The Enforcement of Restrictive Covenants Against Non-Contracting Parties

  • 05 avril 2022
  • Idan Erez, Hoffer Adler LLP

Restrictive covenants are a common feature of franchise agreements. They are intended to restrict the ability of existing and departing franchisees to exploit the knowledge and expertise they acquired from the franchisor, for the purpose of competing with the franchisor. Restrictive covenants can take different forms, but most commonly appear in franchise agreements as non-competition and non-solicitation clauses. These clauses are intended, respectively, to prohibit franchisee from operating a business that competes with the franchisor’s system, or from soliciting to a competing business the franchisor’s (or sometimes other franchisees’) employees or customers.

Well-drafted restrictive covenants restrict not only the competitive freedom of the franchisee, but also of the franchisee’s principals. Ideally, the principals are personally made parties to the franchise agreement that contains the restrictive covenant. This practice ensures that there exists a sound contractual basis, founded on the principle of privity, to bind the franchisee’s principals to the contract’s restrictive covenants.

Canadian courts, primarily but not only in Ontario, have demonstrated a repeated willingness to impose the terms of a restrictive covenant not only on the parties to the franchise agreement in which the covenant is contained, but also on persons who are not parties to that contract. This article will (i) discuss the jurisprudence in which courts both inside and outside of Ontario have considered whether to bind non-contracting parties to the terms of restrictive covenants contained in franchise agreements; and (ii) identify the underlying principles that appear to animate the courts’ approaches.