Supreme Court of Canada
Doerner v. Bliss & Laughlin Industries Inc., [1980] 2 S.C.R. 865
Date: 1980-12-18
Frank Doerner, Jr., Carl Doerner and Joseph Doerner (Defendants) Appellants;
and
Bliss & Laughlin Industries Incorporated and Doerner Products Co. Limited (Plaintiffs) Respondents;
and
Northfield Metal Products Ltd. (Defendant).
1980: May 26, 27; 1980: December 18.
Present: Laskin C.J. and Estey, McIntyre, Chouinard and Lamer JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Contracts—Sale of business—Non-competition covenants—Covenants to run for five years from the later of the date of execution of the agreement or the date of leaving employment with the company—Clause in share purchase agreement that all representations, warranties and agreements to survive for six years from the date of closing—Appellants left company nine years after sale and became engaged in enterprise in direct competition with the company—Whether or not the non-competitive covenants were enforceable.
This appeal concerned a restrictive covenant given by vendors of shares in a manufacturing company to the purchasers, who then continued the operation of the company’s business. The purchasers, alleging a breach of the covenant, brought action against the vendors. At trial, the covenant was held to be unenforceable, but an appeal was allowed and the vendors appealed to this Court.
In 1965, as part of the purchase agreement, the vendors, who were key men in the company’s operation, signed covenants prohibiting their carrying on or associating with a like business for a period of five years from the later of the date of the execution of the agreement or the date of their leaving the employ of the company. The vendors resigned their positions in the spring 1974, and shortly after incorporated a business that operated in direct competition with the Doerner Company and significantly reduced its sales and profits.
Appellants denied the allegation of breach of covenant and based their argument in part on an article in
[Page 866]
the share purchase agreement which provided that all representations, warranties and agreements made by the sellers would survive for a period of six years from the date of closing. It was contended that the vendors were freed from the burden of the covenant restricting employment if they remained in the company’s employ for six years or more. In addition, appellants maintained that they were entitled to discontinue their employment with the company, freed from all obligation created by the covenant, because of wrongful and monopolistic practices of the company contrary to the public interest and public policy.
Held: The appeal should be dismissed.
The covenant was clearly and unambiguously expressed and was not affected by the terms of other articles. It fixed without doubt the time limits of its own operation—from the date of the closing of the transaction if the Doerners thereafter did not become employed by the company, and from the date of termination of employment if they did. The covenant did not bind the Doerners for a period extending too far into the future.
The covenant was approached as one given by the vendor of a business to a purchaser; it formed part of a transaction involving the purchase of a going concern and the paying for more than physical assets. Considering the interests of the parties, the covenant was clearly reasonable. The purchaser, having paid for the goodwill, was entitled to the five-year protection. The Doerners’ key role in both their business and the industry made their continuation in the business very desirable and their competition very dangerous. The restrictions imposed in the case at bar fell within the range the authorities considered acceptable.
The covenant was neither unreasonable with respect to the public interest nor contrary to public policy and therefore void. Both the trial judge and the Court of Appeal concluded the allegations of wrongdoing on the part of the purchasers had not been made out. While there was conflicting evidence on the issues of fact involved in the appellants’ allegations of wrongdoing, the judgment of the trial judge was not to be replaced in order to reach conclusions different from those which he adopted. It was not shown that the trial judge had made any error. The plaintiffs conduct, nevertheless, was relevant to the determination of his right to relief. Where the conduct of the purchaser in the operation of the acquired business had a direct relationship to the restrictive covenant obtained on the purchase, and where his behaviour in the conduct of that business raised grave issues of public policy, the Court could refuse to
[Page 867]
accord the relief to which he otherwise would have been entitled.
Of the allegations of wrongdoing, only the assertion that the respondents had engaged in monopolistic and anti-competitive pricing could have had any relevance for it could have had a bearing on the question of reasonableness with respect to the public interest. The question of the reasonableness of a covenant of this nature, moreover, had to be considered with reference to the time the covenant was given. Even if these practices had been established, the sale of the business and the giving of the restrictive covenant did not create a monopoly for one existed before the sale.
Nordenfelt v. The Maxim Nordenfelt Guns and Ammunition Company, Ltd., [1894] A.C. 535; Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916; H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., [1973] 2 O.R. 57, referred to.
APPEAL from a judgment of the Court of Appeal for Ontario[1], allowing an appeal from a judgment of O’Leary J. Appeal dismissed.
D.K. Laidlaw, Q.C., and J. Colangelo, for the defendants, appellants.
J. John Brunner, Peter Israel and R. Hobson, Q.C., for the plaintiffs, respondents.
The judgment of the Court was delivered by
MCINTYRE J.—This appeal concerns a restrictive covenant given by vendors of the shares in a manufacturing company to the purchasers, who then continued the operation of the company’s business. The purchasers, alleging a breach of the covenant, brought action against the vendors. At trial the covenant was held to be unenforceable, but an appeal was allowed and the vendors now appeal to this Court.
By an agreement, dated August 20, 1965, the respondents Bliss & Laughlin Industries Incorporated, a very large United States conglomerate operating principally in the steel industry, agreed to purchase from the appellants all of the issued and outstanding capital stock of Frank Doerner & Sons Limited. The appellant vendors are brothers
[Page 868]
who, with their father, had commenced the business of Frank Doerner & Sons Limited in 1945. The Doerner Company was engaged in designing, manufacturing, and marketing chair bases and controls. The bases are the structures upon which the chairs are mounted and the controls are the devices that control swivel, height, tilt and inclination of the chairs. The appellants are all skilled tool and die makers who were actively engaged in designing and developing chair controls and bases for the company, as well as acting as officers and directors. Frank Doerner, Jr. was president, Carl Doerner was vice-president, and Joseph Doerner was secretary and sales manager. Carl Doerner was responsible for production and plant operation.
The agreement for sale provided for a sale to the respondent of all the issued shares of Frank Doerner & Sons Limited for $900,000. It also provided in s. 5(d) that the Doerners would sign and deliver to the respondent covenants in a form prescribed in the agreement. The covenant is reproduced hereunder:
As further consideration for your purchase of my 2681/3 shares of common stock of Frank Doerner & Sons Limited pursuant to the Purchase Agreement among you and Carl Doerner, Joseph Doerner and myself, dated August, 1965, I hereby covenant and agree that for a period of five years from the closing date of such purchase or from the termination of my employment with you, whichever period ends later, 1 will not, without your prior written consent, anywhere within any county of any province of Canada or of any state of the United States in which the business of Frank Doerner & Sons Limited is being carried on, own, manage, operate, control, be employed by, participate in, or be connected with the ownership, management, operation or control of any business (i) similar to the type of business being conducted by Frank Doerner & Sons Limited or (ii) operating under any name similar to that of Frank Doerner & Sons Limited; nor will I give any such business any information concerning the business, products, prices, customers or affairs of Frank Doerner & Sons Limited.
[Page 869]
Each of the Doerners executed and delivered a covenant in this form to the respondents and, although the individual covenants were signed after the agreement for sale, it was understood by all the parties, and these proceedings have been based upon the proposition that the restrictive covenants contained in the three forms executed and delivered to the respondents form a part of the purchase agreement and part of the consideration for the purchase price.
After the execution and delivery of documents, the respondents assumed control of the company’s business. Shortly after the purchase, the name of the company was altered to Doerner Products Co. Limited. The Doerners remained in the employ of the company. Frank Doerner, Jr. became vice-president and general manager, and Joseph Doerner became sales manager and assistant to Frank Doerner. The company carried on its operation much as it had prior to the sale of shares, at least in so far as its relations and dealings with its customers were concerned. The Doerners, in addition to being officers of the company, remained active in the business operations much as they had before the sale. On April 30, 1974 Joseph Doerner resigned and a few days later Carl Doerner also resigned. Upon learning of his brothers’ resignations, Frank Doerner, Jr. resigned on May 24, 1974. At about this time one Edward Dorsch, who had been plant superintendent, also resigned.
In the summer of 1974, the appellants and Edward Dorsch incorporated a company known as Northfield Products Limited. This company went into the business of manufacturing and selling chair controls and bases in competition with the Doerner Products Co. Limited, which will hereafter be referred to as the Doerner Company. By November of 1974 it was in full production. During the first year of this competition the Doerner Company’s sales declined and its profits were substantially reduced.
This action commenced on October 4, 1974. It alleged a breach of the restrictive covenant and sought an injunction against its continuation by
[Page 870]
the operation of the Northfield business, as well as damages for breach of the covenant. The Doerners defended denying any breach of the covenant. The denial was based upon their construction of the covenant which relied on the provision of article 7(a) of the share purchase agreement, which provided:
All representations, warranties and agreements made by Sellers shall survive for a period of six years from the date of Closing. All representations, warranties and agreements made by Sellers hereunder shall be joint and several.
They contended that the five-year period from the closing date of the agreement, or from the termination of employment with the company, could bind them only if they left their employment with the company before the six-year period referred to in article 7(a) had expired. In any event, they argued that they were freed from the burden of the covenant if they remained in the company’s employment for the full six-year period. A further point was advanced to the effect that they were entitled to discontinue their employment with the company, freed from any obligation created by the covenant, because of certain unlawful and monopolistic practices adopted by the purchasers in the operation of the Doerner Company’s business. They asserted that the respondents had directed: unlawful accounting practices concerned with the valuation of inventory for the purpose of tax evasion; the dumping of Doerner products in the United States at very low prices to the detriment of the Canadian company, and to the benefit of the American companies controlled by the respondent; the misuse of a Canadian government grant; and monopolistic and anti-competitive pricing. As a result of the alleged misconduct, it was claimed that they were justified in leaving the company’s employment and that the restrictive covenant should not be enforced against them.
At trial the action was dismissed. The trial judge found that the restrictive covenant was reasonable with reference to the interests of the parties concerned and reasonable in the interests of the public. He considered that the covenant provided no more than adequate protection to the purchaser and it did not create a monopoly because a monopoly already existed, the Doerner
[Page 871]
Company having had before the sale some ninety-eight per cent of the Canadian market in the products it sold and, accordingly, the covenant was not injurious to the public. He also found that allegations by the Doerners of unfair, unlawful, and monopolistic business practices of the employer were not supported in the evidence. He dismissed the action, however, on the basis that the proper interpretation of the sales agreement required that the restrictive covenant be read with s. 7(a) of the agreement which, he said, provided for a six‑year warranty, and he held that the restrictive covenant could be effective only if the covenantors left the employment some time within the six-year period.
In the Court of Appeal Morden J.A., speaking for a unanimous court, disagreed with the trial judge upon the construction of the covenant and held it to be binding upon the covenantors. He held that the covenant was reasonable, both from the point of view of the parties and from that of the public interest, and he also considered that the evidence did not support the allegations of wrongdoing made against the respondents. The appeal was accordingly allowed and the respondents were held to be entitled to damages for breach of the covenant in an amount to be assessed by the local master at Kitchener. The claim for an injunction had been abandoned at the appeal.
In this Court counsel for the appellants based his argument on two propositions. He contended that the trial judge had been correct in his approach to the construction of the covenant and that its force was spent after the passage of six years from the closing of the sale transaction. He argued as well, and this was clearly his principal submission, that the covenant was not reasonable in the public interest and that the second branch of the test propounded by Lord Macnaghten in Nordenfelt v. The Maxim Nordenfelt Guns and Ammunition Company, Limited[2], at p. 565, had not been met.
The point raised concerning the construction of the covenant may be readily disposed of. I am in full agreement with the Court of Appeal on this
[Page 872]
point. In my view, the covenant is clearly expressed in language which creates no ambiguity and is not affected by the terms of article 7(a). It fixes without doubt the time limits of its own operation. The evidence indicated that the purchasers, in acquiring the company’s shares, were seeking more than ‘bricks and mortar’. They wanted the Doerners with the business and while the agreement, including the covenant, did not provide for their employment, it did provide that if they were not in the company’s employment they would not be in competition with it. The purchasers wanted a five-year restriction on the future employment of the Doerners after they terminated their employment with the Doerner Company. This period was to run from the date of the closing of the transaction if the Doerners did not thereafter become employed by the company, and from the date of termination of employment if they did. This was expressed in unequivocal language and it cannot be said to have bound the Doerners for a period extending too far into the future—see Elsley v. J.G. Collins Insurance Agencies Ltd.[3], for a covenant which governed the employment over a longer period. I can give no effect to this argument. The covenant, if not otherwise contrary to the law, bound the Doerners according to its clearly expressed terms at the time they terminated their employment with the Doerner Company.
The general principles governing cases of this nature are well settled. While, generally speaking, covenants in restraint of trade have been considered contrary to public policy and unenforceable, certain exceptions have been recognized. Covenants which restrain competition by an employee with his former employer, and those restraining a vendor of a business from competing with his purchaser, form two exceptions to the general rule where the restraint imposed is reasonable considering the interest of the respective parties and also the interest of the public. It is recognized that the public has an interest in the continued provision of goods and services resulting from the employment of skills acquired by employees in the course of their employment and,
[Page 873]
as well, an interest in the continuation of the trade or business. Covenants which seek to interfere with such activity are to that extent injurious to the public interest. On the other hand, it is said that it is also in the public interest that a person who has built up a valuable business should be able to sell it and be competent in law to bind himself to refrain from competition with the business he has sold, so that a purchaser will be encouraged to acquire and thus maintain the business in active operation for the general public benefit, as well as his own profit.
A distinction also has been recognized between a covenant given by the vendor of a business to protect his purchaser, and one given by an employee terminating his employment to protect his employer from competition. This latter type of covenant, it has been said, may well arise from dealings between unequals and thus be oppressive to an employee. It may be acceptable, however, where the purpose of the covenant is not to prohibit the employee from exploiting the skills he has acquired in his past employment, but to protect the former employer against competition where the scope and nature of the employee’s work and his contact with clients and customers of his former employer is such that he could readily do harm to his employer.
This subject was examined in this Court recently in Elsley v. J.G. Collins Insurance Agencies Ltd., supra, where Dickson J. stated the principles, briefly summarized above, and collected the principal authorities. He accepted the test described by Lord Macnaghten in the Nordenfelt case, supra, and adopted in many other cases, to the effect that to be enforceable a restrictive covenant of this nature must be reasonable both in the interests of the parties to the covenant and in the interests of the public. He made it clear that the question of reasonableness must be determined in each case upon a consideration of the facts presented. With these considerations in mind I will seek to apply these principles to the peculiar facts of the case at bar.
To begin with, this case has been argued upon the basis that the covenant must be approached as
[Page 874]
a covenant given by a vendor of a business to a purchaser. Furthermore, it must be recognized that in the acquisition of this business the purchasers were acquiring a going concern and paying for more than physical assets. The price paid includes a substantial allowance for goodwill and the purchasers hoped to acquire, as has been pointed out, the services of the Doerners in the future conduct of the business. In the events which occurred they were successful in this last step but, again it must be noted, they were careful to guard against competition, having paid for the goodwill associated with the Doerners’ intimate connection with the business by providing for a covenant restraining the Doerners from active competition for five years after the termination of their employment.
Both courts below considered the covenant was reasonable as between the parties and, indeed, the appellant did not strenuously argue that point before us. His attack was made on the aspect of reasonableness with regard to the public interest. In my view, the covenant was clearly reasonable considering the interests of the parties. The purchaser, having paid for the goodwill, was entitled to the five-year protection. The business had been conducted by the Doerners personally. They knew all the customers and enjoyed a virtual monopoly in the field in Canada. In the eyes of the public they were the business. It was this fact which made their continuation in the business so desirable, and their competition with the business so dangerous. The falloff in the business done by the company after the Doerners commenced a competitive operation in 1974 bears testimony to this proposition. While, as Dickson J. has said in Elsley, each case must be decided on the basis of its own peculiar facts, a review of the various cases on this subject (see such cases as Elsley, supra; Herbert Morris, Limited v. SaxeIby[4]; Connors Bros., Ltd. and Others v. Connors[5]; and generally Cheshire & Fifoot’s Law of Contract (9th ed. 1976), at pp. 381 et seq.) would indicate that the restrictions imposed in the case at bar fall within the range of
[Page 875]
others which have been found acceptable.
The major attack by the appellants was based on the second branch of the test. It was said that this covenant was unreasonable with regard to the public interest, contrary to public policy, and therefore void. It was said that after taking control of the business the purchasers followed policies which were corrupt, monopolistic, and generally contrary to public policy, to such a degree that the Doerners were freed from the obligation to observe the covenant. The specific allegations made against the purchasers are set out in the statement of defence, para. 8:
8. Further, the Doerners left their employment with Doerner by reason of the unfair, unlawful and monopolistic business practices of Doerner all as instructed, authorized and condoned by Bliss. Such practices consist of the following:
(a) Improper accounting for inventory and business purposes of Doerner;
(b) Dumping of Doerner products in the United States;
(c) Misuse of Government grants;
(d) Monopolistic and anti-competitive pricing and marketing policies;
(e) Avoidance and evasion of taxes, particularly by reason of the facts alleged in paragraph 8(a) and (b) hereof.
Much evidence was led at trial concerning these allegations and it was reviewed and considered in the Court of Appeal. In this Court we were referred extensively to parts of the evidence and we were urged to reconsider the findings expressed in the courts below. In both the courts below, after considering the arguments raised regarding the evidence, it was concluded that the allegations against the purchasers were not established. The position of an appellate court with respect to findings of fact made at trial has been frequently stated in this Court, see for example: Stein v. The Ship “Kathy K”[6] and authorities there considered. The trial judge must remain the judge of matters of fact where it can be shown that there was evidence before him on which he could base his findings, and where it is not shown that he has
[Page 876]
proceeded on any false principle or made any palpable error. In this case, on his view of the evidence, the trial judge concluded that allegations of wrongdoing had not been made out. The Court of Appeal on its consideration of the evidence reached the same conclusion. In this Court, we were invited to review the evidence and reverse the two courts below on matters of fact. I have considered the evidence and, while there was conflicting evidence on the issues of fact involved in the appellants’ allegations of wrongdoing, I am not prepared to substitute my judgment for that of the trial judge in order to reach different conclusions from those which he adopted. The trial judge who heard the evidence reached his conclusions. It has not been shown, in my view, that he made any error and, like the Court of Appeal, I would decline to interfere. I would proceed then upon the basis that the allegations of wrongdoing against the respondents have not been established.
I do not wish it to be understood, however, that in an action upon a restrictive covenant the conduct of the plaintiff is irrelevant to the determination of his right to relief. Where the conduct of the purchaser in the operation of the acquired business has a direct relationship to the restrictive convenant obtained on the purchase, and where his behaviour in the conduct of that business raises grave issues of public policy, the Court may refuse to accord the relief to which he would otherwise be entitled. Where, for example, the covenantor has been required in the course of his employment by the purchaser to participate in a serious breach of the law relating to the conduct of the acquired business, the courts may well refuse the relief claimed because of such conduct and, in effect, release the covenantor from the obligations of the covenant. Here, as I have stated, there is no basis for interference with the concurrent findings of fact below, and this consideration does not come into play.
While it follows from the foregoing that the appeal must fail, I would like to add a comment
[Page 877]
regarding the allegations made against the respondents and their relevance, in any event, to the issues in this case. The allegations are set out above in the extract from the statement of defence. Of the five allegations described, only the one in para. 8(d) could have any relevance here, i.e. the assertion that the respondents engaged in monopolistic and anti‑competitive pricing. As to the other allegations, while the conduct complained of would have been made possible by the sale of the shares, it would not have been influenced by the restrictive covenant. Such conduct would be neither assisted nor impeded by the covenant. If it occurred, it did so as a result of the conscious decisions of the purchasers entirely unrelated to the restrictive covenant and not affected by it.
Regarding the allegations of monopolistic practice, it is apparent that it could have a bearing on the second branch of the Maxim Nordenfelt test, i.e. the question of reasonableness with respect to the public interest. However, in my view, even assuming such practices had been established, I am unable to conclude that the sale of the business and the giving of the restrictive covenant created any monopoly. The monopoly existed before the sale. It was conceded that the Doerners had about ninety-eight per cent of the Canadian market in the goods that they manufactured and sold prior to the sale transaction. The monopoly had been created by the appellants themselves and it rested largely upon their skill and industry in the pursuit of their business activities. They sold the product of their skill and industry and were paid for it. I cannot agree that they may now say that their creature is an evil thing contrary to public policy, whose continued existence would be harmful to the public interest. I agree with Morden J.A., in the Court of Appeal, and I adopt his words, when he said:
To the extent that the Doerner company in fact sold to 98% of the Canadian chair control market in 1965 I suppose it could be said that there was a monopoly but it is not suggested that there was anything improper or “pernicious” relating to this. In this regard, the observations of Viscount Maugham in Connors Bros., Ltd.,
[Page 878]
[[1940] 4 All E.R. 179], at p. 195, is of some relevance to the facts of the present case:
‘In the present case, it seems to their Lordships that there are no grounds for holding that a restriction restraining the respondent from carrying on a sardine business in Canada is likely to produce a real monopoly, since every other person in Canada can set up such a business, and the evidence is to the effect that some persons have done so. The practical difficulty in successfully competing with the appellants may well be due to their skill and enterprise and long experience.’
Therefore, any argument to the effect that the covenant was to create a monopoly fails to recognize that its enforcement cannot prevent others from competing in the market and, also, the legitimacy of reasonable protection against competition from the defendants. In a sense the defendants seem to be asserting that they could properly enjoy, through the Doerner company, a large portion of the chair control market but that it is not legitimate, as far as the public interest is concerned, for any purchaser from them to enjoy such benefit. I cannot accept such a submission.
I would add as well, since a submission on the point was raised in the appeal, that subject to what has been said above concerning proved misconduct, the question of reasonableness of a convenant of this nature must be considered with reference to the time the covenant was given. The English position in this regard is illustrated by comments in Cheshire & Fifoot’s Law of Contract, (9th ed. 1976), at p. 378; Gledhow Autoparts, Ltd. v. Delaney[7], per Diplock L.J. at p. 295 and Commercial Plastics Ltd. v. Vincent[8], where Pearson L.J., speaking for the Court, dealt with the matter at p. 644. A comment from the Privy Council is to be found in Attorney General of Australia v. Adelaide Steamship Co., Ltd.[9], per Lord Parker of Waddington, at p. 797. Canadian authority appears in H.F. Clarke Ltd. v. Thermidaire Corp. Ltd.[10], in the Ontario Court of Appeal where Brooke J.A., speaking for the Court, said at p. 66:
[Page 879]
This covenant is a covenant in restraint of trade and, when considering whether or nor it meets the test of reasonableness, regard must be had to the time when the covenant was made.
This principle was reasserted in the Ontario Court of Appeal in Stephens v. Gulf Oil Canada Ltd. et al[11].
For all of the above reasons, I would dismiss the appeal with costs to the respondents, and affirm the judgment of the Court of Appeal.
Appeal dismissed.
Solicitors for the defendants, appellants: McCarthy & McCarthy, Toronto.
Solicitors for the plaintiffs, respondents, Bliss & Laughlin Industries and Doerner Products Co. Limited: P. John Brunner, Toronto and Hobson, Wood, Jenkins, Duncan & Wellhauser, Waterloo.