So you recently purchased a business. Everything is going well, albeit the profits or revenue just aren’t what you expected, or certain promised clients or customers have gone off the books.
Then you find out the vendor has set up in competition, and has taken a share of that revenue or customer base with them. That revenue stream or customer base you paid for. How can you avoid a situation whereby your vendor becomes a competitor? This article will give you some tips on how to manage this very real risk, and what active steps can be taken to ensure you do not find yourself in this unenviable position.
What can be done?
Most sale of business contracts contain a restraint of trade provision. A restraint of trade is a contractual clause that prevents a person, in this case the vendor, from undertaking certain defined activities for a certain period and within a certain area. If using the standard form business contract in the relevant state, a restraint is usually contained in the general conditions, with the area and period over which that restraint will apply to set out in the schedule, or on the first page.
If you find yourself in this unfortunate predicament, the first step is to ascertain what the restraint clause is, and ensure the activity of the vendor breaches it.
Next, it’s important to examine the extent to which that restraint will be upheld. Most states of Australia have specific legislation that applies to restraint of trade clauses. The general rule is the restraint will only be upheld to the extent reasonably necessary to protect the legitimate business interests of the person seeking to enforce it, in this case, the purchaser.
What is reasonable?
What is reasonable will depend on the relevant facts at the time the restraint was entered into and, in the sale of business context, will involve the examination of such factors as the nature of the business, location of the business, consideration paid for the business and, in particular, the goodwill of the business, the negotiations entered into between the parties prior to entering into the agreement, and the terms of any specific special conditions that formed part of the business sale agreement. Where valuable consideration has been paid for ongoing goodwill, as is usually the case when a business is sold as a going concern, the Courts have generally expressed a willingness to uphold restraints (subject, of course, to the way they are drafted!).
Common Law Misrepresentation and the ACL
There are other areas of law that may assist, too. For example, promises about certain clients staying on, made in circumstances where the vendor had already negotiated to take them elsewhere, may amount to misrepresentation at common law or misleading and deceptive conduct in breach of the Australian Consumer Law.
Once you have ascertained how the law applies – and your lawyer should be consulted in that regard – it’s important to act fast. Here, a cease and desist may be issued, and an undertaking sought. If that doesn’t yield a result, it may be necessary to instigate proceedings, seeking an injunction and/ or damages, including an account of profit. From a practical perspective, you may wish to get your detective hat on, particularly if the Court option is being pursued; its one thing to claim that the vendor becomes a competitor, and quite another to prove it.
If you find yourself in such a predicament where your vendor becomes a competitor, you should take action quickly. A commercial lawyer will be able to identify the relevant causes of action and take steps to stop the offending conduct and/ or seek damages. Get in touch today on 1300 544 755 for a free legal health check, obligation-free of course, and a fixed-fee quote to assist!
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