Current to July 17, 2026
In Ontario, restrictive covenant enforceability depends heavily on type.
- Covenants tied to selling a business are generally enforceable as long as they are carefully and properly drafted, because the buyer paid for the goodwill it protects.
- Covenants in shareholders' agreements fall somewhere in between, depending on the circumstance.
- Most employment non-compete clauses are banned under the Employment Standards Act.
- Every covenant must be clear, and no broader than what is genuinely needed to protect a real business interest.
- A non-compete stops someone from competing at all. A non-solicit only stops them from going after specific clients or employees.
- Courts give more room to non-competes signed when a business is sold, because the buyer is protecting goodwill it paid for.
- Ontario law generally bans new non-compete clauses in employment contracts, with narrow exceptions.
- A covenant must protect a real business interest. It cannot exist just to block competition for its own sake.
- The restraint must be reasonable in what it covers, how long it lasts, and where it applies.
- Vague wording is dangerous. Courts usually strike down an unclear covenant rather than rewrite it.
- Shareholder covenants are judged on the real facts: the person's role, what they were paid, and what they knew.
- Severance, cutting out only the bad part of a clause, is rare. Most flawed covenants fail completely.
- Good drafting starts with careful consideration of the deal, the industry, the timing, the geography and the actual interest you are protecting.
Restrictive covenants are common when dealing with the sale of a business. You will find them in purchase agreements when someone sells a company, in shareholders' agreements dealing with departing shareholders, and in employment agreements meant to stop a departing employee from taking clients, staff, or confidential information. But Ontario courts are nuanced in enforceability. They do not use the same test in every setting. They scrutinize employment restraints the hardest, and give more room to covenants that protect goodwill sold in a business transaction.[1]
Often clients will want the broadest restrictive covenants possible, but that isn't always wise. An Ontario court will not rewrite an unclear or overreaching covenant into something reasonable. It will usually just strike the whole thing down, leaving the business with no protection at all.[2]
Non-Competition vs. Non-Solicitation
A non-competition clause stops someone from working in, or carrying on, a competing business, usually within a set area and time period. A non-solicitation clause is narrower. It only stops someone from actively going after the company's clients or employees, without necessarily barring them from the industry altogether. Courts are generally more willing to enforce a well-drafted non-solicitation clause, because it restrains less activity while still protecting relationships the business can fairly claim. A non-solicit also does not always need a map. If the protected clients or relationships are clearly identifiable, and the word "solicit" is clearly defined, adding an arbitrary territory can create confusion instead of protection.[4]
| Factor | Non-Competition | Non-Solicitation |
|---|---|---|
| Prohibited conduct | Working in, or carrying on, a competing activity | Soliciting specified clients, customers, or employees |
| Breadth | Broad; can shut a person out of a market or industry | Narrower; targets identified relationships or conduct |
| Geography | Usually needs a reasonable, clearly defined territory | May not need a territory if the protected group is objectively identifiable |
| Typical enforceability | More difficult; must be necessary and proportionate | More likely if precise, limited, and tied to a real interest |
| Ontario employment-law treatment | Generally prohibited by statute, subject to limited exceptions | Not generally prohibited, but still subject to common-law reasonableness |
| Common drafting risk | Overbroad activity, territory, or duration; ambiguity | Vague definitions of solicitation or protected persons; capturing passive acceptance |
Context matters. Employment restraints get the strictest scrutiny, while reasonable business-sale restraints may get more room, because they protect goodwill someone already paid for.
Why Reasonableness Is Everything
Under Ontario common law, a restrictive covenant is assumed to be unenforceable. The party relying on it has to prove the restraint is reasonable between the parties, and that it does not harm the public interest. The court asks what real interest needs protecting, such as goodwill someone paid for, confidential information, client relationships, or a stable workforce. It then asks whether the activity covered, the time period, and any required territory go no further than what is actually necessary in that situation.[1][3] A non-compete covering all of Ontario when the business only operates in the GTA, or one that lasts five years without a good reason, invites a legal challenge. Being unclear is just as risky. The person bound by the covenant has to be able to tell exactly what conduct is banned. Courts generally will not rescue a vague or overbroad covenant by quietly narrowing it down for the parties. Cutting out only the bad part of a clause, known as severance, works only in narrow cases where a clearly separate piece can be removed without changing the deal.[2]
A client came to us needing new employment agreements. Every one of the existing agreements included a non-competition clause for every employee, the kind Ontario's Employment Standards Act now bans in nearly every case. We removed those clauses entirely, since they likely would not have held up anyway. The agreements had no non-solicitation clause at all, so we drafted one properly. The result was stronger protection than before. The client could now stop a departing employee from soliciting clients, customers, and suppliers, something the old non-compete never actually gave them.
Restrictive Covenants When You Sell a Business
Courts take a noticeably more relaxed view of non-competition clauses tied to selling a business, compared to restraints in an employment relationship. The seller received real value for the business and its goodwill. Both sides are more likely to have similar bargaining power and their own legal advice, and the buyer is entitled to protect what it paid for.[3] A commercial non-compete can be reasonable in a sale even where the exact same wording would fail in an employment contract. But the drafting still needs a clear link to the business being sold, the relevant territory, the customers involved, and how long it should realistically take the buyer to build its own relationships. A buyer who does not secure a properly drafted covenant from the seller can end up financing a brand new competitor.
On the sale of a professional services business, we drafted the seller's non-competition covenant to apply only to the specific service line and territory the buyer was actually acquiring, for a term tied to how long it would reasonably take the buyer to build its own client relationships. When the seller later tried to open a competing business nearby under a different name, the buyer went to court. The covenant was upheld exactly as written, because it was narrow enough to be clearly reasonable rather than a blanket restriction the seller could challenge as overreaching.
Restrictive Covenants in Shareholders' Agreements
Restrictive covenants in a shareholders' agreement can be enforceable, but they are not enforceable just because they show up in a commercial document instead of an employment agreement. Courts still treat non-competes and non-solicits as restraints on trade, and still ask whether the restraint is reasonable between the parties and consistent with the public interest. In Wyse Meter Solutions Inc. v. Papanicolopoulos, the Ontario Superior Court refused to enforce shareholders' agreement covenants at the injunction stage because the clauses were arguably overbroad. They restricted passive investment, barred involvement "in any manner whatsoever" with a competitor, covered all of Canada, and used broad customer and prospect language.[6] The drafting lesson is simple: a shareholders' agreement should protect the company's goodwill, confidential information, and customer relationships with targeted restrictions, not a blanket ban on future competition.
Courts generally will not rescue a vague or overbroad covenant. They will strike it down instead of rewriting it.
The Employment Context
Employment non-competes face the strictest scrutiny of all, and in Ontario, a statute now blocks most new ones before a court even reaches the reasonableness test. Section 67.2(1) of the Employment Standards Act, 2000 stops an employer from entering into an employment contract, or any other agreement, that is or includes a "non-compete agreement." That term is defined in section 67.1. There are two narrow exceptions. The rule does not apply where someone sells a business, agrees not to compete with the buyer, and becomes the buyer's employee right after the sale (section 67.2(3)). It also does not apply where the employee is an "executive" as specifically defined in section 67.2(5).[5] Fitting into an exception only means the agreement is allowed to exist. It does not guarantee a court will enforce it later. Employers are usually better off focusing on precise confidentiality, intellectual property, fiduciary duty, and non-solicitation clauses instead. Those clauses still have to protect a real interest. They cannot simply act as a disguised non-compete.
Drafting for Enforceability
Start with the actual interest that needs protecting, then draft the narrowest clear restraint that protects it. A few targeted tips make the difference between a covenant that holds up and one that gets struck down:
- Define the restricted business or activity precisely.
- Set a duration that matches how long the goodwill or relationships actually last.
- Include a clearly defined and reasonable territory.
- Name a specific, workable group for a client non-solicit, such as clients the person actually dealt with during a stated period, rather than every customer the company has ever had.
- Spell out whether "solicit" covers only active, targeted contact, or also specific kinds of indirect conduct, and don't assume that accepting unprompted business is automatically banned.
- For employee non-solicits, identify the actual workforce interest at stake and avoid language so broad it blocks ordinary hiring or competition.
- Avoid copying generic boilerplate from another agreement, since that is one of the most common ways these clauses fail when they are actually tested in court.
Five Common Mistakes
- “Using employment-style language in a business-sale covenant.”
- “Drafting beyond the actual interest that needs protection.”
- “Leaving the restricted activities or geography unclear.”
- “Using a non-compete where a non-solicit would protect the business just as well.”
- “Counting on severance to fix a poorly drafted clause.”
Frequently Asked Questions
Most new employment non-compete clauses are banned by statute in Ontario, subject to a few narrow exceptions.
They can be, if they reasonably protect the goodwill the buyer paid for and are clear about scope, duration, and territory.
Not always. It depends on whether the protected clients or relationships are clearly identifiable without one.
Usually not. Courts generally refuse to rewrite a vague or excessive restraint and will strike it down instead.
Only as long as is reasonably necessary to protect the real interest at stake in that particular situation.
Related Articles
Primary Authorities Cited
This article gives general information about Ontario and Canadian law, current to July 17, 2026. It is not legal advice, and it doesn't replace advice about your specific situation. Reading it doesn't create a lawyer-client relationship. Laws and practices change. Get advice from a qualified Ontario lawyer before signing, enforcing, or challenging a restrictive covenant.
Forgione Deal and Corporate Counsel · Burlington · Mississauga · Oakville · Vaughan · Toronto