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Non-compete Clause

Also known as: Non-Compete Agreement, Non-Competition Clause

Definition

A non-compete clause is a contractual restriction preventing someone from competing with a business for a specified period, commonly found in shareholders' agreements and partnership agreements that affect business succession when an owner dies.

For business owners creating wills, these clauses matter because they can survive death and bind estates or beneficiaries, affecting how business interests are transferred and what beneficiaries can do with inherited assets or knowledge.

What Does Non-compete Clause Mean?

Under UK common law, non-compete clauses are subject to the principle of "restraint of trade"—they are prima facie void unless they protect legitimate business interests and are no wider than reasonably necessary. Courts enforce only clauses with reasonable duration, scope, and geographic restrictions protecting confidential information, client relationships, or workforce stability. Business owners encounter these in employment contracts and business ownership agreements like shareholders' agreements or partnership agreements.

In estate planning, non-compete clauses in shareholders' agreements and partnership agreements typically survive death and bind the deceased's estate and beneficiaries. When Sarah, a 45% shareholder in a manufacturing business, dies and leaves her shares to daughter Emma, Emma inherits the 3-year non-compete obligation from the shareholders' agreement. Emma cannot use the business's confidential processes or client lists to compete during that period. The clause protects business value during succession.

Duration standards vary by context. Employment non-compete clauses typically last 6-12 months and face strict scrutiny, while business sale non-competes can extend 2-5 years because sellers receive payment for the restriction. Shareholders' agreements commonly include 1-3 year provisions. Courts are more lenient with business ownership clauses negotiated between equals rather than imposed on employees.

The UK government proposed limiting employment non-compete clauses to three months in May 2023, but this is not yet law and excludes shareholders' agreements and partnership agreements. Business owners creating wills should identify existing obligations and ensure executors understand these restrictions.

Common Questions

"Do non-compete clauses in shareholders' agreements survive the death of a shareholder?" Yes, these clauses typically continue after death and bind the estate or beneficiaries, preventing use of confidential information or trade secrets to compete. Specific terms depend on how the agreement is drafted and whether it explicitly addresses death scenarios.

"How long can a non-compete clause last in a business sale agreement?" Business sale non-competes can last longer than employment clauses because they protect the buyer's investment. In the UK, 2-5 years is common for business sales versus 6-12 months for employment. Courts uphold longer periods when owners voluntarily sell and receive payment for the restriction.

"Can I include non-compete restrictions in my will for my business?" You cannot directly impose non-compete clauses through your will, but you can structure succession using shareholders' agreements, partnership agreements, or family business plans working alongside your will. These documents can make inheritance conditional on respecting existing non-compete obligations.

Common Misconceptions

Myth: "Non-compete clauses automatically end when someone dies."

Reality: Non-compete clauses in business agreements typically survive death and bind the deceased's estate and beneficiaries for their full duration unless explicitly stated otherwise. Executors and beneficiaries must comply with restrictions protecting confidential information and client relationships during succession.

Myth: "All non-compete clauses are unenforceable and not worth including in business agreements."

Reality: Courts regularly uphold reasonable non-compete clauses. Enforceability depends on context: employment clauses face strict scrutiny (6-12 months typical), while business sale clauses can last 2-5 years because sellers receive payment. Courts enforce restrictions that are reasonable in duration, scope, and geography and protect legitimate interests like confidential information or client relationships.

  • Restrictive Covenant: The broader category including non-compete, non-solicitation, non-dealing, and confidentiality restrictions.
  • Shareholders' Agreement: Document commonly containing non-compete clauses that works alongside wills to control business succession.
  • Partnership Agreement: Contract typically including non-compete provisions affecting what happens when a partner dies or exits.
  • Business Succession Planning: Estate planning process where non-compete clauses protect business value during succession.

Need Help with Your Will?

Business owners with shareholders' agreements or partnership agreements need wills that coordinate with existing commercial documents. Understanding how non-compete obligations affect your estate succession helps ensure smooth business transitions.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.