1978] 2 SCR 916 in order to balance the parties' right to contract with the public interest in discouraging restraints on trade. In light of reliance on restrictive covenants and ongoing concerns with their enforcement, it is useful to provide an overview of the considerations that go into determining their lawfulness.