Insurance · 29 March 2018

Negotiating a non-compete clause when dissolving a business partnership

dissolving a business partnership
There are number of ways to dissolving a business partnership

Here, Grid Law founder David Walker responds to a reader who is seeking clarification around non-compete clauses when in the process of dissolving a business partnership. Are the terms fair? Can they be re-written? Our expert explains.

Question

Hi,

I was interested in your article titled “When are non-compete clauses enforceable?” and would appreciate some clarification regarding a non-compete clause currently contained within a dissolution of partnership agreement that is being forced upon my fiancé by her current business partner.

The clause is currently worded as follows:

(a) You shall not, for a period of 36 months following Completion, compete with the Business or solicit any past or present customer or current employee of the Business;

[SPECIFIC DETAILS OF THE SPLIT REMOVED FOR CONFIDENTILITY PURPOSES. ESSENTIALLY, THERE IS A DISPUTE BETWEEN THE TWO PARTNERS AND THE OFFER TO DIVIDE THE PARTNERSHIP PROPERTY IS UNACCEPTABLE. THE REMAINING PARTNER WISHES TO CONTINUE RUNNING THE BUSINESS]

With reference to the conditions listed in your article upon which a non-compete cause can be deemed to be legally binding.

Point 1: Legitimate Interest

Upon dissolution of the partnership, my fiancé intends to purchase an existing business which is already in competition. Ergo a “new” business is not being set up.

Point 2: Reasonable Restrictions

The competing business is a distance of three miles from the existing business. Both are located in South London.

While I accept that non-compete clauses are common, I would like to be able to propose an alternative wording which would allow my fiancé to carry out her purchase of the new business without obviously breaching the terms of the dissolution agreement, but in such a way as to not alert her current business partner as to her intentions.

There is a partnership agreement in place, signed by both parties. It is very a basic document and It contains no post partnership agreements/clauses.

Thanks in advance.

Answer

There are a number of ways in which a partnership can be dissolved. For example, it could be dissolved by mutual agreement between the partners, in accordance with the Partnership Act 1890 or by way of an order of the court.

It seems like you are working towards mutual agreement, but there is a little way to go still.

Subject to any agreement to the contrary, and assuming the partnership is not making a loss, on dissolution the assets of the partnership will be divided as follows:

  1. paying any debts and liabilities owed by the partnership to non-partners;
  2. repaying proportionally to each partner any advances such as loans, but not capital, they made to the partnership;
  3. paying proportionally to each partner their capital in the partnership; and
  4. any residue remaining is then divided between the partners in the proportion in which they receive profits from the partnership.

So, this should be the starting point for any negotiations.

If the remaining partner wants to deviate from this, there needs to be a good reason why.

Looking at the restrictive covenant, it needs to be reasonable. If the business of the partnership is the only business your fiancé has knowledge and experience of, it would be unreasonable to restrict her from this business for three years without paying her not to work.

Soliciting past or present customers may be reasonable, but a blanket ban on competition would be unreasonable, especially if there is already existing competition in the locality.

Three years may also be excessive depending on the type of business it is.

So, whilst negotiations are progressing, you can put forward any suggestions you wish. Your fiancé can’t be forced to accept this offer.

If you can’t reach a negotiated settlement, you could force the situation by giving notice to dissolve the partnership. Without an agreement, this would mean that there would be no restrictions in place after it has been dissolved and the assets would be divided as above.

Would this lead to a fairer split for your fiancé?

If it would, this could be a serious threat the remaining partner and increase your bargaining position. However, you have to be aware that taking this action could lead to a legal battle to recover what is rightfully yours.

You also have to be careful to give notice for valid reasons.

Once the notice has been given, this may make the remaining partner more amenable to a reasonable settlement agreement.

I hope this helps and if you have any further questions, please feel free to ask.


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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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