Legal Implication of Non-Compete Clause in Employment Contracts in Nigeria

INTRODUCTION

The success of any organization or body corporate is mainly dependent on sensitive and confidential information. Such sensitive information often includes marketing plans, business strategies, financial plans, industrial relations strategies, or production formulae, which is the key reason why employers employ all forms of protective measures for the protection of their confidential information, intellectual property, and trade secrets.

Without a doubt, employers are faced with the reality of having employees leave to either start their own business or work in another organization. There lies a concern by employers that such employees may work with a competitor, poach their long-term clients or utilize skills, confidential information, and trade secrets acquired during the pendency of their employment for their business or that of their new employer. This concern has prompted many employers to have prospective employees sign non-compete agreements as a condition for working for them. In this article, we shall be focusing on the legal implication of inserting a non-compete clause otherwise known as restrictive clauses in employment contracts in Nigeria.

MEANING OF NON-COMPETE CLAUSE

A non-compete agreement also referred to as covenant not to compete (CNC) or a contract in restraint of trade or non-competition or non-solicitation clause is an agreement wherein an employee consents not to engage in a similar occupation or disseminate trade secrets that are likely to occasion damage or compete against the business of his employer.

A non-compete agreement has been defined as one in which a party covenants to restrict his future liberty to exercise his trade, business, or profession in such a manner and with such persons as he chooses.[1]

It is a business scheme that seeks to prevent employees from taking trade secrets, business connections, or clientele to other corporations or employers when they leave. Such clauses are also utilized where the employer has invested in the employee for example, by way of training, to enable the employer to enjoy the returns on his investment by ensuring that the employee remains in the employment for a specified period.

A non-compete agreement may either be a major clause forming part of the employment agreement or a separate agreement, which serves as a condition precedent to employment. This restriction is usually in two phases, one operates during the pendency of the employment. The other continues to operate even after termination of employment transcending the employment period. Whichever way, it is a practice whereby an employer and his employee enter into a covenant to restrict the right of the employee to engage in particular types of business activities within a given area or locality and/or within a stipulated period of time.[2]

The former restriction can be considered reasonable, and the determination of their validity is less complex since it is aimed at protecting the employer’s business interest.[3] The latter poses a lot of problems when courts are called upon to assess their validity. The argument has always been that a non-compete agreement is of no effect once the contract of employment is determined. This is because the employer is not in any way to protect himself from competition with a former employee. However, an employer is entitled to protect, through restrictive covenants in employment contracts, confidential information, and trade secrets[4] acquired by the employee in the course of his employment.

WHAT THE LAW SAYS ABOUT NON-COMPETE CLAUSES/AGREEMENTS

Notwithstanding the need for an employer to protect his confidence and trade secrets, which has given rise to the insertion of restraint clauses in contracts of employment, the courts are always cautious in giving effect to such contracts.

As a matter of general principle, covenants in restraint of trade are unenforceable. But such contracts or covenants can be enforced if they are proven to be reasonable in their scope, nature, and content; and having regard to the interests of the parties and the general public.[5]

In Koumoulis v Leventis Motors Ltd. [6] the Supreme Court held that:

“Generally, all covenants in restraint of trade are prima facie unenforceable at common law. They are enforceable only if they are reasonable with reference to the interests of all parties concerned and of the public”.

 In determining the question as to the reasonableness, the court considers:

• The nature of the business, trade, or occupation;
• the geographical area which the restraint is to be imposed; and
• the given period for which it is to continue.

In Overland Airways Ltd.  v. Captain Raymond Jim[7], The court enforced the training bond against the defendant. In this case, 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 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.

The court, however, held in 7th Heaven Bistro Limited v Mr.  Amit Desphande[8], that a non-compete agreement that restrained the defendant from taking 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.

With the enactment of the Federal Competition and Consumer Protection Act of 2019 (FCCPA), there appears to be a change in the principles governing non-compete agreements in Nigeria.

Section 59 of the FCCP Act 2019 prohibits agreements in restraint of competition. This provision states that:

“Any agreement among undertakings or a decision of an association of undertakings that has the purpose of actual or likely effect of preventing, restricting or distorting competition in any market is unlawful and, subject to Section 61 of this Act, void and of no legal effect”.

Section 68(e)[9] provides an exception to the prohibition of restrictive agreements which is as follows:

Nothing in this Act prohibits-

A contract of service in so far as it contains provisions by which a person agrees to accept restrictions as to work whether as an employee or otherwise in which that person may engage during or after the termination of the contract and this period shall not be more than two (2) years;

The effect of this Section is that a non-compete agreement will be enforceable as long as it does not exceed (two) 2 years. This is a fundamental change from the case law authorities which seemed to emphasize the reasonability of the clause. It, therefore, means that under the FCCPA which was enacted on January 30, 2019, a non-compete clause will be enforceable (without the need of proving its reasonability), in so far as it does not exceed two years.

Furthermore, it also indicates that once a non-compete clause stipulates for more than two years, it will become unenforceable no matter how reasonable such a clause may be under the circumstance.

WHAT THEN IS THE LEGAL IMPLICATION OF A NON – COMPETE CLAUSE IN AN EMPLOYMENT CONTRACT?

The legal implication of a non-compete clause or agreement will depend on its enforceability. An enforceable non-compete clause or agreement implies that:

1. the employee is prohibited from working with a competitor upon the termination of the given employment for a period of two years;
2. the employee upon ceasing to be an employee of his current employer is prohibited 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;[10]
3. the employee is prohibited from enticing 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.[11]

Where an employee breaches a valid non-compete clause or agreement, the following remedies will be available to the former employer:

Damages

Damages follow breach of contract and is payable by the party responsible for the breach.[12] An employee will be liable to pay damages that can be compensatory, punitive, or liquidated where he violates a non-compete agreement that is legally valid and enforceable under the law.

The purpose of compensatory damages is to compensate the victim (the former employer) of a tort for the harm suffered and it seeks to put him as far as possible in a position he would have been in, had the tort not been committed.[13] In this case, compensatory damage will be made to the former employer for any actual losses suffered by the employer. The amount will depend on what the employer can prove the damages were in Court.

In addition to the compensatory damages, punitive damages may be awarded where the employee’s conduct is sufficiently outrageous to merit punishment as where it discloses malice.[14] In this case, the employer is required to provide strong evidence showing malicious conduct by the employee.

The Black’s Law Dictionary[15] defines ‘Liquidated Damages’ as “An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches; also, If the parties to a contract have agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages”.  In this context, employers may include an amount that the employees must pay if they breach the non-compete agreement with their employer.

Injunction

The former employer may file for an injunction against the employee – that is an order from a court directing the employee to refrain from violating the non-compete agreement.[16]

This means that in many cases, the former employer cannot or does not try to prove that he suffered damages. This may be because the irreparable harm done cannot be compensable by monetary damages.  Instead, the employer asks the court to uphold the non-compete agreement – make the employee leave the new employer.[17]

Tortious Interference

In addition, the former employer may also take legal action against the current employer for the employee violating the non-compete agreement under tortious interference with contract or business relations. This action will only be allowed where it is established that:

1. The present employer intended to cause damage to the former employer’s economic relationship with the employee or to inflict economic harm on the former employer.
2. The present employer engaged in an unlawful act.
3. The former employee has suffered Damage as a result of the interference.[18]

It is important to note that if an employee discloses information relating to the commission of a crime, fraud, or the fact of corruption by his former employer, he can rely on the defence that the disclosure was made in the public interest.[19]

However, the potential implications discussed above will apply only if the non-compete agreement is binding between the employer and the employee, to begin with[20].

Finally, like any contract, a non-compete agreement is only enforceable if the elements of a valid contract are fulfilled. Where it shows that the agreement was signed under duress, a court will likely not enforce its terms.

CONCLUSION

Many employees consider non-compete clauses as inimical to their rights. There is, therefore, a need to properly balance the interests of the employer and the employee to prevent situations where employers unreasonably restrain the trade rights of their employees.

Accordingly, employers should ensure to draft non-compete agreements narrowly and only to the extent necessary to guard their protectable interests in line with the provision of the FCCPA. It would be wise of an employer to assign the drafting of non-compete agreements to a competent attorney knowledgeable in commercial legal drafting and handling contractual matters, to ensure that the agreement is prepared per the provisions of the FCCPA.

Similarly, Employees, on the other hand, are advised to engage the services of a lawyer versed in Labour/Employment Law who will explain the terms of the employment contract to make sure they understand the extent and content of the non-compete clause in the employment contract they enter into.

FOOTNOTES:

[1] Furmston, (ed.), Cheshire and Fifoot Law of Contract 13th ed. (London: Butterworths, 1996) at 351.

[2]A Emiola, Nigerian Labour Law 3rd ed. (Ogbomoso: Emiola Publishers Ltd, 2000). P.46

[3] See John Holt & Co. Ltd v. Chalmers (1918)3 NLR 77.

[4] See Herber Moris Ltd v. Saxelby (1916) 1 AC 688.

[5] O. Ogunniyi, Nigerian Labour and Employment Law in Perspective 2nd ed. (Ikeja, Folio Publishers Ltd, 2004) p.109

[6](1973)1 ALL NLR Part 2, 144

[7] (Unreported) Suit No:  NICN/LA/ 597/2012

[8] (Unreported) Suit No:  NICN/LA/396/2015

[9] Federal Competition and Consumer Protection Act 2019

[10] Rubber v. Manning (1917) 86 LJ Ch 377

[11] Robb v.  Green [1895] 2 QB  315

[12] Bilante Int Ltd v. N.D.I.C (2011) LPELR-781(SC)

[13] Access Bank v. Petro-Al (Nig)Ltd (2017) LPELR-45198(CA)

[14] Kabo Air Ltd v. Mohammed (2014) LPELR 23614(CA)

[15] 9^th ed. 2009. P 1248

[16] Vee Gee (Nigeria) Limited v. Contact (Overseas) Limited (1992) 9 NWLR (Pt 266)503

[17] Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors (Unreported Suit No-NICN/LA/170/2014

[18] Oshiomole & Anor v. Federal Government of Nigeria & Anor (2006) LPELR-7570 (C.A)

[19] See Lion Laboratories v Evans (1985) Q.B 525

[20] Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors. Supra.