The Second Opinion: Restrictive Covenants And The Sale Of A Business

Since the seminal judgment in Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, Canadian courts have applied the rules for determining the validity of a restrictive covenant more strictly in the employment context than where the covenant accompanies the sale of a business. However, it can frequently be difficult to identify which category a covenant falls into where a business is sold as part of a hybrid agreement that contemplates the vendor will also become the purchaser's employee. In Payette v. Guay inc., 2013 SCC 45, the Supreme Court of Canada weighed in on this issue, and held that the answer depends upon the nature of the principal obligations assumed under the master agreement, together with the rationale for the restrictive covenant itself. Along the way, the Court also clarified the test for the validity of restrictive covenants in the commercial context, and drew an important distinction between non-competition and non-solicitation