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Resolving contractual disputes

Written by Liam Tolen on Tuesday, 24 August 2021. Posted in Commercial law, Legal

The best way to avoid a legal battle is to draft an agreement that is reasonable to all parties. Liam Tolen examines the importance of devising ‘restrictive covenants’ which are likely to be accepted by the law courts.

Resolving contractual disputes

The best way to avoid a legal battle is to draft an agreement that is reasonable to all parties. Liam Tolen examines the importance of devising ‘restrictive covenants’ which are likely to be accepted by the law courts.

One of the biggest minefields for the legal profession is devising a contract that will survive detailed scrutiny in a court of law. For this to happen, the agreement needs to be as binary as possible in every single detail. Every clause should try to be as distinctive as black or white, with few grey areas.

This may not always be possible, but the more clinical a contract or agreement is, the easier it is to decipher if two parties end up at either end of a court room. Resolving any dispute in court is never an enjoyable experience, and anyone who draws up a legal commercial agreement needs for it to be as water tight and as reasonable to both parties as they can.

This is particularly important in commercial contracts that include ‘restrictive covenants’. The legal professional who designs such documents will have to feel confident that a judge will accept their inclusion as being ‘reasonable’. 

The question which these men and women must ask themselves, is whether these ‘restrictive covenants’ will be viewed as ‘reasonable’ by a high court judge? Here is one example of when a covenant is unlikely to stand up to scrutiny: When someone purchases a business, it is stipulated in the contract that the vendor cannot be engaged in the same industry for two decades.

It is difficult to justify this as being ‘reasonable’. Most Courts, in this particular instance, are likely to side with the vendor, even though this duration was originally agreed. However, the Court may still fall short on stipulating ‘what is reasonable’ which ultimately renders this ‘restriction’ as meaningless.

Here are four areas where restrictions may be included in a commercial agreement:

  • Non-competition clause: Restricts a vendor from re-entering the same market with a similar type of business to that they have just sold, 
  • Non-solicitation clause: Restricts a vendor from targeting their former client base.
  • Non-poaching clause: Restricts a vendor from taking on former employees. 
  • Non-inference: Restricts a vendor from interfering with supply chains.

All Courts must decide on whether any order, which includes ‘restrictive covenants’, amounts to restraint of trade. Courts will examine the document in far greater detail than the contracting parties did when they entered into the original agreement. The Courts will focus on the wording by using a ‘legal magnifying glass’, and take into account factors that relate to the business and the sector in which the parties operate.

While Courts generally allow for greater latitude in commercial contracts – than they do when restrictions are imposed on employees – there are no hard and fast rules. To correctly judge ‘what is reasonable’, is rarely easy. Yet this should be given serious attention when contracts are being drafted. 

In other words, a legal team must try to justify what constitutes as a ‘reasonable restriction.’ At times they must almost try to second guess how a judge will view any covenant, however difficult this might be.

With regards to a commercial contract or business, a legal professional will need to assess a number of factors when drawing up a contract. What is the nature of the products being sold? What is their lifespan? Are customers likely to replace these products every few years? 

If a particular product usually lasts for three years, then a restriction preventing the vendor from selling such goods for up to three and a half years, may be considered ‘reasonable.’ Every document needs to survive the Court’s careful scrutiny, which is usually called upon several years after an agreement is made. Some disputes create more bitterness than others, and can be avoided if the person subject to restrictions accepts them as being reasonable at point of signature.

About the Author

Liam Tolen

Liam Tolen

Liam Tolen is an Associate in Ashfords LLP’s Commercial Litigation Team. He is an expert in disputes relating to unlawful competition in breach contractual restrictions arising from business sale agreements; franchise agreements; shareholder agreements and other commercial contracts. He frequently advises on pursuing and defending claims of this nature many of which are resolved without the need to issue Court proceedings.

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