Non compete contracts – getting the balance right

“Signed, sealed and delivered”  – getting an agreement signed off is generally seen as a clear result and reassurance that you have got what you want and/or protected yourself and/or your business. Often the above is largely correct and without the whole process of negotiating and drafting contracts, lawyers would be out of business! But

Home » Uncategorized » Non compete contracts – getting the balance right

“Signed, sealed and delivered”  – getting an agreement signed off is generally seen as a clear result and reassurance that you have got what you want and/or protected yourself and/or your business.

Often the above is largely correct and without the whole process of negotiating and drafting contracts, lawyers would be out of business!

But wait a second, with some types of contracts and contract clauses, whatever may be written in the contract may not be enforceable. This often relates to areas of law where statute and common law interfere notwithstanding what has been agreed between the parties.

Non-compete contracts and clauses are 1 of the areas of law where the courts will commonly interfere with what has been agreed. As a result extra care is needed in ensuring that was it contractually agreed stands a good chance of being enforceable. Balance and planning are essential.

What led to the contract may be as important as what’s in it

If you have a situation where there is potential unequal bargaining position between the parties, you need to be extra careful in thinking about what to include and how to get the right balance.

So, particular care is needed with a  non-compete agreement with an employee, as that is an area where the starting point would be that there is inherent unequal bargaining position and that non-compete provisions might be an unlawful restraint of trade.

A more stringent or wide ranging or longer lasting non-compete clause may be possible in a situation such as where a business is being sold and the buyer wants to ensure the seller doesn’t go and start a competing new business straight away.

In all cases, thinking ahead and having an evidential trail supporting a balanced and proportionate approach is recommended. This would generally mean :-

  • documenting the likely risks perceived if there is no non-compete clause. Quantifying in economic terms the risks realistically is probably best of all.
  • time – clauses which have long time limits for non-competing are particularly dangerous. Be realistic, how long is a reasonable period of time to protect your legitimate business interests?
  • geography –  where is the geographical risk in real terms?.
  • avoiding adding some kind of fixed penalty amount for breach of contract – such clauses, known as liquidated damages clauses are generally not allowable under English law
  • document the negotiations – being able to demonstrate that there was an open dialogue between the parties about what is reasonable in a non-compete agreement and why may be helpful in court if needed.
  • Consider whether to add an injunction clause – if there is a clause expressly allowing for a party claiming breach to seek an injunction this can be more useful than most other things. Injunctions are very costly and the threat of an injunction can prevent a breach in many cases.

Get in touch if you want to discuss any aspect of a non-compete agreement or underlying transaction. We are very experienced, practical and cost effective.

 

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