Who is responsible for non-compete provisions in the contract of sale?

Who is responsible for non-compete provisions in the contract of sale?

Published:

Author: Rachel Reeves

Applies to: England and Wales

The absence of non-compete provisions when purchasing a business should cause alarm bells to ring.

In the recent case of Luffeorm Limited v Kitsons LLP [2015] EWHC B10 (QB), the High Court was willing to hold a firm of solicitors liable in negligence and in breach of contract for failing to advise on the absence of non-compete provisions in the contract of sale.

The case

In April 2011, the claimants purchased the lease of a public house, the Highwayman's Haunt ('pub'), from the sellers. The sale included the purchase of the business of the pub as a going concern and the largest part of the consideration was for goodwill. Just three months from completion, one of the sellers took over another public house within a three mile radius of the pub. The claimants believed that the pub's customers had decided to follow the sellers and that this had led to a severe decline in the profits of their business. In July 2012, the claimants sold the lease of the pub for considerably less than they paid for it.

The claimants argued that the downturn in their business (and therefore their loss) would not have been suffered if the contract with the sellers had contained a covenant restraining the sellers from operating a competing public house within a five mile radius for a period of two years and if their solicitor had advised them of the risk that trade might be diverted if there was no such covenant.

What was the solicitor expected to do?

The court considered a number of cases concerning the extent of a solicitor's retainer. It accepted that the solicitor had no duty to advise the claimants on the commercial risks inherent in the transaction. The solicitor was retained to act on behalf of the claimants with their purchase of the 'leasehold business'. This was deemed to go beyond mere conveyancing in respect of the lease. However the solicitor should have noticed, and drawn to the claimants' attention, the absence of a restraint of trade covenant. His failure to do so meant that he was negligent and in breach of contract.

Ultimately, the claim failed on the causation ground. The court found that even had the claimants been advised of the absence of a restraint of competition covenant they would not have withdrawn from the transaction; the facts showed that they were determined to proceed with the transaction as quickly as possible.

Conclusion

  • when paying valuable consideration for a business or the goodwill of a business, a prudent buyer should always ensure that restrictive covenants are negotiated prior to completion. This will offer much needed protection to the buyer who will want to preserve the future value of the business
  • it is essential to ensure that clients and advisers are clear on the scope of work at the outset of a matter
  • it's easy to fail to properly consider risks or adequately guard against them if you are pushing a deal through to completion. Where possible, manage the process within an appropriate timescale

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the author

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Rachel Reeves

Senior Associate

03700 86 8905

Rachel has wide experience of all aspects of corporate law. She has advised on mergers and acquisitions, private equity, group and capital restructuring, corporate governance and compliance issues. Rachel works with a variety of clients including private companies, listed plcs, management teams and owner managed businesses.

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