The SCC’s decision Payette v. Guay and the Potential Implications for Bhasin v. Hrynew
In my previous post here on The Court, I discussed the upcoming appeal of Bhasin v. Hrynew, 2013 ABCA 98, and how the Supreme Court of Canada has an opportunity to clarify whether contractual interpretation should be guided primarily by the intention of the contracting parties at the time the agreement was made (the intentionalist approach), or whether judges should discern the parties’ intent from the words used in the written contract (the textualist approach). The latter approach proclaims that the words of a written agreement are all that really matter, while the former approach views the context, goals, and expectations of the parties as equally or more important.
The SCC’s recent decision in Payette v. Guay, 2013 SCC 45, sheds some light on how the Supreme Court may rule on the issue in Bhasin. Justice Wagner, writing for the unanimous SCC in Payette, held at paragraph 43:
[T]he analytical approaches taken by Chamberland J.A., writing for the majority of the Court of Appeal, and Thibault J.A., dissenting are poles apart. The first is a contextual approach under which it is necessary to assess the circumstances in which the obligations were assumed. Its focus is on determining what the parties intended while at the same time considering the wording of the disputed provision. The second is instead a literal approach according to which the determination of the parties’ intention and the context in which the obligations were assumed are of secondary importance. For the reasons that follow, I am of the opinion that the analytical approach of Chamberland J.A. must prevail.
For a better understanding of why the Supreme Court unanimously concurred with Chamberland J.A.’s analysis in Payette, it is helpful to review the decision itself.
FACTUAL BACKGROUND OF PAYETTE
Guay Inc. is a construction crane rental company that operates across Quebec. Yannic Payette and Louis Pierre Lafortune controlled several companies that were also in the Quebec crane rental business, collectively known as Groupe Fortier. In October 2004, Guay Inc. purchased all of Groupe Fortier’s assets for $26 million.
In the October 2004 asset sale agreement, Payette and Lafortune undertook to work full-time for Guay as consultants for six months, with an option of subsequently entering a contract of employment thereafter. The asset sale agreement also provided that Payette and Lafortune were bound by non-competition and non-solicitation clauses for five years after the closing date or the termination of employment.
At the end of the six-month transitional period, Payette entered into an employment agreement with Guay, which was subsequently renewed for an indeterminate term.
On August 3, 2009, Guay dismissed Payette without cause. On December 16, 2009, Guay agreed to pay $150,000 compensation to Payette and Lafortune.
On March 15, 2010, Payette began a new job with Mammoet Crane Inc. in Montreal, an international company with business in the crane rental and transportation industries. A few days later, Guay lost seven of its most experienced employees to Mammoet.
Guay successfully obtained an interlocutory injunction for Payette to comply with the non-competition and non-solicitation provisions of the October 2004 asset sale agreement. Guay then sought a permanent injunction in Quebec Superior Court (“QBSC”), seeking Payette’s compliance with the restrictive covenants until August 3, 2014 (i.e. five years after the termination of his employment with Guay).
Lemelin J. of the QBSC dismissed Guay’s application, on the basis that the restrictive covenants were unreasonable and thus unlawful. Justice Lemelin found that the length and territorial scope of the non-competition clause was too broad, since it did not circumscribe the term of the prohibition and it applied to the entire province of Quebec, even though the market served by Groupe Fortier was limited to the Montreal area. Lemelin J. also held that because the non-solicitation clause did not outline the geographical territory to which the prohibition applied, it too was unlawful [ibid at paras 21-25].
The majority of the Quebec Court of Appeal (“QBCA”) held that the impugned restrictive covenants were agreed upon in the context of the commercial asset sale of his business to Guay, not in the context of his post-sale employment as Guay’s consultant. As such, Chamberland and Morin JJ.A. found that the trial judge had erred in applying the legal rules for restrictive covenants in employment contracts rather than the less stringent legal rules for restrictive covenants in sale of business agreements. Because employment relationships are generally characterized by an imbalance of power when a contract of employment is negotiated, the common law (and the civil law in Quebec) affords greater protections to employees who are prima facie bound by non-compete and non-solicit clauses. However, in a bulk commercial asset sale, such an imbalance of power is not presumed to exist. In the sale of a business, both parties typically intend for the restrictive covenants to be binding; by preventing the vendor from taking his clients with him upon closing, restrictive covenants not only protect the purchaser’s investment but also increase the sale value of the business for the vendor [ibid at paras 27-28, 35-39].
The dissenting appellate judge, Thibault J.A., agreed with the trial court’s reasons and ruling. In her view, the majority of the QBCA wrongly focused on the commercial context and intentions of the parties that led them to agree on the non-competition and non-solicitation clauses. For Thibault J.A., because the employment agreement entered into after the six-month transitional period was separate and independent of the asset sale in 2004, the restrictive covenants that were allegedly breached by Payette on August 3, 2009 should be examined using the legal rules that apply to employment contracts [ibid at paras 30-32].
In affirming the majority decision of the QBCA, Justice Wagner held at paragraph 45 of his decision for the unanimous Supreme Court:
To determine whether a restrictive covenant is linked to a contract for the sale of assets or to a contract of employment, it is, in my view, important to clearly identify the reason why the covenant was entered into. The [contract] negotiated by the parties must be considered in light of the wording of the obligations and the circumstances in which they were agreed upon.
The SCC agreed with the QBCA majority’s conclusion that the obligations of non-competition and non-solicitation could not be dissociated from the commercial asset sale. The Supreme Court analyzed both the literal wording of the October 2004 asset sale agreement and the factual context in which the restrictive provisions were agreed upon, and found that both the textualist approach and the intentionalist approach supported such a conclusion [ibid at para 46].
After having found that the commercial context must govern the court’s analysis, Justice Wagner ruled that the non-competition and non-solicitation clauses were reasonable and therefore lawful and binding on Mr. Payette. Wagner J. held that the non-competition clause was reasonable in its five-year duration, given the commercial setting and because the parties were represented by competent legal counsel during negotiations. Justice Wagner also found that the prohibition against Mr. Payette competing anywhere in the province of Quebec was not excessive in its territorial scope, given that the crane rental business is uniquely mobile and dependent on the location of construction sites. Moreover, the SCC held that the absence of a territorial limitation in the non-solicitation clause did not render it unreasonable since, “in the context of the modern economy, and in particular of new technologies, customers are no longer limited geographically, which means that territorial limitations in non-solicitation clauses have generally become obsolete” [ibid at para 73].
POTENTIAL IMPLICATIONS OF PAYETTE FOR BHASIN
In Payette, the intentions of the parties and the wording of the contract appear to be clearly aligned. On the other hand, in Bhasin v. Hrynew, the intentions of the parties at the time of agreement appear to differ from the contract’s wording. Nonetheless, the Supreme Court of Canada’s emphasis on considering the wider commercial context in which the contractual provisions were agreed upon in Payette, may serve as an indicator that the Court is willing to favour the intentionalist approach over the strict textualist approach espoused by the Alberta Court of Appeal in Bhasin v. Hrynew.