There are a variety of reasons business owners choose to include ‘non-compete’ clauses into their employment contracts and contractors agreements. The primary reason is to protect the interests of the business after having entered into some agreement to employ or contract someone. A contract lawyer will insert a non-compete’ clause so that any potential conflict of interest between a contractor and the Principal will be resolved under the terms of the Agreement.
Provided the contract lawyer’s drafting of the non-compete clause is not unreasonable in its scope, the business owner will be entitled under the Agreement to protect his or her commercial interests against the contractor. This article will provide a breakdown of the different sub-clauses that may be included by a contract lawyer in a non-compete clause.
Some of the important sub-clauses
- The Contractor may engage in other work during the Term provided it does not conflict with the Contractor’s obligations under this Agreement.
Under a Contractors Agreement, the contractor has certain obligations to complete the work that he or she has been contracted to complete. It would be unfair to restrict the contractor’s right to work for other clients, as a Court may interpret this restriction as unreasonable. Get your contract lawyer to limit the scope so that the Agreement is not interpreted as unreasonably broad.
- If the Contractor becomes aware of any conflict of interest between this Agreement and any other work it has been offered or is undertaking, it must inform the Principal immediately in writing and take all steps as reasonably agreed with the Principal to resolve the conflict.
Conflicts of interest can arise when a contractor agrees to work for two competing businesses. To prevent this situation, have your contract lawyer insert a sub-clause that requires the contractor to alert the Principal as soon as he or she becomes aware of such a conflict.
- The Contractor agrees that in consideration of the contract and remuneration provided under this Agreement, during the Term and when the Term ends, it will not as a sole trader, partner, manager, employee, director, consultant, advisor, shareholder, unit holder, trustee or with any other entity in which the Contractor may at any time have any direct or indirect interest do any of the following:
(a) compete with the Principal’s business, enter into business arrangements, advise, work for, consult with, provide services to, or in any way assist a competitor of the Principal;
This assures the Principal that the contractor will not compete during or after the contract.
Customers and client lists
(b) directly approach, canvass, solicit or deal with any client or customer of the Principal with whom the Contractor had business contact with during the Contractor’s employment with the Principal (who were clients or customers at the date of termination of the Agreement or within the 12 months prior);
Protecting the customers and client lists is hugely important to any business and you would be wise to have your contract lawyer insert a sub-clause that protects this information.
(c) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Principal and any supplier of the Principal (who were suppliers at the date of termination of the Agreement or within the 12 months prior);
Consistent and reliable suppliers are worth protecting. Your contract lawyer should draft the above sub-clause so that the contractor does not poach suppliers.
Employees and other business contacts
(d) induce or solicit any employee, contractor or agent of the Principal or any of its subsidiaries or whom the Contractor had business contact with during the Contractor’s employment with the Principal (who were clients or customers at the date of termination of the Agreement or within the 12 months prior);
Have your contract lawyer insert a sub-clause that prohibits contractors from inducing or soliciting any employees, agents or other contractors to work for them.
Duration and Geographical Reach of Restrictive Covenant
In many cases, a contract lawyer will include a sub-clause that places a restriction on the area in which the contractor may compete with the Principal’s business. There is usually a time restriction attached to this restrictive covenant that will be ‘cascading’ i.e. several different time constraints will be imposed so that in the event that the longest is considered unreasonable by a Court, the clause can be severed only to the extent that it is unreasonable.
Each restraint contained in this Agreement, resulting from any combination of the wording and definitions in the clause, constitutes a separate and independent provision, severable from the other restraints. If a court of competent jurisdiction finally decides any such restraint to be unenforceable or whole or in part, the enforceability of the remainder of that restraint and any other restraint will not be affected.
The above sub-clauses accepts that certain sub-clauses may be severed if found to be unreasonable, which allows the rest of the contract to be enforceable.
The Contractor acknowledges that this clause is reasonable in terms of its extent and duration and goes no further than is reasonably necessary to protect the interests and confidential information of the Principal. The Contractor also agrees that this clause does not unreasonably restrict the Contractor’s right to carry on his or her profession or trade.
The ‘reasonable covenant’ sub-clause serves as an acknowledgment from the contractor of, firstly, its acceptance of the terms, and secondly an acknowledgment of the reasonable nature of the terms. This sub-clause will not prevent a court from determining a sub-clause as unreasonable in the circumstances.
Contractors agreements are essential for any business owner looking to protect the interest of the business. Non-compete clauses are difficult to draft and deserve the attention of a contract lawyer. For advice about drafting such a clause, and to discuss further with a contract lawyer, contact LegalVision on 1300 544 755.