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In Quebec, there are several mechanisms for providing protection to a business in a contractual manner. These mechanisms can be provided for by restrictive clauses, such as non-competition clauses, non-solicitation clauses and non-disclosure agreement. Each clause has its own advantages and disadvantages as well as a specific utility. A prudent entrepreneur will generally use all three types of clauses in the same contract since they are often complementary, for example, in a business sale agreement, an employment contract or a shareholders’ agreement. For instance, in a sale of business, the purchaser, in order to protect its investment, will have an interest in restricting the seller with such clauses, just as an employer does with a key employee at the beginning of the contractual relationship or during employment.
First of all, it is important to distinguish between the non-solicitation clause and the non-competition clause, which are often confused with each other. Both clauses are limited as to their duration, but the non-competition clause is aimed at a clientele defined by the territory, whereas the non-solicitation clause is aimed at the company’s employees and clientele. In addition, the non-competition clause is intended to prevent an individual from entering into the same business as his or her former employer or business, which is not the case with the non-solicitation clause. In fact, the non-solicitation clause is intended to protect the company’s clientele, employees and suppliers and the human capital built up over the years. This restriction on solicitation is necessary because these elements are the basis of the added value or goodwill of the business.
As mentioned above, the non-solicitation clause does not have to contain a territorial limit, but it must specify the clientele or human capital to be protected as well as the duration of the prohibition on solicitation, which may, in some cases, be generally longer than that of the non-competition clause. Once the protected clientele has been determined, it is necessary to define what constitutes unlawful or unfair solicitation. Court decisions interpreting this type of clause have used the criterion of “active” solicitation. Active solicitation involves positive and targeted actions by the person on whom the restriction is imposed, whereas “passive” solicitation consists of a general solicitation of customers through the usual means of communication such as television, radio and newspapers.
It is important to mention that the rules for analyzing the validity of such a clause may differ depending on the context in which it was agreed upon. Indeed, it has been recognized that the clause will have to be interpreted more restrictively when it is concluded in an employment contract and more broadly and liberally in the case of a sale of assets or shares. In addition, when the non-solicitation clause is found in a shareholder agreement, the minority shareholder benefits from similar protection as the employee.
To ensure compliance with the non-solicitation clause, it is often accompanied by a penalty clause as a deterrent. According to certain criteria, the person who invokes the penalty clause will be entitled to the amount of the penalty stipulated in the contract, without having to prove the damage suffered.
Thus, the drafting of a non-solicitation clause can be tedious and requires a certain amount of attention to detail in order to be considered reasonable, but above all in order to ensure that it respects the criteria established by law and jurisprudence while protecting the interests of the company. If the non-solicitation clause does not meet the validity criteria, it may only be a dissuasive measure that cannot be sanctioned by a court.
Our team can assess the situation with you and draft a non-solicitation clause, particularly in the context of a shareholders’ agreement.