Contractors' Questions: Should I accept a non-compete clause?
Contractor’s Question: I did some work for ‘Company A’ who had a contract to build a website for ‘Company B.’ I am due to get paid in full for my contract work but I’ve been asked to sign a non-compete agreement for a reasonable length of time. Is this recommended and, if so, for how long should it be for?
Expert’s Answer: A non-compete agreement is essentially an agreement between two parties that one party will not enter into competition with the other party in the same profession or industry. Such an agreement can seriously restrain/restrict the ability for an independent freelancer or contractor to undertake business with other parties.
Therefore, as a contractor, if a non-compete agreement is absolutely necessary and there really is no way that you can avoid agreeing to one, it is important that you negotiate the specifics of the non-compete agreement on a point-by-point basis. It is in your best interests to bargain and challenge any proposed non-compete agreement.
Before opening negotiations, the first step is to read the proposed non-compete agreement carefully. Scrutinise it thoroughly and ensure that you read all the fine print and most importantly make sure you understand the agreement and the potential implications involved by way of agreeing to it. It may be a good idea to instruct a solicitor to go through it, before you sign it.
When reviewing the agreement, you need to consider a number of points. An important consideration is your client-base; crucially you need to weigh up the proportion of your future clients that you would be excluding, by virtue of signing the agreement. This will depend very much on the industry that you operate in and your potential clients. You should give careful thought to your ability to get clients from non-competing businesses.
Then if, having given consideration to your future clients, you come to the conclusion that a large proportion of prospective future clients would be excluded by the non-compete agreement, it would be sensible to negotiate a lower percentage. It is also worth giving serious thought to specific competitors which might by affected by the non-compete agreement, this should also influence your negotiations.
The scope of the non-compete agreement is an issue that is of utmost importance; it is in your best interests to restrict the scope as much as possible. In terms of the scope, you need to bear in mind the following points:
- Territory: Ask yourself which competitors are out of bounds? Is it local competitors or alternatively direct competitors only? Generally, the larger the geographical scope, the more you need to negotiate to restrict it.
- Time: The time limit should be reduced to as short a time period as possible. It is difficult to advise definitively on an exact timeframe; however, you should be looking at weeks and months as opposed to years -- for example three months, not three years.
Also consider, there may be mileage in determining any specific concerns that your client may have. For example, there may be specific competitors that are causing your client worry, if so, a perfectly reasonable option to put to the client could be to agreeing to limit the non-compete agreement to only these competitors.
It is important that the non-compete agreement is drafted as specifically as possible. A broadly drafted non-compete agreement can, in a worst case scenario, be a recipe for costly litigation. Therefore, it is absolutely in your best interests to negotiate the terms of the potential non-compete agreement, before signing it.
The expert was Fozia Cheychi of legal advisory Lawdit Solicitors.