Whether a clause limiting what someone can do after a deal or relationship ends will hold up depends on where it appears, what it restricts and how carefully it was written. Here is how Ontario law treats them, for both sides.
What is a restrictive covenant?
A restrictive covenant is a promise not to do something after a relationship ends. The main types are:
- Non-compete: a promise not to carry on a competing business, or work for a competitor, for a set time and area.
- Non-solicit: a promise not to approach the business’s clients, or sometimes its employees, to take them away.
- Confidentiality: a promise not to use or disclose the business’s confidential information, such as pricing, client lists or methods.
They appear in sale of business agreements, shareholder agreements, franchise and distribution agreements, and employment contracts.
Are non-competes banned in Ontario?
For most employees, yes. The Employment Standards Act, 2000 prohibits an employer from entering into an agreement with an employee that is, or includes, a non-compete, and a non-compete made in breach of that rule is void. The prohibition took effect on October 25, 2021, and Ontario courts have treated it as not reaching agreements made before that date.
There are two exceptions:
- Sale of a business. Where a business, or part of one, is sold and, immediately after the sale, the seller becomes an employee of the buyer, a non-compete given by the seller as part of the sale is allowed.
- Executives. The prohibition does not apply to senior executives in chief-level roles, as the Act defines them.
A non-compete between two businesses, or given by a seller who does not become the buyer’s employee, is judged under the common law instead. Where a shareholder agreement binds someone who is also an employee, whether the prohibition applies depends on the agreement and the facts.
When will a court enforce a non-compete?
The starting point, set by the Supreme Court of Canada, is that a restraint of trade is unenforceable unless shown to be reasonable. The court asks:
- Is there a legitimate interest to protect, such as the goodwill a buyer paid for, client relationships or confidential information?
- Is the time reasonable? The restriction should last no longer than needed to protect that interest.
- Is the area reasonable? It should match where the business actually operates, and be defined clearly.
- Is the activity reasonable? It should cover competing work, not every kind of work.
On a sale of a business, courts are much more willing to enforce a reasonable non-compete, because the buyer paid for goodwill and the parties usually bargained on more even terms. In employment, courts look much harder, and often find a non-compete unreasonable where a non-solicit would have protected the business. Shareholder agreements and other commercial contracts fall between the two: a covenant given by an owner who is paid for their shares looks more like a sale, while one imposed on someone who works in the business can look more like employment.
Will a court fix a clause that goes too far?
Generally not. The Supreme Court of Canada has held that courts should not rewrite an overbroad covenant into one that would have been reasonable, and that an ambiguous covenant is unenforceable. A business that asks for too much can end up with nothing.
Is a non-solicit or confidentiality clause a better option?
Often, yes. A non-solicit protects client relationships without stopping someone earning a living, so it is easier to justify. It is still tested for reasonableness, and its wording matters: some clauses cover only approaches the person initiates, not clients who choose to follow on their own.
Confidential information is also protected by the law of breach of confidence, even without a clause, and directors and some senior people owe fiduciary duties that can limit taking business opportunities, as our guide on directors’ fiduciary duties explains.
How is a restrictive covenant enforced?
The usual remedy is an injunction, a court order stopping the activity, which the Superior Court of Justice can grant before trial in a proper case. Because a pre-trial order can effectively decide a covenant dispute, courts often look closely at the strength of the case and the harm on each side.
The business asking for the order must usually undertake to pay any damages the order wrongly causes, and delay can weaken the request. A claim for damages, such as lost profits, can be made alongside, generally within the two-year limitation period under the Limitations Act, 2002. Covenant claims often arise within a wider contract dispute or shareholder dispute, for example after a blocked share sale.
If you are bound by a covenant
Do not ignore a demand letter. Check when you signed, in what role (employee, owner or seller), and whether the time, area and activity are reasonable. Avoid soliciting clients or using the business’s information while the question is open. A written undertaking limited to what is reasonable can sometimes resolve the matter without a motion.