Non-Solicitation, but not as you know it

Introduction

Restrictive covenants are most commonly associated with employment contracts, but non-solicitation clauses can play an equally important role in customer and supplier agreements. They are increasingly used to protect commercial relationships, particularly where one party has invested time, capital, or reputation in building customers or supply chains.

A recent example of a small supplier insisting on non-solicitation obligations to protect its own upstream suppliers serves as a useful reminder: these clauses are not the preserve of large or dominant businesses. When used proportionately, they can be an entirely legitimate commercial safeguard.

Non-Solicitation

In a commercial context, non-solicitation clauses typically prevent a customer or counterparty from:

• Soliciting customers introduced by the supplier
• Approaching key suppliers or subcontractors in order to bypass the contractual arrangement
• Inducing staff or agents involved in the relationship to leave

These provisions are generally defensible, particularly where they are clearly defined, limited in duration, and tied to a legitimate business interest such as protecting goodwill or preserving a carefully managed supply chain.

For smaller suppliers or early-stage businesses, this protection can be critical. Losing a single supplier relationship to a bypass arrangement may be very damaging.

Supporting Non-Solicitation with Exclusivity

Many commercial parties achieve similar protection through exclusivity arrangements. Exclusivity can prevent a customer from sourcing competing goods or services from alternative suppliers, or from dealing directly with specified third parties, for the duration of the contract.

When aligned with non-solicitation obligations, exclusivity can:

• Reinforce the commercial rationale for the relationship
• Reduce the risk of circumvention while the contract is live
• Provide clarity on what is, and is not, permitted conduct

As with any restriction, exclusivity must be proportionate and clearly scoped – by product, territory, or customer group – to remain commercially and legally robust. Customers may also require additional incentives or the supplier have the benefit of other leverage, for the parties to agree to work together exclusively.

Liquidated Damages as a practical deterrent

Non-solicitation clauses can be difficult to police and expensive to enforce. For that reason, some parties include liquidated damages provisions to provide a clear financial consequence for breach.

Where properly drafted as a genuine pre-estimate of loss rather than a penalty, liquidated damages can:

• Act as a strong deterrent against opportunistic breaches
• Reduce uncertainty and enforcement costs
• Provide a quicker route to recovery where losses are hard to quantify

Care is needed to ensure the liquidated damages are defensible and reflect the commercial risk being protected. If the liquidated damages are too high, there’s a risk that the clause is deemed to be a ‘penalty clause’ which would be unenforceable. When used appropriately however, liquidated damages can significantly enhance the effectiveness of non-solicitation provisions.

Conclusion

If you are a supplier who has invested in and part of whose success is contingent on a stable supply chain, then non-solicitation clauses, supported by well-designed exclusivity arrangements and, where appropriate, liquidated damages, can be a powerful way to protect your business.

If this is a topic you’d like to learn more about, please feel free to get in touch