Non-competition clause (Art. 2089 and 2095 of the Civil Code of Québec)

Employers may find the guarantee of loyalty under Art. 2088 of the Civil Code of Quebec insufficient to protect their interests. Consequently, employers may include a non-competition clause in their contract of employment therefore preventing future competition with the employer. The employee’s consent on the inclusion of such a clause will render the agreement binding and will prevent competing with the employer, even after the termination of the employment relationship, subject to limitations provided by law.

a) Definition of the non-competition clause

Non-competition clauses represent an important and controversial aspect of employment contracts. Often disputed, this clause must respect certain essential legal elements, which are occasionally ignored, and other times neglected during the drafting and signing of contracts of employments.

The non-competition clause in a contract of employment is a provision by which an employee engages himself/herself not to compete, for example by starting a business in the same industry or working for a competitor, with his employer for a pre-determined amount of time after the end of the employment relationship.

First, it is important to distinguish between the non-competition clause in contracts of employment and the non-competition clause in commercial contracts. Each clause requires distinct formalities and operates differently. We will therefore focus on non-competition clauses in contracts of employment.

Non-competition clauses are the subject of special attention in Art. 2089 of the Civil Code of Québec, which enacts the following:

2089. The parties may stipulate in writing and in express terms that, even after the termination of the contract, the employee may neither compete with his employer nor participate in any capacity whatsoever in an enterprise which would compete with him.

However, the stipulation shall be limited as to time, place and type of employment, to what is necessary for the protection of the legitimate interests of the employer.

The burden of proof that the stipulation is valid is on the employer.

Case law dealt with this issue on numerous occasions and has established a rather exhaustive definition, presented by the Honorable Judge Letarte in the judgment (SNC-Lavalin Group Inc. v. Leboeuf [1994] JQ No. 1262, at p. 61)  :

The non-competition clause imposes itself on the person who has made an important limitation with regards to his freedom. It cannot be contrary to public order or morality, its application must be limited in time and space, the restrictions it imposes must be proportionate to the reasons justifying it; it must not prevent the debtor from earning a living. This non-exhaustive list of requirements justifies the restrictive interpretation that jurisprudence has given to its terms.” (Translated from French)

It is important to note that due to the third paragraph of article 2089 of the Civil Code of Québec, the burden of proving the validity of a non-competition clause rests with the employer. This represents an additional responsibility for the employer as it is necessary to justify the extent of the restriction according to the four (4) requirements described above.

b) Evaluation criteria

It is important to note that a non-compete clause is unenforceable against an employee if the employer terminates the employment contract without a serious reason or if the employee terminates the contract for a serious reason.

Four (4) factors must be analyzed to determine the validity of a non-competition clause. Indeed, the clause must be:

Written

To be valid, a non-competition clause must be explicitly written within the employment contract.

Limited in duration

An employer cannot restrict an employee’s freedom for an excessive period of time. It is therefore necessary to establish a reasonable time limit that will be appropriate for both parties when signing the employment contract. Historically, courts have rejected non-competition clauses with a duration of more than two (2) years. Every professional relationship is unique and will require a case-by-case analysis of the factual framework to determine its validity, hence the importance of informing oneself with the aid of a competent lawyer!

Limited in territory

Territorial restrictions must not exceed the legitimate interests of the employer, in which case the clause could be declared unreasonable and therefore invalid. For example, an employer operating strictly in the city of Montreal could not impose a non-competition clause preventing an employee from working elsewhere in the province of Quebec in the event of his departure.

The intended territorial limits must be stated precisely and explicitly. To illustrate this point, the courts have rejected phrases such as “and in the vicinity”, “metropolitan Montreal” and “the agglomeration of the city of Vancouver”, the latter decision coming straight from the Supreme Court of Canada.

Limited as to the specificity of the work / position

Art. 2089 of the Civil Code of Québec states that the non-competition clause must be reasonable with regards to the type of prohibited work. Limitation must be to pursue a legitimate purpose, for example, to protect trade secrets or confidential information. However, an employer cannot prevent an employee from using his/her skills, knowledge and experience for the benefit of another company.

For example, a non-competition clause preventing a restaurant server from working in the food industry would be overbroad and unreasonable, therefore the clause could be struck down in its entirety.

Proportionality 

Finally, limitations imposed in accordance to Art. 2089 of the Civil Code of Québec must be proportional to the purpose sought by the inclusion of a non-competition clause in the employment contract. Indeed, this criterion is implicit in the analysis of the factors of time, territory, and type of work.

Indeed, the importance and severity of the grounds underlying a non-competition clause will affect the court’s tolerance vis-à-vis the limitations imposed on the employees of a company.

We only need to look at the pharmaceutical field, where the cost of research and development can be in the billions of dollars, to get an insight on the motives underlying the inclusion of a non-competition clause and the proportionality of the limitations sought. It is essential to protect the knowledge and the intellectual property so dearly acquired. Such circumstances will result in greater tolerance on behalf of various courts, who will then adapt their evaluation according to the context, the area of business in which the litigious parties are operating, and the importance of the position held by the employee concerned.

Criteria for Assessing Reasonability

Here are some of the factors that courts will take into account when assessing the reasonableness of a disputed non-competition clause:

  • The position held by the former employee;
  • The importance of his position within the company;
  • The duration of his employment;
  • The circumstances under which he started his job;
  • The field of activity in which the company evolves; and
  • The skills acquired, and contacts developed by the former employee during the duration of his employment with the company.

An ambiguous non-competition clause will be interpreted in favor of the employee.

Conclusion

In conclusion, when a non-competition clause is challenged, courts must strike the proper balance between the interests of both parties. On one hand, it is important to allow the employee to have a certain mobility within the labour market, and, on the other, the importance of preserving freedom of contract which allows the inclusion of a non-competition clause within the employment contract.

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The above noted text should not be construed as providing legal advice or a statement of your claim. The process highlighted above are merely parameters and barometers and do not constitute any warranties and guaranties with regards to your file at hand. We strongly recommend that you seek legal advice with a licensed attorney from the Barreau du Quebec or a notary at the Chambre des Notaires. Each case must be seen and analysed on its merits as the legal process may be complex and cumbersome.