Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
8. Can Third Parties be Subject to the Covenant or Obtain the Benefit of It?
As strangers to the contract between the individual and business that agreed to a restrictive covenant, a third party normally cannot be prohibited, itself, from engaging in the type of activity from which the individual agreed to refrain. A competitor to the business cannot be compelled to cease competing with the other business or stop soliciting its employees because of the covenant given by its new employee, though the employee himself or herself may be ordered to cease engaging in the restricted activity.
However, the courts may entertain broadening the application of the restrictive covenant to a third party where it is a corporate vehicle for the individual who gave the covenant. In a Nova Scotia decision, a franchisee breached the restrictive covenant in a franchise agreement by directly involving himself in the ownership of a competing pizza restaurant set to open 20 metres away from the franchisor’s pizza restaurant. Indeed, at one point, the franchisee had been a shareholder and president of the company which owned the competitor, though no longer was a shareholder or president at the time of the application for an injunction. The franchisor argued that the company which owned the competing establishment was essentially a proxy for the franchisor and should be prohibited from opening its restaurant pending a trial.
While there was substantial evidence that the individual was involved in the start-up of the competitor, the evidence was that his business partner did not know of his restrictions. On the application for an interlocutory injunction, the court held that the evidence did not support a strong inference that the business partner and other company were proxies or vehicles for the franchisee and refused to grant the injunction against them.1
In an application for an interlocutory injunction, a court held that a third party that is not a party to a covenant cannot itself obtain relief on the covenant, even if it is a subsidiary of the corporation that obtained the covenant.2