CorporateProtecting Investments: Lessons From a Noteworthy Restrictive Covenant Ruling

June 6, 2024

Gregory M. Prekupec, Farai Munyurwa

The recent decision in Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, provides critical insights into the enforceability of restrictive covenants within business purchase and sale agreements. The case highlights several important principles that not only clarify the legal framework but also has significant implications for buyers and sellers.

The Facts

In July 2017, Dr. Sims purchased all the shares of Dr. Cooke’s dental practice for $1.1 million. The agreement contained a non-competition clause prohibiting Dr. Cooke from directly or indirectly practicing dentistry within a 15 km radius of the acquired practice for a period of five years. Further to that clause, Dr. Cooke was to remain employed by the dental practice for a period of two years or until employment was terminated with sufficient notice. Two and a half years later, Dr. Sims gave a notice of termination to Dr. Cooke and he stopped working in the practice at that time. Months later, Dr. Cooke expressed his intention to practice dentistry at a practice 3.3 km away from the recently acquired practice, asserting that the non-competition clause was unenforceable. Dr. Sim’s rejected this assertion and brought legal proceedings against Dr. Cooke which were decided in Dr. Sim’s favor. Dr. Cooke appealed this decision citing that the trial judge erred in concluding that the clause in the agreement was reasonable.

Findings and Key Takeaways

The Ontario Court of Appeal dismissed the appeal and awarded costs to the respondent citing that the trial judge had not erred in concluding that the clause was reasonable in terms of duration and geographic scope. This decision reinforces the Courts long standing position that it will not interfere and invalidate restrictive covenants in cases where both parties willing and freely enter into a contract agreement with adequate legal representation and equal bargaining power. This reinforces the autonomy of parties in crafting agreements that protect their interests.

In terms of geographic scope and duration, the Court’s decision sets a benchmark for future transactions by establishing that such covenants are reasonable in this context. This is especially important in industries where client relationships and trust take years to build and the activities of a seller post-sale can affect the value of the acquired practice.

This case will set a precedent that will guide future cases on the enforceability of restrictive covenants. By focusing on reasonableness, the Court offers a reference point in future cases deciding similar issues.

Overall, this decision underscores the importance of drafting, clear, reasonable covenants to protect business investments by reiterating that restrictive covenants will be enforced, given that they are indeed reasonable and mutually agreed upon.

We understand the pivotal role that well-drafted restrictive covenants play in protecting business investments. For more information on the enforceability of restrictive covenants or to discuss the implications of recent legal decisions, contact Gregory Prekupec at [email protected].

Matt

The information contained on this website is not legal advice. It should not be construed as legal advice and should not be relied upon as such.
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