Protection of Goodwill
There's a marked difference between the way the law treats negative covenants in employment contracts on the one hand, and business sale agreements and business dealings similar to sales of businesses on the other.
The amount paid for the business is likely to be a material factor in the assessment of the reasonableness of the covenant.
It's in the public interest that:
- buyers of businesses have access to more stringent restrictive covenants than what would be enforceable against an employee
- the seller should be able to achieve a high price for what they have to sell.
Buyers of businesses therefore have greater freedom of contract to protect the value of what they've purchased.
In one case it was said:
It is obvious that in many types of business the goodwill would be well-nigh unsaleable if it was unlawful for the vendor to enter into an adequate covenant against competition.
There's another factor that justifies stronger restrictive covenants to protect goodwill.
Parties in a sale of a business are seen have equal bargaining power.
There is no legal compulsion on the seller to sell. The parties to the transaction are more often than not the best judges of what is reasonable as between themselves.
However, where a restraint grossly exceeds what is adequate, it like any other restraint is likely to be struck out of the contract.
The main points about goodwill include:
- An employee is not in the same position as a business owner looking to sell a business. Employees are more in a take it or leave it proposition at the time they are offered their contract of employment
- Courts assume that the buyer and seller have “equal bargaining power”.
They can take care of themselves in negotiations. There is no compulsion to sell. Or Buy. - The amount paid for the business is a relevant consideration for assessing the strength of permissible restrictive covenants
- Franchisees are closer to the position of a seller of business: they’re assumed to be of equal negotiating power and capable of take care of their own interests.
No one is forcing a franchisee into accepting a franchise
For these reasons, courts treat sellers of businesses and franchisees similarly to one another on one end of a spectrum, and junior employees (as in young new starters) on the other end of the spectrum.
Example Clause to protect Goodwill:
For the purpose of providing to the Purchaser the full benefit of the goodwill, the Vendor undertakes to the Purchaser that it will not during the Restricted Period in any part of the UK be engaged, concerned or interested in, or provide financial support or management services or technical, commercial or professional advice to any other business which supplies goods or services which are competitive with or of the type supplied by the Purchaser.
Really though these clauses aren't that special. The usual sorts of clauses are used to guard against post-sale competition to prevent abuse or devaluation of the goodwill purchased as part of the sale. A greater range is available to the purchaser to prevent specific acts which would degrade the value of the business purchased.