Non-Compete / Exclusivity Agreement

A. Non-Compete and Restrictive Covenants

1. Protection under Common Law

Senior employees are likely to have influence over customers and clients and access to key confidential information relating to the company's operations. A measure of protection is provided by common law by:

• fiduciary duties of a director / senior management; and
• the obligation not to disclose "trade secrets".

2. Restrictive Covenants

But the employer will typically be looking for wider protection than this, which is where express post-termination restrictive covenants come in. A company may not take post-termination covenants which are designed merely to prevent competition (be careful not to refer to them as Non-compete clauses in the Employment contract but instead as Restrictive Covenants). Such covenants will be in restraint of trade and void. A court will, however, enforce (typically by injunction) a restriction that protects a legitimate business interest and which has been drawn no wider than strictly necessary to provide reasonable protection of the legitimate business interest. The accepted categories of protectable business interest are:

• customer/client connection;
• confidential information; and
• workforce stability.

3. Reasonable Protection

What is reasonable protection of an identified business interest will depend on the individual circumstances of each case. The main types of the restrictive covenant are:

• a confidentiality clause (to catch information that is not sufficiently confidential to qualify as a "trade secret");
• a non-compete clause, preventing an outgoing director from working for a competitor within a specified geographical area for a specified period;
• a clause restricting the outgoing director for a specified period from soliciting custom from or dealing with clients of the company with whom he did business or over whom he had influence; and
• a clause restricting the outgoing director for a specified period from soliciting employees to leave the company

4. Garden leave

Garden leave describes the situation where the employer suspends the employee from work during his notice period and sends him "home to tend his garden". Normally, an employee will be placed on garden leave where he has indicated that he will be leaving to join a competitor. To enforce a garden leave clause it is generally necessary to demonstrate a significant risk of damage to customer connection and/or confidential information. However, if the period of garden leave is long, this may affect the enforceability of the covenants. Consideration should be given to offsetting any time spent on gardening leave against the period for which the covenant will be enforced. 

B. Exclusivity Agreement

An exclusivity agreement is used to ensure that the other party of the exclusivity agreement only deals with the first party as the sole supplier/purchaser, or only negotiates with the first party on a transaction over a period of time. The purpose of an exclusivity agreement is to protect one party from having its customer/supplier/counterparty going to another party who may offer a better price or more favourable terms. The exclusive agreement can be mutual, for example, the buyer agrees only to buy the goods from the seller, and the seller agrees to only supply the goods to the buyer.

In competition law, an exclusive agreement refers to an arrangement where a retailer or wholesaler “binds” to purchase from a supplier, provided that no other distributor is designated or accepted in a designated area. When the point of sale is owned by the supplier, the exclusive transaction is due to vertical integration. It may be illegal for the point of sale to be an independent exclusive transaction due to restrictive trade practice laws, but registration and approval are allowed. Exclusive agreements can be a barrier to entry.