In a recent family law proceeding, a court refused to compel a husband to sign a non-competition agreement in connection with the sale of a family-owned business.
The husband and wife were married for 25 years before they separated in 2018.
At issue was the division of family assets. The husband and wife had bought an insurance company in 2007 that sold commercial insurance products and automobile insurance. The husband had been an officer and director of the company.
On October 10, 2019, on the wife’s application, the court ordered that the company’s assets be sold, with the husband and wife having joint conduct of the sale.
The wife had negotiated the terms of the sale of the company’s assets to an outside purchaser.
As part of the sale, there was a condition that the husband sign a non-competition agreement (the “NCA”) that would prevent him from working in the insurance industry in the Lower Mainland of British Columbia or otherwise competing with the purchaser for a period of two years from the closing date.
Specifically, the NCA included a clause that required that the husband not:
… directly or indirectly, either alone or in conjunction with any individual, firm, corporation or any other entity (except for or on behalf of the Protected Entities), whether as principal, agent, employee, shareholder or in any other capacity whatsoever carry on, be engaged in, concerned with or interested in any Person carrying on any business that is competitive in whole or in part with the Business anywhere in the Territory, or advise, lend money to, or guarantee the debt or obligations of any Person that is carrying on any business anywhere in the Territory that is competitive in whole or in part with the Business.
The purchaser was only willing to close the deal if it was assured that it would not face competition from the husband for the same customers in the Lower Mainland for 2 years following the sale.
The husband objected to signing the NCA. He had worked in the insurance industry for more than two decades and wished to continue.
Issues and Parties’ Positions
The wife sought an order approving the sale of the company’s assets on the terms and conditions she had negotiated. She also sought an order restraining the husband in accordance with the proposed NCA.
The husband opposed the wife’s application on various grounds, but his main objection was to the NCA. He submitted that his liberty to sell insurance in British Columbia was not an asset of the company.
At the outset, the court stated:
“Before turning to [the wife]’s arguments in favour of her application, I begin with a basic question. On what basis could the court order [the husband] not to engage in lawful business activities?”
The court explained that the answer, if there was one, would have to lie in provisions of the Family Law Act (the “FLA”), because the sale of the company was intended to facilitate the division of family property and debt under Part 5 of the FLA. The company was family property as defined in s. 84 of the FLA.
The court stated that while there are circumstances in which a company may have the right to restrain a former officer from competing with it for a time, the evidence in this case did not come close to establishing that the company would be entitled to restrain the husband from competing with it on the terms of the proposed NCA. In other words, the company could sell its book of business, but it could not oblige the husband to agree to a term that would maximize the value of the book of business.
The court found that the order sought by the wife went beyond the division of family property to limit the husband’s future activities; Part 5 of the FLA did not support such an order.
In response to the wife’s further request for an injunction, the court stated:
“[The wife]’s argument for an injunction fails because she is not legally entitled to force [the husband] to refrain from working in the insurance business in the Lower Mainland for the next two years. The fact that such an injunction would permit the proposed sale to take place is not sufficient reason to justify a restraint on [the husband]’s activities that is not legally grounded.”
Finally, the court rejected the wife’s argument that the court rely on an FLA provision that authorizes a court to make an order to manage behaviours that might frustrate the resolution of a family law dispute by agreement or order. The court stated that the husband’s refusal to agree to the NCA did not qualify as a behaviour that might frustrate the resolution of the dispute; rather, he was taking a position that he was legally entitled to take.
As a result, the court dismissed the wife’s application, finding that the orders she sought went beyond the division of family property to limit the husband’s future activities, which was not legally justified.
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