Negotiating a non-compete clause when dissolving a business partnership
QuestionHi, 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 fianc? 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 InterestUpon dissolution of the partnership, my fianc? intends to purchase an existing business which is already in competition. Ergo a new? business is not being set up.
Point 2: Reasonable RestrictionsThe 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 fianc? 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.
AnswerThere 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:
- paying any debts and liabilities owed by the partnership to non-partners;
- repaying proportionally to each partner any advances such as loans, but not capital, they made to the partnership;
- paying proportionally to each partner their capital in the partnership; and
- any residue remaining is then divided between the partners in the proportion in which they receive profits from the partnership.
Can a non-compete clause protect the exclusivity of our product? David responds to another reader considering buying out a small caf? business, but has concerns over how its sellers could compromise the exclusivity of its flagship product.