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As a business owner, your contracts with any contractors must be properly drafted. One of the essential clauses within these types of agreements is a non-compete clause. A non-compete clause aims to limit any potential conflict of interest between you and your contractor. Under a non-compete clause, you will generally be able to protect your interests against your contractor. This article examines non-compete clauses and provides different examples of non-compete clauses that you may include in a contractor’s agreement.

What is a Non-Compete Clause?

A non-compete clause intends to prevent contractors from competing with the business they work for. This clause will generally apply both during and for a period after they work for a specific company. Commonly, a broader restraint of trade clause will include a non-compete clause. Restraint of trade clauses can act to prevent a contractor from:

  • working with rival businesses of the client;
  • soliciting employees of the client to work for the contractor; and
  • providing goods or services to the client’s customers outside of the arrangement.

Why Is a Non-Compete Clause Important?

Non-compete clauses are crucial for businesses as they protect them against the contractor becoming a direct rival.

For example, a tour company providing walking tours of Sydney might engage a tour guide as a contractor. In doing so, the tour company provides the guide with confidential information about their business. Without a non-compete clause, the contractor could start their own tour company offering the same walking tours of Sydney after they stop working for the client. Here, the original tour company would have little ability to prevent the contractor from taking away their customers.

Conflict of Interest Clause

Contractor’s agreements often include conflict of interest clauses. These clauses prevent contractors from working with people that have interests which conflict with the business.

For example, it may be a conflict of interest for your contractor to be working part-time for a direct competitor whilst they are working for you.

However, it may be unreasonable to restrict a contractor’s right to work for other companies. 

Example clause:

The contractor may engage in other work during the term, provided it does not conflict with the contractor’s obligations under this agreement.

The above clause seeks to limit the scope of the non-compete provision so that the agreement is not unreasonably broad.

Conflicts of interest can arise when a contractor agrees to work for two competing businesses. To prevent this situation, it is common to include a clause that requires the contractor to alert you as soon as they become aware of a conflict.

Example clause:

 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 client immediately in writing and take all steps as reasonably agreed with the client to resolve the conflict.

Restraint of Trade Clause

Often non-compete clauses operate as part of a broader restraint of trade clause. We have set out below an example restraint of trade clause and explained the key features of this type of clause.

Example clause:

You, must not, during the restraint period and in the restraint area:

  1. provide the goods and services to our customers, other than pursuant to this agreement;
  2. induce or solicit our personnel (who were personnel at the date of termination or expiry of this agreement or within the 12 months prior), to leave their employment, agency or contractual arrangement with us; or
  3. compete with us or enter into business arrangements with, advise, work for, consult with, provide goods to, or in any way assist, any of our customers or competitors.

This part of the clause sets out the scope of the restraint and non-compete obligations on the contractor. In particular, it limits the ability of the contractor to provide goods and services directly to the client’s customer, soliciting employees of the client and directly competing with the client.

Example clause:

You agree that in consideration of this agreement:

  1. the terms of this clause are reasonable given the nature of our business, are necessary to protect our legitimate business interests and do not unreasonably restrict your right to carry on your profession or trade;
  2. we may seek legal remedies for a breach of this clause; and
  3. on request, you agree to provide us with evidence sufficient to enable us to confirm your compliance with this clause.

This part of the clause attempts to deal with the enforceability of the provision. The ‘reasonable covenant’ sub-clause above serves as an acknowledgment from the contractor of the reasonable nature of the restraint. This sub-clause will not prevent a court from determining a sub-clause as unreasonable in the circumstances.

Restraint Area and Restraint Period

Restraint period means the term, and:

  1. 18 months after the term of this agreement, or (if that duration is deemed unreasonable);
  2. 12 months after the term of this agreement, or (if that duration is deemed unreasonable);
  3. nine months after the term of this agreement.

Restraint area means:

  1. the countries in which you provided the goods and services to us, or (if that area is deemed unreasonable);
  2. the states or territories in which you provided the goods and services to us, or (if that area is deemed unreasonable);
  3. the metropolitan area in which you provided the goods and services to us.

The above clause means that the restraint provisions only operate in various areas and for certain periods. Drafting a clause in this way will make the clause ‘cascading’. It is common for a court to ‘read down’ a non-compete provision where it considers that the scope of the provision is not reasonable. 

For instance, using the tour company example, a court may not consider it reasonable for the tour guide to be prevented from entering into a rival tour business for 18 months after the term of the agreement. In which case, the first fall back position is 12 months, and then nine months. The court can strike out the 18 months or 12 months and decide that nine months is reasonable. This means that the clause may be ‘read down’ without being struck out by a court in its entirety.

Key Takeaways

Non-compete clauses intend to protect the legitimate interests of the client’s business. It is essential, however, to draft a restraint clause in a cascading way to limit the potential for the clause being unenforceable. If you have any questions about these types of clauses, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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