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Non-Competition and Non-Solicitation Agreements: Are they enforceable?
One of the more common questions we receive is whether a non-competition covenant or non-solicitation covenant is enforceable. There is a considerable amount of confusion relating to these restrictive covenants that are common in many corporate and employment agreements. For both those that are looking to enforce such agreements, and those that may be looking to escape a restrictive covenant, the matter can be complicated.
Essentially, the courts when determining enforceability of such agreements are trying to establish a balance between allowing a person to earn a living and protecting the confidential, proprietary and legitimate business interests of the party trying to enforce such agreements. This balancing act can be difficult and has lead to a manner in which such agreements are adjudicated.
Non-competition covenants are those that restrict a person from working or being otherwise engaged in a business that is similar to the business being protected by the covenant, typically being an employer, or the purchaser in an acquisition of a business. For the most part, non-competition clauses in regular employment relationships are difficult to enforce in Ontario. Where there is an acquisition of a business, the court is more inclined to enforce such agreements, however they are still difficult to enforce. The courts in Ontario view non-competition covenants as generally contrary to public policy as the restriction limits the person’s ability to work and restricts open competition in the marketplace.
Non-solicitation covenants are those that restrict a person from approaching or “soliciting” employees or customers of the company for their business. While non-competition clauses are more difficult to enforce, non-solicitation clauses are more likely to be enforceable.
When looking to determine whether either a non-competition covenant or a non-solicitation covenant is enforceable, the main consideration is whether the restriction is “reasonable”. To determine the reasonableness, the court will generally look to factors such as the extent of the geographical territory of the restriction (for non-competition agreements), the duration of the restriction, and how broad are the restrictions or are their any exemptions that would continue to permit the person to work. The facts are specific to each situation, however the more limited the restrictions, the more likely it is that the restriction will be enforced. The context of the agreements are also important, as a court may be more likely to enforce an agreement between a purchaser and seller of a business, than an employee and an employer.
In the end, while these restrictions are enforceable, if not prepared properly and the specific situation considered fully, they may not be enforceable, and the protections a party may be looking to secure through the covenants could be lost.
Communications on this website are intended for information purposes only and do not constitute legal advice or an opinion on any issue. Readers are cautioned against making any decisions based on this material alone. The lawyers of Waterous Holden Amey Hitchon LLP would be pleased to provide additional details or advice about specific situations.