CM SME Club

Protecting your SME Business through Restrictive covenants in legal documents

One of ways in which an Advocate secures the best interest of your business is through the imposition of restrictive covenants. Restrictive covenants are a double-edged sword that can protect and hinder businesses and individuals. On the one hand, they can safeguard your SMEs confidential information, prevent employees from poaching clients, and protect your business’s competitive edge. On the other hand, they can limit a business’s ability to transact freely, restrict free flow of information and potentially stifle innovation. As such, they should only be used with the advice of an Advocate who is well versed in contract law and employment law.

What are restrictive Clauses?

Restrictive Clauses are clauses within a contract or agreement that limit or restrict the actions or activities of one or more parties. These Clauses are typically used to protect the interests of one or more parties and can take various forms depending on the nature of the contract or agreement.

What are some examples of restrictive clauses?

There are several examples of restrictive clauses that are commonly found in contracts and legal agreements. They include:

i) Non-compete clauses; restrict an employee's ability to work for a competitor or start a competing business for a certain period of time after leaving a company

ii) Non-disclosure clauses; prohibit the disclosure of confidential information to third parties.

iii) Non-solicitation clauses ; prevent employees from soliciting or poaching clients or customers from their former employer. For example, a sales executive may be prohibited from contacting their former employer’s clients for a certain period of time after leaving the company.

iv) Non-disparagement Clause; prevents parties from making negative or derogatory statements about each other. For example, a former employee may be prohibited in contract from making negative comments about their former employer to the media or on social media platforms.

v) Force Majeure clause: A force majeure clause is a restrictive covenant that excuses a party from fulfilling their contractual obligations in the event of unforeseen circumstances such as natural disasters, pandemics, or other events beyond their control.

Benefits of restrictive Clauses

1. Protection of Confidential Information; Restrictive covenants can prevent employees from sharing confidential information with competitors or using it to start their own business

2. Protection of Client and Customer Relationships: Restrictive covenants can prevent employees from taking clients or customers with them when they leave the company, protecting the business's interests and reputation.

3. Encouraging Innovation and Investment: Restrictive covenants can encourage businesses to invest in research and development by protecting their intellectual property.

4. Protecting Trade Secrets: Restrictive clauses can prevent employees or other parties from disclosing confidential information, trade secrets, or other proprietary information to third parties.

5. Preventing Competition: Non-compete clauses can prevent employees or former employees from working for a competitor or starting a competing business for a certain period of time, which can protect the interests of the Company.

6. Enhancing Business Value: Restrictive clauses can make a business more valuable by protecting its intellectual property, proprietary information, and customer base

7. Mitigating Risks: Restrictive clauses can help mitigate risks associated with employment or business relationships, such as the risk of losing customers, confidential information, or trade secrets.

While there are potential benefits to using restrictive clauses, it is important to ensure that the terms are reasonable and enforceable, through seeking advice of an Advocate or other legal professional before execution of any document with a restrictive clause.

Enforceability of restrictive covenants

The enforceability of restrictive covenants varies by jurisdiction and depends on several factors, including the scope of the covenant, the duration of the restriction, and the industry in question. Generally, courts will only enforce restrictive covenants that are reasonable in scope and duration and protect legitimate business interests.

Generally, the courts will consider several factors when determining the enforceability of restrictive covenants. These factors include: the geographical scope of the restriction; the duration of the restriction; the nature of the business and parties’ roles and the impact of the restriction on the employee’s ability to find work.

How we can help

At CM SME Club, we provide expert advice on the enforceability of various restrictive covenants, help negotiate the terms of Contracts, and review existing contracts to ensure that any restrictive covenants are reasonable and protect the legitimate business interest. Subscribe today at https://cmadvocates.com/cm-sme/

Published on Aug. 22, 2024, 1:10 p.m.