Non-compete clauses can be a valuable tool for protecting your business – but only if they’re drafted to be enforceable under English law.
Whether you’re selling a business, investing in a joint venture or hiring senior staff, it’s crucial to understand when non-competes are likely to hold up in Court – and when they’re not.
This post explains where non-compete clauses are typically used (SPAs, JV/shareholder agreements and employment contracts) and the key points to get right in drafting.
What is a non-compete clause in a contract?
A non-compete clause is a type of restrictive covenant that prevents a party from competing with a business after a certain event – such as the sale of a company, the end of a commercial relationship or the termination of employment.
These clauses are common in contracts where parties share sensitive business information or invest time and money into a commercial relationship.
Used properly, they help protect business value and goodwill. But under English law, non-compete clauses are only enforceable if they go no further than necessary to protect a legitimate business interest.
Where are non-compete clauses used?
1. Share purchase agreements
Non-compete clauses are standard in share purchase agreements (SPAs), particularly where the buyer is acquiring a trading business with established goodwill.
The aim is to prevent the seller from setting up or joining a competing business that could erode the value of what the buyer has just purchased.
Buyers often seek wide protection in terms of:
- time period (often 2–3 years)
- geography (local, national or global)
- scope of business activity
Courts are generally more willing to enforce non-competes in SPAs than in employment contracts, recognising that the seller has received payment for goodwill and agreed to restrictions as part of a commercial transaction between experienced parties.
2. Shareholders’ agreements and joint venture agreements
Non-compete clauses are also common in shareholders’ agreements and joint venture agreements. In these contexts, they’re used to prevent a shareholder (or JV partner) from diverting opportunities away from the JV company or misusing inside information.
Restrictions may apply:
- while the person is a shareholder or party to the JV
- for a defined period after they cease to be involved
- in a defined sector or market area
The enforceability of these clauses will depend on how long they last and how closely they relate to the company’s actual business activities. Courts will assess whether they are proportionate and genuinely necessary to protect the business.
3. Employment contracts
Employers often include non-compete clauses in employment contracts, particularly for senior employees, salespeople or anyone with access to confidential information or key client relationships.
These restrictions typically apply after employment ends, and must be:
- no longer than necessary (usually 3–6 months, rarely more than 12)
- limited to the types of business the employee was actually involved in
- geographically appropriate (e.g. limited to the UK, or specific regions)
Unlike SPAs or JV agreements, Courts treat employment non-competes with greater scepticism because of the unequal bargaining power between employer and employee. To be enforceable, the clause must be carefully drafted and not go beyond what’s reasonably required to protect legitimate business interests.
What makes a non-compete clause enforceable under English law?
English law generally takes the view that contractual restrictions on trade are unenforceable
unless justified. That means the starting point is that non-compete clauses are void -unless they meet the following conditions.
1. Legitimate business interest
The clause must protect a legitimate interest of the business. Examples include:
- trade connections (e.g. customer relationships)
- confidential information
- workforce stability (e.g. preventing poaching)
Courts will not enforce non-compete clauses that are simply designed to prevent competition. There must be a real commercial interest at stake.
2. Reasonable in scope, geography and duration
The restriction must be no wider than necessary to protect the interest in question.
This means:
- time limits should be reasonable – usually no more than 6–12 months post-termination in
- employment, but can be longer in SPAs
- geographical limits must relate to where the business operates
- scope must be tightly defined – overly broad restrictions on competing “in any business” are unlikely to be enforced
The Court will not rewrite or reduce an overly broad clause – it will simply strike it out in full. That’s why careful drafting is essential.
3. Tailored to the individual and their role
In employment and shareholder contexts, courts will look at the specific position of the individual.
Relevant questions include:
- what part of the business were they involved in?
- did they have access to confidential information?
- were they client-facing or in a senior role?
A blanket non-compete clause applied to all employees, regardless of role, is unlikely to be upheld. Restrictions must be justified based on the individual’s function and access.
4. Supported by consideration
Like any contractual term, a non-compete clause must be supported by adequate consideration.
- in employment contracts, the consideration is usually the job offer itself (if signed before the employee starts)
- if added later, fresh consideration (such as a bonus or promotion) is needed
- in SPAs, the purchase price and goodwill form the basis for enforcing post-sale restrictions
This is rarely an issue in SPAs but can be overlooked in employment settings.
5. Not contrary to public policy
Courts may refuse to enforce a non-compete clause if it would have unreasonable consequences – such as preventing someone from earning a living or damaging public interest.
This is more likely in employment situations, especially where the clause would make it difficult for the person to find new work in their field.
That’s why non-competes are often combined with garden leave or pay in lieu of notice, which give employees time and financial support before the restrictions begin.
Final thoughts
Non-compete clauses are a valuable tool in protecting your business – but only if they’re drafted carefully and proportionately.
If they’re too broad or vague, they may be unenforceable and leave your business exposed.
When used in SPAs, shareholders’ agreements and employment contracts, these clauses should always be tailored to:
- the specific role or party
- the legitimate interest being protected
- the appropriate scope, duration and territory
At PaperRock, we provide expertly drafted legal templates that include optional, well-structured non-compete clauses – designed to be enforceable under English law.
Whether you’re preparing an employment contract, shareholder agreement or business sale, our documents help you strike the right balance between protection and fairness.
Need help protecting your business relationships?
Explore our selection of legal templates, each written by leading English solicitors and accompanied by clear, practical guidance.
