Ever wondered whether the non-compete restrictions in your agency agreement can be relied on to work?
For sure principals and agents will have different interest in wondering. But some of the mists of uncertainty have cleared following a very recent Court of Appeal decision.
The agency agreement provided that:
- the principal was obliged to accept orders obtained by the agent
- during the term of the Agreement, the Agent was not permitted to operate as principal or act as agent or representative of another money transfer business anywhere within the UK and
- for a period of 6 months from the date of termination of the Agreement, the Agent was not permitted to work for a money transfer business or use clients, contacts or employees within a radius of 5 miles from the place where the Agent had represented the Principal under the Agreement.
The agent in breach entered into an agency agreement with one of the principal’s competitors. The principal brought a claim against the agent for breach of the non-compete provisions in the agreement. The agent argued that the non-compete provisions, being unreasonable restraints of trade, were unlawful.
The Court of Appeal stated that:
- the doctrine of restraint of trade should not apply to non-compete provisions which are effective during the term of an agreement unless the agent's ability to work is sterilised. In respect of this agency agreement the agent’s work would only be sterilised if the principal could choose not to accept the agent’s orders. The fact that the principal could appoint other agents in the agent’s area did not turn the non-compete provisions into unreasonable restraints of trade, because the principal was contractually obliged to accept and honour orders obtained by the agent and, as such, the agent could still earn his commission;
- the principal’s right to terminate the agency agreement on short notice was not critical to the issue of whether the non-compete provisions were valid;
- due to the time and money invested in training the agent, the principal had a legitimate interest to protect by imposing the post-termination restriction; and
- the 5 mile radius and 6 month duration of the post-term restriction were considered to be reasonable.
Take home points
Proportionate and reasonable non-compete provisions which are necessary to protect a principal’s investment in the agency will be recognised by the courts as enforceable. Meanwhile agents need to be alert to:
- as to the particular provisions of their agency agreements, for example the ability of their principals to engage other agents or use other channels to market; and
- generally changing circumstances or demand for the products or services of the principal,
If they are not be caught out by the non-compete restrictions in their agency agreements.