Overview of non-competition clauses in a commercial context

In commercial matters, companies must make certain that the non-competition clauses in their contracts satisfy specific conditions to ensure that the clauses are enforceable and that they protect their commercial interests.

A non-competition clause is a contractual stipulation requiring one of the parties to refrain, for a specified period and in a specified place, from exercising a professional or commercial activity likely to compete with that of the other party[1].

A non-competition undertaking will, in a commercial context, be found to be reasonable and lawful if it is limited as to its term, territory and activities to which it applies, to whatever is necessary to protect the legitimate interests of the party in whose favour it was granted[2]. These three conditions are cumulative and interrelated and therefore must be analyzed bearing that in mind.

In considering the validity of a non-competition clause, commercial contracts must be distinguished from employment or service contracts. There is a presumption in commercial matters that such clauses are valid, which does not apply in an employment contract given the imbalance of power inherent in the employment relationship.

Such criteria must be considered when negotiating, drafting and entering into the agreement. If the validity of the non-competition clause is challenged before the courts, the judge hearing the case only has the power to declare the clause abusive and illegal; he or she will not be able to “rewrite” the clause to render it enforceable.

In commercial matters, the identity of the party that drafted the non-competition clause can be taken into consideration. It would be difficult for that party to claim that it had no knowledge of the applicable geographical restrictions.

It must therefore be borne in mind that the following criteria apply solely to non-competition clauses in commercial matters and are entirely transposable to employment or service contracts, which are governed by different criteria.

Generally, the courts validate non-competition clauses with five-year terms. But, given that every case is unique, the courts have on occasion upheld the enforceability of clauses with a term of up to 10 years.

However, a non-competition clause may provide for an indeterminate but determinable term, which satisfies the duration test imposed by caselaw. The term must therefore not be undeterminable. For example, if the clause provides that the non-competition clause will apply as long as the business is in operation, it will be considered to have an indeterminate, but ultimately determinable, term, namely the cessation of the business’s operations.

It is important to clearly define the geographical scope of the non-competition clause in relation to the legitimate interests at stake. Otherwise, the clause could be declared abusive. However, certain geographical constraints, despite that fact that they cover a large area, may be considered legitimate given the diversity of a company’s activities. The geographical scope may be global if it can be demonstrated that the beneficiary of the non-competition clause has legitimate interests worldwide.

For a proper determination of the geographic scope, the description must correspond to the area covered by the company’s activities at the time the non-competition clause is signed. A word of caution: geographical restrictions cannot be made subject to the location of clients served.

Also, the description of the area covered by clause must be sufficiently specific. For example, the “Region of…” could be replaced by the distance described as radius in kilometers from the town hall of the city or town where the business is located or by a list of all the municipalities encompassed by the restriction.

In any event, the clause must stipulate a geographical area of application, because a failure to delimit the geographical area of application will render the clause invalid and unenforceable.

Online services

A company operating in the online services field is not necessarily subject to physical boundaries. It can therefore sell its products anywhere in the world from a web platform without having a bricks-and-mortar base in a particular location, which can make it difficult to determine the geographical scope of a non-competition clause.

In such situations, the caselaw is clear: the beneficiary of the non-competition clause may not disregard the requirement that a geographical scope of application must be stipulation.

It does not suffice to “be able” to conduct sales at a particular location. For the clause to be regarded as validly protecting legitimate interests, goodwill is required – namely an active clientele in the stipulated geographic area.

In the same vein, the activities restricted in a non-competition clause will be considered reasonable if they are limited to what is necessary to protect the beneficiary’s legitimate interests.

It is generally accepted that the non-competition clause must still allow a person to earn a living by his or her professional knowledge and skills[3].

In principle, a non-competition clause should cover only the activities carried on by the company at the time of the transaction or the activities stipulated in the sale of the business, for example.

The description of prohibited activities must therefore be very precise. Like the other tests discussed above, failure to specify the prohibited activities in the non-competition clause will be fatal to its enforceability.

The degree and extent of expertise may also be taken into consideration in analyzing the validity of the clause and the scope of activities covered. For example, it may be appropriate to restrict a party’s activities if its knowledge is unique and critical to a particular industry.

As regards companies doing business internationally through online services, some clarification is still needed regarding the interpretation of these clauses. The globalization movement resulting from technological progress has made it possible for businesses to reach a much larger market through various online platforms. Although a certain framework has been established by the caselaw to the effect that no clause can escape the three-pronged test of duration, geographic territory and prohibited activities, it remains important to closely follow its application by the courts.