Non-Compete Clauses in Contracts of Employment: Contractually Beneficial or a Challenge to Public Policy? – Israel Olawunmi

2
  1. Introduction.

The regulation of the relationship between an employer and an employee derives from statute and the contract of employment itself. The express or implied terms of a contract of employment determine its duration. It is an ineluctable reality that employees would always leave their employers in the search for a greener pasture- either to set up their own enterprise or work in a much better organization. This is one reality that sometimes leave employers anxious; especially bearing in mind the rigours of a new recruitment process to fill the vacuum left by a former employee’s exit and having to integrate the new employees into the existing structure of the organization, or even having to, in some cases, review their employment terms to make them alluring for prospective employees. Stretching their fears, many an employer also believe that there is the risk that, upon leaving their employ, a former employee might delve into the same business activities as theirs or get employed by their competitors, and there lies some worries that the former employee might even woo away their workers or clients from them; or that the former employee might exploit their organization’s trade secrets, business strategies, marketing plans or confidential information gained while in their employment for their own business’ advantage or that of their new employers. Consequent to these fears is why employers insert certain restrictive clauses in their contract of employments to protect themselves against these possibilities. This work has as its focus, an appraisal of these restrictive clauses under the Nigerian Labour law and issues that are incidental.

  1. Historical Background of Non-Compete Agreements.

Non-compete covenants used to be generally unenforceable, because of the public policy doctrine. The history of non-compete clauses in employment contracts dates back to the Dyer’s Case (1414) 2 Hen. V, fol. 5, pl. 26. In this case, a master craftsman attempted to enforce an agreement which would restrain an apprentice from competing with the master upon the end of the apprenticeship. The court invalidated the agreement on the ground that the master had promised nothing in return. The court’s major concern was protecting the apprentice’s right to earn a living. Hull, J‘s dislike for non-compete agreements was so pronounced in the case, that he ordered that the plaintiff be imprisoned till he paid a fine to the King.

This remained the unfavourable attitude of the court to non-compete agreements. In Claygate v. Bachelor (1602) Cro. Eliz. 872, it was held, that a bond conditioned to pay £20 if A shall use the trade of a haberdasher within a certain time and place, is void. In The Case of the Tailors of  Ipswich, 77 English Rep. 1218, 1219 (King’s Bench 1614), Chief Justice Lord Coke did not mince words, when he held that no man could be prohibited from working in any lawful trade, and such trade restraints could force young men into idleness.

There was however, a different turn in the watershed decision in Mitchel v. Reynold(1711) 1. P. Wms 181. In this case, the defendant leased a bakery to plaintiff for five years. As part of the lease terms, the defendant agreed not to compete with the plaintiff in the baking trade, during the lease term and within the town they were in; that if the defendant did business as a baker during the lease term and within the town, he would be required to pay the plaintiff, on a bond for 50 Pounds. The plaintiff sued the defendant for payment on the bond, claiming that he was transacting as a baker in violation of the agreement not to compete. The defendant contested that, the agreement not to compete in the baking trade constituted an unlawful restraint on his trade, and the agreement therefore, could not enforced against him. Chief Justice Parker held, while general restraints on trade were unlawful, as they benefited neither party, some partial restraints were reasonable; as the defendant had received financial benefit of rent, the restrictions were limited and specific, and there was no injury to the public. In this case, the restraint of trade was necessary and ancillary to a lawful transaction, hence, enforceable. This case laid down the ground of reasonableness for the enforceability of non-compete agreements. 

  1. What are Non-Compete Clauses?

Non-compete clauses are restrictive clauses. They are also known as non competition or non solicitation clauses or covenants not to compete (CNC). These clauses at law are aimed at protecting employers from competition, especially from their past or present employees, in that they restrain employees from engaging in business either on their own or in the employ of another employer upon leaving their employ, which is in the line of their own business activities. They restrict the employee’s future liberty to exercise his trade, profession or business in such a manner or with such persons as he chooses.

ALSO READ   Re: Lagos Drags FG to Supreme Court Over Virtual Hearing - Please, Where is The “Dispute”, Udemezue Asks

A non-compete agreement may form a part of the contract of employment or be contained in a different agreement, which in most cases serves as a condition precedent for the employee to be considered for employment. Furthermore, these clauses generally prohibit an employee from entering into any similar employment for a given period of time or within a given geographical location. This restriction mostly operates in two forms, namely: a restriction that applies during the course of the employment; and the other restriction that continues to operate even after the employment has ceased-this transcends the employment period. The first restraint is usually justified in order to protect the employer’s business interests, but may be void and unenforceable when it does has elements vitiating the law of contract. In Esso Petroleum Company v. Harper’s Garage(Stourport) Ltd( 1967) 1 W. L. R, 871 at pg 727, Lord Pearce held that an agreement will be unenforceable “if during the contract, one of the parties is too unilaterally fettered.”

The other example of non-compete clause that operate after the contract of employment has been terminated is prima facie void on the ground of being contrary to public policy doctine requiring competition.

On the jusification for the insertion of non-compete clauses, essentially, non-compete clauses are inserted in employment contracts to ensure the following:

  1. i) That an employee is restrained from working with a competitor upon the termination of the given employment;
  2. ii) that an employee upon ceasing to be an employee of his current employer is restrained from disclosing the employer’s trade secrets, business strategies, marketing and confidential information gained in the course of his employment or even exploit same for his business advantage –Rubber v. Manning(1917) 86 LJ Ch 377; Herbert Morris Ltd v. Saexlby; and

iii) that an employee is restrained from wooing his former employer’s clients for his new employer or business, or former co-employee of his former employer to be an employee in his new employment or organization- Robb v. Green[1895] 2 QB 315; Wessex Dairies Ltd v. Smith; Scheting Chemicals Ltd v. Falkman Ltd(1982) QB 1.

Apart from contracts of employment, joint venture agreements and shareholders’ agreements may require the insertion of non-compete clauses. On the other hand, businesses which are to develop strategic alliances, which seek to joining of forces and resources to create a business partnership and leverage on each other’s strength, yet remain independent, may not require the insertion of non-compete clauses in their agreements. What is most useful in this circumstance is a synergy to yield good business results rather than the push for non-competition.

  1. Enforceability of Non-Compete Clauses in Contracts of Employment.

As a general rule, a contract in restraint of trade is void at law. This stems from the public policy doctrine, and because an employee may not only lose his job, but also the right to certain other jobs, and these underpin the dark side of non-compete agreements and the restraints. In the House of Lord decision in, Nordenfelt v Maxim Nordenfelt (1894) A.C 535, which is the foundation of all modern law on the subject of restraint of trade, Lord Macnaghten held that the public has an interest in every person carrying on his trade freely; so has an individual, and that all interference with individual liberty of action of trading and all restraints of trade are contrary to public policy and therefore void. The House of Lords in this case held that all covenants in restraint of trade, are in the absence of special circumstances justifying them, void as being contrary to public policy. The House of Lords went further to classify covenants in restraints of trade into two classes: general and partial. General covenant is void in all cases, whilst partial covenants are void if unreasonable in the interest of the parties and the public. It follows that, all contracts in restraint of trade are prima facie void, but might be acceptable if in the interest of the parties and the public.

This position was followed and applied by Alexander, J in the Nigerian case of Leonataritis v. Nigerian Textile Mills Ltd(1967) NCLR 114, where the court held that a contract in restraint of trade is valid if:

  1. i) It is reasonably necessary to protect the interest of persons in whose favour it is imposed;
  2. ii) it is not unreasonable as regards the person restrained; and

iii) it is not injurious to the public.

In determining the question as to reasonableness, the court must give consideration to:

  1. i) The nature of the business, trade or occupation;
  2. ii) the area which the restraint is to be imposed; and
ALSO READ   Judiciary Always at the Receiving End - Omenyi Ejiofo

iii) the given period for which it is to continue.

In Campagne Francaise de’ L’ Afrique Occidentale v. George E Lueba(1918) 3 NLR, it was held that the onus of establishing facts and circumstances which show that a restraint is reasonable is on the party alleging that it is of character.

It is noteworthy that, the court will not uphold any non-compete clause which has as its sole purpose, the protection of the employer from mere healthy competition. In John Holt & Co. (Liverpool) Ltd v. Chalmers (1918) 3. N. L. R. 77, it was held that a non-compete clause in the employment contract which restricted the employee from engaging in business within an area after leaving the employer’s service without the employer’s consent was beyond that which was necessary to protect the employer’s interest and unreasonable.

It is imperative at this juncture to discuss briefly the identified determining factors for reasonableness that the court will consider to enforce non-compete clauses:

  1. 1. The Nature of the Business, Trade or Occupation Protected.

In deciding the question as to reasonableness of a non-compete clause, a restraint imposed on an employee would not be reasonable except the employer has a proprietary interest which demands protection from the employee’s activities. In deciding this, the employee’s status in business, trade or occupation is germane. If he holds an important role or has access to confidential information, the court will enforce the clause against him, than an employee who holds a less important role, especially when the nature of his job does not avail him access to the employer’s trade secrets or confidential information. The employee must hold a position in which his subsequent competitive business activities would injure that of his employer. In Plowman (G. W.) & Co Ltd v. Ash(1964) 2 All E. R. 10, the court held that a restraint on a sales representative was valid, as he was in a position to attract his employer’s customers.

It is noteworthy that where a non-compete covenant contains more than one term, and one of which is in undue restraint of trade, the court will apply the doctrine of severance to strike out the offending term, then leave the other part – Scorer v. Seymour-Johns(1966) 3 All E. R. 347; Anglo- African Supply Co Ltd v. John Benvie (1937) 13 NLR. 158.

  1. 2. The Area which the Restraint is to be Imposed.

Geographical scope with respect to restraint is also a deciding factor as regards the enforcement of non-compete clauses in contracts of employment. Where the restraint is more extensive in area than the employer’s proprietary interest requires, it will be unenforceable or that part extending its area of operation illegitimately will be expunged. In Goldsoll v Goldman(1915)1 Ch. 292, where it involved a business of imitation jewelries in London, a restraint extending to real jewelries and other European Countries was held unreasonable and invalid. In Mesop Kholopikiaan v. Metal Furniture Nigeria Ltd(Unreported) High Court of Lagos State, Ikeja Judicial Division, Suit No IK/180/69  delivered on March 5th 1971, Beckley J. held that, a non-compete clause was declared void, as it covered a radius of 800 miles, from Ikeja, Lagos, where the defendant company was based. This restraint not only covered the whole of Nigeria, but some West African States also.

  1. 3. The Given Period for which it is to Continue.

The duration of the restraint is also a cogent factor in determining a reasonable and enforceable non-compete clause to this end. Where the duration is long, it will be void and unenforceable. The Court in Esso Petroleum Ltd v. Harper’s Garage(Stouport) Ltd (supra) held that a 21 year restraint imposed on the plaintiff was unreasonably long and owing to that, the clause was held void and unenforceable.

Statutorily, section 68 (1)(e) of the Federal Competition and Consumer Protection Act, 2018 provides that the duration of the restraint especially for contract staffers must not exceed 2 years.

  1. Right of a Third Party as Regards Non- Compete Agreements.

There is the question as to what extent a third party can intervene in a non-compete agreement between an employer and employee. The simple answer to it is the doctrine of privity of contract rule. Lord Haldane in Dunlop Pneumatic Tyre Co Ltd v. Selfridge Ltd[1915] AC 847 at p 853 held that only parties to a contract can lay claim to rights and obligations arising from the contract, and they cannot be conferred on a stranger to the contract. However, flowing from Lord Atkin’s ‘neighbor principle’ in Donoghue v. Stevenson( 1932) AC 562, where harm is done to a party from a contract between two parties, the third party is not restrained from bringing an action, just because he was not a party to the action. This was the position of the court in Abusomwan v. Mercantile Bank of Nigeria(1987) 3 NWLR(pt 60) 196. In this case, the court held that obligation towards contracting parties extends to all such persons in the world who may be affected by the acts or omissions of the contracting parties. Furthermore, it will be illegal if an agreement imposes undue restraint on the mobility its labour. An affected employee may obtain an order in Court to set aside such restrictive agreement even where he was not a party to it. In Eastham v. Newcastle United Football Club(1963) 3. All. E. R. 139, it was held that a system of “retain and transfer” operated by members of the English Football League was an undue restraint on mobility of labour, and a footballer was granted a declaration against it, even though he was not part of the agreement

  1. Notable Recent Judicial Attitude of Nigerian Courts towards Non-Compete Agreements.
ALSO READ   Who’s After Paul Usoro SAN?

Having discussed the attitude of the courts towards non-compete agreements, it is needful to cite the decisions of the court in few notable recent cases on non-compete cases in Nigeria. They are as follows:

 The Court of Appeal in Afropim Engineering Construction Nigeria Ltd v. Jacques Bigouret  [(2012);FWLR [pt.622]1740], held that a non-compete clause in a contract of employment was unconstitutional, contrary to public policy and unreasonable because it attempted to castrate an able-bodied man, render him unemployed, useless to himself and his family.

In Overland Airways Ltd. v. Captain Raymond Jim(Unreported) Suit No: NICN/LA/ 597/2012, the defendant, a former employee of the plaintiff airline, was bonded to serve the company for a minimum of 4 years after his aviation training, as his training was sponsored by the company. Upon completing his training, the defendant attempted to leave the plaintiff’s employment. The court enforced the training bond against the defendant, as the court found the restriction reasonable. This is to allow the employer benefit from its investment in the employee, since it sponsored his training at the aviation school.

In Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors. ( Unreported)Suit No: NICN /LA /170/ 2014, The National Industrial Court held that albeit non-compete agreements are generally unenforceable, there will be an exception where such clauses are shown to be reasonable, bearing in mind certain factors. The non-compete clause as drafted in the contract of employment between both parties reads: “Please note that all the above terms and conditions are subject to you agreeing not to join any other company in Nigeria for one year if you cease working with us.”The court held the clause was very broad, and that though the restraint for one year, and within Nigeria was reasonable, the non-compete clause restraining defendant from joining “any other company in Nigeria” was unreasonable and unenforceable. In this case, the court was concerned about the reasonableness of the clause and not the restraint in the clause. It follows that the non-compete agreement was not breached, since it was unenforceable and void.

 In 7th Heaven Bistro Limited v Mr. Amit Desphande (Unreported) Suit No: NICN/LA/396/2015, the court held, a non-compete agreement that restrained the defendant from talking any employment in Nigeria for a period of 3 years,  after leaving the plaintiff employer was inhuman and stifling and found to be an unfair labour practice.

  1. Conclusion and Recommendations

In a contract of employment, as much as employees need to be protected under the law, employers in the same vein are entitled to protection. In seeking to protecting employers are restrictive covenants, however, in inserting these clauses is the call for caution; drafting them requires a level of circumspection. Employers must be mindful of the proprietary interests they seek to protect. Employers must stave off insertion of unreasonably broad and wide non-compete clauses in their contracts of employment as they may end up counterproductive, and make a dog’s breakfast of the protection the employer seeks to achieve. The clauses must be well drafted with consideration given to nature, duration, geographical location, and other ancillary factors, so the clauses can be enforceable if there is a need to resort to the court. Furthermore, judging from some circumstances, it appears many an employee, maybe out of desperation to get a job, or recklessness, sign employment contracts containing non-compete clauses without actually understanding the implication of these restraining clauses. On the part of the employer, it is advised that the employers should endeavour to explain the implication of these covenants to their prospective employees to stave off a breach or avoidable litigation process. Lastly, prospective employees, on their part, should endeavour to seek legal advice before agreeing to any non-compete agreement.

Israel Olawunmi writes from Lagos. He can be reached at: olawunmiisrael10@gmail.com

2 COMMENTS

  1. This design is incredible! You most certainly know how to keep a
    reader amused. Between your wit and your videos, I was almost moved to start my own blog (well, almost…HaHa!) Excellent job.
    I really loved what you had to say, and more than that, how you presented it.

    Too cool!

LEAVE A REPLY

Please enter your comment!
Please enter your name here