How to Effectively Use Restrictive Covenants in Commercial Contracts

A restrictive covenant in a commercial contract is a clause that is designed to stop one party to the agreement doing something that they would otherwise have been at liberty to do.

There are many commercial reasons why your contracts should include carefully drafted restrictive covenants in order to protect your business.  For example, they can be used to prevent another contracting party soliciting and taking away your customers and staff.

There is little point in including a restrictive covenant in a commercial contract if it is not enforceable.  At common law a restrictive covenant is potentially void because it is a restraint of trade.  However, a restrictive covenant is enforceable in a court of law if the restrictive covenant does extend beyond what is reasonably necessary to protect a legitimate business interest.  That is why it is best to take legal advice on what restrictive covenants to include in your contracts and to ensure that they are carefully drafted.

The term ‘reasonable’, in the context of restrictive covenants, means providing no more protection than is relevant and necessary to safeguard the relevant legitimate business interest.  In this regard, the restriction must be reasonable in terms of:

• The duration.
• The scope.
• The geographical area.

If you are negotiating any form of commercial contract it is important to consider the use of restrictive covenants to protect your business interests.  Likewise, if you are being asked to agree to the imposition of a restrictive covenant against you in a commercial contract then you should take legal advice on whether the covenant is reasonable or too restrictive in nature.

For further information on this or any other matters relating to commercial law, please contact Christopher Buck, Associate Partner and Solicitor, on 01908 660966 / 01604 828282 or by email at Christopher.Buck@franklins-sols.co.uk.