In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, the Ontario Court of Appeal confirmed that restrictive covenants negotiated as part of the sale of a business must be treated differently by courts than those contained in employment contracts.
The dispute arose from an agreement of purchase and sale between two dentists for a dentistry practice in Hamilton, Ontario (the “APS”). The APS contained a non-solicitation/non-competition provision, which prohibited the vendor from practicing dentistry within 15 km of the practice for a period of five years post-closing (the “Noncompete Provision”). About three years after the purchase and sale, the vendor began working at a separate practice in a location that violated the Noncompete Provision, and the purchaser commenced an action to enforce it. The purchaser was successful at trial, and the vendor made this appeal.
In his appeal, the vendor submitted that the trial judge incorrectly placed the onus on him to prove the Noncompete Provision was unenforceable. He asserted that the case law established the onus is on the party seeking to enforce a restrictive covenant (such as the Noncompete Provision) to prove that it is reasonable as between the parties, whether in the context of employment or the sale of a business.
The Ontario Court of Appeal rejected this argument. In doing so, it restated the general principles from the case law which govern restrictive covenants in a commercial context. The court began its analysis by confirming that “courts will give more scrutiny to the reasonableness of a restrictive covenant in the employment context, while applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business,” citing its previous decision in MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168.
The Court also cited the Supreme Court of Canada’s decision in Payette v. Guay inc., 2013 SCC 45, wherein the Court recognized that “rules applicable to restrictive covenants relating to employment differ depending on whether the covenants are linked to a contract for the sale of a business or to a contract of employment,” because “parties negotiating the sale of assets have greater freedom of contract than parties negotiating a contract of employment.” The Court also referred to its decision in Tank Lining Corp. v. Dunlop Industrial Ltd., 1982 CanLII 2023 (ON CA), wherein it stated that “[w]hen two competently advised parties with equal bargaining power enter into a business agreement, it is only in exceptional cases that the courts are justified in overruling their own judgment of what is reasonable in their respective interests.”
The Ontario Court of Appeal made it clear in Sims Dentistry that, when considering the enforceability of a restrictive covenant like the Noncompete Provision or an equivalent clause, the context of the agreement will be of “central importance.” Courts must recognize that parties who negotiate the sale of a business “are best placed to determine what is reasonably required to protect the purchaser’s interest in the goodwill,” and afford deference accordingly.
At Gilbertson Davis LLP, our lawyers have experience in business sale disputes, enforcement of restrictive covenants and contract litigation. Please contact us for an initial consultation.
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