Is a non-compete in a business sale illegal under the Competition Act?

The Competition Act does not mention non-competes or covenants by name, so a seller’s promise to stay out of the buyer’s market is not illegal simply because of its label. The Act does make certain agreements between competitors a criminal offence, and a seller who would otherwise compete with the buyer is a competitor in the Act’s sense. The real question is whether the covenant fits the Act’s defence.

What the Act makes an offence

Section 45 makes it an offence to agree with a competitor to fix prices, to allocate sales, territories, customers or markets, or to restrict production or supply. A competitor includes anyone it is reasonable to believe would be likely to compete without the agreement. A covenant barring the seller from the buyer’s customers or territory can look like market allocation on its face, which is why the defence matters. The Competition Bureau explains illegal competitor agreements online.

The no-hire side of a sale agreement

The same section makes it an offence for two unaffiliated employers to agree to fix wages or terms of employment, or not to solicit or hire each other’s employees. A promise by buyer and seller not to poach each other’s staff sits in this territory and needs the same care.

The defence that fits a sale

No one is convicted if they show that the arrangement is ancillary to a broader or separate agreement between the same parties, and directly related to and reasonably necessary for giving effect to that agreement’s objective, and the broader agreement does not itself breach the section. A purchase agreement is the obvious candidate for the broader agreement. A covenant limited to protecting the goodwill being bought stays closer to that wording than one reaching further in time, place or activity, but whether yours qualifies is a legal judgment.

A civil route, and a different rule for employees

Apart from the offence, the Competition Tribunal can, on application, make orders about an agreement between competitors that prevents or lessens competition substantially in a market. Employment law is separate: Ontario’s Employment Standards Act voids most employer-employee non-competes but excepts one given on a sale where the seller becomes the purchaser’s employee immediately afterwards. Enforceability is another question, covered in are non-competes enforceable in Canada.