Non-competition clauses when selling a business in Quebec

A sale of a Quebec business can involve two different promises not to compete. One is given by an employee, including a seller who stays on to work for the buyer. The other is given by the seller in the sale agreement itself. This guide covers the first kind, because articles 2089, 2095 and 2097 of the Civil Code of Québec speak to it: 2089 on the stipulation, 2095 on when the employer cannot rely on it, and 2097 on what a sale does to an employment contract. It also says what the sources we opened do not cover, so you know what to put to a Quebec lawyer. For the wider picture, see employees when you sell a business in Quebec and are non-competes enforceable in Canada.

Article 2089: what the stipulation must look like

Article 2089 lets the parties stipulate, in writing and in express terms, that even after the contract ends the employee may neither compete with the employer nor participate in any capacity whatsoever in an enterprise that would compete with the employer. The same article then limits it: the stipulation must 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 article asks for writing and express terms, so check that any clause you are relying on is written down and says so plainly.

Who has to prove it is valid

The last sentence of article 2089 puts the burden of proof that the stipulation is valid on the employer. Éducaloi, a Quebec charity that explains the law in general terms, describes the same thing for an employee sued by a former employer: the former employer has to show the court that the commitment respects guidelines, including that it only prevents specific jobs or tasks in direct competition, applies only in a reasonable geographic area, and is valid for a set period rather than indefinitely. If a buyer is relying on a staff clause, ask a Quebec lawyer whether the employer could prove it valid, since the article puts that burden on the employer.

Article 2095: when the employer cannot use it

Article 2095 says an employer may not avail itself of a stipulation of non-competition if it has resiliated the contract without a serious reason, or if it has itself given the employee such a reason for resiliating. Éducaloi gives the example of an employer who dismisses an employee to reduce operating costs and increase profits: that employer cannot stop the employee from working for a competitor. Éducaloi adds that a former employee must still act fairly, reasonably and loyally. If a buyer plans to let staff go after closing, ask a Quebec lawyer what that does to any clause the staff signed.

Article 2097: the sale does not end the employment contract

Article 2097 says a contract of employment is not terminated by alienation of the enterprise or any change in its legal structure by way of amalgamation or otherwise, and that the contract is binding on the successor of the employer. The Act respecting labour standards adds that the alienation or concession in whole or in part of the undertaking, or the modification of its juridical structure, namely by amalgamation, division or otherwise, does not affect the continuity of the application of the labour standards. Neither provision mentions non-competition stipulations. Whether a clause in an existing employee’s contract is something the buyer can enforce, and on what footing, is a question for your lawyer, who should read each employee’s actual contract before closing rather than assume.

A seller who becomes an employee

A seller may agree to stay on and work for the buyer under an employment contract. For a stipulation in that contract, article 2089 asks for a written, express stipulation limited in time, place and type of employment, with the burden on the employer. Éducaloi warns, though, that a non-competition clause could be assessed differently from the employee rules it describes when the clause sits in a commercial contract rather than an ordinary employment contract, and that this is often so where an entrepreneur sells company A to company B and then stays on as an employee of company B. It does not say how the assessment differs. Ask a Quebec lawyer to say which document carries the restriction, and why.

Covenants in the sale agreement itself

The Code articles in this guide are about contracts of employment. We did not find a source we could open that explains how a non-competition covenant given by a seller in a sale agreement is judged in Quebec, so this guide does not state a rule for it. Éducaloi’s page, which we did read, is about employees leaving to work for a competitor; it only warns that a clause in a commercial contract could be assessed differently. How a covenant in a sale agreement is judged is a question for a Quebec lawyer.

• Ask whether each restriction is written down in express terms, and in which document.
• Ask what the restriction limits in time, place and type of employment.
• Ask who would have to prove it is valid if it were challenged.
• Ask what happens to a staff clause if the employer ends the employment without a serious reason.
• Ask your lawyer whether a seller’s restriction belongs in the sale agreement, an employment contract, or both.