Supreme Court of Canada
Hecke v. Compagnie de Gestion Maskoutaine Ltée et al., [1972] S.C.R. 22
Date: 1971-04-27
Kurt W. Hecke (Defendant) Appellant;
and
La Compagnie de Gestion Maskoutaine Ltée et la Compagnie de Gestion Cayouette Ltée (Plaintiffs) Respondents.
1971: February 8; 1971: April 27.
Present: Fauteux C.J. and Abbott, Ritchie, Hall and Pigeon JJ.
ON APPEAL FROM THE COURT OF QUEEN’S BENCH, APPEAL SIDE, PROVINCE OF QUEBEC
Contract—Sale of shares—Restrictive covenant—Penal clause—Undertaking not to carry on similar business directly or indirectly—Breach—Validity.
The defendant sold to the plaintiffs all the issued shares of a company which carried on business as a sash and door manufacturer. In the deed, the defendant undertook “not to carry on, whether directly or indirectly, the business of manufacturing sash and doors, general woodwork, for a period of ten years… under pain of a penalty”. Shortly after the sale, a new company was incorporated in which the defendant became a major shareholder, a director
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and the president. The new company sought and obtained contracts for building materials of the kind described in the penal clause. The plaintiffs instituted an action to enforce payment of the stipulated penalty. The trial judge maintained the action and his judgment was affirmed by the Court of Appeal. The defendant appealed to this Court.
Held: The appeal should be dismissed.
It is well settled that a restrictive covenant of the type in issue here, contained in a contract of sale, is valid if it does not go beyond what is reasonably necessary for the protection of the purchaser. The trial judge and the Court of Appeal have rightly found that the covenant was valid and that the defendant had breached it.
APPEAL from a judgment of the Court of Queen’s Bench, Appeal Side, province of Quebec, affirming a judgment of Archambault J. Appeal dismissed.
M. Pothier and P.M. Verdy, for the defendant, appellant.
L. Nichols and D. Robert, for the plaintiffs, respondents.
The judgment of the Court was delivered by
ABBOTT J.—This appeal is from a unanimous judgment of the Court of Appeal, affirming a judgment of the Superior Court which condemned appellant to pay a sum of $20,000, the amount of the penalty stipulated for breach of a covenant contained in a contract for the sale of shares.
On November 9, 1962, by deed passed before Jacques Lafontaine, notary, the appellant sold to respondents for the price of $100,000 all the issued shares of A. St-Germain & Fils Ltée of St-Hyacinthe, which carried on business there as a sash and door manufacturer.
The said deed contained the following clause:
[TRANSLATION] The vendor, Mr. Kurt W. Hecké, undertakes not to carry on, whether directly or indirectly, the business of manufacturing sash and doors, general woodwork, for a period of ten (10)
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years from the date of these presents, under pain of a penalty of twenty thousand dollars ($20,000.00), payable by the vendor to the purchasers or their representatives, as the case may be.
The present action was taken to enforce payment of the stipulated penalty.
Appellant, in his defence, denied having breached the covenant and alleged that in any event the clause was null and void. The paragraph in his plea to that effect reads as follows:
[TRANSLATION] 4. That the clause restricting the freedom of trade, stipulated in the deed, Exhibit No. 1, and reproduced in paragraph 2 of the declaration, is illegal and void, in that:
(a) it is unreasonable;
(b) it is too vague in its terms;
(c) it is too wide in its scope;
(d) it is contrary to law and public order.
The trial judge made the following findings of fact which were concurred in by the Court of Appeal:
1. That shortly after the sale of the shares to respondents a new company was incorporated under the name of Multiplex Inc. in which, upon its organization, the appellant became a major shareholder, a director and the president. That several of the other directors and shareholders were former employees of the St-Germain company.
2. That the sale of shares to the respondents and the decision to form the new company were virtually contemporaneous.
3. That the new company occupied premises leased to it by appellant, that he actively directed its operations and that it had sought and obtained contracts for building materials, of the kind described in the penal clause, in competition with the St-Germain company.
4. That the appellant had breached the covenant above referred to.
It is well settled that a restrictive covenant of the type in issue here, contained in a contract of sale, is valid if it does not go beyond what is reasonably necessary for the protection of the purchaser.
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In rejecting the appellant’s contention that the covenant in the contract which he had made was illegal, the trial judge said:
[TRANSLATION] The object of the stipulation is not vague; though general, it states specifically that it applies to sash and doors, and general woodwork; this the defendant could not fail to understand, as he had carried on a business of this type for 10 years.
Defendant contributed to forming and operating the new company in direct competition, to a significant extent, with his former business.
It is certain that his title and authority as President, his advice as administrator, industrialist and financier, as well as his former contacts based on his experience with the St-Germain Company, are profitable both to the new company and to himself. He undoubtedly exercises a predominant influence on his co-shareholders, neither of whom is a majority shareholder, and who demonstrate clearly their faith in his leadership and acceptance of his advice, if not his instructions.
I agree with those findings which were also expressly approved by the Court of Appeal. The appeal should be dismissed with costs.
Appeal dismissed with costs.
Solicitors for the defendant, appellant: Pothier & Pothier, St. Hyacinthe.
Solicitors for the plaintiffs, respondents: Nichols & Robert, St. Hyacinthe.
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