Court Dismisses Buyer’s Claim Over Unreasonable Non-Compete Agreements  

In a landmark ruling, the High Court has dismissed a buyer of a business’s claim over excessively broad non-compete agreements in a share sale. This case highlights the importance of drafting precise and reasonable restrictive covenants to protect business interests without overreaching.

The Case at a Glance

The dispute arose from the sale of Mountain Healthcare Limited, a company providing medical services to sexual assault referral centres. The seller, an experienced professional in this niche field, sold the company to the buyer in 2018 for approximately £4.7 million, with much of the payment deferred. After the sale, the seller continued to work as a director and entered into an employment agreement that included a 12-month non-compete clause.

As the company grew, the seller sought to renegotiate the terms of the sale, leading to new agreements that included restrictive covenants preventing her from competing with the company and other unrelated businesses within the buyer's group. These covenants had a duration of up to 10 years, effectively limiting her ability to work in any related industry across the UK.

The Court's Decision

In December 2021, the seller established a new company that initially did not compete with the protected industries. However, after her 12-month non-compete expired, the new company began offering similar services and secured a contract with South Wales Police. The buyer alleged that this breached the ongoing non-competes.

The Court found that the buyer failed to demonstrate that the 10-year covenant was necessary or justified in its geographical scope. The only legitimate interest to protect was the goodwill of the original company, not the unrelated businesses. Consequently, the Court dismissed the buyer's application for an injunction.

Key Takeaways

This ruling serves as a crucial reminder for both buyers and sellers to carefully negotiate and define non-compete agreements in business transactions. Non-compete clauses should focus on protecting the goodwill of the target business without being overly broad or lengthy.

For buyers, it is essential to draft non-compete clauses that are no wider than reasonably necessary to protect legitimate business interests. For sellers, defining the target business precisely can prevent overly broad restrictions that limit future opportunities.

Conclusion

The High Court's decision highlights the importance of balanced and reasonable non-compete agreements in business sales. Both parties must ensure that these clauses are fair and enforceable to protect their interests without overstepping boundaries.

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