SALE OF BUSINESS - KEY LABOURAND EMPLOYMENT ISSUES

These materials were prepared by Melissa Brunsdon, of MacPherson Leslie & Tyerman law firmSaskatoon, Saskatchewan, and Eileen Libby of MacPherson Leslie & Tyerman law firm, Regina,Saskatchewan for the Saskatchewan Legal Education Society Inc. seminar, Buying and Selling aBusiness; April 2000.

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\ SALE OF A BUSINESS: KEY LABOUR AND EMPLOYMENT LAW ISSUES

Purchasers and vendors alike must turn their minds to labour and employment law issues when

conducting the purchase and sale of a business whether the transaction takes the form of an asset

or share transfer. Both parties will want to consider whether the purchaser will continue the

employment of existing employees after the transaction is concluded. A number of factors

should be examined in taking this decision, including whether the vendor's business has been

certified by a trade union and whether the purchaser will be a "successor" under trade union

legislation. With respect to non-unionized employees, the parties should consider whether they

ought to be terminated by the vendor and rehired by the purchaser. Both parties will also want to

consider whether, and to what extent, the vendor should be restricted in competing with the

purchaser after the transaction has concluded.

This paper is not intended to be an exhaustive discussion of all labour and employment law

issues that may arise in the context of the purchase and sale of a business. Instead, it will focus

on three primary issues: successorship provisions applicable in the unionized context, the

severing of employment of non-unionized employees, and non-competition agreements, with a

focus on Saskatchewan legislation and caselaw.

Successorship

Where the vendor's business is unionized, the purchaser of that business may well inherit the

certification order, any collective bargaining agreements, Labour Relations Board orders and

proceedings, and any other obligations that the vendor had under the applicable labour

legislation.

Provincial and federal labour legislation both contain "successorship" provisions that govern the

sale of a business. In general terms, The Trade Union Act and the Canada Labour Code provide

that where a business or part of a business is sold, leased, transferred or otherwise disposed of,

the person acquiring the business or part thereof shall be bound by all orders of the board, any

proceedings before the board, and any collective bargaining agreements in force unless the board

) orders otherwise. Both the federal and provincial legislation also contain provisions that govern

situations where, following a disposition, the business falls under a different jurisdiction (ie.

where the business was provincial, but becomes subject to federal jurisdiction after the

disposition, and vice versa). Again, the person who acquires such a business will also be bound

by any collective bargaining agreement in force.

The relevant sections of The Trade Union Act are as follows:

"Transfer of Obligations

s.37(1) Where a business or part thereof is sold, leased, transferred or otherwisedisposed of, the person acquiring the business or part thereof shall be bound by allorders of the board and all proceedings had and taken before the board before theacquisition, and the orders and proceedings shall continue as if the business ofpart thereof had not been disposed of, and, without limiting the generality of theforegoing, if before the disposal a trade union was determined by an order of theboard as representing, for the purpose of bargaining collectively, any of theemployees affected by the disposal or any collective bargaining agreementaffecting any of such employees was in force the terms of that order or agreement,as the case may be, shall, unless the board otherwise orders, be deemed to applyto the person acquiring the business or part thereof to the same extent as if theorder had originally applied to him or the agreement had been signed by him.

(2) On the application of any trade union, employer or employee directly affectedby a disposition described in this section, the board may make orders doing any ofthe following:

a) determining whether the disposition or proposed disposition relates toa business or part of it;

b) determining whether, on the completion of the disposition of abusiness or of part of the business, the employees constitute one ormore units appropriate for collective bargaining and whether theappropriate unit or units will be:

i) an employee unit;

ii) a craft unit;

iii) a plant unit;

iv) a subdivision of an employee unit, craft unit or plant unit;or

v) some other unit

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c) determining what trade union, if any, represents a majority ofemployees in the unit determined to be an appropriate unit pursuant toclause (b);

d) directing a vote to be taken among all employees eligible to vote in aunit determined to be an appropriate unit pursuant to clause (b);

e) amending, to the extent that the board considers necessary oradvisable, an order made pursuant to clause 5(a), (b) or (c) or thedescription of a unit contained in a collective bargaining agreement;

f) giving any directions that the board considers necessary or advisableas to the application of a collective bargaining agreement affecting theemployees in a unit determined to e an appropriate unit pursuant toclause (b).

Deemed Sale of Business

37.1 (1) In this section, "services" means cafeteria or food services, janitorial orcleaning services or security services that are provided to:

a) the owner or manager of a building owned by the Government ofSaskatchewan or a municipal government; or

b) a hospital, university or other public institution.

(2) For the purposes of section 37, a sale of a business is deemed to haveoccurred if:

a) employees perform services at a building or site and the building or site istheir principal place of work;

b) the employer of employees mentioned in clause (a) ceases, in whole or inpart, to provide the services at the building or site; and

c) substantially similar services are subsequently provided at the building orsite under the direction of another employer.

(3) For the purposes of section 37, the employer mentioned in clause 2(cc) isdeemed to be the person acquiring the business or part of the business.

Application of section 37 to certain businesses

37.2 Unless the board orders otherwise, if collective bargaining relating to abusiness is governed by the laws of Canada, and the business or part of it becomessubject to the laws of Saskatchewan, section 37 applies, with any necessarymodification, and the person owning or acquiring the business or part of it is

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bound by an collective bargaining agreement in force when the business becomessubject to the laws of Saskatchewan."

The Canada Labour Code contains comparable provisions for employers that are federally

regulated.

The Ontario Labour Relations Board described the underlying rationale or purpose of

successorship legislation in C. UP.£. v. Metropolitan Parking Inc. [1980] 1 Can. L.R.B.R. 197 at

203 as follows:

"The concept of successorship is an attempt to balance the interests andexpectations of parties in the industrial community and preserve both collectivebargaining stability and industrial peace. The employer retains his freedom todispose of all or part of his business; but it is recognized that one cannotrealistically expect that the interests of employees will be at the forefront of hisnegotiations. On the other hand, his employees may have recently struggled tobecome organized or to achieve a collective agreement. They expect that theirstatutory right to bargain collectively and their negotiated conditions ofemployment will have some permanence. Their expectations would be frustratedif a transfer of the business terminated both."

Section 37 of The Trade Union Act can be reduced down to two essential elements. First, there

must be a disposition. Second, it must be a disposition of a business or part thereof.

With respect to the first requirement, successorship provisions in both The Trade Union Act and

the Canada Labour Code apply to a broad range of commercial transactions including sales,

leases, transfers and "other dispositions". Therefore, successorship obligations may arise even

where there has not been the sale of a business in a technical legal sense. The Saskatchewan

Labour Relations Board commented on the notion of "disposition" in Wilson and Fafchuk v.

Access Transit Ltd,. [1992] 4th Quarter Sask. Labour Rep. 127 at 130:

"However freely the Board has interpreted the notion of "disposition" indetermining whether an employer should be held to have assumed the collectivebargaining obligations of a predecessor, we are of the view that there has been aconsistent requirement that there must be such a "disposition" to find asuccessorship under section 37. Though various specific characteristics of abusiness may be held up as constituting the subject matter of such a disposition,there must be something which passes from one enterprise to another whichwould justify a finding that collective bargaining obligations should betransferred."

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The Supreme Court of Canada has also stated that there must be something that was relinquished

or conveyed by the first business to the second business in order for a disposition to have taken

place.

W W Lester (1978) Ltd. v. United Association of Journeyman, [1990] 3 S.C.R.644 (S.C.C.)

The precise form of the legal transaction between the parties is not determinative of the issue of

whether there has been a disposition. The Saskatchewan Labour Relations Board stated in

S. G.£. U v. Headway Ski Corporation, [1987] Aug. Sask. Labour Rep. 48:

"To determine whether there has been a sale, lease, transfer or other disposition ofa business or part thereof, the Board is not concerned with the technical legalform of a transaction but instead looks to see whether there is a discerniblecontinuity in the business or part of the business formerly carried on by thepredecessor employer and now being carried on by the successor employer."

The second requirement to engage successorship obligations under section 37 is that there has

been a disposition of a "business or part of a business". Again, the Board does not confine itself

to a business in the technical legal sense that we might understand a proprietorship, partnership

or corporation. Instead, the concept of "business" is somewhat more esoteric. The Ontario

Labour Relations Board described "business" in C. UP.£. v. Metropolitan Parking Inc., supra as

follows:

"A business is a combination of physical assets and human initiative. In a sense,it is more than the sum of its parts. It is a dynamic activity, a "going concern",something which is "carried on". A business is an organization about which onehas a sense of life, movement and vigour. It is for this reason that one canmeaningfully ascribe organic qualities to it. However intangible this dynamicquality, it is what distinguishes a "business" from an idle collection of assets."

The Saskatchewan Labour Relations Board has approved of this definition on numerous

occasions, adding in C. UP.£. v. Versa Services Ltd. et al,. [1993] 1st Quarter Sask. Labour Rep.

174:

"As we have suggested earlier, to establish that an employer is a successor in thesense envisaged by section 37, it must be established that something of a coherentand dynamic nature, something which may enjoy a separate existence as a"business", was passed on from the original employer to the successor."

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The Board may examme any number of factors m determining whether there has been a

disposition of a business under section 37. The Saskatchewan Board often quotes the following

list of potentially relevant factors provided by the Ontario Labour Relations Board in

Culverhouse Foods Ltd., [1976] O.L.R.B. Rep. Nov. 691:

"In each case the decisive question is whether or not there is a continuation of thebusiness ... [T]he cases offer a countless variety of factors which might assist theBoard in its analysis; among other possibilities the presence or absence of the saleof or actual transfer of goodwill, a logo or trademark, customer lists, accountsreceivable, existing contracts, inventory, covenants not to compete, covenants tomaintain a good name until closing or any other obligations to assist the successorin being able to effectively carry on the business may fruitfully be considered bythe Board in deciding whether there is a continuation of the business.Additionally, the Board has found it helpful to look at whether or not a number ofthe same employees have continued to work for the successor and whether or notthey are performing the same skills. The existence or non-existence of a hiatus inproduction as well as the service or lack of service of the customers of thepredecessor have also been given weight. No list of significant considerations,however, could ever be complete; the number of variables with potentialrelevance is endless. It is of utmost importance to emphasize, however, that noneof these possible considerations enjoys an independent life of its own; none willnecessarily decide the matter. Each carries significance only to the extent that itaids the Board in deciding whether the nature of the business after the transfer isthe same as it was before, ie. whether there has been a continuation of thebusiness."

The Supreme Court of Canada provided a brief list of some factors that will typically be

examined in considering whether a successorship occurred in W W Lester Ltd., supra at 676-77:

'To determine whether or not the business or part of the business has beendisposed of, most boards examine the nature of the predecessor business, and thenature of the successor business to determine if the business of the predecessor isbeing performed by the successor. Most boards approach the issue by examiningfactors like the work covered by the collective agreement, the type of assets thathave been transferred, whether goodwill has been transferred, whether employeesare transferred, whether the business is operating in the same location, whetherthere is a continuity of management, and whether there is a continuity of workperformed...."

The Saskatchewan Labour Relations Board has stated that there is no one single factor that will

in and of itself guarantee a successorship and the transfer of collective bargaining obligations

from one party to another.

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)C. u.P.£. v. Versa Services Ltd. et aI, supra.

In u.s. WA., Local 8294 and Fairford Industries Ltd. and Moose Jaw Steel Fab Services Ltd.

(1985), July Sask. Labour Rep. 31, the union alleged that Moose Jaw Steel Fab Services Ltd.

("Moose Jaw Steel") acquired the business or part of the business of Fairford Industries Ltd.

("Fairford") and was therefore bound by a certification order and collective bargaining

agreement affecting Fairford. The manufacturing portion of the business formally carried on by

Fairford was transferred to a limited partnership operating under the name of Merit

Manufacturing Company ("Merit"). Specifically, the limited partnership acquired from Fairford

land, buildings, manufacturing equipment, inventory, raw materials, work-in-progress, purchased

goods, manufactured goods, management and an exclusive franchise. Merit readily

acknowledged that there had been a transfer of part of Fairford's business from Fairford to Merit.

However, Merit was not named as a respondent in the application. The respondent, Moose Jaw

Steel, was incorporated by the former plant manager of Fairford for the specific purpose of

supplying Merit with labour services. All of Fairford's former employees became employees of

Moose Jaw Steel and performed the same or substantially the same work as they did previously.

There was only a six day hiatus between the termination of their employment by Fairford and

their hiring by Moose Jaw Steel. There was no corporate interrelationship between Moose Jaw

Steel and Fairford or Merit. No assets were transferred from Fairford to Moose Jaw Steel.

The Board held that Moose Jaw Steel was not bound by the certification order and collective

bargaining agreement affecting Fairford by virtue of s. 37. The Board concluded that what

Moose Jaw Steel had acquired from Fairford was a group of employees and the work they

performed, rather than Fairford's business or part thereof. The Board stated that the question of

Merit's rights and obligations with respect to the union and Merit's relationship with Moose Jaw

Steel's employees would have to be dealt with in a separate application naming Merit as a

respondent.

In a subsequent application, the Union named Fairford, Moose Jaw Steel and Merit as

respondents and alleged that all of them were engaging in an unfair labour practice under section

11(1)(c) of the Act by refusing to bargain collectively with the union. The Board held that Merit

violated this section by negotiating directly with the employees of Moose Jaw Steel and by

refusing to recognize their union. The Board formed the view that transferring the employees to

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Moose Jaw Steel rather than directly to Merit constituted an attempt to circumvent the

certification order and the union's exclusive bargaining status. The Board also held that the

employees of Moose Jaw Steel should be designated as employees of Merit for the purposes of

the Act.

us. WA., Local 8294 and Fairford Industries Ltd., Moose Jaw Steel Fab ServicesLtd., Merit Manufacturing Inc. and Merit Manufacturing Company (1986), JuneSask. Labour Rep. 54

In Carpenters Provincial Council ofSaskatchewan and Parkland Drywall Ltd. (1985), July Sask.

Labour Rep. 39, the union contended that Parkland Drywall Ltd. ("Parkland") had acquired a

business or part of a business from Mechanical Drywall (Prairie Region) Ltd., a company which

was certified by the union. Parkland took the position that it had acquired a collection of assets,

rather than a business, and therefore was not subject to the certification order.

Parkland had acquired from Mechanical Drywall (Northern) Ltd. (a company that carried on

business side by side with and had identical shareholders and directors to the certified employer,

Mechanical Drywall (Prairie Region) Ltd.) certain inventory, equipment, a one-tonne truck and a

house trailer for the total sum of $8,739.00. None of the tradesmen previously employed by

either of the Mechanical Drywall companies were employed by Parkland. The Board concluded

that Parkland had not acquired a "functional economic vehicle" from Mechanical Drywall or that

Parkland's business "drew its economic life" from Mechanical Drywall. The Board found that

the business of Mechanical Drywall came to an end in Saskatchewan in 1970 and that one of its

shareholders took the opportunity at that time to acquire equipment and to set up a completely

new, although similar, business. The Board held that there was no transfer of a business or part

thereof within the meaning of s. 37 of the Act. Rather, there was merely a transfer of assets.

In this case, the Board also expressed concern with the fact that the union was attempting to

invoke s. 37 some 15 years after the transaction had concluded. The Board stated that the union

was actually attempting to substitute the Act's successorship provisions for normal certification

proceedings. The Board stated that if the union had been unable to certify Parkland directly by

obtaining support of the majority of its employees in an appropriate unit, then the union would

not be permitted to do so indirectly by invoking s. 37. The Board further stated that the union's

attempt to rely on s. 37 some 15 years after the transaction concluded was also inappropriate

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because any wage rates contained in the collective bargaining agreement that was in force

between Mechanical Drywall and the union would have been inadequate by modem day

standards.

In S.J.B.R. W.D.S. U and West-Can Photo & Graphic Supply Ltd., carrying on business as

Kroma Kolor Processing Lab (1985), August Sask. Labour Rep. 45, the union alleged that West­

Can had acquired a photofinishing business from White Cross Properties (1965) Ltd. ("White

Cross") and was therefore bound by a certification order and collective bargaining agreement

affecting the employees of White Cross pursuant to s. 37 of the Act. The union also alleged that

West-Can had committed an unfair labour practice in violation of s. 11(1)(c) by refusing to

recognize the certification order and bargain collectively with the union.

On the facts of that case, White Cross had owned and operated a photofinishing service for

approximately four years which carried on business under the name of Kroma Kolor Processing

Lab. The union was certified as the bargaining agent for all employees of the photofinishing

business. In 1984, a receiver-manager was appointed for all of White Cross's assets, including

the photofinishing business. The receiver-manager terminated most of the employees in the

Kroma Kolor Processing lab. The remaining employees were terminated when the business

ceased to operate. A few months later, West-Can began a photofinishing business at a nearby

location. The sole shareholders of West-Can were the former general manager of White Cross

and his wife. They advertised in the newspaper "Same face, new place, a tradition of quality

continues. Former Kroma Kolor employees have opened West-Can Photo to continue offering

quality photofinishing. The people and prices haven't changed, just the location."

None of the equipment or facilities of the White Cross lab were used by West-Can at first. West­

Can later made a successful bid to purchase the film processing equipment of White Cross from

the receiver-manager. In particular, West-Can purchased all photofinishing equipment and the

right to use the name Kroma Kolor Processing Lab for the total sum of $450,000.00 from the

receiver-manager. West-Can then leased the same property that had been formally occupied by

the White Cross lab and applied to register the business name "Kroma Kolor Processing Lab".

The Board considered whether what had been transferred from White Cross to West-Can

amounted to a business or part thereof within the meaning of s. 37. The Board noted that the

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presence of a receiver-manager in between the two parties does not necessarily mean that there

had not been a transfer of a business or part thereof from White Cross to West-Can. The real

issue for the Board to determine was whether there had been a transfer of a business or merely a

transfer of assets. The Board found that there were factors going both ways, some of which

supported the view that there has been a continuation of a business and others that tended to

negate that conclusion. The Board held:

"When a trade union is certified, it does not acquire an absolute right to the workbeing done by employees it represents no matter who their future employer maybe or how that employer came by the work. Successor rights were not intended toapply to loss of business to a competitor, or to situations in which there is nonexus between one employer and its alleged successor. It is not enough that anemployer has in the past hired persons to do certain work that another employernow does or will do. For successor rights provisions to apply, there must be somecontinuity in the employing enterprise as well as a continuity in the nature of thework. ...

In this case, the Board is of the view that there was continuity in both theemploying enterprise and the work, and that West-Can did acquire a viable,cohesive part of the photofinishing business formerly carried on by White Cross.The fact that the business had ceased operating for approximately 2 'l'2 months wasno different than if White Cross had ceased operations due to a lack of funds andthen resumed them when necessary financing became available. While it is truethat West-Can did not acquire each and every asset of the business from itspredecessor, it did acquire enough of its essential elements, either directly fromWhite Cross or indirectly through its receiver/manager, for the Board to find thatit acquired a functional economic vehicle rather than an idle collection of assets.There is little doubt that the respondent now carries on substantially the samebusiness as before.

Under all of the circumstances, the Board therefore finds that the respondentacquired the business or part of the business of White Cross Properties (1965)Ltd. operating under the name and style of Kroma Kolor Processing Lab and thatit is therefore bound by the certification order and collective bargainingagreement affecting employees of its predecessor. The Board also finds that therespondent has violated s. 11 (1 )(c) of The Trade Union Act by reason of the factthat it has failed to bargain collectively with representatives of the certifiedunion."

In another case, a receiver-manager was appointed for Newberry Energy Ltd. ("Newberry") the

operations of which included a casting division which was certified by the U.S.W.A.. The

receiver-manager was unable to sell the business of Newberry Energy Ltd. as a going concern

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and terminated all employees and closed the plant. Responsibility for the business was then

assumed by SEDCO. SEDCO agreed to lease Newberry's pattern shop. core-making facilities,

certain cores and patterns to A-I Steel & Iron Foundry Ltd. ("A-I Steel"). The leased area

comprised a small portion of the Newberry plant. A-I Steel then negotiated contracts with some

of Newberry's previous customers and hired three of Newberry's previous employees to work in

the rented facilities. Those employees became members of International Molders and Allied

Workers Union, which was a bargaining agent certified for all employees of A-I Steel. The

U.S.W.A. argued that there had been a transfer of a business under s. 37 and therefore A-I Steel

was bound by the certification order and collective agreement affecting employees of Newberry

and further that it was obliged to bargain collectively with U.S.W.A.

The Board stated that the issue in this case was whether there had been a disposition of a

business or part thereof, and not simply a collection of physical assets. The Board reiterated that

the existence of the third party, acting as agent or trustee, does not necessarily preclude a finding

that a business or part thereof has been disposed of. The Board found that A-I Steel did not

acquire a business or part thereof from SEDCO as agent for Newberry. Rather, it acquired a

collection of assets consisting of a leasehold interest in a pattern shop and core-making facilities,

and certain cores and patterns. A-I Steel's ability to negotiate contracts with some of

Newberry's former customers depended on its ability to be competitive in the market. In the

Board's view, to hold that A-I Steel had acquired a business or part thereof on the facts of this

case would be to root bargaining rights in a location, the employees or the work done rather than

in "the business". The Board went on to state that even if there had been a successorship under

s. 37, it would not order that A-I Steel was bound by the certification order and collective

bargaining agreement affecting employees of Newberry. Rather, it would find that the three

former employees of Newberry could, without hardship or disadvantage, be integrated into the

existing and much larger A-I Steel bargaining unit, a result in keeping with the Board's policy of

maintaining large integrated bargaining units. This would therefore be an appropriate case, in

the Board's view, to order that A-I Steel is not bound by a certification order and collective

bargaining agreement affecting employees ofNewberry.

us. WA. and A-I Steel & Iron Foundry Ltd and International Molders & AlliedWorkers Union, Local 83 (1985) October Sask. Labour Rep. 42.

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In Sheet Metal Workers' International Association, Local 296 and Modern Roofing (1978) Ltd.,

et al. (1986), June Sask. Labour Rep. 64, the union alleged that Modem Roofing (1978) Ltd.

("Modem Roofing") transferred its business or part thereof to Herb & Steve Roofing Ltd. ("Herb

& Steve Roofing") and Custom Roofing Ltd. ("Custom"), and that the latter two parties were

bound by a collective bargaining agreement and certification order affecting employees of

Modem Roofing. The union further alleged that Herb & Steve Roofing and Custom had violated

s. 11 (l)(c) of the Act.

On the facts of this case, the principal shareholders of Modem Roofing incorporated Herb &

Steve Roofing and Custom. The shares of the corporations were issued and exchanged such that

Modem Roofing and Custom became wholly owned subsidiaries of Herb & Steve Roofing. In

1984, Modem Roofing sold all of its land, buildings, equipment, inventory and certain "pre-paid

expenses" to Herb & Steve Roofing for the approximate sum of $163,000.00. There was no sale

of Modem Roofing's goodwill, accounts receivable or work-in-progress. The effective date of

the sale and purchase transaction was almost one year later. Shortly before the effective date, the

tradesmen employed by Modem Roofing were informed that there was no more work available

for them and that they could apply for work with Custom (a non-union operation). Modem

Roofing's employees were laid off on the effective date of the transaction and began working

with Custom on the very next day. They continued to do the same type of work as they had

always done and to use the same vehicles and equipment. They also worked with the same

supervisors, foremen and work crews. From the standpoint of the employees the only difference

was that their hourly wage had been reduced.

The Board stated that when examining a transaction under s. 37 of the Act, the Board must be

mindful of the purposes of s. 37 of the Act. The Board stated:

"Whenever the Board is called upon to determine whether there has been adisposition of a business or part thereof within the meaning of s. 37 of The TradeUnion Act, it must look through technical legal form at the real intent andsubstance of a transaction. Each alleged disposition is therefore examined in thecontext of the purposes of The Trade Union Act, which are to protect the right ofemployees to organize in and bargain collectively through a trade union of theirchoosing, to protect the right of a trade union to act as exclusive representative ofall employees in an appropriate unit and to promote industrial stability. Morespecifically, each transaction is viewed in the context of s. 37 of the Act, which is

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intended in part to ensure that corporate artificialities do not result in the loss of acertified union's bargaining rights."

In the Board's view, Herb & Steve Roofing and Custom were created in part to allow their

owners to acquire work either through its union subsidiary (Modem Roofing) or its non-union

subsidiary (Custom). The fact that all of Modem Roofing's physical assets were transferred to

what became the parent company, Herb & Steve Roofing, with only the employees going to

Custom was no doubt intended to insulate Herb & Steve Roofing from certification.

Theoretically at least, if the union attempted to organize Custom's employees in a traditional

way, the company could simply be wound up and another Herb & Steve Roofing subsidiary

quickly incorporated. After considering the substance of the transaction, the Board concluded

that Modem Roofing transferred a business or part thereof to Herb & Steve Roofing within the

meaning of s. 37 of the Act. Even though the agreement for sale between the two companies did

not provide for a transfer of goodwill, accounts receivable or work-in-progress, Herb & Steve

Roofing had acquired all of Modem Roofing's other physical assets, as well as its office,

supervisory and management personnel. Although the employees were hired by Custom, Herb

& Steve Roofing maintained fundamental control over their day-to-day responsibilities. From

the public's point of view, the new operation was almost identical to the old. Customers would

deal with the same owners operating out of the same location, employing the same people and

using the same equipment.

With respect to whether Custom had acquired a business or part thereof from Modem Roofing,

the Board stated that although there was no express provision in The Trade Union Act enabling it

to treat two associated employers as one for the purposes of the Act (at that time), Custom was an

integral part of Herb & Steve Roofing. The business affairs and industrial relations of the two

companies were so interconnected that they were inseparable. The Board was therefore prepared

to pierce the corporate veil and find as a matter of fact that employees of Custom are employees

of Herb & Steve Roofing. Herb & Steve Roofing was a successor under s. 37 of the Act and

therefore had breached its obligation to bargain collectively with the union in violation of s.

11(1)(c).

In S.JB.R. WD.S. U and Regina Exhibition Association Ltd. et al. (1991), lSI Quarter Sask.

Labour Rep. 54, the Board stated that the continuity of the work done is one of the important

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indicia of the transfer of the business, but is by no means conclusive. The Board stated that if the

work performed subsequent to the transaction is substantially similar to the work performed prior

to the transaction, that is normally a salient indicator that there has been a transfer of the business

within the meaning of s. 37.

On the facts of that case, Regina Exhibition Association Ltd. ("REAL") owns and operates

Regina Exhibition Park and, until January 1990, all concessions at the park. REAL entered into

an agreement with V.S. Services Ltd. ("VS"), effective February 1, 1990, pursuant to which VS

would commence operation of the concession facilities and services at the Regina Exhibition

grounds. Vnder the terms of the agreement, REAL agreed to provide and supply VS with

facilities and equipment formerly used by REAL in the operation of its concessions, REAL

agreed to be responsible for major repairs or replacement, VS acquired the exclusive right to

provide food and beverages at Regina Exhibition Park, VS was responsible for the direction and

control of concession employees, and VS was given the right to convert concessions to catering

facilities and open new concessions.

REAL laid off all of its concession employees shortly before the effective date of the agreement.

VS invited all of those employees to apply for employment with it and ultimately hired many of

them. Around the time of the layoffs, the R.W.D.S.V. had begun an organizing campaign to

organize the employees of REAL. R.W.D.S.V. filed a certification application on January 23,

1990 (prior to the effective date of the transaction between REAL and VS). The Board certified

R.W.D.S.V. to represent REAL's employees in its concession department on March 12, 1990

(after the effective date).

The union alleged that REAL transferred the concession division of its business to VS and that

VS was bound by the certification order. VS argued that it had merely acquired assets, and not a

business, within the meaning of s. 37 of the Act. VS also argued that it had been in business for

many years and was already a functional economic unit in its own right. VS acquired nothing

from REAL that made it any more of a business than it was before.

The only asset or component of REAL's concession business that was not transferred to VS was

its senior management and, through them, its experience and expertise in the concession

business. VS already had much of this expertise.

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The Board stated that in an operation of this size, management expertise is not an insignificant

asset. However, the Board stated, as important and essential as management expertise and

know-how may be to any business or economic organization, it is not an essential element or

pre-condition to a finding that a business has been transferred under. s. 37. In many small

businesses, management and ownership cannot be separated. If management must be among the

transferred assets, then s. 37 would be inapplicable to businesses where management and

ownership overlap. The Board stated that this result could not have been intended by the

Legislature:

"Therefore, although management expertise is obviously a very important elementof any business, and although its presence among those assets which aretransferred will certainly weigh in favour of a finding that there has been atransfer of a business or part thereof, its absence is not in itself conclusive wherethere are other significant assets."

The Board concluded that every meaningful asset of REAL's concession business, except senior

management, but including customers, had been transferred to VS. The concession aspect of

REAL's business was capable of being defined as a functioning entity, viable in itself. REAL is

no longer in the concession business and intended to transfer to VS its former concession

business as a viable and going concern. The Board held that VS was a successor bound by the

union's certification order and under a duty to bargain collectively with the union.

These are just some of the cases that have considered whether or not a successorship arises as a

result of a commercial transaction between two parties. Based on these and other cases, the

following list of potentially relevant factors may be considered by the Board in determining

whether s. 37 applies:

• Has there been a transfer of:

• Assets

• Equipment

• Employees

• Management

15

• Accounts receivable

• Goodwill

• A "functional economic entity" or a "going concern"

• Customers or customer lists

• Existing contracts

• Are there any covenants not to compete?

• Do the employees perform the same or substantially the same work that they

performed before?

• Has there been a hiatus in production or work?

• Is the business operating in the same location?

Parties should keep in mind that a successorship under s. 37 of the Act arises as a matter of law.

The parties cannot contract out of The Trade Union Act in general or the successorship

provisions in particular by including certain clauses in their purchase and sale agreements.

Successorship provisions usually need not be considered in the context of a straight share

purchase as the change in share structure of a corporation will have no effect on the continuation

of a certification order and collective agreement. The certification order and collective

agreement will apply to the purchaser of the shares. Successorship provisions may apply in the

context of an asset transfer. They have also been applied to joint ventures and partnership

agreements. Other cases involving an examination of s. 37 of the Act have included situations

where an employer has contracted out work formerly performed by a members of the bargaining

unit. While this paper will not examine cases in these contexts, we would simply remind parties

to review successorship provisions to determine whether they apply to any commercial

transaction involving one or more parties that are unionized.

16

)In one recent case concerning jurisdictional issues, an Alberta corporation purchased in Alberta

some of the inventory and tools of a bankrupt company from its trustee in bankruptcy. The

bankrupt company was certified by a union pursuant to a certification order of the Saskatchewan

Labour Relations Board. The purchaser of the assets declined to recognize the union. The union

filed an unfair labour practice application against the purchaser on the grounds that the purchaser

was a successor and inherited both the certification order and the collective agreement that bound

the bankrupt company. The purchaser denied that it was a successor.

The thrust of this case, at least to this stage, has been whether the purchaser must provide certain

documents to the union. The purchaser has refused disclosure of many documents on the

grounds that it is an Alberta company and its Alberta operations are not relevant. The purchaser

argued that the Saskatchewan Labour Relations Board has no jurisdiction unless there has been a

disposition of a business or part thereof in Saskatchewan. If the disposition concerns a business

only outside Saskatchewan, the purchaser argued that the Board should not have jurisdiction.

The Board held that it must determine whether a successorship has occurred such that the

purchaser inherits a Saskatchewan certification order and, in order to do so, must examine

) transactions that took place outside Saskatchewan. The Board ordered the purchaser to disclose

certain documents requested by the union.

The purchaser applied to the Court of Queen's Bench for judicial review of the Board's decision.

On the question of the Board's jurisdiction, Dawson J. held in Pyramid Electric Corporation v.

I.B.E.w., Local 529 et aI., [1999] Sask. L.R.B.R. c-93:

)

"It is clear that the Board does not have jurisdiction over employees residing andworking outside Saskatchewan. The Act is not intended to have applicationbeyond Saskatchewan. However, s. 37 is concerned with continuing thebargaining rights applicable to a particular Saskatchewan business onto a personwho has acquired that business or part thereof. Although Pyramid is an Albertabased company it could have employee relations which fall under the jurisdictionof the Board. Further, a certification order will apply to an employer based inanother jurisdiction when it carries on business in Saskatchewan. Whether thoserelationships bring them within the bargaining obligations which were imposed ona predecessor business is within the Board's jurisdiction to decide. The Boardmust decide whether there is a sufficient nexus between [the bankrupt companyand the purchaser], as the putative successor, so as to determine whether [thepurchaser] is the heir to the obligation to bargain collectively....

17

[The purchaser] argues that its possible acquisition of some of [the bankruptcompany's] inventory in Alberta cannot make it the successor of [that company's]business. But that is the very determination that the Board must make: what is thenature and extent of the disposition from [the bankrupt company to thepurchaser]?"

The Board has not yet determined whether there was, in fact, a successorship under section 37

based on the facts of this case. It is clear, however, that the Saskatchewan Board has jurisdiction

to make that determination.

As mentioned previously, the legislation provides for the situation where a business transfers

from provincial to federal or from federal to provincial jurisdiction. The purchaser is bound by

the collective bargaining agreement in force and the laws of the jurisdiction to which it has

transferred.

Interesting issues arise where both the vendor and the purchaser are unionized employers. In that

situation, the Board may apply the successorship provisions to order the amalgamation of the

two bargaining units, dovetailing of seniority and a vote to determine which union represents

employees in the unit created as a result of the amalgamation. The collective agreement in place

between the employer and the union successful on the representation vote will become the

collective agreement in force for all employees in the unit created as a result of the

successorship.

Estevan Coal Corporation et al. and Us. W.A., Local 9279 et al., [1998] Sask. L.R.B.R.709.

Wrongful Dismissal Damages

In a non-unionized setting, or when dealing with out-of-scope employees, the obligations of an

employer in dismissing employees are governed by The Labour Standards Act (if provincially

regulated), the Canada Labour Code (if federally regulated), and the common law. Section 43 of

The Labour Standards Act provides the minimum amount of notice or pay in lieu of notice that

must be provided to an employee upon termination without just cause as follows:

"43. Except for just cause other than shortage of work, noemployer shall discharge or layoff an employee who has been in

18

)

)

his service for at least three continuous months without giving thatemployee at least:

(a) one week's written notice, ifhis period of employment isless than one year;

(b) two weeks' written notice, ifhis period of employment isone year or more but less than three years;

(c) four weeks' written notice, if his period of employment isthree years or more but less than 10 years;

(d) six weeks' written notice, ifhis period of employment isfive years or more but less than 10 years;

(e) eight weeks' written notice, if his period of employment is10 years or more."

Sections 230 and 235 of the Canada Labour Code also address severance pay and notice of

termination. Section 235 in particular only applies to employees that have completed at least 12

consecutive months of continuous employment. Section 43 of The Labour Standards Act, on the

other hand, applies to employees who have completed 3 continuous months of employment.

J Of particular importance in the context of the sale of a business is s. 83 of The Labour Standards

Act, which provides as follows:

"83. For the purposes of this Act, where a business or partthereof is sold, leased, transferred or otherwise disposed of, theservice of the employees affected shall be deemed to be continuousand uninterrupted by the sale, lease, transfer or other disposition."

The implication of these provisions is that a purchaser of a business who wishes to dismiss

certain employees upon assuming control of the business will have to meet at least the minimum

statutory requirements for notice or pay in lieu of notice (assuming that the vendor has not

already terminated the employees). Moreover, for the purposes of calculating the Labour

Standards notice, the length of service of the employees will be calculated based on length of

service with both the vendor and the purchaser of the business. It is important to note, though,

that The Labour Standards Act sets minimum standards in certain matters but it is not a complete

code. In particular, s. 73 preserves an employee's right to launch an action for wrongful

dismissal. It states:

19

"73. Except as may be otherwise pennitted by this Act andsubject to section 68, nothing in this Act curtails, abridges ordefeats any civil or other remedy for the recovery of wages by anemployee from his employer."

These provisions create an interesting framework in which to consider an employer's obligations

with respect to notice or pay in lieu of notice. These issues were raised in Lingelbach v. James

Tire Centres Ltd, [1995] 2 W.W.R. 330 (Sask.C.A.). In that case, the plaintiff was a salesman

who had worked for the defendant business for nine years. Eventually, a corporation bought all

the shares of the employer business. The plaintiff continued to work as a salesman for the

business on tenns reflecting his previous remuneration. Nine months after the sale of the

business, the plaintiff was wrongfully dismissed. The main issue faced by the Court of Appeal

was how to calculate the employee's length of service. Section 83 of The Labour Standards Act

which deems employment to be uninterrupted by the sale of a business is only applicable "for the

purposes of this Act". The Court of Appeal held that this limitation restricts the effect of s. 83 to

claims made under the Act. For example, if the plaintiff in this case had made a claim for labour

standards notice under s. 43, his full nine years with the company would be used for calculating

his entitlement. However, the Court of Appeal held that s. 83 does not apply to claims relying on

common law employment contracts which meet or exceed the minimum standards of The Labour

Standards Act. Moreover, the Court of Appeal held that by selecting his common law right of

action (an action for wrongful dismissal) instead of his rights under s. 43 of the Act, the plaintiff

excluded himself from the effect of s. 83. Accordingly, the court held that common law rules

should be used to assess his length of service.

The obvious question in this case was whether the plaintiff s length of service was nine months

(based on the length of time he was employed by the new owner of the business) or nine years

(based on the length of time he had been with the company). Unfortunately the Court of Appeal

did not decide which method of assessment was proper. The Court was able to avoid this

question because it held that even if the plaintiffs length of service was nine months, length of

service is only one factor used to calculate the proper notice period. In the present case, the court

held that the plaintiffs employment contract was designed to use his lengthy experience for the

benefit of the new owner, and his remuneration was reflective of this. On these facts, the Court

of Appeal held that whether one considered the plaintiff s employment to have been continuous

20

or to have been interrupted by the sale of the business, nine months was an appropriate notice

period at common law.

The issue of whether length of service is continuous at common law has been addressed in both

Alberta and B.C. In Sorel v. Tomenson Saunders Whitehead Ltd (1987), 39 D.L.R. (4th) 460

(B.C. C.A.), the plaintiff had worked for 37 years with the same company, and had seen two

changes in ownership of the company. The B.C. Court of Appeal held that unless the purchaser

ofa business expressly states that it will not credit ongoing employees with their years in service

to the vendor employer, the employer is deemed to have contracted on the basis that such credit

will be given for purposes such as notice of termination. Nemetz C.l.B.C., for the court, set out

the issue in these terms:

"In every case, of course, the judge must assess reasonable notice based on theparticular circumstances before him. Where there has been merely a change inownership, it is open to the judge to consider the period of continuousemployment as a whole.

We think the legal situation might be conceptualized as follows:

1. When a purchaser acquires a business as a going concern there isan implied term in the contract of employment between it andthose employees continuing in the service of the business, that theemployees will be given credit for years past service with thevendor for purposes of such incidents of employment as salaries,bonuses and notice of termination.

2. This implied term may be negated by an express term to thecontrary. In other words, the purchasing employer may, at hisoption, advise the employees that he does not intend to give themcredit for past services to the vendor. If this is done, theemployees have the option of entering into the new contract ofemployment on these terms or of declining to work for thepurchasing company and suing the vendor for wrongful dismissaland damages in lieu ofnotice.

3. Where the new employer does not advise the employees that he isunwilling to contract on the basis that the employees have creditfor past years of service, the employer is deemed to havecontracted with the employees on the basis that the employees willbe given such credit."

21

As might be expected, in provinces where this case has been influential, the focus of litigation

has become one of whether the particular facts of a case demonstrate a sufficient intention of the

parties to sever the accumulation of years of service. For example, in Marchi v. Superior Bakery

(1985) Ltd., [1999] B.C.J. No. 2496 (QL) the H.C. Court of Appeal considered a situation where

the purchaser of a bakery entered into a contract with an existing employee which included the

following term:

"This Agreement shall be for a term of two (2) years commencing on the 24th dayof January, 1986, [the effective date of the sale transaction] provided that thisAgreement and the employment of the Employee may be terminated by theEmployer without cause upon giving one (1) month's written notice, or one (l)month's pay in lieu of notice, to the Employee. The Employer reserves the rightto terminate this Agreement and the employment of the Employee at any time,without notice, for cause."

No new contract was entered into at the expiry of the two-year term. The employer argued that

this contract was evidence that an entirely new contract of employment was entered into and that

was sufficient to rebut the presumption that years of service with the predecessor employer were

to be counted. The Court disagreed, holding that the wording was far from constituting an

express waiver or override of the implied term that the plaintiff would be given credit for his

previous years of employment.

A similar conclusion was reached in Taylor v. Dallas Investments Inc. (1993), 8 Alta. L.R. (3d)

181 (Q.B.). In that case, however, the vendor employer paid the plaintiff his vacation pay

entitlement and benefits according to the Alberta Employment Standards Act. In addition, the

agreement under which the assets were transferred specified that:

"Dallas [the purchaser] agrees to employ all the present staff as at September 1,1990, with new compensation packages which are similar to what they arecurrently receiving from Megill [the vendor]."

As well, the plaintiffs job description was somewhat modified under the purchaser's

management. The purchaser (defendant in the wrongful dismissal action) pointed to all of these

circumstances as being proof that the employment relationship with the predecessor had been

entirely severed, and length of service should be assessed based on the time spent under the

purchaser's ownership of the business. Once again, the court disagreed, emphasizing the need to

address the issue of length of service directly, and not merely by implication:

22

)

)

"In my opinion, it is incumbent on the purchaser, who is the prospectiveemployer, to specifically discuss these matters with the employees being takenover, and bring to the attention of them that the new owner does not accept suchimplied terms, if that is the case. The problem is, or should be, present to themind of the person proposing to purchase. If he is to put the employees outwithout prospect of reliance by them on their past service, than this is a matterwhich will concern the vendor, and will likely impact on the selling price. It is forthe purchaser to raise it and meet it squarely, if he is not to be fixed with theimplied term referred to by Nemetz, C.J.A. Any consideration of reasonablenotice should take that service into account."

Further reference may be made to Rhodes v. Koksilah Nursery (1997), 29 C.C.E.L. (2d) 303

(B.C.S.C.); affirmed (1999) 42 C.C.E.L. (2d) 179 (CA.), which dealt with an out-of-scope

employee's length of service in the context of the privatization of a government greenhouse. The

overall message of these cases is clear: in order to effectively "restart the clock", the purchaser

must inform employees that their years of service with the previous employer will not be

recognized.

Although this position is strongly established in B.C. and to some extent in Alberta, Ontario has

not wholeheartedly adopted the B.c. analysis. In Walker v. Serviplast Inc., [1995] O.J. No. 2081

(QL), the Ontario Court of Justice General Division considered the Sorel case but declined to

wholly accept the reasoning. However, like the Saskatchewan Court of Appeal in Lingelbach,

the Ontario Court held that the value of acquiring employees with long service to the predecessor

was a factor to be considered in assessing the reasonable notice period.

If it is unclear what position Saskatchewan courts will take on the issue of length of service in

the context of the voluntary sale of a business, the situation is clearer where a receiver-manager

is appointed. The effect of the appointment of a receiver was considered in Engel v. Clarkson

Co. Ltd., [1983] 1 W.W.R. 657 (Sask.Q.B.). With respect to s. 83 of The Labour Standards Act,

Halvorson 1. held (at664) that the provision did not apply to receivers:

"It is the plaintiffs submission that the phrase 'or otherwisedisposed of includes a liquidation of the Rogers Group assets. Iam not convinced this is correct. The words are sufficiently broadto encompass the liquidation but, in my opinion, the section wasnever meant to cover that eventuality. The section was intended toapply to situations where the employer voluntarily or activelydivested himself of his business, but not to dispositions resulting

23

from the realization by a creditor on security granted by theemployer. Were it otherwise, employees would be even moreprejudiced by a liquidation because a receiver would be obliged toimmediately fire all employees to avoid paying increasedseverance money. Use of the words 'sold, leased, transferred' alsoimplies to me that the legislature did not purport to includeseizures. Such a fundamental alteration of the common law wouldhave been expressed in clear terminology."

The court then went on to consider the length of service as determined by common law. First,

the court noted that at common law the appointment of a receiver-manager generally operated to

discharge a servant from his or her current employment contracts. Based on this principle,

Halvorson J. held that the appropriate length of service on which to base a common law action

for wrongful dismissal was the length of service after the receiver-manager was appointed.

However, as with the Lingelbach case, the court considered all of the surrounding factors in

addition to length of service when assessing the notice period:

"We have then a 51-year-old employee who was earning $1,500per month when fired. His length of service with the defendantwas a mere six months which would normally call for a shortnotice of termination. The character of his employment was by nomeans unique and, having regard to his experience, training andqualifications, it might have been assumed he could have quicklyacquired another suitable job. Such was not the case. With thebenefit of hindsight it is evident alternate employment was notavailable in spite of the plaintiff s diligence. It took three years tolocate a similar position. This suggests that a rather long period ofnotice would be reasonable. There is another element to beconsidered, and it is the fact that, in light of the liquidation, it couldnot be said the plaintiff had no forewarning his employment was injeopardy.

Weighing all factors, I am of the opinion that four months' noticeto the plaintiff of termination of his employment would bereasonable."

In light of these cases, if the purchaser wants to hire employees of the vendor following the

conclusion of a sale transaction, the purchaser must determine whether it is prepared to recognize

the employees' previous years of service with the vendor for purposes such as calculating

entitlement to notice or pay in lieu of notice. If the purchaser does not want to be bound by the

employees' past service, then certain specific steps should be taken to avoid that risk. First, the

24

vendor should provide all of its employees with written notice of tennination effective on the last

day on which the vendor will own the business (unless some employees will be tenninated

earlier). That notice should unequivocally state that the employees' employment is tenninated.

The vendor should also pay to employees the amount of pay in lieu of notice to which they are

entitled under The Labour Standards Act (assuming the vendor is a provincially-regulated

employer). In addition, the vendor should issue a record of employment to the employees.

Once these steps have been taken, the purchaser may choose to extend an offer of employment to

the vendor's fonner employees. The purchaser should enter into a written contract of

employment with any of the employees that it chooses to hire that makes it clear that the

employees' past years of service with the vendor will not be recognized and that, for the

purposes of calculating notice or pay in lieu of notice, the employees' length of service

commences on the date of hire by the purchaser. The purchaser may also wish to include a

further provision which states that while the purchaser acknowledges that the employees have

experience in the area, the employees' past experience is not to be taken into account as a factor

when assessing reasonable notice or pay in lieu.

These steps will go some distance in reducing the risk to both the vendor and the purchaser that

either of them could be saddled with an award for wrongful dismissal damages that they did not

anticipate. However, the vendor should be aware that if it provides tenninated employees with

the minimum statutory pay in lieu of notice and those employees are not hired on by the

purchaser (ie. did not achieve full mitigation of their losses), those employees may sue the

vendor for common law damages. The purchaser should also be aware that, for the purposes of

The Labour Standards Act, express provisions in an employment agreement which state that past

service prior to the sale transaction is not recognized may be ineffective. As well, there is a risk

that courts will view past experience as a factor to be taken into account when calculating notice

periods even if they do not include past service in the years of service with the purchaser.

25

Non-Competition Agreements

Two forms of non-competition agreements are relevant for the purchaser of a business. First, the

purchaser may want to ensure that the employees are subject to non-competition clauses in their

employment contracts. This is particularly so if there is a risk that the change in ownership may

cause some employees to contemplate going into business on their own. The second type of

non-competition agreement is that between the vendor and purchaser of the business. The

purchaser may wish to ensure that the vendor does not start up a business similar to the one it

just sold. This is particularly so where there is considerable goodwill attached to the identity of

the vendor.

When faced with a non-competition agreement of either type, the courts look for the proprietary

interest that is being protected. Without such an interest, non-competition agreements are

generally looked upon as restraints of trade. A four step process for inquiring into restrictive

covenants was laid out in Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 40 O.R. (2d) 219

(Ont. C.A.), which can be summarized as follows:

1. Is the covenant under review a restraint of trade?

2. If so, is the restraint one which is against public policy and therefore void?

(The court noted that a very few restraints are not against public policy, including

those coupled with mortgages or leases of real property. If the restraint does not

fall within one of these few exceptions, it is prima facie void.)

3. Can the restraint be justified as reasonable considering the interests of the parties?

4. Can the restraint be justified as reasonable considering the public good?

Where the two types of restrictive covenants differ, however, is in how rigorously the courts

examine the justifications offered for the covenants. In the case of restrictive covenants in

employment contracts, courts require a much more demanding standard of justification than they

do with respect to covenants accompanying the sale of a business (Elsley v. 1. G. Collins

Insurance Agencies Ltd., [1978] 2 S.C.R. 916). The rationale for this difference in approach is

26

that an employee is presumed to have less bargaining power with respect to the employment

contract than the vendor of a business has with respect to the contract for the sale of a business.

This paper focuses on restrictive covenants as between the purchaser and vendor of a business,

but it is nonetheless worth giving brief consideration to restrictive covenants in the employment

context. Non-competition or non-solicitation clauses will be scrutinized with respect to both

their geographic and temporal scope as well as the breadth of activities which the clause purports

to prohibit (see, for example, Roblan Distributors Ltd. v. Theofan, [1993] 4 W.W.R. 49

(Sask.Q.B).; Deloitte, Haskins & Sells v. Brooker et al (1982), 23 Sask.R. 58 (Q.B.); and R.L.

Crain v. Hendry (1988),48 D.L.R. (4th) 228 (Sask.Q.B.».

Although there are no hard and fast rules as to what constitutes an unnecessarily broad covenant,

in Western Inventory Services Ltd. v. Sager (1983), 148 D.L.R. (3d) 434 (Ont. H.C.) at 439­

440(a case involving an employment contract), the Court laid out a number of propositions

which have been developed in the case law. Some of the relevant principles that can be drawn

from the Sager case are as follows:

1. Proprietary interests that justify some form of restrictive covenant include trade

secrets, confidential information, and business or trade connections;

2. The duration and geographic scope of the covenant must be limited to what is

reasonably necessary to protect the proprietary interests;

3. In general, the longer the duration, the narrower the geographic scope should be,

and vice versa;

4. A covenant not to solicit a former employer's customers IS generally more

reasonable that a covenant not to compete generally;

5. In a typical employer/employee relationship, a non-competition agreement will

generally be void unless the employee was in a position to build personal

relationships with the customers;

)6. The time at which to assess reasonableness of the covenant is at the time the

contract was made, rather than at the time of alleged breach;

27

7. A covenant that is too broad will be struck down rather than read down [the

authority for this proposition comes from Bassman v. Deloitte, Haskins & Sells of

Canada (1984), 44 O.R. (2d) 329 at 334 (H.C.)].

In general, similar considerations will be applied to assessing non-competition clauses between

vendor and purchaser of a business. Perhaps the most significant difference between these two

contexts is that in a business setting, both parties to the transaction stand to gain from the

restrictive covenant. The purchaser of the business will be assured that the vendor will not

undermine the profitability of the business by opening a competing establishment. The vendor

gains in the sense that the value of the business is increased by the vendor promising not to

compete with the purchaser. In contrast, in the employment setting, non-competition clauses are

primarily for the benefit of the employer. This difference in purpose for non-competition

provisions, as well as the relative equality of bargaining power between vendor and purchaser

likely explains the greater deference shown by the courts to non-competition clauses in sale

agreements.

Before addressing the factors that courts consider when assessing the validity of non-competition

clauses, it is worth paying some attention to the form of the agreement. First, it is important to

identify the parties who will be bound by the non-competition agreement. In some cases, the

purchaser will want the principle shareholders and officers of a vendor corporation to enter into

non-competition covenants (e.g. Bliss & Laughlin Industries Inc. v. Doerner (1978), 5 B.L.R.

132, affirmed 13 B.L.R. 45 (S.c.c.». However, where individuals are entering into personal

non-competition agreements, the agreements must be clearly tied to the sale of the business to

avoid the perception that the non-competition agreement is actually a restraint of trade

independent of the sale of the business (Vancouver Malt & Sake Brewing Co. v. Vancouver

Breweries Ltd., [1934] 2 D.L.R. 310 (P.c.».

With respect to the acceptable scope of non-competition agreements, the basic principles applied

in the employment context are also applicable to the sale of a business. The fundamental

justification for restrictive covenants is the protection of the legitimate interests of the

covenantee. As with employment clauses, courts will focus on three aspects of the restrictive

covenant:

28

1. the breadth of activities covered by the covenant;

2. the geographical scope of the covenant; and

3. the temporal scope of the covenant.

With respect to the breadth of the covenant, terms which prevent the covenantor from engaging

in too broad a range of business activities will be void. In Latimer v. Fontaine (1905), 2 W.L.R.

191 (N.W.T.S.C.), the defendants sold their business to the plaintiff and covenanted that they

would not engage in any business within a certain town for a period of five years. Such a broad

prohibition was void as being in restraint of trade in part because the restrictive covenant was not

directly linked to the proprietary interests of the covenantee.

Where courts are asked to interpret restrictive covenants, they generally do so with an eye to

limiting the breadth of activities that are prohibited under the covenant. In Broker's Marine &

Sport Ltd. v. Graumann, [1998] A.J. No. 1237 (QL), the Alberta Court of Queen's Bench was

faced with interpreting a covenant in which the defendant had promised not "directly or

indirectly as principal, agent, owner, partner, shareholder, director, officer or otherwise own,

. operate, be engaged in the operation of or have any financial interest in any business... " within a

200 km radius of Camrose, Alberta, for a period of five years, that competed with the purchased

business. The defendant in that case became an employee of a competing business. The

purchaser claimed this violated the restrictive covenant. The main issue to be resolved was

whether being an employee fell within the prohibited "otherwise" role or involvement with a

competing business. The Court noted that the list of positions which preceded the "otherwise"

were all ones in which the defendant would have the authority to affect the competitor's legal

position with respect to third parties, and that an employee does not necessarily have such an

ability. The Court held that the defendant was not prohibited from working as an employee of a

competitor.

Although the Sager case cited above suggested that in the employment context courts will strike

down a restrictive covenant rather than read it down, there is some evidence that covenants with

respect to the sale of a business may be read down. In Fareway Coach Lines Ltd. v. Wells Gray

) Tours (Okanagan) Ltd. (1990),47 B.L.R. 145 (B.C.C.A.), the purchaser bought a tour business

29

from the vendor. The agreement included a non-competition clause which specified that the

vendor would not operate a tour business for 5 years. Within the 5 year period, the vendor began

a competing business and the purchaser claimed a breach of the contract. The vendor argued that

the non-competition clause was void because it was expressed without any geographical

boundaries and restricted all types oftour business, not just bus tours. The B.C. Court of Appeal

held that the ordinary rules of interpretation should be applied such that the restrictive covenant

could be saved despite its overly broad wording if the intention and understanding of the parties

was to apply the covenant in a more limited fashion. Based on the evidence, the Court held that

it had been the intention of the parties to limit only bus tours in the particular county where the

business was based. As a result, the covenant was valid.

With respect to the geographical scale of the restriction, much will depend on the nature of the

business. For example, where the vendor of a bulk foods business included a covenant

prohibiting the vendor from opening a competing business within a 50 mile radius, the covenant

was upheld because the evidence showed that customers would travel more than 20 miles to shop

at the stores (Belair v. Renaud (1992), 41 c.P.R. (3d) 169 (Ont. Gen. Div.). In contrast,

restrictive covenants in the range of 1 to 5 miles have been found reasonable for businesses such

as restaurants and barber shops (Blethering Place Investments Ltd. v. Howard, [1983] 1 W.W.R.

273 (B.C.S.C.), Nero v. Silvestri, (1980), 52 c.P.R. (2d) 160 (Ont. Co. Ct.)). Once again, the

question of what is justifiable is determined by reference to what interest is being protected. In

Huberman v. Hadath (1973), 13 C.P.R. (2d) 253 (B.C. S.C.), for example, the business in issue

operated in the City of Vancouver and drew its clientele from the lower mainland of B.C. The

vendor subsequently opened up a business in Kamloops. The non-competition provision

purported to prevent the vendor from competing anywhere in the province. The Court held that

this provision was unenforceable as it extended beyond the area in which the original business

operated, and thus could not be harmed by the Kamloops business.

The nature of the business will also be a consideration in assessing the reasonableness of the

duration of the restrictive covenant. Although it has been suggested that a non-competition

agreement with a reasonable geographic scope is unlikely to be invalidated on the basis of its

duration (Connors Brothers Ltd. v. Connors, [1941] 1 D.L.R. 81 (P.c.) at 98), reasonableness is

still the ultimate standard.

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)

)

Vendors and purchasers should take care in crafting non-competition agreements to ensure that

they are reasonable in addressing the restrictions on competition. Otherwise, there is a risk that

the agreements will be read down or struck, in which case both parties' intentions could be

frustrated.

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