Kelly O’Ferrall and Graeme Deuchars -

In the recent decision of Martin v. ConCreate USL Ltd. Partnership, Justice Perell of the Ontario Superior Court dismissed an application by a former employee, Mr. Derek Martin, for a declaration that the non-competition and non-solicitation covenants in favour of his former employer were unenforceable. The judge decided that the agreements, which were signed in connection with a sale of a business for which Martin received consideration, were reasonable and enforceable.

Derek Martin began his career in construction at age of 18 as a general labourer. He eventually worked his way up to the position of vice-president of a bridge construction refurbishment business. In 2011, Martin’s employer was sold to TriWest Capital Partners III (2007) Inc. (TriWest). As part of the transaction, a corporation wholly-owned by Martin became a unit holder of a 25% partnership interest in his new employer, Concreate USL Limited Partnership (ConCreate), through a subsidiary of TriWest, TriWest Construction Limited Partnership (TriWest LP). As a partner, Martin was governed by a limited partnership agreement. He also signed an employment agreement as part of the transaction, taking on the position of president of ConCreate as well as a related company, Steel Design & Fabricators (SDF) Ltd. (SDF).

The employment agreement Martin signed included non-competition and non-solicitation covenants pursuant to which Martin was prohibited from carrying on a business competing or soliciting the employees, customers or suppliers of ConCreate or SDF within Canada for 24 months of the date Martin disposed of his interest in TriWest LP. In the employment agreement, ConCreate’s business was defined as covering a variety of concrete rehabilitation, construction, concrete production and geotechnical works and the business of SDF was defined as steel fabrication. The purchase agreement with TriWest included as a condition to the transaction a requirement that Martin agree to agree to the non-competition and non-solicitation covenants in his employment agreement.

In addition to his employment agreement, Martin was also subject to non-competition and non-solicitation covenants contained in the TriWest LP Limited Partnership Agreement  which applied for 12 months following the date on which Martin ceased to hold partnership units. The book value of the partnership units was said to be $6.5 million, but Martin’s ability to dispose of his units was somewhat restricted and could take up to 18 months. By combined effect of the transfer period and the 24 month non-competition and non-solicitation covenants under the employment agreement, the longest duration for the operation of the covenants was 3.5 years following Martin’s termination.

A few months following the closing of the acquisition by TriWest, Martin’s employment with ConCreate and SDF was terminated, allegedly for cause. Shortly thereafter, Martin incorporated Innovative Civil Constructors Inc. (Innovative), and quickly secured over $34 million in contracts in a matter of 6 months.  In December of 2011, ConCreate and SDF brought an action against Martin and Innovative for, among other things, an injunction to restrain Martin and Innovative from breaching the non-competition agreements. Martin subsequently brought this application to determine the enforceability of such agreements

Decision

After a thorough review of the law surrounding non-competition and non-solicitation covenants, Justice Perell determined that the covenants at issue were justified and enforceable. While acknowledging that non-competition and non-solicitation provisions are covenants in restraint of trade and prima facie illegal and unenforceable, Justice Perell found that in this case the provisions were reasonable as between the contracting parties and not contrary to the public interest, on the basis of the following:

• The impugned covenants were not solely connected to Martin’s employment with ConCreate and SDF, but were connected to a broader sale transaction. Martin’s acceptance of the restrictive covenants was a major part of the bargain, and the parties’ obligations under the purchase agreement were conditional upon his agreement to those covenants. As a result, the court gave deference to commercial autonomy of the parties.
• ConCreate and SDF had valid proprietary and business interests worthy of protection by a covenant in restraint of trade. Neither party made significant arguments on this point but the existence of a legitimate interest was assumed based on the context in which the restrictive covenants were signed (the sale of a multi-million dollar business).
• The scope of the prohibited activities were found to be reasonable as they clearly intended to prevent Martin from competing with ConCreate’s and SDF’s business but still permitted Martin to undertake other business activities within the construction industry.
• The territorial scope, which included all of Canada, was also found to be reasonable because, even though it included provinces and territories where neither Concreate nor SDF had ever won a contract, it was within the parties’ reasonable expectations that those provinces and territories were “within the sphere of that business’ operations”.
• The duration was also found to be reasonable, despite the fact that the term of the covenants was of indeterminate duration and could survive for up to 3.5 years (24 months, plus the time it could take Martin to divest himself of his partnership units).
• Martin had received independent legal advice in respect of the provisions of the non-competition and non-solicitation agreements, and had entered into negotiations on an equal footing based on equal bargaining power. He acknowledged the same in the purchase agreement.

Determining that the covenants were reasonable as between Martin and ConCreate/SDF, Justice Perell turned to the public interest. On this issue, he concluded that Martin had failed to demonstrate that the covenants were unreasonable having regard to the public interest. Based on these findings, he determined the covenants to be enforceable, and dismissed Martin’s application.

OUR VIEWS

While the non-competition covenants at issue in this case were entered into in the context of a commercial transaction, lessons can be taken from this case and applied to standard employment non-competes. Even in Martin v. ConCreate where the non-competition and non-solicitation covenants were entered into in the context of a sale of business (where deference to the parties was warranted), the judge thoroughly scrutinized each aspect of the non-competition covenant that was at issue in the case. Accordingly, this case provides valuable guidance for drafting non-competition covenants.  In order to improve the likelihood that a non-competition covenant will be enforceable, employers should ensure that the covenant includes a defined geographic scope and discrete term. The prohibited activities should also be clearly defined in relation to the business being conducted by the employer. Above all, the covenant must be reasonable and not go beyond what is necessary to protect the employer’s legitimate business interests. If the covenant prevents the employee from doing any work following his or her termination from employment it is unlikely that a court will enforce it.

We note that, while in this case the non-competition covenant was justifiable as necessary to protect the employer’s business interests, this will not always be the case. There is other case law that suggests that a non-competition clause in an employment contract will not be enforced where a non-solicitation clause would have been sufficient (see for example Lyons v. Multari. In this case, however, the non-competition covenants were signed in connection with a sale of business and therefore they were upheld.