In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, the Ontario Court of Appeal upheld the trial judge's decision that a restrictive covenant in an agreement of purchase and sale was reasonable. The decision affirms the principle that parties to commercial agreements are generally free to contract as they see fit, and that court intervention will only be justified in relatively rare cases.
Background: In 2017, the respondent, Dr. Sims, through his corporation, agreed to purchase the dentistry practice of the appellant, Dr. Cooke, for $1.1 million (the "Share Purchase Agreement"). Dr. Cooke had operated the dentistry practice in Hamilton since 1987 and relocated it to its current location in 2005 ("the Premises").
Under the Share Purchase Agreement, Dr. Cooke agreed to work in the practice as an associate for two years, subject to termination by either party on 90 days' notice.
Additionally, the parties agreed to a restrictive covenant that prohibited Dr. Cooke from directly or indirectly engaging in the practice of dentistry, or permitting his name to be used in such a practice, for five years following his association with the practice within a radius of 15 kilometres from the Premises (the "Non-Compete"). Dr. Cooke also provided Dr. Sims with a valuation of the practice, which among other things, valued the goodwill of the practice ("the Valuation"). The Valuation defined the "trading area" as "90% of patients from [the] Greater Hamilton [A]rea, Dundas, [and] Ancaster."
On December 19, 2019, Dr. Sims gave Dr. Cooke 90 days' notice of termination. In November 2020, Dr. Cooke began practicing at a dental practice 3.3 kilometres away from the premises (the "Stonehill Practice). As a result, Dr. Sims brought an action against Dr. Cooke and the Stonehill Practice on the basis that Dr. Cooke was in breach of the Non-Compete. In 2021, the Superior Court issued an interlocutory injunction preventing Dr. Cooke from working at the Stonehill practice.
The Trial Judge's Decision: One of the issues at trial concerned the enforceability of the Non-Compete. The trial judge ultimately held that the Non-Compete was reasonable as between the parties and therefore enforceable according to its terms.
According to the trial judge, Dr. Cooke had the burden of proving that the Non-Compete was unreasonable and that he had failed to meet this burden. The trial judge also found that the temporal scope of the agreement was reasonable, pointing to Dr. Sims' evidence that the five-year period reflected the reality that it takes several visits (potentially over a period of years) for a patient to build a trusting relationship with their dentist. Finally, the trial judge found that the geographic scope of the Non-Compete was reasonable, finding that it was necessary to include Stoney Creek and Ancaster in the agreement. Dr. Cooke appealed to the Ontario Court of Appeal.
The Ontario Court of Appeal's Decision: The Court of Appeal dismissed the appeal, upholding the Non-Compete as enforceable by its terms. The Court of Appeal found that the trial judge did not err in citing the Supreme Court's decision in Payette v. Guay Inc., 2013 SCC 45 ("Payette"), as a relevant and binding authority. Payette recognized the "cardinal rule" that parties negotiating the sale of assets in a commercial context have greater equality of bargaining power than parties negotiating a contract of employment, and that the common law rules for restrictive covenants relating to employment do not apply with the same rigour or intensity where the obligations are assumed in the context of a commercial transaction. This rule recognizes the reality that the parties who execute an agreement for the purchase and sale of a business are best placed to determine what is reasonably required to protect the purchaser's interest in the goodwill. Accordingly, the trial judge did not err in treating the Non-Compete as presumptively reasonable.
Van Rensburg J.A., writing for the Court, also noted that the purpose of a restrictive covenant is to protect the goodwill of a business that is being sold from being devalued by the vendor's actions, and that the duration of the Non-Compete was therefore reasonable in this case.
In affirming the trial judge's decision, Van Rensburg J.A. observed that the trial judge accepted Dr. Sims' evidence regarding the lengthy amount of time it often takes patients to build a trusting relationship with their dentist.
Finally, the Court also rejected Dr. Cooke's argument that the geographic area referred to in the Valuation (which was apparently smaller than that of the Non-Compete) proved that the Non-Compete was broader than necessary to protect the legitimate interests of Dr. Sims. The Court observed that it was not determinative that the radius of the Non-Compete did not map perfectly onto the "trading area" as described in the Valuation—the trial judge was only required to determine whether the geographic scope was reasonable.
Key takeaways:
- In upholding the restrictive covenant in this case, the Court affirmed that parties to commercial agreements are generally free to contract as they see fit. It is only in relatively rare cases that the courts are justified in overruling the parties' own judgment of what is reasonable in their respective interests.
- In the commercial context where parties are presumed to be of relatively equal bargaining power, the burden of proof lies with the party challenging a restrictive covenant to show that it is unreasonable.
- The purpose of a restrictive covenant is to protect the goodwill of a business that is sold from being devalued by the vendor's own actions.
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