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Non-Competition Clauses in a Subcontract Agreement


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All,

I have a Contract law hypothetical:

A subcontract indicates the subcontractor covenants and agrees that "for a period of 6 months after the term of the subcontract, the subcontractor will not, either directly or indirectly, enter into a contract with End Client X for services Y and Z".

The question: Could a company bound by this clause enter into a subcontract with a Prime that is performing services Y and Z for Agency X? In a Prime-Sub relationship, the sub has no privity of contract with the end-customer...the subcontract relationship is entirely between the Prime and the Sub. There is no contractual relationship between the Sub and the end-customer.

To me, the restrictive language reads that one only violates the clause if the result is a contract with Agency X (whether that contract be direct, or somehow "indirect") for services Y and Z.

My thought is that a Sub does not violate the clause because it is not entering into *any* contract with Agency X: there is no contractual relationship of any kind between Sub and Agency X.

For the sake of discussion, I request that any other legalities surrounding enforceability of non-compete clauses in general be put aside - I'm really just bothered by the "indirect contract" language. I understand the intent was likely to precisely address a subcontract scenario, but based on the limited research I've done I can't seem to find any acknowledgement that an "indirect contract" is a legally recognized concept.

Thanks in advance,

-MuchToLearn

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Guest Vern Edwards

How do you "indirectly enter into a contract"? I don't know what "indirectly" means in that context. What kind of contract formation process does that refer to? Through an agent? I can see how you can provide something to someone indirectly, but I don't see how you can "enter into a contract" indirectly.

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I think the hypothetical firm's entering into a subcontract to perform services Y and Z for another Agency X prime contractor would be a violation of the intent of its agreement with the current prime contractor. It could perform services A and B, perhaps, but not Y and Z. I tend to think "directly" means as a prime contractor and "indirectly" means as a subcontractor.

But, I haven't read anything other than what is posted here.

If you "understand the intent was likely to precisely address a subcontract scenario" and the other party has the same understanding, well, that's great! There is no difficulty. But if you're trying to use weasel words to get out of honoring your mutual understanding, well, that's a problem, isn't it?

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Guest Vern Edwards

I tend to think "directly" means as a prime contractor and "indirectly" means as a subcontractor.

I don't understand "tend" to think. I am going to leave out the "tend" and understand you as meaning that you think "indirectly" means as a subcontractor.

Okay, since I have no opinion of my own at this point, I'm open to yours. So tell us why you think that way. Walk us through your reasoning. Your conclusion is that "indirectly" means as a subcontractor. What are the premises from which that you deduced that conclusion?

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1. Because the original poster wrote, "I understand the intent was likely to precisely address a subcontract scenario..."

2. Because I cannot imagine any other reason for using the words "...either directly or indirectly..." They used those words in a non-compete agreement for some reason, and the subcontract scenario is a plausible (even a likely) reason.

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Guest Vern Edwards

Interesting.

I ignored the OP's "likely", because I took it to mean that he or she doesn't know for sure, which raises doubts about his or her "understanding".

As for the reason for using "either directly or indirectly" -- who knows? Who cares? We're contracting folk. We don't care about the author's reasons for using a word. We care what the parties agreed to. What we have is a problem of contract interpretation.

We have to start with the plain meaning of the words, if there is one. I don't think there is a plain meaning in this case. I think that "indirectly... enter into a contract" is very unclear. You can't omit the phrase "enter into a contract", so the question is how does anyone "enter into a contract" "indirectly"? When two parties "enter into a contract" there is a contract between them. There are rules about when a contract exists between parties. In order for there to be a contract between two parties certain conditions must have been met.There is usually no contract (privity) between a customer and a prime contractor's subcontractor. Unless the parties have agreed on what "indirectly... enter into a contract" means, the party who wrote the language has to explain (1) what it means and (2) show that the other party manifested its assent to that meaning.

You also have the problem of the phrase "services Y and Z".

1. Does the "and" mean that the company could enter into a contract with End Client X, directly or indirectly, for service Y or Z?

2. How are "Y and Z" defined? If the prime has a contract with End Client X for services "Y and Z", then, presumably, a sub would perform only part of those services. If so, would only part of Y and Z constitute "Y and Z"?

I think the contract language is lousy, and I'm not interested in helping a company that wrote a crummy clause get its way.

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ji20874,

When I stated "I understand the intent was likely to precisely address a subcontract scenario", I came to that conclusion via your #2 - in other words, what else could it possibly be referring to? The question still remains why it is a plausible (even a likely) reason this refers to a subcontract arrangement, because it is still unclear why that would make sense given the concept of a contract.

My original question was born out of sheer curiosity, and I appreciate both Vern and ji20874's thoughts.

Something came to me this morning...could the indirect contract language possibly refer to a situation where a wholly owned subsidiary or some kind middle entity contracts with the Government, but for all practical purposes that entity is controlled by the hypothetical firm. Haven't flushed this out yet, but this at least makes more sense to me than insinuating that a subcontractor could enter into an indirect contract with a Government end-client.

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Guest Vern Edwards

It could mean any of a number of things. But if it is not clear on its face, then it means to each party what they say it means unless the other party can show that not to be the case. If asked, I might say that I have no clear idea about what it means, but that it doesn't prohibit subcontracting because it doesn't say "will not contract or subcontract to provide services to End Client X." Then I'd wait for to hear the other guy's argument and see his evidence, assuming that his evidence is admissible.

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Something came to me this morning...could the indirect contract language possibly refer to a situation where a wholly owned subsidiary or some kind middle entity contracts with the Government, but for all practical purposes that entity is controlled by the hypothetical firm. Haven't flushed this out yet, but this at least makes more sense to me than insinuating that a subcontractor could enter into an indirect contract with a Government end-client.

Another possibility that occurred to me for what the drafter had in mind for the use of "indirectly" is to prohibit the company from participating in a joint venture that would contract with Client X for services Y and Z.

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MuchToLearn: If, as you say in post #3, you have no idea what a term in your hypothetical means, then, hypothetically, you question probably ain't so hypothetical.

It may not matter what "indirectly" means. Vern, as usual (if not as always) is pointing in post #9 to the correct analysis. If a term in the contract is not clear we all know the rule on how to resolve the ambiguity. Is the ambiguity latent or patent? Was there an obligation to inquire as to the meaning?

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wvanpup -

Can I say it is "based on a true story?" :)

I also consider it an academic question because my organization has already decided it refers to, or at least covers , a subcontracting arrangement and we are proceeding accordingly. I asked the question to the law department and my direct supervisor (both with vastly more experience than I have), and while I didn't get an opportunity to fully explain my position, it appeared for both of them that it wasn't even a question as to whether it covered a subcontract scenario.

This was an inherited agreement for me, so I cannot speak to what occurred or what did not occur prior to execution. Naturally, the questions are coming up near the end of the term of the agreement.

-MuchToLearn

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