Tips for including restrictive covenants in commercial contracts

Clients frequently ask us whether the restrictions they wish to include in a commercial contract would be enforceable. This question is often accompanied by their concern that such restrictions might not be enforceable, stemming from information they’ve come across regarding employment contracts. 

As a very general guide, the courts are more likely to uphold restrictive covenants in a commercial contract than an employment contract. One of the reasons for this is the premise that there is a greater freedom of contract in a commercial agreement.  

When preparing and negotiating the restrictive covenants in commercial contracts, the following broad points should be kept in mind:

1. Plan what types of restrictive covenants you would like to adopt and do not use any that are not necessary. The most common types of restrictive covenants are: (i) Non-complete, (ii) non solicitation of customers, (iii) non-solicitation of suppliers, and (iii) non-solicitation of employees.
2. Separate the restrictions into distinct clauses.
3. Use clear unambiguous language for the restrictions and do not risk losing that clarity by making them overly complex.
4. Consider the scope of the business interests you want protection for, which will be more likely to be enforceable if you only include the minimum level of restriction that is needed to protect them.
5. Consider the duration of the restriction. While on the whole the greater the length of the restrictions, the more likely it will be unenforceable.  With commercial contracts it is common to see periods of 2 or 3 years. As with all restrictive covenants they are included partly as a deterrent. However, this aspect needs to be carefully weighed against what a judge may consider acceptable if the restrictive covenant is challenged in the courts.
6. Consider the  geographical scope of any restriction. In the context of employment contracts, the courts may often deem overly broad geographical restrictions as unreasonable. However, in commercial contracts, the acceptable range can differ significantly—from a few miles to entire countries, and in some cases, it may even extend worldwide. 

If you would like assistance with your commercial contracts or have any specific questions relating to this blog then please do not hesitate to contact me, James Macdonald here.