As you examine Canadian franchise opportunities, you...
A non-competition clause is the name given to a contractual undertaking to not compete with somebody else. Such a clause will often be referred to as, simply, a non-compete.
A non-competition clause may be valid if it is drafted so as to meet strict criteria, as established by the law, as discussed by legal scholars and as interpreted by the jurisprudence.
Generally speaking, such clauses provide, for example, within franchise agreements, that if such an agreement would terminate, for any reason, that the franchisee undertakes to not compete with the franchisor in any manner whatsoever.
The criteria may vary in their importance with relation to the fact that we are talking about, on the one hand, a contract of employment, or on the other hand, a contract for the purchase and sale of a business. The courts are much more severe with respect to the said criteria when studying employment relationships, because of the principle of the freedom of employment that may be limited by a non-compete clause. We must be aware that the criteria, which we will discuss hereinbelow, are interpreted restrictively by the courts, which are not at ease to interpret such clauses in favor of employers or even franchisors, if such clauses do not, for example meet all the criteria for validity.
It should also be known that, pursuant to the principles of interpretation under the Civil code of Quebec, an ambiguous clause will be interpreted against the person who stipulated or imposed the clause and in favour of the person bound by the clause. This means that, because such clauses are generally included in contracts prepared by an employer or a franchisor and which are submitted to the employee or the franchisee for signature, in the case of ambiguity, such clauses will be interpreted against the employer or the franchisor, as the case may be.
No, the court will purely and simply annul the non-compete clause if it does not meet the criteria for validity. The court will not intervene in its judgement to rewrite an invalid clause, for example, by shortening the time period of the clause or by limiting the applicable territory of the clause.
Certainly. We believe that the franchisor who grants to his franchisee, subject to certain conditions, the right to use his concept, to use his trademarks, and to have access to his business secrets, but sees his franchisee use these elements of the franchise system in an improper way, will see an important weakening of the value of his business, which is, specifically, the operation of the network of franchises in an organized manner within a specific territory.
A franchisee who wishes to join a franchise network where franchises are not bound by a non-compete clause is taking a risk that his franchisor will not be able to protect the franchise system
We believe that a franchisor who does not have a non-compete clause in his standard franchise agreement is depriving himself of a necessary tool to protect his business concept.
From the other side, a franchisee who wishes to join a franchise network where franchises are not bound by a non-compete clause is taking a risk that his franchisor will not be able to protect the franchise system, which is the very reason that the franchisee decided to get into business with the franchisor.
If you have any doubts whatsoever, before going any further, it is important to consult your legal advisor.
- François Alepin, lawyer
This article contains legal information of a general nature and cannot replace legal advice given by a lawyer who will examine the details of your particular situation.