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WA Sole Trader - Non-Compete After Business Direction Changed?

Discussion in 'Commercial Law Forum' started by bennyboy108, 24 March 2015.

  1. bennyboy108

    bennyboy108 Member

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    Hello.

    I have a question about my business situation.

    In 2008, I started trading as a sole trader doing graphic design and commercial printing services.

    In 2011, I partnered with someone and we started a company that supplies done-for-you newsletters to customers. We both signed a non-compete clause. Specifically it said:

    "No participating member will start of participate in a direct competitor or XYZ whilst this agreement is in place and for 2 years after it ends."

    For 2 years, we ran this in conjunction with our own separate businesses.

    In late 2013, I sold my independent graphic design and printing business to the newsletter company for a minimal fee to reduce overheads and management costs. There was no adjusted terms regarding the non-compete at this time.

    Things have changed recently and I will be exiting the newsletter business shortly and I wanted to find out whether if I started a new graphic design and printing business, would that be in breach of the non-compete under commercial law, seeing as at the time of signing the non-compete, what I was agreeing to was NOT to participate in a competing newsletter business.

    Appreciate your advice. Thank You.
     
  2. Ivy

    Ivy Well-Known Member

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    Hi there,

    Non-compete (or restraint of trade) clauses are governed by the common law (not legislation) and can exist where they don't conflict with the Competition and Consumer Act. They are generally difficult to enforce, however it is highly dependent on the factual circumstances of the case.

    For example, a very broad non-compete clause was upheld recently by the Full Federal Court: Full Federal Court enforces two year global non-compete restraint | Clayton Utz

    Do you have a good relationship with your partner? Can you speak with them about the business you are starting and get their blessing (preferably in writing) based on the fact that you won't be directly competing with them?
     
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  3. bennyboy108

    bennyboy108 Member

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    Thanks so much for your response.

    After the newsletter business purchased the design and printing business (for $2,000 with no contract), we began offering design and printing services through the newsletter business. - So in a sense, the new business would be directly competing with them.

    If existing clients were adamant about dealing with me specifically (as you can imagine 'graphic design' is a very individualised skill.) - Can they contract me through my new business or would there be a problem?

    I do have a good relationship with my partner, but I believe if we had that discussion about it he would insist that I sign something stating that I won't work with existing clients (which I don't really want to do, as I know there are lots of extra services I provide to them that they just wont get elsewhere).

    appreciate your knowledge.
     
  4. DennisD

    DennisD Well-Known Member

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    Hi bennyboy108

    To clarify:
    - you started ''business 1'' (graphic design and commercial printing) under your own steam in 2008.
    - you started ''business 2'' (done-for-you-newsletters) with your mate in 2011, and that included a non-compete clause.
    - in 2013 business 2 buys business 1 and starts offering graphic design and commercial printing services.
    - in 2015 you're likely to leave business 2 and under your own steam start a ''new business'', which (like business 1) is related to graphic design and commercial printing.


    Non compete clauses are about balancing the competing interests of allowing a business to protect its legitimate business interests versus allowing someone to earn some coin and make a living by freely contracting with other parties after they leave their employment with that business. Normally non-compete clauses are drafted in a way that limits their scope by geography, time, and perhaps in other ways too, so that the individual can still work for similar businesses but outside the state, or after 2 years (as in the case of the clause you have extracted), or something of that sort. As Ivy says, these clauses are generally pretty difficult to enforce, which is especially true if they're seen to be excessively broad. Despite that, sometimes they are enforced.

    You acknowledge that:
    - in a sense the new business would be directly competing with business 2
    - the owner of business 2 wouldn't like you building your new customer base for your new business from his existing clients.

    So on the basis of what you've said, on first glance it seems like your new business as described might well be caught by the non-compete clause. It would be great to hear what other contributors think about this.
     
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  5. bennyboy108

    bennyboy108 Member

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    Hi Hugh, Pretty much as you describe is correct.

    The part that I'm unsure about is that when I started Business 2 and I signed a non-compete it was purely a newsletter business, and I was agreeing to not compete in any rivaling NEWSLETTER business. - selling business 1 was done out of convenience, it was a minimal fee with no contract just because it seemed pointless to let that business just end. - There is no recorded transaction for this purchase either, I never got directly paid, it was going to be sorted out when more money was available in the company.

    So the way the law works is that a non-compete clause covers future purchases and direction changes in the business?

    If I had the foresight and thought that maybe the 'non-compete' would carry over to the graphic design and printing by selling the business for a mere $2,000, never in a million years would I have sold it, or purchased it with the other company. (my business partner is not a designer, he has never worked in printing and I've been teaching him the basics over the past 6 months)

    Graphic design and printing are my developed skills, I've been doing it for years and I can make a good living from it, without those skills I don't have a lot of options for employment. Neither of us are in a position financially to seek legal advice. The company is running a loss.

    If he were to want to try and enforce the non-competed, what ballpark costs would he be looking at?
     
  6. DennisD

    DennisD Well-Known Member

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    Hi again bennyboy108

    Thanks for clarifying things, much appreciated. So it seems you're saying that:

    a) from 2011 to 2013, business 2 only fulfiled done-for-you-newsletters services;
    b) you signed the non-compete in 2011;
    so
    c) the scope of that non-compete applies only to done-for-you-newsletters services, regardless of the fact that business 2 branched into graphic design and commercial printing services when it purchased business 1 in 2013.

    What is the scope of the non-compete, does it include graphic design and commercial printing services? Is (c) correct?

    The clause is there to protect the interests of the business. The clause as you have extracted it has one or two grammatical errors, and it's important that you check it and read it carefully. For example, if ''business'' is capitalised, you might find that there is a description of its activities in the definitions section, or in the recitals/background clauses (which, if any are in the document, are generally found somewhere at the start). If that information is described in the document it will help to clarify what was understood to be the ''business'' and in so doing help to clarify the non-compete.

    If that information is not described in the contract, let's apply (what I may incorrectly consider to be) a common sense view. I don't know anything about the design/print industry. As an outsider who knows nothing about this stuff, design and printing as against done-for-you-newsletters sound like two creatures from the one family, in contrast to for example if a business was one day selling cars and the next day something completely unrelated like t-shirts or ice-cream. That makes me think that maybe these fall within the clause. Add to that, you seem to mention that you'd potentially be plucking existing clients of business 2 to create new clients in your new business. Plus business 2 purchased business 1 in 2013, which you say was for convenience on your part, and though that may be so, perhaps your business partner saw it slightly differently.

    That's one way of looking at it from someone who knows nothing about design/print. It's also a rather academic approach. If you think there is some ambiguity around what was intended and subsequent events, you might consider discussing it with your business partner, including what you mention about ''If I had the foresight and thought that maybe the 'non-compete' would carry over to the graphic design and printing by selling the business for a mere $2,000, never in a million years would I have sold it, or purchased it with the other company'' because that is how you're able to earn a crust. As for your question how much would it cost to enforce the clause, I'm not sure exactly however ambiguous clauses are generally a bit tricky and costly to enforce.

    So, please excuse the long-winded response, let us know how things go or if you have any further questions.
     
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