Non-compete clauses are commonplace in the commercial world, so if you’ve signed one but you’re thinking of your options, here is all you need to know.
What is a non-compete clause?
A non-compete clause is a contract term that occurs in numerous commercial contracts - most commonly in employment. These terms are restrictive covenants that seek to restrict the trade, profession or location of any new company or job that you take when you leave your current role.
It aims to protect the employer from any undue pressure that may be caused from your establishment in a similar location. It’s important to read the terms of any contract you’ve entered, either as an employee or a contractor, to see if you’re subject to one and how it affects a new venture.
Are you subject to a claim for breaching a non-compete clause?
If you receive a letter or form setting out that a claim is being brought against you for breaching a non-compete clause, please do not ignore it. Whilst threats of a claim are different and may be empty, if you receive formal paperwork, then action needs to be taken.
Firstly, find out if you’re actually in breach of the term. For instance, was the term that is being invoked in your contract? Commonly a non-complete clause will be included in your employment contract along with various other restrictive covenants, therefore, when you signed your contract you would’ve agreed.
Secondly, you need to review the contents of any claim in light of the contract terms, series of events and the location of your new role. Do they all add up? Are you carrying out a similar business? Are you within the area the term excludes you from? Has the clause been misinterpreted by either the other party or yourself? These are all questions that should be answered and made clear in your mind. If it helps, write out a few notes about the situation and use a map to establish if you’ve breached the exclusion area.
Is the clause enforceable?
When deciding if a clause of this nature is enforceable, the court will look at three points:
- Are the limits applied for a reasonable time?
- Are the limits applied on a reasonable geographical area?
- Do the clauses goes further than necessary to protect a legitimate business interest?
A clause of this nature can’t tie you to it indefinitely, nor can it exclude a large area. It, therefore, must have an end point; a clause may limit you from working within a location or field for say a year, but it must be reasonable to do so. The idea of reasonableness will be assessed by a court if the matter gets this far.
In breach, what sanctions may be applied?
If the clause is enforceable and you’re in breach, there are various sanctions that your ex-employer can seek. These include:
An injunction: This would stop you from carrying out your new role and you may also face payment of the other party’s legal costs.
Damages: If the other party can demonstrate that your new enterprise or role has caused them to lose profits, say from a major client moving to your new firm, then the court may award them compensation for this.
An account of profits: If your ex-employer can demonstrate that your actions and use of confidential information belonging to them caused an increase of your new enterprise’s profits, then they can request that the court order and account of these.
An order for delivery up: If you ex-employer can demonstrate that you have taken documents belonging to them, an order may be sought for the delivery of these documents to the Court or your ex-employer.
What defence could you have?
Have you actually committed a breach? This is all dependant on the wording of the clause; you need to establish what the clause is stating.
For example, if the clause states you can’t work or establish a new business within a 10 mile radius for a period of 6 months, and you established a business within this time but it’s 15 miles from your old company, you wouldn’t necessarily be in breach. It is, therefore, key that you read these terms carefully, and note exactly what the restrictions are.
If you feel the clause is unreasonable or was not incorporated into your contract correctly, there is a defence available here. If you can demonstrate that the clause is too stringent with regards to the restriction of location and time, or it’s more than necessary to protect the legitimate business interest, then the clause may well be found to be unreasonable and therefore will not stand. This is a question, however, for the court and not for you - don’t expect a response letter stating the clause is unreasonable to make the claim go away.
The best thing to do if in receipt of a claim stating you have breached a non-compete clause is to seek legal advice. This can be done by contacting your local solicitor or using the Law Society’s ‘Find a Solicitor’ tool.
Can you get out of it?
A non-compete agreement is a type of restrictive covenant used to prevent employees from setting up competing businesses or working for direct rivals after they’ve quit their position.
To get out of a non-compete agreement, the simplest step is simply to ignore it. Set up your new business or get hired by the rival firm, and if your former employee does nothing to try to enforce the agreement then it’s void.
If your former employer does want to challenge your actions, they’d have to sue you for breach of contract. The onus would be on them to prove to a court that the clause was legal. You could win such a case by showing that the agreement was unreasonable, or designed solely to stifle free trade.