Non-Compete Clauses- Those Who Have More Will Lose Them! – Elvis Asia

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Introduction

There is the tendency by employers to insert wide and ‘comprehensive’ non-compete clauses in employment contracts in Nigeria in an attempt to “catch” the employees. The scope of the provisions is particularly extended when expatriate workers are involved.  The decision of the National Industrial Court of Nigeria (NIC) in Multichem Industries Limited v. Mr. Sunil Kumar Kakkapilakal & Anor. delivered by Honourable Justice O. A. Obaseki-Osaghae on June 14,  2019, should sound a note of caution to such practice. The court refused to enforce a widely drafted non-compete clause and accordingly dismissed a claim for inducement of its breach.

Multichem Industries’ case

Multichem Industries had instituted the action against Mr. Sunil Kumar Kakkapilakal for breach of a non-compete provision in his employment contract and sought damages against Montana Industries for inducement to breach the contract. The relevant clause provides that:

“The employee covenants with the company that he shall not, for a period of two years after ceasing to be employed under this contract, either alone or jointly with or as a manager, agent, consultant or employee of any person, firm or company directly or indirectly carry on or be engaged in any activity or business in Nigeria which shall be in competition with the business of the company and/ or its subsidiaries”

 Mr. Sunil did not file a defence but Montana challenged the claim on the premise that the claim for inducement to breach contract should fail because the non-compete clause was unreasonable[1]. Montana predicated its defence on the following:

(a)  the clause was too wide because it restricted Sunil in all respects including businesses which may not be related to the business activity in respect of which he was employed by Montana[2].

(b) the clause was not precise in defining the type of business activities Sunil may not be engaged during the operation of the restraint and it is not limited to the business of the kind in which Sunil was engaged by the claimant[3].

(c)  It is not reasonable and against public interest for a contract/temporary staff who has barely worked for two years without any form of benefit to be prevented from working elsewhere in any capacity[4].

(d) Sunil’s place of assignment under the contract was limited to Delta and Anambra States. The extension of the limitation to the whole country was unreasonable[5]

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(e) Multichem did not plead any specific secret or client the restrictive covenant was intended to protect.

Decision of the court

The court agreed with Montana on a, b, and d above. In doing so, the court refused Mmultichem’s contention that Sunil did not file a defence and agreed with the submission of counsel to the defendants that the question of whether or not a non-compete clause is reasonable is an issue of law which a claimant must discharge whether or not there was a defence.  At page 10 of the judgment, the court held thus:

“In this instance the geographical area of coverage is the whole Nigeria. the evidence of CW is that the 1st defendant was assigned to manage the claimant’s business in Anambra and Delta States of Nigeria only; and he now works in Lagos for the 2nd defendant. I find the area of coverage to be unreasonable. The economic activity is not only the business of the claimant, but also includes the business of its subsidiaries who are not the 1st defendant’s employers; and whose line of business is not pleaded and is therefore unknown. I find this to be unreasonable. The clause has restrained the 1st defendant from being gainfully employed in Nigeria for a period of two years upon his exit from the claimant. I find the length of time the defendant is barred from making use of his skills and general knowledge in Nigeria is unreasonable in terms of time and width….It is detrimental to the interest of the 1st defendant and the economic interest of the country”

The court refused the claim for inducement of breach of contract because in the absence of primary liability on the part of Sunil, there can be no accessory liability for Montana. The court also found that Montana did not know about the contract at the time of employing Sunil and therefore could not have induced the breach[6].

Comments

The decision of the NIC is line with the established tests of enforceability of non-compete clauses, otherwise known as contract in restraint of trade[7] and consistent with other recent decisions of the court[8]. Though section 68 (1) (e) of the Federal Competition and Consumer Protection Act, 2018 exempts non-compete clauses from provisions dealing with restrictive agreements and placed a cap of two years on it, this will not change the judicial approach to its enforcement[9]. This is because such clauses have never been absolutely illegal in Nigeria but restrictively interpreted to ensure it serves a reasonable purpose.

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Employers and legal practitioners should resist the urge to prepare unreasonably wide non-compete clauses as this may defeat the purpose the clause is intended to serve. Other means of protecting trade secrets like the use of non-disclosure agreements should be considered[10].

Another lesson from the case is that a non-compete clause should not be a mere formality or employed as a tool of punishment of an ex-staff. To be enforceable and for a claim of inducement of breach of contract predicated on it to succeed, it must be shown that the clause is intended to protect a clearly defined and ascertainable proprietary interest and that the interest was prejudiced in the circumstances of the case. As the court noted, there was no evidence that Sunil divulged Multichem’s trade secret or confidential information to Montana.

Elvis. E. Asia is a Senior Counsel in Lagos, Nigeria. Mr. Asia can be contacted at elvis.easia@gmail.com

Footnote

[1] Both defendants were represented by the writer.

[2] Courts in the UK have held that a restrictive covenant that extends to customers of an associated company, for which the employee concerned does not work, will be held to be invalid. See Business Seating (Renovations) Ltd v Broad (1989) ICR 729

[3] See the cases Norbrook Laboratories (GB) Ltd v Adair [2008] IRLR 878 and Wincanton Ltd v Cranny [2000] IRLR 276, CA 6 where the court held that an imprecise restrictive covenant is invalid

[4] Section 68 (1) of the Federal Competition and Consumer Protection law, 2018

[5] In the UK, a 3 kilometre restraint which took out the entirety of the City of London was considered too wide and a covenant covering a radius of 25 miles where the customers were concentrated within 20 miles was struck down as being too wide. See the cases of  Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 CA and Spencer v Marchington [1988] IRLR 292

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[6] This was another major basis upon which the defendants’ counsel urged the court to refuse the claim of inducement of breach of contract. The argument and the finding of the court are very significant. To succeed in the tortious claim of inducement of breach of contract, also known as intentional interference with contractual relations, the claimant must show that the defendant intentionally damaged a contractual or business relationships with a third party causing economic harm. The authorities show that the claimant must prove that the defendant did something in the nature of effectually persuading or prevailing upon the other party to the contract to violate his obligations under it. The persuasion may take the form of advice or friendly solicitation, or it may take the form of intimidation or molestation, but in every case it must be shown that the defendant deliberately intervened between the contracting parties, either with the express design of depriving the claimant of the benefit of his contract, or under such circumstances that he must have known that the effect of his intervention would be to deprive the claimant of that benefit. See Short v City Bank of Sydney (1912) 12 SR(NSW) 186 (affirmed in the High Court, (1912) 15 CLR 148), Street J, Lumley v Gye EWHC QB J73, (1853) 118 ER 749, (1853) 2 and Mainstream Properties Ltd v Young and ors [2007] UKHL 21.

[7] See Vee Gee (Nigeria) Limited v Contact (Overseas) Limited [1992] 9 NWLR (Pt. 266) 503, Commercial Plastics v Vincent [1965] 1QB 623 and Koumolis v Leventis Motors Ltd [1973] NSCC 557

[8] See for example 7th Heaven Bistro Limited v. Mr. Amit Desphande, delivered on 27th September, 2018 per Hon. Justice J. D. Peters, available online at https://judgement.nicnadr.gov.ng/details.php?id=2772. See  also Infinity Tyres Limited v. Mr. Sanjay Kumar, delivered on 10th July, 2018 per Hon. Justice B. B. Kanyip, PHD, available online at https://judgement.nicnadr.gov.ng/details.php?id=2004

[9] Indeed, if the section is interpreted to confer unrestrained applicability of non-compete clauses, the section will be contrary to public policy as expressed in section 17 (3) of the 1999 constitution (as amended) and concretized by section 34 of the constitution.

[10] See “Eight steps to secure trade secrets” by world Intellectual Property Organization, available online at https://www.wipo.int/wipo_magazine/en/2016/01/article_0006.html

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