This article was first published in First Voice.
Adam Grimwood, a solicitor at FSB Legal and Business Hub, discusses restrictive covenants and tenant law.
I know restrictive covenants can be challenged in employment contracts, but what about in other types of commercial contracts?
Recently, the Court of Appeal decided a ‘non-competition’ clause in a standard franchise agreement was unreasonable and unenforceable. This case shows how a party may challenge ‘restrictive covenants’ in commercial agreements in certain circumstances.
Restrictive covenants are clauses that restrict what a party can do during and after a contract. They are most common in employment contracts but can occur in any commercial contract, and often arise in franchise agreements and contracts for the sale or purchase of a business. They tend to restrict one party’s ability to compete with the other, to poach its clients or staff, or to take or use its intellectual property and/or confidential information.
Such clauses tend to be contrary to public policy, restricting parties from exercising their freedoms – often to do the only thing they are good at. As such, they can always be challenged as to whether they are reasonable, and courts will take all relevant circumstances into account.
Of particular importance will be both the duration of the restrictive covenant post-termination of the contract, and its geographical scope. The longer the clause lasts, and the wider the geographical area it covers, the more likely it is to be challengeable.
Generally, the courts have been more accepting of these clauses in commercial agreements than in employment contracts, especially when the business in question has a legitimate and reasonable basis for including one. For example, if I am buying a long-standing greengrocer business in a small village, it may not be unreasonable for me to expect the seller to covenant that he will not open another greengrocer within a certain radius and period of time.
In this particular case, the court decided that a 12-month post-termination non-compete covenant in a 10-year franchise agreement was unreasonable, and there was no reasonable justification for it.