Can a Non-Compete Protect Your Business?

4 avril 2018 | Lisa Goodfellow | Toronto

( Disponible en anglais seulement )

Canadian Consulting Engineer

Employers keen to protect their business commonly put non-competition clauses in their employment contracts, or a stand-alone non-competition agreement. A duty not to compete during the period of employment is fine, and even implicit in every employment relationship. One that continues after the employment ends is more difficult to enforce.

These clauses are a restraint on trade, contrary to public policy. On the other hand, there is a competing public interest in freedom of contract. Canadian courts are reluctant to interfere with an individual’s ability to earn a living, so they are less likely to enforce clauses that would effectively preclude someone from working in the field in which they have acquired all of their expertise. As a result, non-competition covenants will only be enforced by the courts where they are clear and unambiguous, and where they provide the minimal restriction necessary to protect the legitimate business interests of the employer.

They must, therefore, be reasonable in terms of how long they last, the territory they cover, and the type of activity which is restricted. What is reasonable in each case will depend on the nature of the business, the role held by the employee, and how vulnerable the business is to competition by that employee. The clause should be narrowly drafted, so it does not extend beyond the territory where the company actually does business, and it should not prevent the person from participating in areas of the business where they did not actually have any role. For example, if the employee worked only in one specialized part of the company’s business, the employee should not be prevented from working in other areas where he was not involved. The timeline should be no longer than needed. That might range from only a few months to as much as two years, depending on the nature of the industry and the importance of the person’s role. (Where a person sells their business, non-competition clauses can be much longer and broader than in the employment relationship, where there is generally unequal bargaining power. )

Generally, a non-compete will only be found reasonable and enforceable in situations where less restrictive terms, such as non-solicitation and confidentiality obligations, could not adequately protect the business.

If it is the employee’s strong relationships with customers or key employees that makes the employer vulnerable to competition, then normally a well-drafted non-solicitation clause will provide adequate protection. This will normally be the case with sales or customer-facing employees. And if that is the case, a broader non-competition clause will be found unreasonable. Still, even a non-solicitation clause must be reasonable in order to be enforceable. It should apply only for the minimum period of time needed by the business to insert new people into the departing employee’s role, and to forge new relationships. That will depend on the nature of the business, its sales cycle, and other factors. It should only restrict the employee from soliciting those customers with whom the person had contact in the course of their work. If the non-solicitation covers all customers of the company, or related companies, and the employee does not know them all, or even know who all the customers are, then the non-solicitation covenant becomes, in effect, a non-compete. Consider also limiting the non-solicitation clause to solicitation for competitive purposes. If the person is free to solicit customers of the business for non-competitive purposes, that will make it more reasonable, and more likely to be enforceable. In many cases, a non-solicitation term is all that the employer really needs.

All employees have a common law duty not to disclose any confidential information which lasts for as long as the information is not generally available to the public. If an employee will have access to confidential or strategic information of any kind, it is advisable to have their written agreement not to disclose or use that information for any purpose other than carrying out their duties with the organization. This can educate the employee about their obligations, and delineate what types of information the employer considers to be confidential. This is a simple and important tool to protect the business that should not be overlooked.

A final point–the Courts in Canada will not “read down” clauses that are overly broad, even if the contract states that they may. They will not re-write the agreement between the parties. They will either strike it out, if the clause is found to be unreasonable, or enforce it, if it is reasonable. At the outset, care must be taken to draft a clause that will stand up to scrutiny by the courts.


This article was published in the January/February edition of the CCE magazine