Are You Drafting an Agreement to Commit a Crime?

September 2010

A number of written agreements, such as those for the purchase and sale of interests in a business, contain non-competition provisions.  Some of these provisions may be agreements to commit a criminal offence under the Competition Act (the “Act”).  After the client has been convicted of the offence, and sentenced, I leave it to your imagination to consider what might be the fate of the in-house counsel or outside law firm who advised that party, and drafted the offensive agreement.

The new section 45 of the Act makes it an offence for anyone to agree or arrange with a competitor to:

  • fix, maintain, increase or control the price… of a product;
  • allocate sales, territories, customers or markets for the production or supply of the product; or
  • fix, maintain, control, prevent, lessen or eliminate the production or the supply of the product.

Every person who commits an offence under this section is liable to imprisonment for up to 14 years or to a fine of up to $25 million, or to both.  There is now no requirement that the conspiracy actually work to lessen competition, or have any effect, or be capable of having any effect on competition.  Under the old law, the prosecution had to show that the intention of the agreement was to limit competition “unduly.”  Today, “unduly” no longer matters.  If two persons, each with no more than 1% market share, were to agree to fix prices in the market – an agreement highly unlikely to succeed in the real world – the act of agreeing would be enough to convict them.

Potentially offensive non-competition provisions might include a provision that the vendor of a business or an interest in the business to an existing or potential competitor:

  • cannot compete with the purchaser in a given territory, for particular customers, or in particular markets for an unreasonable length of time;
  • cannot sell products at less than certain specified prices from the part of its business that was not sold to the purchaser; and
  • cannot increase output from, or expand, the remaining part of its business not sold to the purchaser in order to compete with the purchaser.

The new section 45 has a new two-part defence.  If the accused can establish that the agreement under challenge is “ancillary to” a broader agreement that includes the same parties – which is likely to be true if an interest in the business is being sold – that would succeed on the first, and the easy part, of the defence.  The second part is that the agreement must be directly related to, and reasonably necessary for giving effect to, the objective of that broader agreement.  Although there is no case law on this new provision yet, it is likely that the expression “reasonably necessary” will be interpreted as an objective test.  Thus, what is reasonably necessary would be determined by the judge’s perception of what reasonable business people would do in these circumstances, rather than what the parties to the agreement considered necessary.

Section 45 of the Competition Act is Parliament’s expression as to what constitutes lawful versus criminal agreements or arrangements intended to reduce competition.  Agreements on the sale of an interest in a business that require one or both parties not to compete, and that go beyond what is strictly necessary to preserve the value of the business transaction to the purchaser, will probably be held to be criminal.

Lawyers who advise a client to draft a criminal agreement, or who actually draft such an agreement for their client, might be held to be aiding and abetting the commission of the crime.  That would itself be an offence.  If the law firm avoids conviction for aiding and abetting, it is still highly probable that the convicted client would sue the law firm and obtain substantial compensation.  The inevitable publicity surrounding such an event would be a public relations disaster for the reputation of the law firm.  No law firm can afford to take such risks.  Non-competition provisions in any contract between two actual or potential competitors should be carefully reviewed for compliance with the Competition Act.

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