When a partnership comes to an end, it is important to protect the interests of the partnership from the departing partner. It is commonplace to draft a restraint of trade clause into a Partnership Deed of Dissolution to limit the rights of the departing partner.
Make sure that your business lawyer has adequately defined all the important terms. Here is a quick guide to give you an idea of the most important terminology that ought to feature in the restraint clause of your Partnership Deed of Dissolution.
- Be Involved – This includes to conduct, carry on, promote, engage, invest in, be concerned with, interested or participate in any business activities or decisions, in any capacity, whether solely or jointly with any other entity and whether as sole trader, partner, joint venturer, principal, agent, director, trustee, beneficiary, officer, employee, consultant, adviser, shareholder or unit holder, or otherwise.
- Prescribed Period – This term refers to the period prior to the Termination Date (usually 12 months)
- Prescribed Services – This refers to the development, marketing or distribution of the service or product that is the subject of the contract, which is in competition with or of a similar nature to the activities of and solutions provided by the Business up to and including the Termination Date.
- Restraint Area – This refers to the area in which the ex-partner is restrained from working.
- Restraint Period – This refers to the period of time that the ex-partner is prevented from working. To ensure that the clause is accepted if it were ever challenged in a Court, the business lawyer would usually draft several options, so that if the lengthiest period is considered too harsh, that particular provision may be severed without affecting the entirety of the contract. For example, the clause might be structured as follows:
- 2 years
- 1 year
- 6 months
If 2 years is considered unreasonable, the judge might allow for a 1-year restraint, for example.
How else is the departing partner restrained?
Along with the transfer of all interests in the Business to the remaining partners, the departing partner undertakes and agrees that he or she will not, during the Restraint Period, within the Restraint Area, without the prior written consent of the remaining partners, either directly or indirectly, be involved in:
- Providing the prescribed services to any person or organisation other than the Business;
- Canvassing, soliciting to, or enticing away from the Business any person or organisation that was a client, customer, prospective client, prospective customer, supplier, representative or agent of the Business during the Prescribed Period, and whom the departing partner regularly dealt with as a director or contractor to the Business;
- Interfering or seeking to interfere, directly or indirectly, with the relationship between the Business and its clients, customers, employees or suppliers in the conduct of the Business’ business;
- Employing, soliciting or inducing or attempting to employ, solicit or induce away from the Business, any person who was, during the Prescribed Period, an employee, manager, officer, contractor, consultant or agent of the Business; or
- Counselling, procuring, inducing or otherwise assisting any other person, agent or entity to perform any of the acts specified in sub-clauses (a) to (d).
It is paramount that a well-drafted restraint of trade clause be included in any Partnership Deed of Dissolution. It ensures that the exiting partner is restricted insofar as their capacity to interfere with the partnership’s day-to-day activities and general earning capacity of the business.
For assistance in drafting this clause, contact LegalVision on 1300 544 755 to speak with one of our experienced contract lawyers.