Non-compete clause – make sure you can rely on the contract

The purpose of a non-compete clause is to protect vital business interests when an important or senior employee leaves. Non-compete clauses can be problematic because they conflict with other important legal rights and principles such as freedom to work and restraint of trade. It is therefore imperative that non-compete clauses are carefully thought through, justifiable

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The purpose of a non-compete clause is to protect vital business interests when an important or senior employee leaves.

Non-compete clauses can be problematic because they conflict with other important legal rights and principles such as freedom to work and restraint of trade. It is therefore imperative that non-compete clauses are carefully thought through, justifiable and proportionate in every case because otherwise the clause(s) may be successfully and expensively challenged.

Case example relating to non-compete clauses

A case involving a media and communications training business highlights the difficulties with attempting to implement and exercise a non-compete clause and also how such clauses, when they cross over between employment issues and ownership issues can create other legal implications. In this case, the wording of the clause allowed the former employee to challenge the clause and render it invalid.

T who worked as a journalist and business news broadcaster was employed in 2003 by W who up until that point owned the entire share capital of the Company. W came to an agreement with T that he would have an 8 % stake in the Company, which was eventually increased to 20 %. However, within the contract, W inserted a non-compete clause stating that T would not be allowed to ‘solicit, canvas or endeavour to obtain business relating to management and communications development which is in direct competition with the company’s activities’. The restriction was in place for six months post termination.

During T’s tenure he was approached to conduct event moderations for another Company, O Ltd, with the permission of W. As these assignments took place during work hours the Company received a fee for T’s work. In June 2008 T served his resignation because he had accepted a job from R Ltd as a presenter. There was no issue with moving to R Ltd as the field of work was different. However, T also continued to run events for O Ltd resulting in W claiming that he had breached his non-compete clause. At first glance it would seem that since T was still involved with O Ltd, he was directly competing and thus in breach. It is also important to note that under the terms of the contract, if T was in breach his very valuable entitlement to shares in the company would also be forfeited.

When the case reached court

Many non-compete clauses are challenged on the basis that they are too widely drafted, since many such clauses have a long period of time inserted or wide geographical area in which they apply, and on that basis may be considered disproportionate.

This case is interesting as the outcome was more dependent on analysing the facts and conduct of the parties to decide whether the clause should stand. In particular :-

  • T did not leave in order to compete with W.
  • T had already embarked on assignments such as event moderation before being employed by W. Once employed, T utilised these skills and brought in revenue from a source that had never been tapped into before his arrival. Once he left, there was no one appointed as a replacement and even though O Ltd remained clients of W, they no longer used an employee of W to run their events. T was in no way competing with W as his category of work was not being performed there anymore.
  • T’s restrictive covenant only applied to work that involved business relating to management and communications development. His new role did not fall into this category.

It is always worth remembering that in many situations a clause can be partially upheld and may not necessarily be considered wholly valid or wholly unlawful. The party seeking to rely on such clauses is well advised to ensure that the contract includes a clause whereby both parties agree that if a clause ids partly unenforceable other aspects may still stand.

Non-compete – employment and commercial situations

Non-compete clauses may be used in a variety of commercial as well as employment situations. Note that then courts are inherently more likely to interfere with such clauses in employment rather than commercial relationships. With employer and employee situations, the starting point is that there has been an advantage in negotiating position in favour of the employer. This dynamic or presumption can be shifted by evidence or the fact that an employee may be a very senior employee with experience and highly sought after. With commercial contracts it is generally harder to convince a court to interfere with clauses that the parties have negotiated between them.

This is just one example out of many others where non-compete clauses have been successfully disputed. It is imperative that the non-compete clauses are written meticulously.

We would be happy to discuss with you any contractual issues and ways in which you can protect yourself as employer or employee at the time you are negotiating. Alternatively, if you face a dispute over a non-compete clause, we can advise you on your options and tactics. Please get in touch with Debbie Serota.

More on our employment contract services here.

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