July 11 2016

Non-competition and exclusivity clauses are having a hard time

Wisniewski Jeremy

On January 19, 2016, the Superior Court looked into a litigious situation which emphasises the importance of properly writing non-competition and exclusivity clauses, and the burden it can be to ensure they are respected.

The facts

In Second Cup Ltd. c. 8702934 Canada Inc. (Café Vasanti), 2016 QCCS 274 (CanLII), Second Cup rents a space in a shopping centre. By presenting an exclusivity clause in its lease, Second Cup seeks to cease the exploitation of a competitor’s business in the shopping centre: Café Vasanti.

In this case, the exclusivity clause defines Second Cup as being a business ''operating a coffee shop selling gourmet coffees and espresso''. Therefore, it seeks the following exclusivity:

''Landlord shall not lease or permit the operation of any premises in the Commercial Area, in whole or in part, to any tenant or occupant who will use the premises for the principal business of a specialty coffee shop selling coffees, specialty coffees, and espresso-based drinks, such as, by way of example, a Starbucks, Tim Horton’s, Dunkin Donuts, Café Dépôt, and AL Van Houtte''.

Furthermore, Café Vasanti’s lease provides a formal commitment on its part to respect Second Cup’s exclusivity and not to ''use the premises for the principal business of a specialty coffee shop selling coffees, specialty coffees and espresso-based drinks…'', being the same terms stipulated in Second Cup’s lease.

The lessor reassures Second Cup: Café Vasanti will be a cafeteria-style business, not a specialty coffee shop.

As soon as it opens, Café Vasanti still sells filter coffee in six different thermoses. Second Cup’s sales start to drop. Second Cup initiates injunction proceedings to enforce its exclusivity clause.

The decision

The judge criticizes the drafting of the exclusivity clause and the evidence submitted by Second Cup to support its judicial action.

He first notes that Second Cup sells ''gourmet'' coffees while it seeks protection against the sale of ''specialty'' coffees.

The judge then points out the following defaults:

 

  • No definition of ''gourmet'' or ''specialty'' coffees in the lease;
  • No definition of Second Cup’s activities in the lease even though we are trying to protect a particular type of business;
  • No detailed information on Second Cup’s activities or facts to compare with Café Vasanti’s activities.

 

 

The Court observes that when a clause seeks to limit similar activities or prohibit a ''principal activity'' or a ''principal use'', a thorough analysis of the business’s elements, including its general appearance, decor and distinguishing features (price, clientele, etc.), has to be conducted.

The Court concludes at paragraph 72 of the judgement [Translation]:

''Second Cup’s exclusivity clause targets a type of establishment (« specialty coffee shop »), a listing of products (« coffees, specialty coffees, and espresso-based drinks ») and a business model or a restaurant concept (« by way of example, a Starbucks, Tim Horton’s, Dunkin Donuts, Café Dépôt, and AL Van Houtte ») all at once. The evidence is incomplete on these three aspects.''

This judgement reiterates the general principle of free competition. Non‑competition and exclusivity clauses being restrictive of such free competition, they must be interpreted by courts in a restrictive manner.

Consequently, the evidence before the tribunal will have to be carefully prepared and presented since it will be just as carefully examined. Otherwise, the clause will be of no use.

Therefore, in this case, according to the court’s comments, a comparative table of the different elements identified by the jurisprudence as distinctive elements from both stores could have helped the plaintiff to protect its commercial interests.

Do not hesitate to communicate with us if you have any questions regarding non‑competition or exclusivity clauses.

 




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Wisniewski Jeremy
Jeremy Wisniewski
Jeremy Wisniewski practices in the fields of commercial arbitration and litigation.
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