COURT OF APPEAL FOR ONTARIO
Weiler, Juriansz and Hoy JJ.A.
BETWEEN
Derek Martin
Applicant (Appellant)
and
ConCreate USL Limited Partnership and Steel Design & Fabricators (SDF) Ltd.
Respondents (Respondents in Appeal)
Jonathan F. Lancaster and Keri Gammon, for the appellant
Eric R. Hoaken and Ranjan K. Agarwal, for the respondents
Heard: November 7, 2012
On appeal from the judgment of Justice Paul M. Perell of the Superior Court of Justice, dated March 21, 2012, with reasons reported at 2012 ONSC 1840, 348 D.L.R. (4th) 526.
I OVERVIEW
1In the course of the 20 years Derek Martin worked at ConCreate USL Ltd. (“ConCreate”), he acquired a minority interest in ConCreate and a related business, Steel Designed & Fabricators (SDF) Ltd. (“SDF”). The businesses were sold to entities controlled by TriWest Construction Limited Partnership (“TriWest LP”). Martin retained an indirect interest in Concreate and SDL.
2In conjunction with the sale, Martin signed agreements (the “Agreements”) containing similar restrictive covenants in favour of the respondents. For ease of reference, the relevant clauses of the Agreements, and to related provisions of the Partnership Agreement, are reproduced in Appendix A to these reasons.
3The restrictive covenants would end 24 months after Martin disposes of the indirect interest in the respondents he acquired in the sale transaction. Martin cannot dispose of that interest without the approval of the board of TriWest LP’s general partner and any required approvals from the respondents’ and their subsidiaries’ lenders from time to time.
4Martin applied to the Superior Court for a determination that the restrictive covenants in the Agreements were unenforceable. The application judge dismissed his application. Martin now appeals to this court.
5The central issue in this appeal is whether the duration of the general non-competition and non-solicitation covenants in the Agreements is ambiguous or otherwise unreasonable and therefore unenforceable. A related issue is whether the prohibition on the use of confidential information in the Agreements is enforceable.
6Contrary to the application judge’s conclusion, in my opinion the general non-competition and non-solicitation provisions in the Agreements have no fixed, outside limit on their term. For this, and the reasons that follow, I would conclude that these provisions are unreasonable and therefore unenforceable.
7Accordingly, I would allow the appeal to the extent of declaring the general non-competition and non-solicitation provisions – sections 2.1 and 2.2 in the Agreements – unreasonable and therefore unenforceable. I would not disturb the application judge’s conclusion that the prohibition on the use of confidential information in s. 2.3 of the Agreements is enforceable.
II BACKGROUND
(1) Martin acquires and sells an interest in ConCreate and SDF
8In 1990, at the age of 18, Martin began working as a general labourer for ConCreate, a company owned by Gord Tozer. Over the years, Martin assumed roles of greater responsibility. Ultimately, through his holding company, 2272322 Ontario Inc. (“MartinCo”), Martin acquired a minority interest in ConCreate and a related business, SDF.
9ConCreate’s business focussed predominantly on concrete work on existing and new bridges. The vast majority of its business was on public works for government bodies, awarded through public tenders. SDF made and installed structural steel for use in bridge rehabilitation and railing for new bridges. Its business primarily came, directly or indirectly, from ConCreate. ConCreate and SDF worked predominantly in Ontario and Alberta, but also undertook a handful of projects in some other provinces and territories.
10Tozer wanted to sell and began to look for buyers. Although he initially kept his plans a secret, Tozer eventually told Martin of his plans and persuaded him to cooperate in the sale of the businesses.
11ConCreate ultimately sold all of its assets to the respondent ConCreate USL Limited Partnership (“Target LP”), an entity controlled by Triwest Construction Limited Partnership (“TriWest LP”). MartinCo and Tozer sold all of the shares of SDF to another entity controlled by TriWest LP. In connection with these transactions, MartinCo received $1.29 million in cash, and $3.81 million of loans MartinCo and Martin had made to ConCreate and SDF were repaid. MartinCo also received 25 per cent of the outstanding limited partnership units (the “Units”) of TriWest LP, with an unappraised book value of $6.5 million, and entered into a form of limited partnership agreement (the “Partnership Agreement”). In addition, ConCreate was entitled to future payments, worth up to $7.5 million, conditional upon the respondents generating a certain level of earnings. Martin retained a 25 per cent interest in ConCreate.
12As part of the sale, Martin was appointed President of Target LP and SDF, and entered into a corresponding employment agreement (the “Employment Agreement”).
(2) The Agreements
13The Agreements are the same, in all material respects, except in the scope of business to which they apply. One Agreement relates to the “Concreate Business”; the other relates to the “SDF Business”.
14Each of the Agreements contains three types of restrictions: a general non-competition covenant in s. 2.1; a restriction on soliciting employees, customers, dealers, agents or distributors in s. 2.2; and a prohibition on the use of any non-public information pertaining to or concerning the respondents in s. 2.3.
15The geographical reach of the non-competition and non-solicitation provisions in the Agreements – the “Prohibited Area” – is Canada-wide. The provisions restrict activities that ConCreate and SDF did not engage in at the time of the transaction.
16The term of the non-competition and non-solicitation covenants in the Agreements – defined in s. 1.1(f) of the Agreements as the “Prohibited Period” – ends 24 months after Martin disposes of his direct or indirect interest in the Units. However, both MartinCo’s ability to dispose of its Units, and changes in the ownership of MartinCo, are restricted by the Partnership Agreement.
17Any transfer of the Units is subject to any required consents of the Lenders, which is defined in s. 1.1 of the Partnership Agreement to include the respondents’ and their subsidiaries’ senior secured lenders and bonding companies from time to time. This includes transfers to a third party (s. 9.1), or the exercise of TriWest LP’s right to purchase the units (s. 9.22(c) and (e)) or Martin’s right to require the repurchase of his units (s. 9.22(d)) following the end of Martin’s employment. A transfer of Units also requires the approval of the board of directors (the “Board”) of TriWest Construction (GP) Inc., the general partner of TriWest LP (s. 9.1).
18A change in the ownership of MartinCo is similarly subject to required consents, including the consent of the Board. In section 9.1(g) of the Partnership Agreement, MartinCo agrees that it “shall not permit or approve any Transfer, whether direct or indirect, in the legal or beneficial ownership of … Martin Co without the prior written consent of the Board.” MartinCo also makes a continuous representation and warranty that Martin and/or companies that are controlled, directly or indirectly, by Martin, will remain the legal and beneficial owner of all of the shares of MartinCo “until such time as written notice of change in ownership is provided in accordance with these provisions and the required consents, including the consent of the Board, are obtained”.
19Any transfer of the Units not in compliance with the Partnership Agreement is void (s. 9.1).
20In s. 2.5 of the Agreements, Martin agrees, among other things, that all of the restrictions are reasonable. In s. 3.1, he acknowledges that he received independent legal advice and has negotiated on equal footing. In s. 3.7, entitled “Severability”, he agrees that if any term or provision of the Agreement is unenforceable, all other provisions of the Agreement shall remain in effect, and that if a covenant is deemed to be unreasonable as to duration or area, the court shall have the power to reduce the duration or area of the covenant.
21Tozer, Martin and their companies were jointly represented by counsel in the purchase and sale transaction.
22The transaction closed on February 1, 2011. Martin was 38 years of age and was, as the application judge found, at para. 103, an “accomplished and successful businessman” with interests in a number of other ventures.
(3) Events following closing
23The Employment Agreement provided that Martin’s employment could not be terminated prior to December 31, 2012, except for just cause. The respondents terminated Martin’s employment as President less than six months after the closing of the sale transaction. The respondents allege they had cause; Martin disputes this.
24Eight days after his employment was terminated, Martin started a company that allegedly competes with the respondents. This new company employs a number of former ConCreate employees, including two former members of ConCreate’s management team.
25On December 14, 2011, the respondents commenced an action against Martin, claiming that he had breached the restrictive covenants in the Agreements and his fiduciary duties. They sought significant damages, and an interlocutory and permanent injunction.
26Five days later, Martin resigned as a director of Target LP’s general partner, ConCreate USL (GP) Inc.; TriWest LP’s general partner, TriWest Construction (GP) Inc.; and SDF.
27On January 26, 2012, Martin applied for a declaration that the Agreements are void and unenforceable as being unlawful restraints of trade.
28The application was heard on February 28, 2012, and the application judge released his reasons on March 21, 2012.
29On April 12, 2012, on application of The Bank of Nova Scotia, a receiver was appointed of all the assets, undertakings and properties of TriWest LP and its general partner, TriWest Construction (GP) Inc.; Target LP and its general partner ConCreate USL (GP) Inc.; and SDF.
30The value of MartinCo’s Units is now presumably minimal. They are certainly worth far less than the $6.5 million unappraised book value they were ascribed at the time of the purchase and sale transaction.
III THE APPLICATION JUDGE’S REASONS
31After thoroughly and carefully surveying the law regarding covenants in restraint of trade, the application judge made the following findings and conclusions:
“[T]he impugned covenants are not ambiguous and Mr. Martin is able to know whether or not his conduct would breach the covenants, including the confidentiality provision” (at para. 96).
The Agreements were part of a commercial transaction, and not connected only to Martin’s employment. Therefore, the Agreements “should be scrutinized giving deference to the contractual autonomy of the parties” (at para. 103).
The respondents had “a legitimate business interest that needs the protections of a restraint of trade” (at para. 105).
In light of all the circumstances and the reasonable expectations of the parties, the covenants were reasonable as between the parties (at para. 108).
The scope of the prohibited activities was reasonable since the purpose of covenants was to prevent Martin from competing in activities that the respondents “had already staked out for themselves” (at paras. 109-110).
The geographic scope of the covenants was reasonable since, at the time of contractual formation, the parties envisaged that “the scope of the business was and would be national” (at para. 114).
While the final decision rests with the court, Martin’s agreement that the restrictions in the Agreements are reasonable is not to be ignored (at para. 123).
Martin had the onus of proving the covenants were unreasonable having regard to the public interest, and did not discharge that onus (at para. 124).
32Given that the central issue on appeal is whether the covenants’ duration is reasonable, the application judge’s analysis, at paras. 118-122, merits reproduction at length:
In my opinion, connecting the duration of the covenants in restraint of trade to Mr. Martin’s corporation’s ownership of units in the limited partnership was not unreasonable. Mr. Martin has an indirect 25% ownership interest in ConCreate and SDF, and it is reasonable that while he is an owner, he should not compete with his own company. The issue then is whether the time for divesting himself of the indirect ownership interest is unreasonable as between the parties.
Putting aside the matter of obtaining the consent of any Lenders to a transfer of unit in the limited partnership, as I understand the transfer provisions of the Limited Partnership, the longest duration for a transfer (which duration applies for both a dismissal for cause or for a dismissal without cause) is the length of time between the date of termination and 90 days after Mr. Martin gave notice to the partnership that he was exercising the right “to put” his shares, which right would be available to Mr. Martin up to 90 days after the 12 months during which the Partnership had the right “to call” the shares.
Thus, subject to obtaining the consent, if necessary, of the Lenders, the longest duration to complete a transfer is 12 months and 180 days and the longest duration for the operation of the covenants is three and a half years. In my opinion, this duration does not amount to any unreasonable duration for the operation of the covenants in restraint of trade.
In my opinion, the duration does not become unreasonable because of the pre-condition to any transfer that the limited partnership’s lender’s consent to the transfer. Apart from the fact the Partnership’s Lenders may not have contracted for the right to consent to any transfer of the shares and apart from the fact that the Lenders might give their consent, Mr. Martin agreed to this restraint on transfer as an incident of owning units in the limited partnership. In my opinion, it was reasonable for him to do so and it was reasonable for the parties to stipulate these restrictions on transfer.
Particularly with respect to the duration of the covenant but also with respect to its territorial and operational scope, it is significant that as a part of the agreements, Mr. Martin acknowledged the reasonableness of the covenants in restraint of trade.
33The application judge also indicated that if the covenants were unreasonable in the scope of their operation, their territoriality, or in their duration, they could not be saved by either “blue pencil” or “notional” severance: to do so would entail rewriting the contract for the parties. The respondents do not contest that determination.
IV THE PARTIES’ SUBMISSIONS
(1) The appellant
34Martin does not challenge the application judge’s findings that the restrictive covenants were not entered into in an employment context and that the respondents had a legitimate business interest to protect.
35He argues that the application judge erred in holding that the Prohibited Period is not ambiguous. Among other things, the definition of “Lenders” includes not only current lenders and bonding companies, but such entities “from time to time”. The consent of possibly unknown and possibly unascertainable third parties may be required. The covenants could remain in force “potentially forever”.
36In the alternative, Martin contends that the Prohibited Period is unreasonable between the parties: covenants of potentially indefinite duration were unnecessary to protect the respondents’ legitimate business interests. The Lenders – which owe Martin no duty of good faith– have a commercial interest in limiting his competition with the respondents. Moreover, it cannot be assumed that the requisite Board approvals would be forthcoming: in the fall of 2011, the Board refused to purchase the units held by two other former management employees of ConCreate who were similarly subject to restrictive covenants tied to the period during which they held units.
37Martin argues that the application judge placed undue emphasis on the commercial context of the covenants, Martin having been represented by competent counsel, and Martin having acknowledged the reasonableness of the covenants in the Agreements themselves. These facts were treated as insulating the covenants from scrutiny. Instead, Martin argues, each of the covenants must be scrutinized individually to determine if it is broader in scope than reasonably necessary.
38Martin submits that the application judge erred in principle in relying on a Confidential Offering Memorandum and slideshow presented to the respondents as “evidence of the contractual negotiations” to find the Canada-wide territorial restriction reasonable as between the parties. There is no evidence that the respondents themselves relied on such documents, and the “entire agreement” clause in the agreement of purchase and sale precluded reliance. Moreover, Martin argues, the application judge erred in failing to find that covenant’s territorial scope was overbroad. Since the respondents do not carry on business generally throughout a province or territory, but rather bid on specific projects in specific locations, it was unreasonable to prohibit Martin from working anywhere in Canada.
39Martin also argues that the scope of the prohibited activities goes well beyond what was necessary to protect the respondents’ reasonable commercial interests. The definitions of “Concreate Business” and “SDF Business” are broader than the activities the purchased businesses actually carried on. The Agreements prohibit the solicitation of persons that become customers after MartinCo ceases to hold Units. Similarly, the scope is not restricted to products or services offered by ConCreate or SDF at the time of the sale transactions, or by Target LP or SDF while MartinCo holds Units.
40Martin also challenges section 2.3, “Confidentiality”, as being unreasonable. As drafted, it goes beyond protecting proprietary information, and restricts Martin from using the know-how he developed over his 20 years with ConCreate, for as long as ConCreate and SDF carry on business. He argues that section 2.3 is effectively a further non-competition provision, and one that is for an indefinite, and therefore unreasonable, term.
41Finally, he argues that the application judge misapprehended the evidence, and this error tainted his analysis. The application judge wrote, at para. 71:
And it will be important to note that the Limited Partnership Agreement contained a non-competition agreement binding Mr. Martin’s corporation and Mr. Martin personally from competing with [LP] and SDF.
In fact, the restrictive covenants in the Partnership Agreement have no application to Martin or MartinCo; they apply to other limited partners. Only Martin is subject to restrictions, and only pursuant to the Agreements.
(2) The respondents
42The respondents submit that the application judge was correct that the covenants are not ambiguous. Practical ambiguities are part of the reasonableness analysis: see Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344, 280 O.A.C. 305, at paras. 18-19.
43The covenants were entered into in connection with the sale of a business, the parties were therefore on an equal footing, and Martin was represented by counsel. Martin should not now be able to argue that they are unreasonable.
44Moreover, the respondents argue, the application judge’s reasoning was sound and, in all of the circumstances, the covenants are reasonable as between the parties.
45As to Martin’s argument that the temporal restriction is unreasonable, there was no evidence that the respondents would withhold the identity of the Lenders or that the Lenders would withhold their consent. Further, assuming that Martin exercised his put rights under the Partnership Agreement expediently, and the Lenders and the Board consented to TriWest LP acquiring his Units, the duration of the Prohibited Period would be in the range of three and a half years – a reasonable period in the context of the sale of a business where the covenantor received significant consideration.
46With respect to the geographical scope of the restrictions, the respondents argue that they relied on the representation that the business had national reach. The application judge found that the respondents were provided with a Confidential Information Memorandum, describing ConCreate as “one of the nation’s leading players in infrastructure services” and “market leader with a national reach”. Further, the respondents were shown a slide show describing ConCreate as having a “highly mobile group able to serve customers on a national basis” prior to the transaction. There was also evidence that ConCreate in fact does business in all regions of Canada.
47The “entire agreement” clause in the agreement of purchase and sale is irrelevant. It excludes liability for representations other than those set out in the particular agreement. The respondents do not seek to hold Martin liable for misrepresentation. They point to the documents as demonstrating the mutually intended geographical scope of the purchased business.
48Regarding the scope of the prohibited activities, it was represented to TriWest LP that the scope of business carried on by ConCreate was broader than that actually carried on. If Martin has any doubt about whether a particular transaction would run afoul of the Agreements, he could confirm with his customer or with the respondents that there is no conflict.
V ANALYSIS
(1) Framework
49Covenants in restraint of trade are contrary to public policy because they interfere with individual liberty and the exercise of trade: see Elsley v. J.G. Collins Ins. Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 923. They are prima facie unenforceable. A covenant will only be upheld if it is reasonable in reference to the interests of the parties concerned and the interests of the public in discouraging restraints on trade: see Elsley, at p. 923.
50The party that seeks to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties. The party seeking to avoid enforcement of the covenant bears the onus of demonstrating that it is not reasonable with respect to the public interest: see Stephens v. Gulf Oil Canada Ltd. (1975), 1975 CanLII 711 (ON CA), 11 O.R. (2d) 129 (C.A.), at p. 141.
51If a covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable: see Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, at paras. 27, 43; Mason, at para. 14. It is therefore unreasonable and unenforceable.
52The law distinguishes between a restrictive covenant in connection with the sale of a business, and one between an employer and an employee: see Elsley, at p. 924. The former may be required to protect the goodwill sold to the purchaser, and does not usually involve the imbalance of power that exists between employer and employee. Accordingly, a less rigorous test is applied in determining the reasonableness of a restrictive covenant given in connection with the sale of a business: see Shafron, at para. 23; Elsley, at p. 924.
53Greater deference is given to the freedom of contract of “knowledgeable persons of equal bargaining power”: Elsley, at p. 923. Nevertheless, the broader restraints on trade justifiable in the context of a sale of a business must be reasonable within such a context. There is a strong public interest “in discouraging restraints on trade and, maintaining free and open competition unencumbered by the fetters of restrictive covenants”: Elsley, at p. 923; see also H.L. Staebler Co. v. Allan, 2008 ONCA 576, 239 O.A.C. 230, at para. 34.
54The factors relevant in determining whether a restrictive covenant is reasonable are the same in the contexts of the sale of a business and an employment agreement: the geographic coverage of the covenant, the period of time that it is in effect and the extent of the activity prohibited: see Shafron, at para. 43. And, as the application judge noted, reasonableness is determined in light of the circumstances existing at the time that the covenant was made. Those circumstances include the reasonable expectations of the parties about the future activities and marketplace of the business: see Tank Lining Co. v. Dunlop Industrial Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2d) 219 (C.A.), p. 226.
(2) Standard of review
55The parties agree that the standard of review of the application judge’s determination that the covenants are unambiguous and reasonable is one of correctness.
(3) Ambiguity
56I agree with the application judge that the covenants are not ambiguous. As in Mason, the covenants in this case are more appropriately analysed as part of the reasonableness inquiry.
(4) Geographic scope
57Nor, in my view, is there any basis for interfering with the application judge’s finding that the parties envisaged that “the scope of the business was and would be national.” I agree with the application judge’s reasons for concluding that the geographical scope of the restrictive covenants is reasonable. I also agree with the respondents that the “entire agreement” clause in the agreement of purchase and sale did not preclude the application judge from considering other documents connected to the transaction. The Confidential Information Memorandum and slideshow presented to the respondents were relevant in determining the parties’ reasonable expectations of the scope of the purchased business.
(5) Duration: the Prohibited Period
58I part company with the application judge on the key issue on this appeal – the reasonableness of the duration of the restrictions.
59In my view, the duration is unreasonable because it depends on any required consents of third parties, is therefore for an indeterminate period, and there is no fixed, outside limit. Notably, the required consents are not limited to third parties whose consent was required at the time that the covenants were entered into. As the definition of “Lenders” in s. 1.1 of the Partnership Agreement, and the definitions incorporated therein, make clear, the duration is potentially tied to the consent of unascertainable future third parties:
“Bank” means the principal banker of the General Partner, from time to time;
“Bonding Company” means collectively all Persons which from time to time have bonding facilities with the Partnership, the General Partner or any of the Subsidiaries including the Guarantee Company of North America;
“Lenders” means the senior secured Lenders to the Partnership and its Subsidiaries from time to time, including the Bank, the Bonding Company, and any senior secured debtholders of the Partnership or any of its Subsidiaries from time to time; [emphasis added]
60Further, the third parties owe no contractual duty to Martin to act promptly or reasonably. As Martin argues, the Lenders may have a commercial interest in limiting Martin’s competition with the respondents.
61The application judge correctly noted that the respondents bear the onus of establishing that the covenants are reasonable as between the parties. However, in my view he erred when he posited that the “Lenders may not have contracted for the right to consent to any transfer of the shares and... the Lenders might give their consent.” In so doing, he shifted the onus to Martin to establish that the Lenders would not give their consent. At the time the covenant was made, who the Lenders might be at the relevant time, what consents might be required, and whether those consents would be given, was not ascertainable. Moreover, there was no guarantee that Martin would be in a position to influence who the Lenders would be and whether they would be entitled to approve the transfer of Units. Martin could not have proved what the application judge would seemingly have required.
62Martin did agree to this provision in the context of the sale of a business and acknowledged its reasonableness in signing the Agreements. He was also represented by counsel. However, while these are important factors, they do not entirely immunize the clause from scrutiny. Safeguarding the public interest in free and open competition, in my view, requires that the court conduct a greater level of independent analysis.
63While not determinative, unlike the application judge, I am also troubled by the fact that the duration is tied to the period during which Martin has an indirect interest in the Units. Unlike the usual non-competition covenant obtained in a sale transaction, the duration is not calculated from the time of the sale transaction. Nor does it run until a specified time period after Martin ceases to be an officer or director, as is common in an employment context.
64Significantly, the Units are units in a limited partnership. In the Partnership Agreement, MartinCo and the other limited partners specifically covenant not to take part in the control or management of the business. Indeed, MartinCo risks losing its limited liability if it takes any part in the control or management of the business. In contrast, in a private company, shareholders can take an active role in the management of the corporation, and, pursuant to a unanimous shareholders agreement can even assume the functions of the directors. The reasonability analysis of a non-competition covenant in a limited partnership agreement is therefore different from that applicable to a non-competition covenant in a unanimous shareholders’ agreement.
65The respondents argue that tying the duration of the non-compete to the ownership of the Units is reasonable because MartinCo has the right to inspect and audit the limited partnership’s books of accounts and records and registers of the business and affairs of the partnership pursuant to s. 6.1 of the Partnership Agreement. They argue that if MartinCo exercises those rights of inspection and audit, it might obtain confidential information which it could use to compete unfairly with the respondents.
66Section 2.3 of each of the Agreements is a broadly drafted prohibition on the use of non-public information. The prohibition is not limited to the Prohibited Period; it continues in force for so long as the respondents carry on business. Section 2.3 protects the respondents’ proprietary information. Given this, and that divestiture of Martin’s interest in the Units does not necessarily follow when Martin ceases to be actively involved in the businesses, tying the general non-competition provision in s. 2.1 and the non-solicitation covenant in s. 2.2 to the period during which Martin has an indirect interest in the Units is in my view unreasonable.
67The respondents do not appeal the application judge’s determination that if the duration of the covenants was unreasonable, ss. 2.1 and 2.2 could not be saved by either “blue pencil severance” or “notional severance”. It is therefore unnecessary for me to address this issue. Having concluded that the duration of the covenants is unreasonable, and having regard to the application judge’s determination (with which I agree) that ss. 2.1 and 2.2 cannot be saved by the doctrine of severance, ss. 2.1 and 2.2 are therefore unenforceable. This does not affect the enforceability of s. 2.3.
(6) Prohibited activities
68While not determinative of this appeal, I also do not agree that the scope of the prohibited activities is reasonable.
69I do not take issue with the application judge’s finding of fact that the definitions of “Concreate Business” and “SDF Business” particularize and describe business activities “that ConCreate and SDF had already staked out for themselves” or his conclusion that they are therefore reasonable. The application judge was appropriately deferential to the parties’ right to contract in coming to this conclusion.
70My difficulty arises with respect to s. 2.2(a), the non-solicitation clause. That clause, which is reproduced in Appendix A, was not addressed by the application judge in his reasons.
71The restrictions in s. 2.2(a) extend to communicating or dealing with any persons who were customers, dealers, agents, or distributors of SDF or Target LP, at the time of the sale transaction or afterwards. Further, the section is drafted in relation to “any products or services that compete with products or services offered by [SDF or Target LP]”, whether or not offered, or planned to be offered, by ConCreate or SDF at the time at the time of the sale transaction. Moreover, the prohibitions are not limited by reference to the “Concreate Business” or “SDF Business”. The restriction is effectively broader than the general non-competition provision and goes far beyond what was properly required to adequately protect the goodwill of the purchased business.
72Section 2.2(a)’s prohibitions also extend to persons who did not start conducting business with the respondents, and products and services the respondents did not offer, until after Martin ceased to be a director of Target LP’s and TriWest LP’s respective general partners and SDF, and after MartinCo disposed of the Units. The restrictions go beyond what is reasonable to protect the respondents’ interests.
73Martin would have no basis to know if persons unassociated with the respondents at the time he ceased to have any involvement with SDF and Target LP had since commenced business relations with them. Likewise, Martin cannot be expected to know about every new product or service the respondents offer or plan to offer. This is particularly so given that the section purports to apply to businesses not included in the definitions of “Concreate Business” and “SDF Business”.
74Given the litigation between the parties, I am not convinced that a prompt response to any queries by Martin would be forthcoming. A potential, permitted customer could be lost while waiting for a response.
75In Mason, a restrictive covenant in an employment contract prohibited the employee from dealing with “any business entity which was a customer of the Company during the period in which [he] was an employee of the Company”. This court held that the covenant was ambiguous in its practical implementation and overly broad, and therefore unenforceable. The employer company had world-wide operations and the covenant was not limited to the customers that the employee had dealt with. The employee did not have a list of all of the company’s customers, and he had no way of knowing whether any particular potential contact he might wish to make was a customer of the company during the 17 years that he was an employee. This court concluded, at para. 29, that it was not workable, or realistic where the parties are in ongoing litigation, for the former employee to contact his former employee and vet potential customers.
76In my view, while the covenants in this case were entered into in the context of the sale of a business, the analysis in Masonis nonetheless apt. It is not reasonable for a restrictive covenant, given in the context of the sale of a business, to extend to activities neither carried on nor in the parties’ contemplation at the time of sale, while the covenantor was involved in the business post-sale, or even while the covenantor had an ownership interest in the business.
(7) Confidentiality
77As I understand it, the crux of Martin’s argument on the confidentiality argument is that the prohibition in s. 2.3 of the Agreements on his use of “know-how” prevents him from using the wisdom he accumulated over his 20 some years with ConCreate for an unlimited period of time and is therefore unreasonable. I am not persuaded that this is the effect of s. 2.3. While “know-how” is not specifically defined in the Agreements, it is a type of the respondents’ non-public intellectual property (“all non-public intellectual property including trade secrets, unfiled patents....and know-how...). It is reasonable for the respondents to seek to protect their proprietary interests.
(8) Misapprehension of evidence
78Finally, as Martin submits, the non-competition covenants in the Partnership Agreement do not apply to Martin or MartinCo. The only restrictive covenants to which Martin is a party are those in the Agreements, entered into in connection with the sale transaction. The term of those covenants is, however, linked to the period of time during which MartinCo holds the Units. Given that linkage, the application judge’s error in concluding that Martin and MartinCo were also bound by the covenants in the Partnership Agreement is of no moment.
VI SUMMARY
79In summary, in my view the application judge erred in concluding that s. 2.1, the general non-competition provision, and s. 2.2, the non-solicitation provision, in the Agreements are reasonable in duration, and therefore enforceable. The parties do not dispute the application judge’s conclusion that those sections cannot be saved by “blue pencil” or “notional” severance, and I agree with his conclusion on that issue. As well, the application judge in my view correctly concluded that s. 2.3, the confidentiality provision of the Agreements, is reasonable and therefore enforceable.
VII DISPOSITION AND COSTS
80I would therefore allow the appeal, to the extent of declaring ss. 2.1 and 2.2 of the Agreements unenforceable.
81Martin was substantially successful on this appeal. Accordingly, I would award costs in the all-inclusive amount of $18,000, which the parties agreed Martin was entitled to if successful on the appeal.
Released: Feb. 5, 2013 “Alexandra Hoy J.A.”
“KMW” “I agree K.M. Weiler J.A.”
“I agree R.G. Juriansz J.A.”
APPENDIX A
RELEVANT PROVISIONS OF THE AGREEMENTS
ARTICLE 1 – DEFINITIONS AND INTERPRETATION
1.1 Defined Terms
Unless otherwise defined herein, all capitalized terms appearing in this Agreement shall have the meaning ascribed to them in the Acquisition Agreement. In this Agreement, the following terms shall have the following meanings:
(b) “Concreate Business” means:
(i) concrete rehabilitation and strengthening including for bridges, dams, aqueducts, locks, parking garages, reservoirs, culverts, silos, tunnels, grain elevators and other structures;
(ii) construction of new bridges, water reservoirs, domes and other structures;
(iii) concrete protection including expansion joint system installations, waterproofing and traffic topping system application; and
(iv) geotechnical works including foundation support, shoring, slope protection, slurry walls and water cut off barriers; …
(e) “Prohibited Area” means Canada;
(f) “Prohibited Period” means a period commencing on the date of this Agreement and ending twenty-four (24) months after the disposition by Martin of his direct or indirect ownership interest in the [Units]; and
(g) SDF Business” means steel fabrication.
ARTICLE 2 - COVENANTS
2.1 Non-Competition
(a) Subject to Sections 2.1(b) and 2.1(c), Martin shall not, without the prior written consent of [SDF or Target LP], at any time during the Prohibited Period, in any manner whatsoever, including either individually or in partnership or jointly, or in conjunction with any other Person or Persons, as principal, agent, consultant, partner, shareholder, employee, investor, creditor, director, officer or otherwise, or in any other manner whatsoever, directly or indirectly, carry on, engage in, be interested in, be concerned with, advise, lend to, guarantee the obligations of or otherwise have a financial interest in, any business which competes with the [SDF Business or the Concreate Business] in the Prohibited Area.
(b) Martin’s performance in connection with his employment with Target LP, SDF and/or their respective Affiliates will not constitute a breach of this Section 2.1.
(c) Nothing in this Section 2.1 shall be construed as preventing Martin from holding, during the Prohibited Period, an interest, either directly or indirectly, in a business which competes with the [SDF Business or the Concreate Business] in the Prohibited Area, provided that the competing business is listed on a Canadian or United States stock exchange and Martin’s interest does not exceed five percent (5%) of the outstanding listed equity.
2.2 No-Solicit
(a) Subject to Section 2.2(b), Martin shall not, without the prior written consent of [SDF or Target LP], at any time during the Prohibited Period, in any manner whatsoever, including either individually or in partnership or jointly, or in conjunction with any other Person or Persons, as principal, agent, consultant, partner, shareholder, employee, investor, creditor, director, officer or otherwise, or in any other manner whatsoever, directly or indirectly:
(i) knowingly solicit, interfere with or otherwise attempt to obtain the withdrawal of any employee or independent contractor of [SDF or Target LP];
(ii) communicate or deal with any Person that is a customer, dealer, agent or distributor of [SDF or Target LP] for the purpose of selling, servicing or promoting in the Prohibited Area any products or services that compete in the Prohibited Area with any products or services of [SDF or Target LP] or submit a tender or proposal to any authority soliciting tenders or proposals for any products or services that compete with products or services offered by [SDF or Target LP] in the Prohibited Area; or
(iii) communicate or deal with any Person that is a supplier, dealer, agent or distributor of [SDF or Target LP] for the purpose of attempting to obtain a franchise, distribution or other arrangement in the Prohibited Area with that supplier in respect of any products or services that compete in the Prohibited Area with any products or services of [SDF or Target LP].
(b) Martin’s performance in connection with his employment with Target LP, SDF or their respective Affiliates will not constitute a breach of this Section 2.2.
2.3 Confidentiality
Martin acknowledges that all records, material and information pertaining to [SDF or Target LP] and its Affiliates, and any copies thereof obtained by Martin are and shall remain the exclusive property of [SDF or Target LP] or the Affiliate, as the case may be. For so long as [SDF or Target LP] carries on business, Martin shall keep in the strictest confidence, not disclose and not use, without the consent of [SDF or Target LP], any non-public information pertaining to or concerning [SDF or Target LP] or any of its Affiliates, including all budgets, forecasts, analyses, financial results, costs, processes, drawings, blueprints, margins, wages and salaries, bids, tenders and other business activities, all supplier and customer lists, price lists, all non-public intellectual property including trade secrets, unfiled patents, trade-marks, technical expertise, proposals, bid or tender packages, business opportunities and know-how, documentation including standard terms and agreements and all other information not generally known outside [SDF or Target LP] or any of its Affiliates. However, Martin shall not be obliged to keep in confidence and shall not incur any liability for disclosure of information which:
(a) is already in the public domain or comes into the public domain without any breach of this Agreement;
(b) is required to be disclosed pursuant to applicable laws or pursuant to policies or regulations of any regulatory authority having jurisdiction over Martin;
(c) is required to be disclosed in any arbitration or legal proceeding arising under or in connection with this Agreement; or
(d) is made to a professional or other advisor of Martin and insofar as is reasonably possible, cause the recipient to comply with the terms of this Section as if he, she or it were a party to this Agreement.
Martin shall, upon request by [SDF or Target LP] at any time, forthwith return any such confidential information to [SDF or Target LP] or confirm in writing that any of such information in the possession of Martin has been destroyed.
2.5 Legal Review
(a) Martin hereby agrees that all restrictions contained in this Article 2 are reasonable and valid. Martin further agrees that enforcement of the restrictions set out herein shall not prevent him from earning a livelihood and providing for himself and his family. The provisions of this Article 2 shall not in any way derogate or limit the exercise of Martin’s right to engage in subsequent employment and are only intended to safeguard against Martin’s participating in competitive endeavors against the [SDF Business and Concreate Business] in the Prohibited Area. Accordingly, Martin hereby waives any and all defenses to the strict enforcement of these restrictions by [SDF or Target LP] by any lawful means, including injunctive relief.
(b) In addition to the foregoing, Martin further expressly acknowledges and agrees that:(i) the [SDF Business and Concreate Business] is carried on throughout the Prohibited Area and that the [SDF Business and Concreate Business] is interested in and solicits or canvasses opportunities throughout the Prohibited Area; (ii) the nature of the [SDF Business and Concreate Business] is such that the on-going relationship between the [SDF Business and Concreate Business] and its customers is material and has a significant effect on the ability of the [SDF Business and Concreate Business] to continue to obtain business from its customers with respect to both long term and new projects; and (iii) Martin is entering into this Agreement and making the covenants contained herein, pursuant to the Acquisition Agreement and to consummate the transactions contemplated by the Acquisition Agreement, and because [SDF or Target LP] would not be prepared to complete its portion of the transactions contemplated by the Acquisition Agreement unless Martin agrees to the covenants contained therein.
ARTICLE 3 - GENERAL
3.1 Advice and Bargaining Power.
The parties hereto acknowledge and confirm that:
(a) they have each been independently advised by legal counsel in respect of the provisions of this Agreement and the obligations it imposes on them; and
(b) they have negotiated the provisions hereof on an equal footing based on equal bargaining power through extensive discussions and negotiations.
3.7 Severability
If any term or provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect without regard to the invalid, illegal or unenforceable term or provision. If the courts of any one or more jurisdictions shall hold all or any part of such term or provision wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination shall not bar or in any way affect [SDF or Target LP]’s right to relief in the court of any other jurisdiction as to failures to observe such term or provision in such other jurisdictions, the above provisions as they relate to each jurisdiction, being, for this purpose, severable into diverse and independent provisions. In addition, each of the parties hereto recognizes that the covenants and restrictions contained in this Agreement are:
(a) properly required for the adequate protection of [SDF or Target LP] and the [SDF Business or Concreate Business];
(b) properly required for the adequate protection of the goodwill acquired by [SDF or Target LP] pursuant to the Acquisition Agreement; and
(c) an inherent part of the consideration under the Acquisition Agreement.
Consequently, in the event that any covenant or other provision contained herein shall be deemed to be illegal, unenforceable or unreasonable by any court or tribunal of competent jurisdiction with respect to any part of the duration of such covenant or provision or the area covered thereby, the parties agree that the court or other tribunal making such determination shall have the power to reduce the duration or area of such covenant or provision and in its reduced form said covenant or provision shall then be enforceable.
RELEVANT PROVISIONS OF THE PARTNERSHIP AGREEMENT
ARTICLE 1 – INTERPRETATION
1.1 Definitions
In this Agreement, the following words have the following meanings:
"Bank" means the principal banker of the General Partner, from time to time;
“Board” means the board of directors of the General Partner, appointed or elected from time to time in accordance with the provisions of this Agreement and all committees of the Board;
“Bonding Company” means collectively all Persons which from time to time have bonding facilities with the Partnership, the General Partner or any of the Subsidiaries including the Guarantee Company of North America;
“Lenders” means the senior secured Lenders to the Partnership and its Subsidiaries from time to time, including the Bank, the Bonding Company, and any senior secured debtholders of the Partnership or any of its Subsidiaries from time to time;
“Transfer” means a transfer of any Unit and includes any sale, exchange, transfer, assignment, gift, mortgage, pledge, encumbrance, hypothecation, alienation, transmission or other transaction, whether voluntary, involuntary or by operation of law, by which the beneficial ownership or a security interest or other interest in, any Unit passes from one Person to another Person, or to the same Person in a different capacity, whether or not for value, other than an involuntary transmission of any Units of a deceased, disabled or Mentally Incapacitated Partner to the legal personal representative of such Partner for so long as the Units continue to be held by the legal personal representative of such Partner, and "to Transfer", "Transferred", "Transferor" and "Transferee" and similar expressions have corresponding meanings;
9.1 General Prohibition
(a) No Partner shall Transfer, whether directly or indirectly, any Units or enter into any agreement or commitment to Transfer Units except, in each case:
(i) with the prior consent in writing of (1) the Lenders, if such consent is required by the terms of any loan agreement with such Lenders, and (2) the Board;
(ii) pursuant to and in accordance with the applicable provisions of this Agreement;
any attempt to do so without such consent or not pursuant to such provisions or without such compliance shall be void.
(g) Martin Co shall not permit or approve any Transfer, whether direct or indirect, in the legal or beneficial ownership of Vendco or Martin Co without the prior written consent of the Board. Martin Co shall advise in writing the Board prior to any change in such ownership occurring. Martin Co represents and warrants that the legal and beneficial owners of all of the issued and outstanding shares in Vendco and Martin Co are as set forth in Schedule F and hereby represents and warrants, and is deemed to continue to represent and warrant for so long as Martin Co is a Partner, that such Schedule F is and remains true and complete in such regard (until such time as written notice of change in ownership is provided in accordance with these provisions and the required consents, including the consent of the Board, are obtained) and that the only asset held by such corporation is the Martin Co Units. Martin Co hereby covenants and is deemed to continue to covenant for so long as Martin Co is a Limited Partner, to not permit Martin Co to incur any liability or obligation otherwise than pursuant to or as contemplated in this Agreement or under the Act.
9.22 Martin
(c) If at any time Martin's employment is terminated without cause, then the Partnership shall, subject to obtaining required approvals, if any, from the Lenders, have the right (but not the obligation) to purchase, and Martin Co shall have the obligation to sell if the Partnership exercises its right, the Martin Co Units provided that the Partnership provides written notice of such election to Martin Co within 12 months of the termination date; failing which, the Partnership shall be deemed to have forever waived its rights to call the Martin Co Units under this Section 9.22(c) and Martin Co shall then have the right to put to the Partnership the Martin Co Units, and if such right is exercised, the Partnership shall, subject to obtaining required approvals, if any, of the Lenders, have the obligation to purchase the Martin Co Units, provided that Martin Co provides written notice of such election within 90 days of the expiry of the foregoing 12 month period… The purchase of the Martin Co Units under this Section 9.22(c) shall be on the following terms:
(i) the closing date shall be the Business Day that the Partnership specifies within 90 days of the Partnership providing written notice to Martin Co, or if Martin Co exercises its put right, within 90 days of Martin Co providing written notice to the Partnership;
(d) If at any time Martin's employment is terminated with cause, then the Partnership shall, subject to obtaining required approvals, if any, from the Lender, have the right (but not the obligation) to purchase, and Martin Co shall have the obligation to sell if the Partnership exercises its right, the Martin Co Units provided that the Partnership provides written notice of such election within 12 months of the termination date; failing which, the Partnership shall be deemed to have forever waived its rights to call the Martin Co Units under this Section 9.22(d) and Martin Co shall then have the right to put to the Partnership the Martin Co Units, and if such right is exercised, the Partnership shall, subject to obtaining required approvals, if any, of the Lenders, have the obligation to purchase the Martin Co Units, provided that Martin Co provides written notice of such election within six months of the expiry of the aforementioned 12 month period. The purchase of the Martin Co Units under this Section 9.22(d) shall be on the following terms:
(i) the closing date shall be the Business Day that the Partnership specifies within 90 days of the Partnership providing written notice to Martin Co, or if Martin Co exercises its put right, within 90 days of Martin Co providing written notice to the Partnership;
(e) If at any time Martin resigns, then the Partnership shall, subject to obtaining required approvals, if any, from the Lenders, have the right (but not the obligation) to purchase, and Martin Co shall have the obligation to sell if the Partnership exercises its right, the Martin Co Units, provided that the Partnership provides written notice of such election within 12 months of the resignation date; failing which, the Partnership shall be deemed to have forever waived its rights to call the Martin Co Units under this Section 9.22(e) and Martin Co shall then have the right to put to the Partnership the Martin Co Units, and if such right is exercised, the Partnership shall, subject to obtaining required approvals, if any, of the Lenders, have the obligation to purchase the Martin Co Units, provided that Martin Co provides written notice of such election within six months of the expiry of the aforementioned 12 month period, on the following terms:
(i) the closing date shall be the Business Day that the Partnership specifies within 90 days of the Partnership providing written notice to Martin Co or if Martin Co exercises its put right, within 90 days of Martin Co providing written notice to the Partnership[.]
