The Contract Adviser

Hello Entrepreneurs!

In this series of columns, we're looking at the impact of including severability language on a non-compete provision contained in an asset purchase agreement (APA).  In my hypothetical, you are purchasing a one-store clothing retail business, and want the seller, Fred, to agree to a non-compete provision.  In the first of these columns (October 1st column), I present a choice of three severability provisions - Choice A, Choice B and Choice C.  In yesterday’s column, we looked at the impact of Choice A.

Today, let's look at Choice B, as follows...

Choice B - “If any provision of this Agreement is unenforcable, then the entire Agreement is no longer in effect and no party has the right to enforce any provision of this Agreement.”

Again, here is the hypothetical non-compete provision.
 
“For a period of three (3) years after the Closing, Seller shall not directly or indirectly (i) own, operate or otherwise engage in any clothing retail business in any location within 15 miles of the Retail Store*, or (ii) own an interest in, manage, operate, control or render financial assistance to, or become an officer, employee, partner, stockholder, or consultant of or otherwise participate in, any person that engages in a clothing retail business in the above-described restricted area.”

*"Retail Store" is defined elsewhere in the agreement as the store being sold under the APA.

Truth be told, an asset purchase agreement is not the best hypothetical to use for Choice B because the sale of a business is not an on-going transaction.  Except for the non-compete, maybe a brief consultancy period, the survival of certain indemnities, and confidentiality obligations, the Seller and the Purchaser pretty much go their separate ways after the closing.  Choice B would have the court unravel the entire transaction if it finds any part of the non-compete unenforceable.  A court-ordered unravelling (in legal parlance, a "recission") of the asset purchase agreement (where the court makes Fred buy the business back) is highly unlikely, and in fact may not be desired by either party.

Choice B is not a great solution in general.  Here's why... most contracts have provisions that remain in effect (in legal parlance, "survive") after the contract's termination or expiration.  In fact, I've listed above some of the surviving post-closing provisions of the asset purchase agreement - things like confidentiality, etc.  Confidentiality is the kind of obligation most businesspeople want to maintain even after a business relationship is terminated (or gets unravelled).  So, the mostly negative impact of Choice B can best be summed up by this rhetorical question - do you really want your severability provision to undo the entire agreement, even provisions like confidentiality, which were meant to survive no matter what?