Anonymised, illustrative composite. The seller had operated in Ontario and Alberta. The non-compete he signed covered all of Canada. When he started a competing business in Quebec eighteen months later, the fund found out which of those two facts actually mattered.
At a glance
A fund acquired a specialty equipment rental business from its founder, who agreed to stay on as an employee for a transition period. As part of the purchase agreement, the founder signed a five-year non-competition covenant restricting him from operating a competing equipment rental business anywhere in Canada.
The founder's business had, in fact, only ever operated in Ontario and Alberta — two branches, one customer base, no history of national ambitions. The Canada-wide restriction was drafted defensively, on the standard buyer instinct that broader is safer, without anyone on the deal team asking whether it was actually enforceable at that scope.
Eighteen months after closing, the founder's transition period ended and he moved to Quebec and opened a new equipment rental business there. The fund's counsel sent a cease-and-desist invoking the five-year, Canada-wide covenant, and the founder's new counsel challenged its enforceability outside the two provinces the original business had ever served.
The relevant test is not provincial boundaries as such. Treadstonelaw's guidance on exactly this question is direct: “the permissible geographic scope depends on where the business actually competed and generated goodwill, not on provincial lines drawn for their own sake” — a Canada-wide restriction can be enforceable where the underlying business genuinely operated nationally, but “a clause reaching well beyond where the business ever realistically operated risks being found broader than necessary.”
Canadian courts test a restrictive covenant on three axes, as treadstonelaw's guidance on enforceability sets out: “the activity restricted must not be broader than necessary to protect the employer's legitimate interest; the geographic scope must be no wider than required; and the duration must not exceed what is genuinely necessary” — measured, on a business sale, against the goodwill actually purchased. On the fund's theory, a court asked to enforce the covenant in Quebec, where the target had never operated, had a straightforward basis to find the geographic scope overbroad: there was no goodwill in Quebec for the fund to be protecting, because the business it bought had never generated any there.
Two corrections to that reading, both from the Supreme Court, and both cut against the fund's confidence rather than for it. First, the standard is not the employment standard. Payette v. Guay inc. holds that where restrictive covenants cannot be dissociated from a contract for the sale of a business — including where the seller becomes an employee of the purchaser immediately afterwards — “the scope of these clauses must be interpreted on the basis of the rules of commercial law,” and those rules are more permissive: “a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable having regard to the context in which it was negotiated.” The onus sits on the party attacking the covenant. That is the reverse of the employment rule confirmed in Shafron, where “[t]he onus is on the party seeking to enforce the restrictive covenant to show that it is reasonable” — and the difference exists for a reason the Court states plainly: “a sale of a business often involves a payment for goodwill whereas no similar payment is made to an employee leaving his or her employment.”
Second, the fund's own industry cuts the other way. Payette upheld a five-year covenant covering the whole of Quebec against a crane-rental business whose market was essentially Montréal. The principle the Court applied is the one the fund was relying on — in principle the territory is “limited to that in which the business being sold carries on its trade or activities . . . as of the date of the transaction,” and a clause reaching outside it “is contrary to public order” — but what that territory is is a question of evidence, and the trial judge had erred by treating a business that did “the vast majority” of its work in one city as confined to it. A specialty equipment rental business with branches in two provinces does not automatically have a two-province footprint; a rental fleet travels. What the fund lacked in Quebec was not a rule in its favour. It was evidence.
The 2021 amendment to Ontario's Employment Standards Act, 2000 — s.67.2, added by the Working for Workers Act, 2021 and applying to agreements entered into on or after October 25, 2021 — did not resolve this in the founder's favour either, but the fund had been reading it far too generously. Section 67.2(1) provides that “No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement,” and s.67.2(2) makes the consequence blunt: a covenant caught by the prohibition “is void.” Section 67.2(3) does carve out a sale of a business where, “immediately following the sale, the seller becomes an employee of the purchaser” — but the Ministry of Labour's own published guide describes that exception as applying where the business sold “is operated as a sole proprietorship or a partnership” — but those words are not in the Act. The consolidated s.67.2(3) reads simply “If there is a sale of a business or a part of a business…”, with no such limit. The guide is the Ministry’s reading, not the statutory test. A fund acquiring an incorporated equipment-rental business does not obviously sit inside it. The other route out is s.67.2(4), which exempts an employee who is an “executive” — a closed list of chief-officer titles — and whether the founder's transition role answered to one of those titles was a question nobody on the deal team had asked. So the statutory exception was not the safe ground the fund assumed it was standing on. It simply was not the ground the dispute ended up being fought on. What was fought was scope: the fund had drafted a five-year Canada-wide restriction against a business it could only evidence in two provinces, and never tested whether the extra reach would hold up if it actually had to be enforced somewhere the business had never been.
The fund and the founder settled: a modified covenant restricting the founder from competing in Ontario and Alberta specifically, for the remaining balance of the original term, with no restriction on Quebec or anywhere else the original business had never operated. The fund gave up the reach it could not have evidenced, and kept the protection that actually mattered — the two markets where the goodwill it had paid for demonstrably existed. Settling also spared it the risk that sits behind every overbroad covenant, which is not narrowing but collapse: in Shafron the Supreme Court held that “Notional severance . . . is not an appropriate mechanism to cure a defective restrictive covenant,” and that blue-pencil severance “may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant,” because “Employers should not be invited to draft overly broad restrictive covenants with the prospect that the court will sever the unreasonable parts or read down the covenant to what the courts consider reasonable.” Treadstonelaw's summary that “Courts strike out or reduce overly broad clauses rather than simply enforcing whatever the contract says” is right about striking out; the reducing half is the half a buyer must not plan around.
The fund's standard-form purchase agreement changed after this: non-compete geographic scope is now drafted to the target's documented operating footprint and any concrete, evidenced expansion plans, rather than defaulting to a national restriction on the theory that broader always protects more.
A 30-minute call is enough to tell you whether a structuring or diligence gap like this one is sitting in your pipeline.
