Ontario’s top court rules on non-competition clauses when selling a business

1. The Dispute

The Court of Appeal for Ontario (the “ONCA”) recently provided guidance to business owners on the enforceability of restrictive covenants, such as non-competition provisions, in the context of the sale of a business.

In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388 (CanLII), Dr. Sims purchased the dentistry practice of Dr. Cooke by way of an Agreement of Purchase and Sale (the “APS”).

As a term of the sale, Dr. Cooke agreed to a non-competition/non-solicitation covenant, both as part of the APS and in a separate agreement with identical terms.  The restrictive covenant prohibited Dr. Cooke from engaging in the practice of dentistry, or permitting his name to be used in such a practice, for a period of five years within a radius of 15 kilometers of his former practice (the “Non-Compete”).

Approximately three years later, Dr. Cooke notified Dr. Sims that he intended to work at a dental practice 3.3 kilometers away, and then did in fact begin working at that practice.  Dr. Sims commenced legal proceedings.

2. The Court’s Decision

Enforceability of the Non-Compete was the key issue at trial.  The trial judge concluded that the Non-Compete was enforceable. Dr. Cooke appealed. The issue before the ONCA was whether the trial judge had erred in concluding that the Non-Compete was reasonable and, therefore, enforceable.

Dr. Cooke argued that the trial judge made a reversible error by putting the onus on him to establish that the Non-Compete was unreasonable.  Dr. Cooke’s position was that the onus should have been on Dr. Sims, as the party seeking to enforce the Non-Compete, to prove that the Non-Compete was reasonable.  The ONCA did not agree.

The ONCA relied on its prior decision in MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168 (CanLII), which itself relied on the Supreme Court of Canada’s decision in Payette v. Guay inc., 2013 SCC 45 (CanLII), for the proposition that the “courts will give more scrutiny to the reasonableness of a restrictive covenant in the employment context, while applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business.”

In other words, the legal principles applicable to restrictive covenants depend on whether the covenants are part of the sale of a business or an employment contract.  This distinction is drawn because parties negotiating the sale of a business have greater freedom of contract than parties negotiating an employment contract.[1]  Accordingly, the common law rules governing restrictive covenants will apply more strictly in the context of the sale of a business than in the employment context.

3. Conclusion

Since restrictive covenants in the business sale context protect a purchaser’s interest in the goodwill of the acquired business, they attract less scrutiny from the courts than restrictive covenants in the employment context.  Accordingly, where a vendor and a purchaser with equal bargaining power enter into a business sale agreement, only in exceptional cases will the courts interfere with the parties’ judgment of what was reasonable at the time.

Should you have any questions regarding restrictive covenants or disputes relating to the purchase or sale of a business, please do not hesitate to contact the authors.

[1] For example, the Employment Standards Act, 2000 in Ontario prohibits the inclusion of non-competition clauses in employment contracts or other agreements with the following limited exceptions:  1.  Where the employee is an executive, such as a chief executive officer; or 2. In the context of a sale of a business where the purchaser hires the seller as an employee immediately following the sale of the business to the purchaser.