Non-Compete Clauses in an Ontario Partnership Agreement

It’s easy to assume that any “non-compete” in Ontario is governed by the same rules, especially given how much attention Ontario’s ban on employee non-competes has received since it came into effect. But a restrictive covenant between business partners — restricting a departing partner from competing with the partnership or poaching its clients — sits in a genuinely different legal category from an employee non-compete, and the two shouldn’t be conflated.

Employee non-competes are governed by Ontario’s Employment Standards Act, 2000, which has, since October 2021, generally prohibited employers from including non-compete agreements in employment contracts, subject to narrow exceptions (most notably around the sale of a business and certain executive roles). That statutory ban is specific to the employer-employee relationship.

A restrictive covenant between partners in a partnership — governed by Ontario’s Partnerships Act and the partnership agreement itself — is a different relationship entirely, and is generally assessed under the common law of restrictive covenants that Ontario courts have applied to business owners and commercial parties for a long time, independent of the employee-specific statutory ban.

The Employment Standards Act, 2000’s restriction on non-competes is specifically targeted at the employer-employee relationship — it’s meant to prevent employers from using non-compete clauses to restrict employees’ ability to find new work. A partner in a partnership is generally not an employee of that partnership; partners are co-owners of the business, with a fundamentally different legal relationship to it than an employee has to an employer.

Because of this, a restrictive covenant in a partnership agreement — restricting a departing partner from competing with the business or soliciting its clients after they leave — generally isn’t subject to the ESA’s employee non-compete ban at all. Instead, it falls under the pre-existing common-law framework that applies to restrictive covenants between business owners, commercial parties, and in the sale-of-business context.

Under the common-law approach that applies to partner-to-partner restrictive covenants, courts generally start from the position that restraints on a person’s ability to work or compete are viewed with some skepticism, but can be upheld where they’re reasonable and protect a legitimate business interest. The analysis typically focuses on three dimensions: the scope of activity restricted, the geographic area covered, and the duration of the restriction.

A restriction that’s narrowly tailored — for example, preventing a departing partner from operating a directly competing business within a specific, reasonably sized geographic area for a limited, clearly justified period — stands a better chance of being upheld than a broad, open-ended restriction covering an entire industry, an unlimited geography, or an indefinite duration.

Courts also generally look at whether the restriction is actually protecting a legitimate interest, such as client relationships the partnership built up, confidential business information, or goodwill the departing partner helped develop while a partner — rather than simply trying to prevent ordinary competition for its own sake. A restriction aimed at punishing a departing partner, rather than protecting a specific interest, is less likely to be upheld.

Partnership agreements often include both non-compete and non-solicitation clauses, and it’s worth understanding the difference. A non-compete clause generally restricts a departing partner from engaging in a competing business altogether within a defined scope and area. A non-solicitation clause is narrower — it generally restricts the departing partner from actively pursuing the partnership’s existing clients, or from poaching the remaining partners’ staff, without necessarily barring them from the industry entirely.

Because a non-solicitation clause is less restrictive of a departing partner’s ability to earn a living in their field, courts often view it as easier to justify than a full non-compete, though it’s still subject to the same underlying reasonableness analysis. Many partnership agreements use a layered approach — a shorter, narrower non-compete combined with a somewhat longer non-solicitation restriction — to balance protecting the partnership’s interests against unduly restricting a departing partner.

Which combination actually makes sense depends heavily on the nature of the business — whether client relationships are central to its value, whether the business depends on specialized knowledge, and how competitive the relevant market actually is. See our guide to fiduciary duties between business partners for how these restrictions relate to partners’ broader obligations to each other.

Because reasonableness is assessed on the specific facts and specific wording, vague or generic restrictive covenant language tends to create more risk than it resolves. A clause that simply states a departing partner “shall not compete” without defining the activity, geography, or duration leaves considerable uncertainty about what it actually covers — and gives a court less to work with in deciding whether it’s reasonable.

Partners drafting these clauses generally benefit from defining the restricted activity precisely (for example, by reference to the specific services the partnership provides), setting a geographic scope tied to where the partnership actually operates or draws clients from, and choosing a duration proportionate to how long it would reasonably take the partnership to rebuild the relevant client relationships or adjust to the partner’s departure.

It’s also worth coordinating a restrictive covenant with the partnership’s broader exit and buyout provisions. Our guide to partnership agreements in Ontario covers how exit provisions generally fit together with the rest of the agreement, and how a buyout and a restrictive covenant often operate side by side when a partner leaves.

If a departing partner later competes despite a restrictive covenant, and the remaining partners seek to enforce it, a court will generally examine the clause’s reasonableness as of the time it was agreed to, considering the scope, geography, and duration against the legitimate interest it was meant to protect. If the court finds the clause reasonable, it can be enforced, potentially through an injunction stopping the competing activity, as well as damages.

If the court instead finds the clause unreasonably broad, the consequences can be more severe than simply narrowing it down to something fair. Ontario courts have, in various contexts, declined to “blue-pencil” an overly broad restrictive covenant into a reasonable one, instead striking the clause entirely — leaving the partnership without any contractual restriction on the departing partner’s competition at all.

This risk is precisely why careful, specific drafting matters so much for these clauses. Our Partnerships hub and our guide to common partnership disputes in Ontario cover related issues that often arise when a partner’s departure turns contentious.

The circumstances surrounding a restrictive covenant also factor into how a court assesses it. A clause negotiated at the outset of the partnership, when all partners had roughly equal bargaining power and the opportunity to negotiate its terms, is generally viewed differently than a clause introduced later, under pressure, as a condition of one partner continuing to participate in the business or receiving a buyout.

Context connected to a buyout is particularly common in practice. When a partnership buys out a departing partner’s interest, the parties often negotiate a restrictive covenant as part of that same transaction, reflecting that the departing partner is being compensated in exchange for agreeing not to compete. Courts have sometimes shown more willingness to enforce a restrictive covenant tied to this kind of transaction, recognizing that value was exchanged specifically for the restriction, though the underlying reasonableness analysis still applies.

Because the specific circumstances matter so much, partners negotiating a restrictive covenant — whether at formation or on a partner’s exit — generally benefit from documenting not just the clause itself but the context behind it: what legitimate interest it’s meant to protect, and why the specific scope, geography, and duration chosen were considered reasonable at the time. That context can matter significantly if the clause is ever challenged later.