In commercial transactions, it is common for one or both parties to provide non-compete undertakings. For example, in a business acquisition, the seller of the business may agree that it will not compete with the business that it has sold, and a clause to this effect may be included in the share purchase agreement or the asset purchase agreement. And in a joint venture, each of the joint venture parties may agree that it will not compete with the joint venture company, and a clause to this effect may be included in the joint venture agreement or the shareholders’ agreement.
Are such undertakings valid and enforceable under the general law and under specific laws such as competition law? If so, what restrictions are imposed on the nature and extent of such undertakings? This article considers the position under the general law in common law jurisdictions, and then examines the position in China, and under competition law.
In answering these questions, the law often needs to make difficult choices between competing priorities. For example, a fundamental principle in common law jurisdictions is freedom of contract; namely, the parties to a contract should be free to determine their mutual rights and obligations.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.