Franchise agreements, distribution agreements, leases, employment contracts and numerous other commercial contracts often contain terms that try to prevent one party from competing with the other in the same or a similar business for a period of time after the contract ends.
They're called post-term restrictive covenants or non-competition clauses, and I'll use the terms interchangeably here. Unless these contracts are really – and I mean really – well drafted, they're often not worth the paper they're printed on.
Let’s start with the franchise example, because I see this all the time in my practice.
A franchisee in the pizza restaurant business, whose contract is about to end, doesn’t want to renew his franchise agreement for another five years. He's had it with the franchisor. But he's on the lease for three more years, so he can't really pack up and move away without being sued by an angry landlord. He wants to open up in the same space under a different name and trademark when the old franchise agreement ends, carry on more or less as before, and keep cooking and serving pizza.
The non-competition covenant in his franchise agreement is one short paragraph within a 40-page document. It provides that he won't, within a 50-mile radius around the current location, or any other franchised location operated by someone else, at any time during the period of five years from the date of expiration, termination or transfer, “either individually or in conjunction with or as part of any person, firm, partnership, corporation, syndicate, association, joint venture or other third party or other entity whatsoever, whether as principal, agent, shareholder, director, officer, partner, employee, consultant, member, joint venturer or guarantor or in any other manner whatsoever, directly or indirectly, carry on, be engaged in or be concerned with or interested in, financially or otherwise, or advise in the establishment or operation of a business that is similar to the franchised business under this agreement."
If I'm acting for a franchisee, I love covenants like this because it might just have said “all of North America for 30 years” or “the entire galaxy for eternity."
A restrictive covenant in a franchise agreement that tries to keep someone out the same kind of business for five years in a large chunk of the Greater Toronto Area, Metro Vancouver or other city is rarely, if ever, going to be enforceable in a Canadian court. These sorts of covenants are seen as a “restraint of trade,” and the courts, as a rule, don’t like to enforce contractual provisions that restrain trade. The covenant has to be reasonable in the circumstances to protect the legitimate business interests of the party enforcing it. It has to be limited in time and limited in geographic scope.
But in this case, 50 miles around the location (or any other location within the franchisor’s system) for five years won't be reasonable. Sorry. Game over.
Now if it had said “six months from the location the business operates from,” that might be a different story because it's not so long and not so broad in geographic scope to be blatantly unreasonable.
Let’s run with the example “six months from the current location.” If you look at the language above, and plug in the new numbers, what is our soon-to-be-former pizza restaurant franchisee actually prevented from being involved in? “A business similar to the franchised business.”
This won’t fly either. Also unenforceable.
When a covenant purports to prevent a party from being in a particular business, the language had better be totally clear and specific on the kind of business the franchisee, licensee, employee or other contracting party is being prevented from being in. And it better be reasonable. “Similar business” is too vague and too uncertain. What is a similar business? If I have to guess, so will a judge, and I can tell you, she won’t try. Sorry, game over. Again.