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How to review a non-compete clause as per Canadian Law

Let me teach you how to draft or review an international contract, keeping in mind the local law aspects in Canada. 

We are going to teach you a couple of clauses. 

The first is a non-compete clause. 

Let us assume that a Canadian founder whose startup is in Toronto wants to know what to do about an early employee who has started working with a competitor. 

You get this assignment from a Canadian law firm where you are working as a remote paralegal. 

You ask for a copy of the contract, and you see the following two clauses: 

During the Term of this Agreement, or for 3 years after its termination, the Employee shall not start any new business which is identical or similar, or otherwise competes with the services provided by the Startup, or work with a competitor in any capacity.

Is it valid? What reasons will you give?

You look up the internet, and you find out that Ontario State has recently passed a bill this year 

This is factored into the Employment Standards Act (see here)

Now, what if the person who has left is a CFO? Will such a non-compete clause be valid? 

Do you see that the clause is very clear? 

In India, the position is derived from case laws on restraint of trade (S. 27 of Contract Act).

The best practice in India for non-compete clauses after expiry or termination of employment agreement is that they must be very narrow. 

Even here, if an employee challenges it, we don’t know whether the court will uphold it. 

However, there is significant moral pressure which makes a huge proportion of the employees comply.   

Canadian law is more black and white 🙂 

Now, imagine that a startup founder has recently received an offer to sell the business. The potential acquirer has inserted the following non-compete clause: 

For 3 years after the business is sold the Founder shall not start any new business which is identical or similar, or otherwise competes with the services provided by the Acquirer, or work with a competitor in any capacity.

Will this clause be valid? 

Look at the exception: 

Now, imagine that you are being asked to draft a non-compete clause which is legally enforceable, with a Public Relations (PR) company that will do PR for this Canadian startup. 

Can you draft a non-compete clause there? Will the prohibition in the Ontario law be attracted? 

No, because it only deals with employment contracts.

Remember, this rule for non-compete clauses applies in an employer-employee context. It may not apply when two businesses are dealing with each other. 

So, if Apple’s Canadian entity has a contract with its PR agency which contains the same clause, will the restriction apply? 

No. Why?

Because it is not an employee but an independent business. 

How would you draft the clause? Draft it in the chat box. 

Let me show you a model clause: 

For the duration of this agreement and for 6 months after its termination or expiry, the PR Agency shall not start or work with any new business which is identical or similar, or otherwise competes with the business of the Client Company. 

You can define what a competing business is as well. 

Here are a couple of international projects on review of non-compete clauses: 

Imagine knowing this kind of work for 10 countries. 

Will you not be formidable? 

80% of all contract drafting work is similar across the world.

In working from India/developing countries, you have a cost advantage.

  • 99% of the businesses in any of these developed countries are small businesses and startups, which need to optimise their legal costs and cannot access legal talent in their own jurisdictions affordably, because costs are very high. 
  • There are 33.2 million small businesses as per the US Small Business Administration Office of Advocacy (see here), 1.2 million in Canada (see here) and 5.5 million in UK (see here). 
  • 5 million small businesses registered in the US alone last year. 
  • In addition to SMEs, the digital and tech part of the global economy is growing really fast all over the world –  AI, blockchain/crypto, Web3, digital media, SAAS, fintech, e-commerce, edtech, healthcare, biotech, online gaming, OTT platforms, agritech, insurance are booming like never before. 
  • These businesses cannot afford to hire full-time employees in their country, because the cost is too high – here is how much an average lawyer earns in the US, UK and Canada: 

Here is how much money lawyers make in the USA in a year (as of 2018) (it is only more now, not less):

Here is what Canadian lawyers earn on average: 

Here are the salaries that UK lawyers earn: 

Even freelancers in these countries cost more than USD 200-500/hr.

In India, if a lawyer earns even USD 1000 per month, it will be considered pretty high. Most lawyers can’t get there even after years of practice.

These fast growing startups and SMEs need cost-effective assistance to compete with large corporations, which are offshoring work by working with or setting up their own LPOs and have much lower costs than them.   

The same logic applies to small law firm owners and solo practitioners in developed countries. 

There are more than 439,000 law firms in the US, and 160,000 law firms with 0-20 lawyers.

They need anywhere between 2 -10 international remote paralegals per year. 

The UK has almost 2.2 lakh solicitors, of which 160,676 are practicing. 6000 are registered foreign solicitors. More information available here

There are 136,000 lawyers in Canada, of which more than 57,000 lawyers are in Ontario. Over 41,000 are practising in Ontario.

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