Many kinds of contracts include non-competition clauses, also called restraint of trade clauses. This post explains what these are.
In many situations where one party to a contract is sharing technical know-how with another party, such as special methods to make a product or deliver a service, the first party doesn’t want the other party to use that information to compete with the first party, in other words, to make and sell similar products or services to its pool of potential customers.
The contract between the two parties will therefore usually include clauses restricting the use of confidential information and intellectual property, but it will also normally include a non-competition clause of some kind. Not only is the information to be kept private, it must not be used commercially. Non-competition clauses can operate during the term of the agreement, and also for a period of time afterwards. This kind of clause is common in employment contracts, but can also appear in other types of agreements, such as business sale agreements. In a business sale agreement, the purchaser wants to stop the seller from destroying the value of the purchased business by setting up a new business nearby and capturing the customers of the old business.
The scope of non-competition clauses usually has two aspects: a geographical dimension and a time dimension. The first refers to an area in which the party must not compete, such as a 5-kilometre radius from a defined point, or is a particular State or province. The second refers to the duration of the restraint, e.g. 1 year or 3 years. The bigger the restraint that is imposed, the less likely a court will uphold it as valid. The reason for this is that the policy of the law favours people’s freedom to conduct business. It restricts consumer choice if people impose unfair limitations on business activity in contracts.
The law attempts to balance one party’s right to conduct business against unfairness to the other party who has shared important information or who has bought a valuable asset.
[The author of this blog post, James Irving, is a business lawyer in Perth, Australia. Visit the Irving Law website’s Resources page for further information about the law. This post is not intended as legal advice for any particular person. Photo credit: Raspas con leche by pacomexico a public domain image courtesy of Wikimedia Commons used here under a CC BY 3.0 licence.]