Last Updated May 29, 2024
What is a Non-Compete Agreement?
A Non-Compete Agreement (NCA) is a contract where one party agrees not to compete against the other.
When two parties exchange sensitive business information, one party could exploit that information to gain an unfair competitive advantage. A Non-Compete Agreement can help deter and limit this kind of competition.
Generally, Non-Compete Agreements must be limited by certain boundaries or parameters, such as time, geographical area, or industry.
Non-Compete Agreements are also known as:
- Covenant not to compete
- Restrictive covenant
Why should I use a Non-Compete Agreement?
The primary purpose of Non-Compete Agreements is to prohibit unfair competition. When you share sensitive information with another party, a Non-Compete Agreement deters them from using it to their or another competitor’s advantage.
In addition to preventing unfair competition, a Non-Compete Agreement can also help you:
- Protect confidential information. The agreement includes a confidentiality clause to protect everything from trade secrets to customer lists.
- Get legal recourse. If the other party begins competing against you unfairly, you can rely on the contract to seek injunctive relief to stop the behaviour.
When should I use a Non-Compete Agreement?
Non-Compete Agreements are helpful in most circumstances where you share sensitive business information with another party. This exchange could be for the purpose of employment, commercial negotiations, or the disclosure of intellectual property.
1. Employment or service
Non-Compete Agreements can help you manage employees and service providers with access to sensitive information or trade secrets.
By signing, workers agree not to compete with you for a set amount of time or within a specific geographical area. While they’re working for you, and after they leave, the agreement deters them from taking a job or starting a business where they can gain a competitive advantage against your company.
Using a Non-Compete Agreement can also encourage you to invest resources in an employee. For example, you can pay for external training with peace of mind that employees can’t use it to start or work for a competing company.
Depending on your circumstances, you can add a non-compete clause directly to an Employment Contract instead of creating a separate Non-Compete Agreement.
2. Purchase or sale
You can use a Non-Compete Agreement to protect your interests in commercial negotiations, like when buying or selling a business. In fact, the first document that a prospective buyer should sign in an acquisition process is a non-compete or Confidentiality Agreement.
When buying a business
After selling a business to you, the original owner could use their existing relationships with customers and vendors to open a new business of the same type in the area. This would take valuable market share away from you and defeat the purpose of buying the business.
Entering into a Non-Compete Agreement restricting the seller as part of the business acquisition can protect you against unfair competition.
When selling a business
When negotiating the sale of a business, the buyer usually conducts due diligence and assesses the value of the business they intend to purchase. In these cases, the seller offers the prospective buyer access to sensitive business information, like financial records and customer lists.
A Non-Compete Agreement can help ensure the buyer doesn’t misuse this business information for competitive purposes.
3. Invention
Any time you share intellectual property with someone, you can use a Non-Compete Agreement to protect your interests. Suppose you have to share an invention with a potential investor or disclose details of your work to a collaborator. Access to sensitive information could allow them to compete unfairly with you.
By having a Non-Compete Agreement in place, you can keep the invention details confidential and prevent the other party from using their knowledge against you. If they share or use the information in any way, you can take legal action against them.
Are Non-Compete Agreements enforceable in Australia?
Yes, Non-Compete Agreements can be enforceable in Australia, depending on their exact terms and your jurisdiction.
Most Australian states and territories recognise them as valid under common law. However, if someone challenges a Non-Compete Agreement, a court might void it if the terms are too broad or restrictive. In particular, time limits restricting former employees should be kept short to be enforceable.
To make your Non-Compete Agreement more likely to be legally valid, you should:
- Make sure the restrictions are reasonable. The scope and duration of the restrictions should be fair and reasonable, given the circumstances.
- Consider the industry. Businesses in fields where tight competition and trade secrets are the norm are more likely to need Non-Compete Agreements.
- Offer consideration. In exchange for signing the contract, the other party could receive a job offer, promotion, or pay raise.
- Avoid ambiguity. Be specific about what activities are prohibited, as broad clauses are less likely to hold up in court.
- Make sure the agreement is necessary. Employees with little access to sensitive business information don’t need to sign one, while executives with a lot of insider knowledge probably do.
A court will likely throw out a Non-Compete Agreement that hinders an employee’s career or harms local commerce. Similarly, if the agreement isn’t limited to a reasonable scope of time or geographical area, it might be scaled down to what the court considers reasonable.
Non-Compete Agreements by state and territory
New South Wales is the only Australian jurisdiction with its own laws for Non-Compete Agreements. The Restraints of Trade Act states that non-competes are valid if they don’t go against public policy.
Every other state and territory follows common law. A court may find the clause enforceable if there is a legitimate protectable interest and the restrictions are reasonable. If the non-compete is unreasonable, the court can choose to void it entirely or scale the restrictions down to become reasonable.
Always research your state’s legislation or seek advice from a lawyer to ensure you’re legally compliant.
How do I create a Non-Compete Agreement?
To create your Non-Compete Agreement, you can use LawDepot’s template. Simply fill out our quick and easy questionnaire, and your document will be ready within minutes.
- Choose the circumstances of the agreement (employment/service, purchase/sale, or invention).
- Select the state where you want the agreement to be in effect.
- Add information about the parties involved.
- Describe the terms of the Non-Compete Agreement, such as the length and area of the restriction.
- If necessary, you can include a non-solicitation clause.
- Add a confidentiality clause.
- Create any additional clauses you want to add.
- Have the agreement signed by both parties. Having a witness present isn’t necessary, but it can reduce the risk of a later dispute.
Non-Disclosure Agreements versus Non-Compete Agreements
Both Non-Disclosure Agreements and Non-Compete Agreements seek to prohibit the misuse of confidential information.
If one party has shared confidential information for a specific purpose, the other party can’t use it for anything but that purpose. Attempting to misuse the information for other purposes will result in a breach of the agreement, which could lead to a court case.
One potential misuse of confidential information would be to compete against the business of the disclosing party.
For this reason, many Confidentiality Agreements include a non-compete clause expressly prohibiting this conduct. If a Non-Disclosure Agreement is created with the main purpose of prohibiting competition, it may be called a Non-Compete Agreement instead.
