Injuction Granted Against Seller of Company Who Breached Non-compete with Buyer

The BC Supreme Court recently considered the enforceability of a non-competition clause in a share purchase agreement and whether it had been breached by the seller DaKow Ventures Ltd. v. Daski Contracting Ltd., 2018 BCSC 2016.

New Wave Energy Services Group Ltd. purchased the shares of Daski Contracting Ltd. from David Kowalski for $7 million. The share purchase agreement contained a five-year non-solicitation and non-competition clause. The non-competition clause restricted the seller from competing in the frac water management business as conducted by Daski before and after the closing date, in the oil and gas industry in British Columbia and Alberta. New Wave took the position that Mr. Kowlaski and two companies he controlled breached the non-competition clause. New Wave applied to the court for an injunction to restrain Mr. Kowalski and his companies from further breach of the agreement.

Enforceability

A restrictive covenant like a non-competition clause is unenforceable unless it is reasonable as between the parties and in the public interest. The party seeking to enforce the clause bears the burden of showing that it is reasonable. The Court noted that in employment contracts, the courts have applied a very high standard of scrutiny in determining the scope of restrictive covenants and their reasonableness. However, that is not the case with respect to covenants contained in contracts for the sale of a business.

Once the level of scrutiny has been determined, there are three questions that need to be addressed to determine the enforceability of the clause: whether the claimant has a proprietary interest worthy of protection; whether the interest can be protected by less restrictive measures than a non-competition covenant; and whether the geographic scope and duration of the clause are reasonable.

In this case, the Court did not think there was any dispute that New Wave had a legitimate interest to protect, given it bought the shares of Daski for $7 million. In employment contracts, it may be the case that a non-solicitation clause would suffice. However, when considering the sale of a business, a higher level of protection is reasonable, justifying an agreement that the seller is restricted from doing business with the former customers of the company, even if the customers make the initial approach to the former business owner.

The Court also found the five-year duration of the clause to be reasonable. In the case of a sale of assets between well-informed persons who are represented by competent counsel, the Court found it is likely, although there may be exceptions, that the clause negotiated between the parties is reasonable. The Court also noted that courts regularly find clauses with similar terms valid.

In terms of the geographic scope, the Court noted that it is reasonable to restrict the seller of a business from competing in the same territory in which the company does business. The Court found the geographic scope of Alberta and British Columbia to be reasonable as it left Mr. Kowalski able to do business in Saskatchewan, a province in which fracking is used.

The respondents also argued the phrases “in conjunction with” and “concerned with” in the non-competition clause were ambiguous and therefore unreasonable. However, the Court found that in the context of the sale of a business, where the legitimate concern is preventing the seller working in, investing in, or backing a competitor, the phrases have a more certain meaning, and their wider scope is appropriate. In this context, the Court did not find the phrases to be uncertain or ambiguous.

In the alternative, the Court found that if the phrases were offensive, at trial, the Court would exercise its discretion to “blue-pencil” or strike out the offending phrases out of the clause and keep the non-competition enforceable.

The respondents also argued that the definition of “business” was uncertain because it incorporated the business conducted by Daski after the closing and, at the time of the contract, it could not be known what business Daski might be conducting in the future. While the Court noted there was some force to that argument, ultimately the Court would blue-pencil the offending phrase.

 

Breach

After considering the issue of the enforceability of the non-competition clause, the Court considered whether there was a breach of the clause.

The respondents acknowledged that they were providing water management services to the oil and gas industry. The issue, however, between was whether that work amounted to “frac water management”. In other words, what was in dispute was not the work being done, but the interpretation of the contract.

Fracking involves water being injected at high pressure into rock veins. It was not disputed that water pits are filled in advance of fracking. Water may be sourced and stored in the spring for operations in summer, fall, and winter. However, the respondents’ argued that if the pits are being filled, maintained, or loaded when no fracking work is actually being done, then that is not frac water management work under the share purchase agreement. If fracking work is actually being done, then that same work would be frac water management. The Court found that “frac water management” cannot only take place only when water happens to be delivered at the same time as fracking operations take place. On the evidence, the work being done was found to have been prohibited by the restrictive covenant.

Conclusion

New Wave successfully obtained an injunction to restrain Mr. Kowalski and his companies from further breach of the agreement. New Wave demonstrated it would suffer irreparable harm if the injunction was not granted and that the balance of convenience favoured the granting of an injunction.