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Non-competition clauses in commercial contracts

Legal Commercial Law

It is common for contracts between businesses to contain provisions that are aimed at preventing one of the parties from competing against the other (often called “restraint of trade” clauses). The enforceability of such clauses has long been debated.

Under UK law the following requirements must be satisfied for a restraint of trade to be valid:

  • the party imposing the restraint must have a legitimate interest that they seek to protect;
  • the restraint must be no wider than is reasonable to protect that interest;
  • the restraint must not be against public interest.

In a recent case the Supreme Court re-examined this area. The Court stated that two principles must be taken into account in determining the enforceability of a non-competition obligation:

  1. The party which has the benefit of the restriction must establish that the non-compete clause was reasonable as between the parties, by showing that it not only protected that party’s legitimate interests but also that it went no further than was reasonably necessary in doing so.
  2. Assuming the test in paragraph 1 above is met, the party subject to the restrictions has the burden of establishing that it is unreasonable due to being against public policy.

Of particular interest in this case is the Supreme Court’s consideration of the parties’ non-contractual intentions when entering into the contract. This means that legitimate interests do not need to be specifically referenced in the contract.

For a “legitimate interest” to be potentially protected, that interest does not have to be something which is directly related to the contract containing the restriction. In the case examined by the Supreme Court, the contract in question was a confidentiality agreement (also known as a non-disclosure agreement). Its purpose was simply to allow the flow of information from one party to the other, but the agreement contained a clause prohibiting the recipient of the information from exploiting it for its own purposes. This was found to be enforceable, even though the agreement did not express that the provider of the information had any obligations or expectation of its own in relation to that information.

Further Information

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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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