Non-Dealing Clauses
Non-dealing clauses are a form of restrictive covenant which protects a legitimate business interest against competition of a business, post termination of a contract.
“Non-dealing” in the legal context translates “do business with”.
The aims of non-dealing clauses include:
- Allow a protected business to stabilise its customer base after a contractor stops working for the business or employee departs and becomes an ex-employee (ie a leaver)
- Permit time for the protected business to recruit, organise, and train a suitable replacement staff after departure of the consultant or employee
- Grant time for the employer to do what needs to be done to persuade employees and contractors to remain loyal and shore up client contacts that remain with the business
- Have new staff to establish a relationship with the protected business
The window of time allows time to rebuild personal trust, infrequent contact with the customer due to the nature of the business.
Non Dealing Post Termination Protection
For instance, recently departed employees sometimes know:
- which clients are the most profitable overall
- which provide the most business
- margins, focus their efforts on undercutting us with our key customers
- which businesses to prioritise to target in marketing and sales efforts.
Another important factor for enforcement of this type of restrictive covenant is the length of time which is permissible to prevent the dealing. The shorter the time limit, the more likely it is to be enforceable.
Non-Dealing Period: Length of Restriction
Obviously, the protected business wants that time to be as long as possible post-termination.
The leaver - the consultant or employee wants it to be as short as possible. That's one of the main areas of tension between the protected business and the staff
- The longer the time period is, the less likely the non-dealing clause will be enforceable
- Current industry practice is usually relevant, but does not determine whether it is enforceable of not. Other factor also play an important part
- It’s the time it takes to maintain the stability of the workforce which dictates what might be fair with the length of the non-dealing covenant - all the circumstances of the case are taken into account
Time is not the only variable in play: there's the breadth of the classes of Targeted Businesses prohibited from being dealt with, and the geographical extent of the restriction as well.
Non-dealing clauses are more readily justified to protect the business where:
- the market is narrow and specialised, such as financial services
- customers are likely to follow the leaver the new business that they are employed or working with, due to a personal contact between the employee and the customer
- extensive time and effort has been invested to establish the customer base
- strong client relationships are a feature of industry practices, such as markets for high value goods, products and services
A clause to protect the business doesn’t have to include the words “not deal”. Just have that effect.
During the transition period when the employee leaves, customers are able to use any other any service provider with which the employee or consultant is not connected , if they can’t wait for the expiration of the period of restriction set out in the restrictive covenant.
Example: Non-dealing clause:
You will not from the date of termination of your employment either on your own account (whether directly or indirectly) or as a representative employee, director, shareholder or agent of any other person for a period of 12 months have any dealings in the sale or supply of any relevant goods or services to any relevant customer …
Related:
- Restrictive Covenants
- Non Solicitation clauses
- Non Poaching clauses
- Protection of Goodwill
- The Law of Passing Off: Protection of Goodwill