Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements. I should know – I’m one of them and you can contact me directly.

I thought I would blog about certain nuances when it comes to limited partnerships formed by extra-provincial persons.  These are often referred to as extra-provincial limited partnerships, but I don’t think this is always the case (as discussed below).  But before we get into this discussion, lets start off with the basics, shall we?

What is an Extra-Provincial Limited Partnership?
An Extra-Provincial Limited Partnership is a few things.  First, it is a general partnership that is already is in existence.  A general partnership is the relationship that exists between two or more parties doing business in common with a view to making profit.  So, just to recap, if two individuals living in Mexico or the U.S. wanted to form an Ontario limited partnership, they would first have to have a general partnership between themselves.  Remember: an Ontario limited partnership is simply a designation granted by the Ontario statute.  Now, after being organized as a general partnership, it becomes a limited partnership – just not in Ontario.  A general partnership in Ontario becomes a limited partnership by filing and being issued a Form 3 Declaration from the Ontario government.  So the idea is that Ontario is willing to recognize limited partnerships from other jurisdictions.  That recognition is done when the Limited Partnership files a Declaration Form 3.

Now it’s important to note that I’ve generally come across two situations that involve limited partnerships formed by foreign entities: (1) a limited partnership organized outside of Ontario wishes to do business in Ontario and (2) extra-provincial persons wish to create and use an Ontario limited partnership as a legal structure but do not wish to do business in Ontario.  For the purposes of this blog, I’ll be discussing the second scenario.

What’s so special about the second scenario?  Well, it’s interesting because it is not the case that a limited partnership is formed outside of Ontario and which simply needs to register as an extra-provincial limited partnership.  The reality is that the limited partnership is being formed in ONTARIO under the Limited Partnerships Act, but it is done so by persons who are not resident or doing business in Ontario.  This can get a big confusing: it’s not an extra-provincial limited partnership, it’s just a plain old regular Ontario limited partnership.  The only difference is who is forming it.  So, just to recap, I’m going to be talking about how foreign persons (i.e. an extra-provincial corporation, such as a U.S. or Mexican company) can form an Ontario limited partnership.

Extra-Provincial License for the Corporation
OK, so here’s the situation.  A corporation is set up to be the general partner.  Lets assume, for simplicity’s sake, that this corporation is not an Ontario or even Canadian corporation (if it is, then there would need to be compliance with Ontario or Canadian corporate, tax, and securities laws with respect to that corporation).  For their part, limited partners are ready to partner up with the general partner.  How does it all fit together such that they form an “Ontario Limited Partnership”?

Well, the Ontario government will only allow an extra-provincial corporation to be a general partner if it has obtained a license under the Extra-Provincial Corporations Act.   Even if it’s not doing business in Ontario, the government here wants to know who this extra-provincial corporation is.   So they’ll want to see (among other things) information about the corporate name, head office, jurisdiction which it is created and subject to, its proposed business in Ontario, etc. They will also need to see how is the Agent for Service in Ontario.  The idea is that someone over 18 years old who is resident in Ontario or a corporation with a head office in Ontario must act as the Agent for Service of the extra-provincial corporation for the purpose of receiving service of process, notices, or other proceedings (so that service on the Agent is deemed to be service on the extra provincial corporation).  In certain situations, the Ontario government will also want an ORIGINAL Certificate of Status issued under the seal of the incorporating jurisdiction, signed by the proper person, and showing:

1. The name of the corporation;
2. The date of incorporation;
3. The jurisdiction to which the corporation is subject; and
4. That the corporation is valid and existing.

Some jurisdictions (e.g. Netherlands) do not provide these kinds of certificates, but the Ontario government still allow corporations from these jurisdictions to be registered.  Finally, the Ontario government will want to see an original NUANS name search report to make sure that there is no conflicting or confusingly similar name of the corporation which is currently in existence.  It generally takes about 3 weeks for the paperwork to be processed once the Ontario government has received it.   There are also government fees (i.e. $330) which must be paid to obtain this extra-provincial corporate license.

Registering the Limited Partnership
Now that you’ve got your extra-provincial corporate license in hand for the general partner, it’s time to register the Limited Partnership.  Now, as I said above, in the situation I’m describing, the limited partnership has not been formed elsewhere; there is no other organizing statute; so there is no extra-provincial limited partnership.  All that’s happening is the formation of a plain and simply limited partnership in Ontario by a general partner who is not a resident in Ontario (it’s a corporation formed outside of Ontario but with a license to conduct business here).  And, to simplify matters, I’m also assuming that the limited partnership is not doing business in Ontario.  So you fill out the Declaration Form 3 and pay the $220 government filing fee.  Once registered, you will need to file a renewal every 5 years.  Note: the Ontario government will not send notices out, so you better just keep your eye on the date when the limited partnership must be renewed!

Now, I’ve personally gotten into some debates with government staff as to how to go about filling out this declaration for the situation I’ve described.  I’ve spoken with managers in the government office because they seem to believe that the form should be filled out in a certain way.  I would strongly urge you to contact me to deal directly with government staff to prevent delays with respect to registering the LP.  They may not understand the intricacies of the Limited Partnerships Act and may simply demand documentation which is not needed.  It’s quite easy to make mistakes, given that the laws concerning limited partnerships are not always clear.

Carrying on the business of the partnership
Now that the limited partnership has been established, business can be conducted.  As I’ve previously blogged about, in Ontario, the limited partnership is not a legal entity capable of holding or dealing with limited partnership property.  Rather, it is the general partnership, which has been entrusted with managing the affairs of the limited partnership, which does so on its behalf.

Taxes!
So finally, we come to the issue of taxes.  In Canada, a Ontario limited partnership is not a separate legal entity (unlike a corporation) or a”person”.  I have previously blogged about this here.  As such, they are not considered to be taxpayers (i.e. who are, indeed, “persons”) under the Canada Income Tax Act.  Rather, partnership income, losses, assets, and liabilities are all attributable to the partners as per the limited partnership agreement. As per the Canada Income Tax Act, partnerships do not file separate tax returns. They file annual “information returns” setting out their income and details of the partners who are entitled to that income. It is the partners who are required to pay income tax. The limited partnership is simply a flow-through entity.

So to recap: the net income of the partners (for income tax purposes) of a limited partnership is determined by figuring out the net income of the limited partnership.  To figure out the net income of the limited partnership, the Act says that you look at it as if it were a separate legal person: s. 96(1)(a). So you include income and deduct allowable expenses and other credits. Then, the limited partnership’s income will be attributed to the partners (usually as per the limited partnership agreement). Each partner must report their income or losses from the partnership and pay taxes accordingly: s. 96(1)(f).

Now, if the partners (e.g. extra provincial general partner and the limited partners) of the limited partnership are resident of some country other than Canada, the issue comes up as to whether any tax is owing in Canada.  Generally, under the Income Tax Act, RESIDENTS of Canada at any time in the year are required to pay tax on their worldwide income: section 2(1).  Now, if an individual is a non-resident, then they may still have to pay Canadian income tax if they received certain kinds of income from Canadian sources – such as employment income, business income, or income derived from the sale of taxable Canadian property.  Now this stuff is somewhat complicated and long-winded, so I think I’ll dedicate another blog to the topic of taxation of partners of a limited partnership if they are resident or non-resident in Canada.

written by admin \\ tags: Civil Litigation, legal person, legal situations, limited partners, limited partnership agreement, limited partnership agreements, limited partnerships, ontario business, ontario limited, partner status, partnerships act, professional assistance, separate legal entity, tax purposes, taxation of limited partnerships ontario

Ontario Limited Partnership Agreement Lawyer: Using Limited Partnerships to Invest

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario limited partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your limited partnership agreement needs!

So in this blog,I’ll be talking about how a Limited Partnership can be used as an investment vehicle.  So we start off with the idea that a Limited Partnership is a regular partnership (called a general partnership) that has filed a declaration with the Ontario government (and complied with other rules) in order to become a LIMITED PARTNERSHIP.  What’s the big deal about having a limited partnership, you ask?  Well, the biggest benefit is that the limited partners (i.e. the passive investors) will generally have limited liability – akin to shareholders of a corporation!  That’s great news.  I say “generally have limited liability” because there are ways in which they can lose it – specifically if they take part in the control of the business of the limited partnership (which I previously blogged about here).  But assuming they’re passive, it’s all good.

So the limited partners sign onto the limited partnership agreement and contribute money, property, services, etc. in exchange for an interest in the limited partnership.  Now the general partner is the one running the show.  They have all the powers, duties, and responsibilities to act on behalf of the limited partnership.  They have unlimited liability and are typically a corporation for this purpose.

Now here are a few things to keep in mind when thinking about using a limited partnership as an investment vehicle.

For starters, let’s talk a little bit about TAX.  Yes, that’s right: TAX!  Unlike a corporation, there is no double taxation when you’re using a limited partnership.  The limited partnership is a flow-through entity (because it’s a partnership first and foremost).  This means that the income or loss of the partners is computed at the partnership level as if the partnership were a separate person.  Income and losses are then allocated to the partners.  Now there are a few nuances you should know about that apply specifically to limited partnerships when it comes to tax and you can read about them here in a previous blog I wrote.  So the bottom line is that a limited partnership is not required to pay tax under the Income Tax Act; it merely computes its profit or loss for each fiscal year as if it were a legal person and then allocates the income or loss to the partners.

OK, now what about securities laws implications?  As I’ve previously blogged about here and here, a Unit from a Limited Partnership held by a Limited Partner is likely considered to be a “security”; therefore, Ontario’s securities laws will kick in and govern the Limited Partnership and the Limited Partners’ dealings.  Failure to comply could lead to a prosecution under the Ontario Securities Act!  Specifically, “trading” in a “security” requires the issuer (the Limited Partnership) to be registered and, if the trade amounts to a “distribution”, then the Limited Partnership will be required to issue a prospectus and follow all sorts of other securities laws.  It’s all very complicated and expensive!  To avoid these results, the Limited Partnership will need to find an exemption to the registration and prospectus requirements.  I’ve previously spoken about some, and will mention 2 of the here: (1) accredited investor exemption and (2) private investment club exemption.

Accredited investor exemption: Basically, if you issue Limited Partnership Units to certain wealthy / sophisticated / resourceful persons, you can avoid having to register or issue a prospectus.  Accredited investors include (but are not limited to):

• an individual (i.e. human being) who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
• an individual (i.e. human being) whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
• an individual who, either alone or with a spouse, has net assets of at least $5,000,000; or
• a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements.

Private investment club exemption:  In this situation, the Limited Partnership would have less than 50 partners, would not seek to borrow money from the public, would not distribute its Units to the public, would not pay or give any money for investment management or administration advice in respect of trades in securities (except normal brokerage fees), and would require its Unit holders to make contributions in proportion to the value of their securities for financing purposes.

Overall, assuming you comply with securities, tax, and partnership laws concerning establishing and maintaining your Limited Partnership, you may have found a great structure to use to raise money and invest.  Again, if you need help in this regard, give me a shout!

written by admin \\ tags: general partner, general partners, legal advice, limited liability, limited partners, limited partnership agreements, limited partnerships, mississauga, ontario business, ontario limited partnership, ottawa, professional assistance, toronto, unlimited liability

Canada | Canadian not for profit incorporation.

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to incorporating a federal not for profit corporation or an Ontario not for profit corporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. You can also contact me directly if you need a business lawyer.

For the purposes of this blog, I’ll be discussing federal not for profit corporations.  These corporations are created and governed by the Canada Corporations Act.  That Act does not call them not for profit corporations; rather they are called “Corporations Without Share Capital”.  This means that they do not have shareholders, but rather members.  An important difference between for profit and not for profit corporations is that the latter cannot distribute dividends (from profits) to members.  Rather, that money can only be put towards the objects or purposes for which the not for profit corporation was created.

For Profit Corporations (Generally)
Now, I’ve previously blogged extensively about corporations generally, but some things are worth repeating here.  First, corporations are separate legal persons.  They have their own assets.  They have their own rights and obligations.  They can sue and be sued.  They are separate from their owners (called shareholders) and managers (directors, officers, employees).  Now, corporations are great business vehicles because they afford limited liability protection to the shareholders: the personal assets of the shareholders cannot generally be touched if the corporation has to pay for something.  The corporation is created by legislation through the filing of Articles of Incorporation.  You should check out my previous blog posts about corporations, shares, articles, roles and responsibilities, etc.

Canadian Not-For-Profit Corporation
Part II of the Act deals with Corporations Without Share Capital.  Section 154(1) of the Act says that the Minister of Industry MAY issue letters patent to any persons who apply for the creation of a corporation without share capital.  There are a few important caveats here.  First, there must always be at least 3 incorporators and directors of the not for profit corporation.  Second, the letters patent is simply a government document – much like the Articles of Incorporation of a for-profit business.  Third, the corporation must carry on a purpose without monetary gain to its members.  So it must have a purpose that is national, patriotic, religious, philanthropic, charitable, scientific, artistic, social, professional, or sporting in nature.

Application of Letters Patent
To apply for letters patent, you need to submit:

1. Cover Letter
2. Application
3. By-Laws
4. Statutory Declaration
5. Filing fee of $200

Each will be discussed in turn.

Cover Letter
The cover letter should be addressed to:

Corporations Canada
Industry Canada
9th Floor, Jean Edmonds Towers South
365 Laurier Avenue West
Ottawa, Ontario, K1A 0C8

The letter should indicate who you are, what your contact information is and what documents are enclosed.  You will also need to enclose a cheque in the amount of $200 payable to the “Receiver General of Canada”.  If you are requesting them to do a NUANS name search report, then you’ll also need to enclose or add another $15 to cover the cost of that search.

Application
The application must indicate:

• The proposed name of the not for profit corporation (so you’ll need to provide a recent NUANS name search report for the proposed name which is less than 90 days old – or you can simply pay $15 and get the government to do it for you)
• Who the incorporators are (there must be at least 3 of them)
• The objects of the corporation

There are also additional clauses which can be included in the letters patent dealing with the director’s ability to borrow money, issue debt, and pass by laws as the directors see fit.

The application must be signed in duplicate and the originals are to sent to the government.

The By-Laws
Two copies of the by-laws of the proposed corporation must be provided with the application for incorporation. If you need help drafting these by-laws, give me a shout.

Statutory Declaration
One of the incorporators must swear (before a commissioner for taking oaths) that the contents of the application are true.

Processing Time
Processing times vary, depending on whether you’ve provided the government will all required documentation and there are no problems with your proposed name.  It can be as quick as 3 days for expedited processing, or 5 days for standard processing.

Extra-Provincial Licensing
If you have a federal not for profit corporation, you’ll need to obtain provincial licenses for those provinces which you operate in.  If you operate in Ontario, then there is no fee.  But this varies from one province to the next (e.g. Alberta charges $175 for an extra provincial license).

In a future blog, I’ll get into maintenance fees and taxes with respect to federal not for profit corporations (i.e. corporations without share capital).

For more information about incorporating a not for profit corporation in Canada, check out the government’s website here.

written by admin \\ tags: articles of incorporation, business lawyer, business vehicles, canada corporations act, educational purposes, legal advice, legal persons, liability protection, limited liability, ontario lawyers, professional assistance, profit corporation, profit corporations, share capital, shareholders

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to Non-Compete or Non-Solicitation clauses in Ontario, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. If you’re looking for Non-Compete and Non-Solicitation clauses within an employment or independent contractor agreement, then check out our legal forms + video guides. You can contact me directly if you need a business lawyer.

This is part 5 of a series of blogs I’m writing about non-compete and non-solicitation agreements.  In my first blog, I discussed what they were and when you need them.  I also talked about what tests and factors a court will consider in determining whether to enforce a non-compete clause.  In my second blog, I tackled the question of when should an employer or human resources manager require an employee to sign a non-compete or non-solicitation agreement.  In my third blog, I discussed how they could be challenged.  In my fourth blog, I talked about things that employers and human resources managers should be on the lookout for if they want to try to mitigate lawsuits from happening or succeeding in court.  In this blog, I’ll be talking about an important issue that comes up often: what happens if there is no WRITTEN non-compete or non-solicitation agreement or clause within an employment agreement?

OK, so as a human resources person or a small business owner, you’ve gone ahead and hired someone.  Now, for whatever reason, you didn’t purchase an Employment Agreement from Dynamic Lawyers.  That agreement contains restrictive covenants.  But you didn’t think about it.   Now the employee has left and is basically competing with you in the same business.  Nothing was ever written or signed to the effect that they couldn’t.  So where does that leave you?

It’s a very complex area of law, but there was an important case that talked about this very situation.

Gertz v. Meda Ltd.
In Gertz v. Meda Ltd. (2002), 16 C.C.E.L. (3d) 79, the Ontario Superior Court of Justice was faced with the following situation…An employee engineer worked for a placement agency for 8 years.  The employee was dismissed and then went to work briefly for another placement agency to help put together a proposal he had previously given to the original placement agency.  This is where things got contentious: the original placement agency sued for damages resulting from breach of fiduciary duty and confidentiality.

So the issues before the Court were twofold: (1) was the employee a fiduciary of the employer which required him NOT to compete against the employer and (2) did the employee breach confidentiality provisions.  Keep in mind that there was no written agreement dealing with these matters, so the Court would have to rely on common law (i.e. judge-made law).

With respect to whether the employee breached his fiduciary duty to the employer by leaving and then immediately competing, the Court concluded that this particular employee owed NO SUCH DUTY.  Therefore, the employee was free to do so.  The Court reasoned that, while certain employees (such as top management, directors, officers, etc.) may have a fiduciary duty not to do so (in accordance with their duty of loyalty, good faith, and avoiding conflicts of interest, etc.), this particular employee was simply a glorified salesman:

38 I conclude on the evidence that Mr. Gertz was, essentially, a salesman who managed the Chrysler account and others, with a view to selling labour at a markup. He had little or no authority to make decisions that affected the company. He had no power to direct and guide the affairs of the company. As issues arose that required the exercise of authority, his function was to make recommendations only, while the power to make decisions remained with Mel Lawn and, to a lesser extent, Mr. Rosenthal. To use the label that emerges from the caselaw, I find that Mr. Gertz was a “mere employee”, to whom a fiduciary duty does not attach.

OK, so the court found that MERE employees are entitled to get up and compete with their previous employer.  Those in top management, however, may not be so lucky – even if no contract is signed.  Their duties of good faith, loyalty, and avoiding conflicts of interest may restrict their ability to compete.

So that takes care of the first issue.  So what about using confidential information?  When the employee left, he didn’t take anything with him other than his accumulated knowledge retained in his mind. The Court found that there was no breach of confidence.  So how did it get there?  Well, first the Court said that a breach of confidence requires 3 elements:

1. Confidential information
2. Which was communicated in confidence and
3. Which was mis-ued by the party who received it.

Among other things, the Court found that the information was not confidential (it was shared, common to the industry) and it was not unfair for the employee to use that information anyways since he had been wrongfully terminated.

So what’s the moral of the story?  Well, just because employees haven’t signed restrictive convenant agreements (e.g. non compete, confidentiality, non-solicit) doesn’t mean that they can be PREVENTED from competing or soliciting.  At common law, they CAN be PREVENTED from doing so if they owed a fiduciary duty or a duty of confidence to the employer.  There are common law tests that need to be met before a judge will conclude that the employee did anything wrong.  So why wait until a judge rules on an unclear matter when you can just have a contractual obligation entered into at the beginning of the relationship and perhaps at the end?  If they are clear, reasonable, and fair and entered into properly, then you (as an employer) stand a much better chance of enforcing them if you need to.

FYI, in case you’re looking for an Ontario, lawyer-prepared, customizable, downloadable and AFFORDABLE Non-compete Agreement, then look no further:

NON-COMPETE | NON-COMPETITION AGREEMENT

You can use this form to prevent a party from competing with you in a business during and after the term of an agreement.  If you’re an employer hiring an employee, you can purchase an Employment Agreement (indefinite term), which comes with non-compete clauses in it.  If you’re an employer and you are terminating an employee, you can find non-solicitation clauses in this Employee Termination Agreement.  If you’re a client and wish to engage an independent contractor, you can purchase an Independent Contractor Agreement, which also comes with non-compete language in it.  If you’re just doing a business deal with a party (e.g. sharing information, joint venture, partnership or shareholders, services, etc.) and want to prevent them from competing, then you need one of these agreements!

The Video Guide (below) is just a sneak peak of the video guide that comes with the Non-Compete Agreement Legal Form + Video Guide  All of Dynamic Lawyers’ legal forms are lawyer-prepared, simple to read, easy to customize, and only a fraction of the price a lawyer would charge. Also, each legal form comes with a FREE VIDEO GUIDE (watch a useful example of how this legal form can be customized), a FREE DL GUIDE (read helpful information about this legal form), and another FREE DL GUIDE that sheds valuable insight into how legal forms can be challenged. What are you waiting for?   Best of all, if you DO need a lawyer and need some legal advice, simply make a post and get FREE quotes from Ontario lawyers focusing on the area of law you require!

Also, in case you were looking for a NON-Solicitation Agreement, you’ve come to the right place:

Non Solicit | Non-Solicitation Agreement Ontario

This legal form can be used to restrict one party’s ability to solicit the customers and employees of another party. If you’re looking for Non-Compete Agreements, Confidentiality and Non-Disclosure Agreements, you can purchase them as well on Dynamic Lawyers.

If you’re an employer hiring an employee, you can purchase an Employment Agreement (indefinite term), which comes with non-solicitation clauses in it.  If you’re an employer and you are terminating an employee, you can find non-solicitation clauses in this Employee Termination Agreement.   If you’re a client and wish to engage an independent contractor, you can purchase an Independent Contractor Agreement, which also comes with non-solicitation language in it.  If you’re just doing a business deal with a party (e.g. sharing information, joint venture, partnership or shareholders, services, etc.) and want to prevent them from soliciting customers or employees, then you need one of these!

This information and this sample video guide is NOT legal advice and is provided for informational purposes only. If you need an Ontario lawyer, go to Dynamic Lawyers and make a post.

written by admin \\ tags: business lawyer, employment agreement, human resources person, independent contractor agreement, lawsuits, legal advice, legal forms, mississauga, non compete clause, non solicitation agreement, ontario lawyers, professional assistance, restrictive covenants, small business owner, solicitation, video guides

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

As a follow up to a previous blog I wrote about limited partners losing their limited liability status, in this blog, I’ll be discussing this matter in more detail.  So we start off with the idea that, in Ontario, a general partnership does not confer limited liability status on the partners.  That means they will be personally liable for the debts and obligations of the partnership.  Now, if that general partnership register as a limited partnership and complies with the Limited Partnerships Act, then the limited partners’ liability will be limited while the general partners’ liability will be unlimited.  There is an exception to this rule, however: if a limited partners “takes part in the control of the business” of the limited partnership, then they shall be fixed with the same UNLIMITED LIABILITY as a general partner: s. 13(1).  Keep in mind that a limited partner, simply by exercising their other rights and powers granted to them under the Act (as discussed in my previous blog post), will not assume the liability of a general partner.  Such liability only attaches to them exercising control beyond the scope of what they are allowed to under the Act.

So, given this, the question comes up: what if the general partner of the limited partnership is a corporation and the director or officer of the corporation is the limited partner?   So, in this example, the limited partner is an individual (e.g. John Doe) and is also the director or officer (e.g. President) of the general partner.  If the individual acts on behalf of the general partner, will he or she have personal UNLIMITED LIABILITY for the limited partnership?

This is a tricky situation.  The limited partner is essentially trying to go around the rules of the Limited Partnerships Act by being a controlling the general partner.  Now since the general partner is a corporation, and because corporations are assumed to be separate legal entities, the limited partner would think that he or she is personally NOT the general partner and therefore not subject to unlimited personal liability…that’s the idea, at least…  Well, lets see what the courts have said, shall we?

In Laplante v. R., [1995] 1 C.T.C. 2647, the Federal Tax Court of Canada had to deal with an interesting situation that arose in the context of tax law.  A taxpayer claimed certain losses arising from a partnership.  The partnership had incurred certain losses and the taxpayer wanted to take advantage of those losses.  The Minister of National Revenue, however, claimed that the partnership was actually a limited partnership (not general partnership).  As such, the Minister argued that certain tax-rules (known as ‘at risk’ rules – which I’ve previously blogged about) limited the amount of losses which that taxpayer could deduct.  So the issue for court to decide was whether the taxpayer was a general partner or limited partner during the relevant time period (i.e. when the partnership incurred the losses)?  Ultimately, the Court agreed with the tax payer: he was not a limited partner for 2 reasons.  First, a general partnership existed but had not been registered with the government (recall: to have a limited partnership, you must file a declaration with the provincial government).  Since a limited partnership is not recognized at common law, and because nothing had been filed during the relevant years, there was no limited partnership.

The second reason the taxpayer was not a limited partner was because he had taken part in the control of the business (which would make a limited partner have unlimited liability like a general partner).  Specifically, the taxpayer had been a director and officer of the general partner,had authority to effect banking transactions, and had rendered personal services as a sole proprietor in respect of the partnership.  The tax court cited Zivot as authority for this proposition and concluded:

23          The evidence in this case indicated the appellant was the principal if not the sole person in control of the operation. This is also indicated in the partial agreed statement of facts, supra, even to the extent that the appellant was operating as a sole proprietor. Surely this is indicative of control.

So based on these two reasons, the Court allowed the taxpayer’s appeal and sent the matter back to the Minister of National Revenue for reconsideration as to the taxpayer’s tax liability (in light of the fact that he was NOT a limited partner).

So what’s the moral of this story?  Well, this is another example – in addition to Zivot – that shows that a limited partner who is a director or officer of a general partner may have unlimited liability because they take part in controlling the business of the limited partnership.

So what about contracting out of this position?  In other words, could a limited partner use contracts to have control over the business of the limited partnership but still maintain limited liability?  A 1992 British Columbia Court of Appeal case  offered limited support for the idea that a party could do so: Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C. C.A.).  But the better view is that it is unsettled law.  That’s what the Saskatchewan Court of Queen’s Bench said in Stillwater Forest Inc. v. Clearwater Forest Products Ltd. Partnership 2000 SKQB 110:

Loss of Limited Liability by SGGF

7          The plaintiffs allege that SGGF took part in the control of the business of the Limited Partnership and that pursuant to s. 64 of the Act it is therefore liable for the debts and obligations of the Limited Partnership. Section 64 states:

8          On the nonsuit, SGGF argues that even if the plaintiffs are successful in establishing a factual basis for a claim under s. 64 of the Act (which, of course, it does not accept), any potential liability of SGGF is completely answered by the contractual provisions of the agreements. According to SGGF, the parties contracted out of any liability that might arise under s. 64 of the Act. It argues that the specific contractual terms of each of the agreements unequivocally preclude it from having any liability for the general partner’s or the Limited Partnership’s obligations thereunder and it therefore submits that the claim against SGGF in relation to such liability should be dismissed.

9          There are no Saskatchewan cases interpreting s. 64 of the Act and only two Canadian cases that deal with similar statutory provisions in other provinces: Haughton Graphic (Graphics) Ltd. v. Zivot (1986), 33 B.L.R. 125 (Ont. H.C.) and Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C. C.A.). As to its argument based on contract, SGGF relies on the chamber judge’s decision in Nordile which supports its position that a party may contract out of liability that would otherwise arise under limited partnership legislation. It is noted however, that although the Court of Appeal upheld the chamber judge’s conclusion in Nordile, the appeal court found it unnecessary to deal with the contract issue. There is therefore very limited authority to the effect that a limited partner may contract out of the statutory consequences of participating in the control of a limited partnership’s business.

10          I am satisfied that the plaintiffs have led sufficient evidence which, if uncontradicted, could reasonably support a finding that SGGF participated in the control of the Limited Partnership. As the contractual argument that SGGF relies on is far from being well settled law; and, given the paucity of case law interpreting s. 64 of the Act generally or more particularly, its effect, if any, on contractual provisions acknowledging limited liability, I am not prepared at this early stage of the proceedings to preclude the plaintiffs from pursuing this aspect of their claim. The nonsuit will therefore not be granted with respect to the plaintiffs’ claim that pursuant to s. 64 of the Act, SGGF is liable as a general partner of Clearwater.

So because the idea of whether you can contract out of the clear language of the Ontario Limited Partnerships Act has not been resolved, it is best to comply with the act and not try to get around it through contracts.  It’s unsettled law and you could find yourself in hot water!

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Contractor Agreement Template – $97

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to becoming an independent contractor, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Ontario business lawyers in this regard.  You can contact me directly at michael@carabashlaw.com.

So you need an contractor agreement, but don’t have hundreds or thousands of dollars to spend hiring a lawyer to draft it from scratch?  Well, you’ve got two options: (1) you can purchase a do-it-yourself online kit for only $97 or (2) you can do the first option but have a lawyer review it after you’re done (just make a FREE and anonymous post).

So let’s discuss the two options, shall we?

Contractor Agreement Template: Purchase a Legal Form + Video Guide for $97

First thing’s first: why $97?  Well, considering that we’re providing you with a legal form that would normally cost hundreds or more (indeed, I’ve personally charged clients over $1,500 for an independent contractor agreement) plus all the free additional information you’re getting (a video tutorial and 2 written guides), it’s well worth it.

The stuff that’s on the internet selling for $10 or $20 or even $40 is crap compared to this.  How can I say that?  Well, for starters, the other contractor agreement templates may not be prepared by an Ontario lawyer. Keep in mind that laws change from one jurisdiction to the next. A B.C. lawyer has no business drafting or advising on an Ontario independent contractor agreement. Next, the other stuff on the internet does not come with any guidance. I’ve personally put together video tutorials (typically about 10 minutes each) showing you an example of how to fill out the legal form. I’ve also put together a primer (DL Guide #1)that discusses the various issues you should be familiar with.  I’ve charged clients thousands of dollars to research and educate them on these types of issues.  YOU GET IT FOR FREE!  Finally, if you’re worried about whether your legal form is valid and enforceable, I’ve put together another FREE primer (DL Guide #2) entitled “Is My Legal Form Valid and Enforceable?”  It takes you through the various issues you should be familiar with when completing and entering into your legal form so as to minimize future challenges.  The reality is that any agreement – whether a LAWYER HAS PREPARED IT OR NOT – can be challenged.  There’s nothing stopping anyone from alleging that the agreement is bad, unfair, incomplete, etc.  It will always be up to a judge to make the final call.  But going to court is both costly and time-consuming.  So it’s simply best to try to mitigate those challenges from happening to begin with.

The second option will give you additional peace of mind if you need it: simply purchase a contractor agreement for $97 and make a post to have a lawyer quote you on how much it would cost to review.

Now one final thing: when you’re looking to purchase a contractor agreement, there will be two kinds: (1) with a Statement of Work and (2) without a Statement of Work.  So what’s a statement of work and which contractor agreement template is best for you?  The “No Statement of Work” means that the services to be performed by the Independent Contractor are dealt with WITHIN the actual agreement and not in a Schedule (attached and incorporated into the agreement as a “Statement of Work”).   If there is a Statement of Work, then it will allow you to enter things like: pay, time, location of work, etc. (basically the details of the services to be performed).

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to forming a Delaware LLC, you should seek professional assistance.  If you would like me to coordinate with U.S. counsel to form a Delaware LLC for you, you can contact me directly.

So why am I, an Ontario lawyer, talking about Delaware LLCs in this blog?  Well, for the simple reason that Canadians often use Delaware and other state LLCs as part of structuring their business.  LLCs are interesting business structures with definite advantages that should be explored.  So that’s why I’m devoting this blog to talking about them generally.  Now lets start off with the basics, shall we?

LLC?
LLC stands for “Limited Liability Company”.  A Delaware LLC is a Limited Liability Company that is formed and governed in the good state of Delaware under the Limited Liability Company Act.  That Act was enacted in 1992.

Why is an LLC so special?
An LLC is a hybrid entity: part partnership, part corporation.  It takes the best and worse of both worlds.  As a partnership, it can be disregarded for tax purposes.  This means it’s a flow through entity.  So the members (not shareholders) who own the units of the LLC receive the profits and losses and are taxed accordingly.  This differs from a corporation, where the corporation is a separate legal entity (it gets taxed) and then the shareholders receive dividends (they get taxed again!).  So, as a partnership-like structure, it has tax advantages.

But it also conveys limited liability status on its members and managers: the Act provides that, unless an operating agreement of the LLC says otherwise, the members and managers of the LLC have limited liability to 3rd parties for the debts and obligations of the LLC:

§ 18-303. Liability to 3rd parties.

(a) Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company.

(b) Notwithstanding the provisions of subsection (a) of this section, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of the limited liability company.

Operating Agreement
Unless the LLC has an operating agreement that says otherwise, the LLC is governed by the Act.  The Act has various default rules.  This is akin to an Ontario partnership.  It will cover things such as:

• Formation and Purpose
• Term
• Capital Contributions
• Allocations and Distributions
• Company Interests (transfer, redemptions, etc.)
• Members (e.g. admission, removal, resignation)
• Managers
• Administrative Matters (e.g. accounting, tax, etc.)
• Termination and Dissolution
• General Matters

Ease of Creation
Delaware LLCs are easily formed.  They are not incorporated (because they are not corporations), but “formed”.  The Certificate of Formation must be filed, a registered office and agent in Delaware is required, and an Operating Agreement must be entered into (either oral or written).  Interestingly, the government provides a lot of flexibility with what people are required to do to maintain Delaware LLCs: there is no obligation to maintain books and records in Delaware, nor is the LLC required to do business in Delaware!

Costs
Filing a Delaware LLC can cost between USD$200-$600, depending on who does it and what you get (e.g. By-Laws, Unit Certificates, Seal, Minute Book, Operating Agreement, etc.). Part of that cost involves paying a $99 fee to have a registered agent who can accept service of documents (e.g. lawsuits) on behalf of the LLC.  You must also pay a $250 State franchise tax annually.  Operating agreements may cost anywhere from a few hundred to a few thousand dollars, depending on how complicated they are (think: more parties means longer to draft, review, and negotiate = increased costs!).  Finally, for those parties who want to have a manager of the LLC other than themselves, there are service providers who will do that.

So that’s it for now about Delaware LLCs…remember: if you need an Ontario lawyer to help you coordinate with U.S. counsel to form a Delaware LLC as part of your business structure, you can contact me directly.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

I’ve already discussed in a previous blog how a limited partnership can be dissolved.  Here, I’ll be talking about what happens next.

So once the limited partnership is terminated, section 24 of the Limited Partnerships Act kicks in and says that the first persons to get paid are the creditors of the limited partnership.  Next, unless the partnership agreement or another agreement says otherwise, the following persons are paid in this order:

1. Limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions.
2. Limited partners in respect of their contributions.
3. General partners other than for capital and profits.
4. General partners in respect of profits.
5. General partners in respect of capital.

Now in the kinds of limited partnership agreements which I deal with and draft, a limited partnership can be terminated in one of two general ways: (1) by the general partner giving notice or (2) by a special 2/3 vote of the limited partners.  Yes, there are other ways in which the limited partnership can terminate, but I want to focus on these two ways for now.  So if the general partner is the party dissolving the limited partnership, then you need to make sure that all the notice requirements are met and that the general partner has sufficient authority (i.e. the person representing the general partner if it is a corporation) to do so.   If there’s a meeting called for the special resolution to be passed, then you need to make sure that the requirements for the meeting (e.g. notice, quorum, minutes) are addressed.

Once the limited partnership is dissolved, the general partner will wind up the affairs of the limited partnership.  This will involve liquidating assets, closing down bank accounts, preparing financial statements, and then paying out the proceeds that are realized from liquidating the assets (e.g. creditors first, etc.).  The limited partnership will also need to file a DECLARATION OF DISSOLUTION with the registrar under the Business Names Act. If you are looking for a lawyer to help you dissolve a limited partnership, make a post on Dynamic Lawyers or give me a shout.

A final thing to keep in mind is the possible tax consequences which the partners will realize upon dissolution.  First, there’s the profits that will be distributed (assuming there are profits).  Generally, these profits will be taxed as business income.  Then there are taxable capital gains.  If one of the partners initially contributed $1 for his, her or its units and then received a $100 return of capital upon dissolution of the limited partnership, then there will a capital gain of $99 – half of which is taxable at the partner’s full tax rate.  Be sure to consult with a tax lawyer about the tax effect of dissolving a limited partnership.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to Non-Compete or Non-Solicitation clauses, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. If you’re looking for Non-Compete and Non-Solicitation clauses within an employment or independent contractor agreement, then check out our legal forms + video guides.  You can contact me directly if you need a business lawyer.

So this is blog post number two about non-compete and non-solicitation clauses.  In my last blog, I discussed what they were and when you need them.  I also talked about what tests and factors a court will consider in determining whether to enforce a non-compete clause.  In this blog, I’m going to tackle an interesting question: when should an employer or human resources manager require an employee to sign a non-compete or non-solicitation agreement?

Well, there’s basically three options here: (1) right at the beginning, (2) during the course of employment or (3) right at the end.  I’ll discuss the pros and cons of each in turn.

Prior to Employment
This is a good time to bring up a non-compete and non-solicitation agreement so that both parties know what they are getting into.  Also, the consideration (i.e. pay, benefits, and other things of value which the employer will provide in exchange for the employee to agree to the non-compete and non-solicit) will be reflected in the written agreement.  What’s not a good idea is for the employer to have an oral agreement or offer of employment and than have the employee start working on that basis.  The problem is that when the employer then tries to introduce a written employment agreement with non-compete and non-solicitation clauses without offering any new “consideration” (e.g. pay, benefits, etc.), then the employee may claim that he or she was constructively dismissed and then claim damages.  So, as an employer or human resources manager, you definitely want to ensure that the employee does not start working until he or she has been provided with the written agreement, has had time to read and understand and seek legal advice concerning it, and has signed it voluntarily (not under duress or undue influence, etc.).   AVOID ORAL AGREEMENTS OF EMPLOYMENT IF YOU KNOW WHAT’S GOOD FOR YOU!  A problem with having an employee agree to a non-compete and non-solicitation clause right from the get go has to deal with “reasonableness”: whether a restrictive covenant is valid and enforceable will depend, in part, on whether it was reasonable at the time it was entered into (not at the time it was broken).  So if an employee agrees to a restrictive covenant 50 years ago, the courts may look at this negatively.

During the Course of Employment
As discussed above, if the employer tries to unilaterally change fundamental aspects of the employment relationship without giving the employee additional consideration (e.g. pay, benefits, etc.), then the employee can argue that they were constructively dismissed and seek damages for reasonable notice (at common law) and under minimum standards legislation (e.g. Ontario Employment Standards Act, 2000).  So how can an employer avoid this from happening?  Well, it all comes down to asking the employee to agree to the restrictive covenants in return for X (i.e. something of value).  This could be a pay increase, one-time payment, etc.  The employee is being asked to give something up – namely, their right to compete.  So the employer must give something in exchange.

After termination of the Employee
So when the employee is terminated or resigns, it’s a good idea to: (1) get an employment settlement and release agreement (so that the employee does not go after the employee for something to do with the employment or termination thereof) and (2) get the employee to agree to a non-compete or non-solicitation clause, if it can be done.  These are two key things an employer will want; to get them, the employer will need to provide – you guessed it – “consideration” (i.e. something of value to the employee in exchange for giving up its rights).  Now, the good news is that, if an employer can get these documents signed and delivered, then it will look good on the employer if the matter is ever contested in court.  Why?  Because it was agreed to by two parties who were leaving each other.  Unlike a restrictive covenant which is agreed to at the beginning of the relationship (which may have been long time ago), signing at the end of the relationship will mean it’s more recent to when the alleged breach of contract would occur.  The payment may be part of an overall termination / severance package. It’s just a good practice to have these things entered into at the end to put some clarity on the issue so you’re not leaving it up to courts to decide whether they should be enforceable.

By the way, if you’re an Employer and looking for an Employment Agreement (indefinite term), then you’ve come to the right place:

Employment Agreement (Client) – Indefinite Term

This Ontario Agreement can be used by an Employer who wants to hire an Employee. The “indefinite term” part means that the Agreement starts on a date provided for in the Agreement and then comes to an end only when the Employee resigns or is terminated by the Employer (by giving notice, payment in lieu of notice, or for Just Cause). Here’s the sample Video Guide that comes with this Employment Agreement – Indefinite Term:

FYI, in case you’re looking for an Ontario, lawyer-prepared, customizable, downloadable and AFFORDABLE Non-compete Agreement, then look no further:

NON-COMPETE | NON-COMPETITION AGREEMENT

You can use this form to prevent a party from competing with you in a business during and after the term of an agreement. If you’re an employer hiring an employee, you can purchase an Employment Agreement (indefinite term), which comes with non-compete clauses in it. If you’re an employer and you are terminating an employee, you can find non-solicitation clauses in this Employee Termination Agreement. If you’re a client and wish to engage an independent contractor, you can purchase an Independent Contractor Agreement, which also comes with non-compete language in it. If you’re just doing a business deal with a party (e.g. sharing information, joint venture, partnership or shareholders, services, etc.) and want to prevent them from competing, then you need one of these agreements!

The Video Guide (below) is just a sneak peak of the video guide that comes with the Non-Compete Agreement Legal Form + Video Guide All of Dynamic Lawyers’ legal forms are lawyer-prepared, simple to read, easy to customize, and only a fraction of the price a lawyer would charge. Also, each legal form comes with a FREE VIDEO GUIDE (watch a useful example of how this legal form can be customized), a FREE DL GUIDE (read helpful information about this legal form), and another FREE DL GUIDE that sheds valuable insight into how legal forms can be challenged. What are you waiting for? Best of all, if you DO need a lawyer and need some legal advice, simply make a post and get FREE quotes from Ontario lawyers focusing on the area of law you require!

Also, in case you were looking for a NON-Solicitation Agreement, you’ve come to the right place:

Non Solicit | Non-Solicitation Agreement Ontario

This legal form can be used to restrict one party’s ability to solicit the customers and employees of another party. If you’re looking for Non-Compete Agreements, Confidentiality and Non-Disclosure Agreements, you can purchase them as well on Dynamic Lawyers.

If you’re an employer hiring an employee, you can purchase an Employment Agreement (indefinite term), which comes with non-solicitation clauses in it. If you’re an employer and you are terminating an employee, you can find non-solicitation clauses in this Employee Termination Agreement. If you’re a client and wish to engage an independent contractor, you can purchase an Independent Contractor Agreement, which also comes with non-solicitation language in it. If you’re just doing a business deal with a party (e.g. sharing information, joint venture, partnership or shareholders, services, etc.) and want to prevent them from soliciting customers or employees, then you need one of these!

This information and this sample video guide is NOT legal advice and is provided for informational purposes only. If you need an Ontario lawyer, go to Dynamic Lawyers and make a post.

written by admin \\ tags: employment agreement, independent contractor agreement, legal advice, legal forms, mississauga, non compete clause, non solicitation agreement, offer of employment, ontario lawyers, professional assistance, solicitation

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to Non-Compete or Non-Solicitation clauses, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you.  If you’re looking for Non-Compete and Non-Solicitation clauses within an employment or independent contractor agreement, then check out our legal forms + video guides.

So this if the first of many blog posts about non-compete and non-solicitation clauses.  Yes, I’ve previously blogged about this topic (e.g. here, here, and here).  So here, I’ll be talking about these clauses from the perspective of an employer or human resources manager.  If you’re either one of these, you absolutely need to check out our employment agreements or independent contractor agreements.

First thing’s first: do I actually need one?
Whether you need to restrict or limit an employee’s ability to do something (e.g. compete with the business, solicit clients from the business, solicit employees from the business) really depends on whether you have something worth protecting.  Do you have a legitimate interest in protecting a business idea?  If you have provided confidential information to an employee, clearly you want them signing a confidentiality agreement as part of their employment (if they are an employee) or engagement (if they are an independent contractor).  If an employee or independent contractor had access to client lists, trade secrets, pricing policies, formula, or technology that is proprietary, the last thing you want is for them to set up shop across the street or share it with anyone else.  So there has to be some type of harm or damage which could result from this employee or independent contractor doing something to you.  If there is a reasonable prospect of such harm occurring, then having a non-compete or non-solicitation agreement or clause within an agreement makes sense.

Difference between Non-Compete and Non-Solicitation Agreement
OK, so assuming you need a non-compete or non-solicit, the next question to ask is: what’s the difference? And will one of them suffice? A non-compete clause in an employment agreement or an independent contractor agreement puts limits on the person’s ability to establish their own business or work for others so as to compete with their previous employer or client.  This is a much more drastic step than a non-solicit clause.  The latter, when included in an employment agreement or an independent contractor agreement, means that the person will not solicit customers or employees of the previous employer or client.  Now, why not have both, you ask?  Well, there are a few reasons…

First, having both may dissuade a prospective employee or independent contractor from signing on from the get go.  They may feel that, if anything goes wrong and they leave, they will be unemployable.  Related to this is the morale factor: a new employee or independent contractor may feel bad because, right away, they’re threatened with sanctions if things don’t work out and they try to do something akin to what they’ll be doing for the employer.  Ouch!  Finally, having non-compete and non-solicit clauses may actually INCREASE the amount of notice (or payment in lieu thereof) an employee is entitled to at common law if the matter gets litigated: courts may increase the normal amount of notice or payment in lieu thereof because it would take the employee longer to find suitable work with the existence of non-competes and non-solicit clauses.

So, assuming you as an employer still want to have a non-compete and/or non-solicitation clause just for the sake of having them, the next question becomes: do you need both or will one suffice?

Non-Compete vs. Non-Solicit in Employment Context
Interestingly, the case of Lyons v. Multari (2000) 3 C.C.E.L. (3d) 34 becomes relevant here.  This is a leading case by the Ontario Court of Appeal concerning an employee dentist who was sued for allegedly breaching a non-compete clause in an employment contract.  The issue before the court was whether that restrictive covenant was enforceable.  The facts of that case are straightforward.  One dentist was a principal of the business (i.e. the employer).  Another dentist was an associate (i.e. employee).  The two dentists signed a short-hand note that limited the associate’s ability to practice dentistry if he chose to leave.  The entire non-compete clause said: “Protective Covenant.  3 yrs. – 5 mi.”  After 17 months of working, the associate dentist left and opened up his practice – which competed with his employer’s business and was 3.7 miles away.  The employer sued for breach of contract.  The Ontario Court of Appeal disagreed, holding that the non-compete clause was unenforceable.

So how did the Court of Appeal end up there?  Well, it started off by saying that all restrictive covenants go against public policy (free trade, etc.) and are therefore VOID.  The only exception to this general rule is if the restraint is reasonable in the interests of the parties and also reasonable in the public interest. So there are a few factors which a court should consider to answer these questions: (1) whether the employer has a proprietary interest entitled to protection, (2) whether the temporal or spatial features of the clause are too broad, and (3) whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee.

So with this test and factors in hand, the Ontario Court of Appeal held the following:

• The employer had NO proprietary interest in other dentists who referred clients (so those referring dentists were up for grabs);
• The employer benefited from the relationship with the employee;
• The role played by the employee was not special; and
• A non-solicitation clause would have sufficed (a non-compete clause was too drastic).

So based on all of these things, the Court of Appeal concluded:

48 For all of these reasons, I conclude that Dr. Lyons’ non-competition clause is unenforceable. His legitimate interest in protecting his own referring dentists and patients could have been protected by a non-solicitation clause. An established professional person or firm — be it in the field of dentistry, medicine, engineering, architecture, law or other professions — will constantly seek to recruit entry level associates to the practice. Such recruitment is good for the established person or firm and for the young associate.

So what does that tell prospective employers and employees?  Well, basically, you can put whatever you want in an employment agreement (for show), but at the end of the day it may not be enforceable.  Asking too much and not being reasonable may defeat your restrictive covenant.  In the case above, the Court of Appeal held that a non-solicitation clause would have sufficed because a non-compete was too harsh.  Only in exceptional cases will non-compete clauses be upheld; that case was not an exceptional one.

Exceptional cases for non-competes?
So what constitutes an exceptional case for a non-compete clause, you ask?  Well, although the court in the above case didn’t get into it, there was a case in Manitoba which did try to answer that question.  In Winnipeg Livestock Sales Ltd. v. Plewman [2001] 1 W.W.R. 153, the Manitoba Court of Appeal reviewed the various Canadian authorities on the issue of “exceptional cases” and held that the following factors were relevant:

In summary, the authorities reveal that the following circumstances will generally be relevant in determining whether a case is an “exceptional” one so that a general non-competition clause will be found to be reasonable:

1. The length of service with the employer.
2. The amount of personal service to clients.
3. Whether the employee dealt with clients exclusively, or on a sustained or recurring basis.
4. Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies.
5. Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee.
6. If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation.
7. The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required.
8. The nature of the business with respect to the strength of customer loyalty, how clients are “won” and kept, and whether the clientele is a recurring one.
9. The community involved and whether there were clientele yet to be exploited by anyone.

So any employer or HR manager should think long and hard about these factors if they’re concerned about the validity and enforceability of a general non-compete clause…

Now onto the next blog about non-competes and non-solicitation clauses and agreements…

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