In the business world, companies commonly seek to protect themselves against competition and the risks it entails. This is precisely the purpose of a non-compete clause. When a person sells a business, develops a franchise network, or hires an independent representative, they want to ensure that the individual to whom they have transferred their know-how or clientele does not suddenly become a direct competitor.
However, the line between legitimate protection against competition and an infringement on freedom of trade is sometimes a fine one.
In Quebec, even in a commercial context, a non-compete clause constitutes a significant restriction and may be considered contrary to public order if it is unreasonable with respect to one of the parties. Quebec courts regularly reiterate that unreasonable non-compete clauses are null and void.
For this reason, Quebec law and jurisprudence strictly regulate non-compete clauses, requiring that they be reasonable and clearly limited in terms of duration, territory, and scope of activities in order to be valid.
The application of these conditions varies depending on the type of contract. Quebec courts are generally more flexible when a non-compete clause is negotiated in the context of a business sale, and much stricter when it is included in a services contract involving economic dependence or in a tightly regulated franchise relationship.
Sale of a Business
In the context of the sale of a business, whether through a share sale or an asset sale, a non-compete clause is generally viewed as a fundamental element in protecting the purchase price. The buyer acquires, among other things, the goodwill, clientele, know-how, and commercial reputation. A clause prohibiting the seller from competing with the transferred business for a certain period therefore helps preserve the true value of the transaction.
Quebec jurisprudence recognizes that, in such circumstances, the parties contract on an equal footing and are free to negotiate the terms of the clause. This justifies a more flexible interpretation by the courts, in contrast to the stricter approach adopted in employment law, for example.
Although courts show greater tolerance when assessing validity criteria in the context of a business sale, the non-compete clause must nevertheless remain proportionate to the economic interests being protected.
Generally, valid clauses provide for durations ranging from three to five years, which is widely accepted by the courts. However, the Supreme Court of Canada has deemed clauses with durations of up to ten years reasonable in certain circumstances. This may be the case where the transaction is substantial, where the transferred goodwill or know-how has high strategic value, or where the contracting parties are experienced and negotiated with full knowledge of the implications.
In practice, the longer the duration, the more the buyer must demonstrate the existence of a serious interest to protect. Such a duration will therefore only be justified if it is proportionate to the nature of the business sold, the actual scope of its activities, and the role played by the seller in developing the clientele.
As for the geographic scope, it must correspond to the company’s actual field of operations. A province-wide restriction may be acceptable if justified. The clause must target specific competitive activities and must not impose a general restriction on the seller’s right to pursue a profession.
That said, even in this context, the clause must protect a legitimate commercial interest and remain proportionate to the reality of the business activities. A clause that goes too far – for example, one that prevents any form of work in a sector broader than that of the business sold, or within an excessively large geographic area – risks being invalidated.
Services Contracts
In the context of a services contract, particularly with a representative, consultant, or other service provider, companies often seek to include a non-compete clause to protect their clientele, business relationships, or know-how. However, the validity of a non-compete clause depends closely on the true nature of the relationship between the parties, rather than on how the contract is formally characterized.
Where there is a relationship of subordination or clear economic dependence between the service provider and the company, the non-compete clause will be subject to strict scrutiny by the courts as to its duration, territory, and scope. In such cases, the clause risks being invalidated if it is excessive.
Quebec courts have confirmed this approach and have emphasized that the freedom to carry on a professional activity may only be restricted to the extent strictly necessary to protect a legitimate interest.
Courts also take into account the service provider’s actual bargaining power. When a clause is included in a contract of adhesion or imposed unilaterally, it is subject to review under section 1437 of the Civil Code of Québec and may be invalidated due to a significant imbalance or abuse.
In a services contract, a non-compete clause is therefore legally valid only if it is strictly circumscribed. Quebec courts appear to apply the validity criteria for non-compete clauses rigorously. As a result, any clause that is excessive, vague, or not justified by a legitimate commercial interest is likely to be declared null and unenforceable.
Franchise Agreements
A franchise agreement is characterized by a contractual relationship between two independent businesses, structured around a high level of control exercised by the franchisor. The franchisee operates a business under the franchise brand, methods, and standards in exchange for the right to use a trademark, concept, or know-how.
In this context, a non-compete clause is often included at the end of the agreement to prevent a franchisee from using the knowledge, clientele, or processes acquired during the franchise term to operate a competing business. Its purpose is therefore to protect the viability of the franchise network and preserve the franchisor’s investments in expanding the brand.
However, even in this commercial context, the clause must remain reasonable and proportionate. It cannot prohibit all general activities in a sector that is already widely established. For example, a clause prohibiting a former franchisee from selling poutine would likely be deemed excessive. Given that poutine is an extremely common product in Quebec, it is not a sufficiently distinctive element to justify a general prohibition on selling it.
Quebec jurisprudence recognizes that the criteria applicable to assessing the validity of a non-compete clause in a franchise agreement fall somewhere between the strict requirements applicable to employment contracts and the broader latitude recognized in the context of a business sale. This approach reflects the nature of franchise agreements, which often involve a high degree of contractual control that can significantly restrict the franchisee’s autonomy.
The inclusion of a non-compete clause in a commercial contract is never automatic. It must always reflect the specific logic of the contract in which it appears.
While non-compete clauses remain a legitimate tool in commercial law and can play an important role in protecting a company’s interests following a transaction or collaboration, they must be carefully tailored to the contractual context.
To be valid, a non-compete clause must be justified by a legitimate interest and proportionate in scope. Generic or standardized wording is insufficient to ensure its validity or enforceability. Ultimately, the most effective protection lies not in the breadth of the restriction, but in a clause that satisfies the validity requirements consistently upheld by the courts.
Our team at BLP is well equipped to assist you with the drafting, analysis, and validation of non-compete clauses, taking into account the validity criteria established by Quebec jurisprudence, to ensure effective protection that aligns with your company’s commercial interests.