Revisiting Reasonableness: How Changing Business Circumstances can Impact the Enforceability of Restrictive Covenants

  • June 12, 2019
  • Stephanie Sugar, McCarthy Tétrault LLP

Restrictive covenants, particularly non-compete clauses, are regular features in franchise agreements. When franchise agreements often span many years, facts and circumstances may change with a franchisor’s reorganization, expansion of the franchise system, assignment of franchises, and any other number of factors that change the landscape within which the franchise agreement must be interpreted.

The recent Superior Court decision in ADT Security Services Canada, Inc. v. Fluent Home Ltd.,[1] is an important reminder that contracts are living documents that may be subject to different interpretation as circumstances change. Particularly in respect of a restrictive covenant, where the reasonableness of the provision as between the parties is a key consideration in determining its enforceability, parties should be aware how changing a clause in a factual context may impact the interpretation of these clauses.

In ADT, the defendant, Fluent, was originally contracted to sell security services contracts for Protectron. At the time, ADT was Protectron’s competitor. While Fluent’s original contract had a non-compete clause prohibiting it from competing with Protectron for customers, there was no such provision prohibiting Fluent from competing with ADT for non-Protectron customers.

ADT subsequently acquired Protectron. As a relatively common occurrence, ADT then had to deal with how to manage Protectron’s legacy contracts, such as that with Fluent. The parties negotiated a termination agreement, whereby Fluent acknowledged its obligations under the original non-compete clause and agreed to return to ADT all files and information relating to Protectron customers.