By Prakhar Rai, Founder, My Legal Pal. Advocate, Bar Council of India. LL.B, NLSIU Bangalore. Master of Business Laws.
Quick answer: These clauses stop a business partner from going around you, dealing with your competitors or taking your people. Courts in most countries enforce them if they are reasonable in scope, territory and time, and tied to a real business interest. Two further limits apply almost everywhere: restraint-of-trade rules, and competition (antitrust) law. In the EU, for example, a non-compete in a distribution agreement loses its block exemption if it lasts longer than five years.
Key takeaways
- Exclusivity limits who a party can deal with. Non-circumvention stops a party bypassing you to deal directly with your contact. Non-solicit stops them poaching staff or customers.
- During the contract these restraints are far easier to defend than after it ends.
- Competition law sits on top of contract law. A clause that is fine as a contract term can still be unlawful as an anticompetitive agreement.
- Name the parties, the territory, the duration and the carve-outs. Vague clauses fail.
- Give something in return, such as minimum purchase volumes, so the restriction looks fair.
Founders meet these clauses in two places: a distributor, reseller or agency agreement, and an introduction arrangement where a broker or partner brings you a client. In the first case you want to bind a partner. In the second you want to protect a relationship. The drafting differs, and so does what a court will do.
The clause founders get wrong most often is non-circumvention. They sign it to be agreeable, then discover it stops them from selling to a customer they already had.
This guide is about business-to-business restraints. For restrictions on employees, see our piece on non-compete agreement rules by state and country.
What each clause does
| Clause | What it stops | Typical use |
|---|---|---|
| Exclusivity | A party dealing with competitors, or appointing other distributors, in a field or territory | Distribution, supply, agency, licensing |
| Non-circumvention | A party bypassing you to deal directly with an introduced contact, supplier or customer | Introductions, brokers, sourcing, joint ventures |
| Non-solicit | A party hiring or approaching your staff or customers | Services, technology and outsourcing partnerships |
Two legal tests every restraint has to pass
1. Restraint of trade (contract law). Most legal systems start from the idea that people may trade freely, then allow restraints that protect a legitimate interest and go no further than needed.
2. Competition or antitrust law. If the clause forecloses competitors from a market, a regulator or a court can strike it down, whatever the contract says. This matters most for exclusive supply or distribution where one side has a large market share.
Country by country
United States
- Federal antitrust. Exclusive dealing is judged under Section 1 of the Sherman Act by a rule of reason, which looks at the effect on competition. The Supreme Court’s 1961 decision in Tampa Electric Co. v. Nashville Coal Co. is the classic authority on exclusive supply contracts.
- State law. Most states enforce reasonable business restraints. California is the notable exception on the face of its statute: Business and Professions Code section 16600 voids restraints on a lawful business, but in Ixchel Pharma, LLC v. Biogen, Inc. (Cal. 2020) the California Supreme Court held that restraints in contracts between businesses are judged by a rule of reason, not struck down automatically. That’s different from the way California treats employee non-competes.
- No-poach. An agreement between companies not to hire each other’s staff can raise antitrust issues, especially if it isn’t tied to a legitimate collaboration. Keep non-solicit clauses narrow and linked to the project.
United Kingdom
- Restraint of trade. A restraint is enforceable if it protects a legitimate interest and goes no further than reasonably necessary. Courts can sometimes remove an offending part, but the Supreme Court’s decision in Tillman v. Egon Zehnder Ltd [2019] UKSC 32 shows the limits of that.
- Competition law. The Competition Act 1998 prohibits anticompetitive agreements, and a vertical block exemption order covers many distribution agreements below a market share threshold. Check the current order for non-compete limits.
European Union
- Article 101 TFEU prohibits agreements that restrict competition, with exemptions. Under the Vertical Block Exemption Regulation (EU) 2022/720, a non-compete obligation in a supply or distribution agreement can benefit from the exemption if the supplier’s and buyer’s market shares are each 30% or less, the agreement has none of the hardcore restrictions, and the non-compete is not of indefinite duration or longer than five years.
- Tacit renewal. A non-compete that renews beyond five years can still qualify if the buyer can effectively renegotiate or end it on reasonable notice and at reasonable cost.
- After the term. A post-termination non-compete is excluded from the exemption unless it is indispensable to protect substantial, secret know-how that the supplier transferred, is limited to the point of sale the buyer used, and lasts no more than one year.
- Germany. National courts also apply general rules on immoral or excessive restraints in the Civil Code, so a clause can fail even where EU competition law is satisfied.
India
- Section 27 of the Indian Contract Act, 1872 makes an agreement in restraint of trade void to that extent. In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. (1967), the Supreme Court enforced a negative covenant operating during the term. In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan ((2006) 4 SCC 227), the Court held that Section 27 applies to restraints after the contract ends, so a tail beyond the term is hard to enforce. Please verify both holdings against the reports before citing them.
- Section 3(4) of the Competition Act, 2002 covers exclusive supply and exclusive distribution agreements under a rule-of-reason test (appreciable adverse effect on competition).
- If you’re setting up a channel in India, our distribution agreement page covers how we structure it.
Singapore
Singapore courts apply the common law restraint of trade doctrine, and section 34 of the Competition Act 2004 prohibits agreements that prevent, restrict or distort competition. The same drafting discipline applies: a defined interest, a limited scope and a limited period.
Side by side
| During the term | After the term | Competition law | |
|---|---|---|---|
| US | Usually enforceable if reasonable | State law; California applies a rule of reason to B2B | Sherman Act rule of reason |
| UK | Enforceable if reasonable | Harder; needs a protectable interest | Competition Act 1998 |
| EU | Exempt if under 5 years and market shares are low | Narrow: know-how and one year | Article 101 TFEU and VBER |
| India | Generally enforceable if reasonable | Difficult under Section 27 | Competition Act s.3(4) |
How to draft each clause so it holds
Exclusivity
- Define the field, the territory and the products precisely.
- Set a term, with renewal tied to performance, such as minimum purchases.
- Give the restricted party something back: a minimum volume, marketing support or a price commitment.
- Carve out existing customers and arrangements.
- Check market shares if you’re in the EU, UK or India.
Non-circumvention
- Define the protected contacts by name or in a schedule, not as “any person we introduced”.
- Limit the period, and accept that a long tail may not be enforceable in some countries.
- Exclude contacts the other party already had, or found independently.
- State what counts as circumvention: dealing directly, or through an affiliate or an agent.
Non-solicit
- Cover active solicitation, not general job adverts.
- Limit it to people who worked on the relationship.
- Add a carve-out for those who approach on their own.
Remedies and choice of law
A court can often grant an injunction to hold a party to a restraint during the term. Damages are harder to prove for a lost introduction, so some contracts add a fixed sum, which must be a reasonable estimate of loss. Our article on liquidated damages explains how courts treat these.
Choice of law won’t always save a restraint. A court at the place where the restraint operates may apply its own mandatory rules. If your counterparty is overseas, think about enforcement from day one, as we discuss in how to enforce a contract in India.
Before you sign one
- Is it limited to a field, territory and period you can accept?
- Does it stop you serving customers you already had?
- Does the other side give you something in return?
- Does it run after the term, and is that likely to be enforceable where you need it?
- Does competition law matter because of the market shares involved?
Our contract review and revision team can check these clauses in a real draft, and contract negotiation helps when the other side won’t move. If your channel spans several countries, our SaaS reseller agreement guide covers reseller specifics.
Quick answers
Is a non-circumvention clause enforceable? During the contract, usually, if it is reasonable and clear. After it ends, enforceability drops sharply in many systems, including India and the EU.
What is the difference between a non-compete and a non-solicit? A non-compete stops a party doing a type of business. A non-solicit stops them approaching particular people or customers. Courts are generally more comfortable with the narrower non-solicit.
Can I make my distributor exclusive for ten years? In the EU, a non-compete longer than five years loses the block exemption unless it can be justified individually. Even where it’s allowed, a long exclusivity should have renewal tied to performance.
Does a US governing law clause protect a restraint operating in another country? Not always. Courts where the restraint operates can apply their own mandatory rules, including competition law.
A note on who we are
My Legal Pal is an international team of contract lawyers with US law experience. We aren’t a US law firm, and we aren’t a local firm in every country mentioned above. This article is general information and not legal advice on your facts. Have a lawyer qualified in the governing jurisdiction check the details before you act.
About the author. Prakhar Rai is an advocate enrolled with the Bar Council of India and the founder of My Legal Pal. He holds an LL.B from NLSIU Bangalore and a Master of Business Laws, and works on contract drafting, review and disputes for founders and businesses across borders. Full profile
