What is the Benefit of having Non-Competition, Non-Solicitation, Non-Circumvention Terms?

/ Business Law Corporate Law

A non-competition, non-solicitation, non-circumvention agreement is a type of contract that provides restrictions on employee’s, contractor’s, or shareholders actions relating to competition. These three clauses serve as a mechanism to safeguard the employer’s business interests. Furthermore, the restrictive clauses may vary in scope and length of enforcement, and can occur in employment, shareholders or contractor agreements. Nevertheless, it is vital to understand the mechanics each of the clauses.

Non-competition clause

This clause serves as an mechanism for the business to limit the contractors’ ability to directly or indirectly compete. Moreover, it prevents the contractor from joining a competing company during the period of employment, or after the cessation of the contract, even after termination.

The prevention of competition occurs in a variety of ways:

  • The contractor in question not being allowed to be engaged or have a financial interest in a competing business in any capacity, such as director, shareholder, officer or employee.
  • The contractor not being allowed to lend money, or provide financial assistance to a competing business. This would also include the guarantee of debts or obligations.
  • The contractor in question not being allowed to permit its name in a competing business.

Non-solicitation clause

This clause is a tool for the business to prevent the contractor to be used from soliciting other employees existing and potential clients as well as suppliers away from the business, either during the period of employment.

Non-circumvention clause

This clause serves a way for the business to limit the contractor’s ability to circumvent any its interests, for example to discuss or disclose any confidential information.

This is often a catch-all clause, roping in any action that may circumvent the business interests. For example, making disparaging representations, disclosing any trade secrets, customer lists, and so on. This clause too can survive termination of the agreement.

What could happen to your business without a non-competition, non-solicitation, non-circumvention agreement?

Without a non-competition, non-solicitation, non-circumvention agreement, contractors who leave a business would have an ability to do harm to the business. This could include loss of revenue or reputation of a business. In serious cases, it could be devastating to a business.

The enforcement of a non-competition, non-solicitation, non-circumvention agreement

It is important to note that these agreements are often viewed unfavourably by the courts. However, the three restrictive clauses in this type of agreement will still be enforceable if the following conditions are met:

  • The clauses should not exist for the simple and general purpose of limiting competition, or maintaining a competitive advantage, i.e. a monopoly in a market.
  • The employer’s interests that are to be protected must be legitimate and proprietary.
  • The restrictions in the contract can only be as broad as is reasonably necessary to protect the employer’s legitimate and proprietary interests.

It is vital to demonstrate the reasonableness of the entire contract when seeking to enforce a non-competition, non-solicitation, non-circumvention agreement. The onus of demonstrating reasonableness rests with the party seeking to enforce the agreement. This notion will take the entire contract into consideration. Nonetheless, some terms such as the duty of confidentiality may be implied for the benefit of the employer.

As a whole, a carefully constructed agreement serves as a mechanism to restrict the actions, and future actions of contractors. Further, this creates a tool for business owners to protect the reputation and revenue of their business.