The Sheriff Appeal Court of Scotland has held that a particular kind of non-compete clause in a share purchase agreement (SPA) could not be nullified on the grounds that it was a restraint of trade.
In Nekrews and another v PMAC Scientific Limited, Mr and Mrs Nekrews (the sellers) sold all of the shares in a company, Gamm@Chek, to PMAC. Part of the purchase price for those shares was deferred until a later date.
The sellers gave non-compete covenants in the SPA, which required the sellers to procure that none of their “Associates” would compete with Gamm@Chek, or solicit its employees or customers, for three years after the sale. For these purposes, “Associate” included a relative of either seller.
When the deferred part of the price became due, PMAC refused to pay. It alleged that the sellers had breached their non-compete covenants because the brother of one of the sellers had (through a corporate vehicle) traded in competition with Gamm@Chek.
The sellers argued that the non-compete was void because it was a “restraint of trade”. Under English law, a contractual obligation that attempts to restrict someone from carrying on a business or livelihood is invalid unless (broadly speaking) it is reasonable and protects a valid interest.
The context in which the obligation is given is relevant. The courts are more likely to strike out a non-compete covenant in an employment contract (where the employee giving the covenant relies on their employment for a living) than in (say) a share sale agreement (where the seller giving the covenant is exiting his or her business and may be receiving a lucrative payment).
What did the court say?
The court upheld the covenants. It said that, although the non-compete clause in the SPA was a restraint of trade, it was not the kind of restraint that the court could strike out, because it did not deprive the sellers of their ability to compete with Gamm@Chek.
Rather, the clause required the sellers to ensure that their “Associates” did not compete. In that sense, it imposed an obligation on the sellers, rather than their “Associates”. Whilst in practice it might have deterred those Associates from competing against Gamm@Chek, it did not prevent them from doing so if they wanted to.
This is a judgment of the Scottish courts and so is technically only persuasive for the English courts. However, the decision was based on previous English case law and so should carry weight.
The decision highlights an important difference between an obligation not to compete (a “personal covenant”), which may be vulnerable if it is not reasonable, and an obligation to ensure someone else doesn’t compete (a “procurement covenant”), which should be enforceable. Where the seller of a business is a company, it is common for a buyer to ask the seller to give procurement covenants in relation to other companies within its group.
Given this, when seeking the benefit of a non-compete covenant, it is worth considering the following:
- Consider separating out any personal covenants and procurement covenants, rather than mixing them up together. That way, if the personal covenant fails, it shouldn’t automatically bring the procurement covenant down.
- Likewise, consider setting any procurement covenant out in full, rather than linking it to an existing personal covenant. Although this may seem long-winded, it may minimise the chance of the procurement covenant becoming entangled with the personal covenant and so being invalid.