Nov 25, 2016

The Enforceability of Non-Compete Clauses/Agreements under Nigerian Labour Law



Entrepreneurs often dread losing key staff. The difficulty involved in having to recruit and successfully integrate new faces into an existing order makes the endeavour an unsavoury undertaking to many. However, if losing a key staff is worrisome enough, the realization that a disgruntled one may walk out the door with more than his termination letter and severance paycheck, is a much graver cause for concern.

Daily, employers are faced with the unfortunate reality that a departing employee may leave to go work with a competitor, poach their long term clients or utilize skills, confidential information and trade secrets acquired during the subsistence of their employment to secure new jobs. This apprehension has prompted many an employer to have prospective employees sign non-compete agreements as a prerequisite for working for them.

A non-compete agreement also referred to as “covenant not to compete” or a “contract in restraint of trade” is an agreement wherein an employee consents not to engage in a similar occupation or disseminate trade secrets that is likely to occasion damage or compete against the business of his employer. It is a commercial contrivance which seeks to preclude insiders from taking trade secrets, business affiliations or clientele to other corporations or employers when they leave. 

A non-compete agreement may either be a major clause in an employment agreement or a separate agreement, the execution of which is a condition precedent to employment. Which form it takes, the same effect is had. The agreement generally restricts an employee from entering into a similar engagement for a specific period of time or within a certain geographical location. This restriction is usually dual-pronged. One operates during the subsistence of employment. The other transcends employment and continues to operate after its determination. An effective non-compete agreement seeks to achieve the following:

  • Prohibit a former employer employee from working with a competitor
  • Prohibit a former employee from soliciting former co-workers to be employee in his or her new company
  •  Prohibit a former employee from soliciting or disclosing confidential information such as customer lists, price lists, market strategies or other proprietary information
Generally, for a non-compete agreement to be considered valid, it must have the following elements amongst others:
  • Be supported by consideration
  • Be reasonable in scope of the duration and geographic boundaries
  •  Protect a legitimate business interest
In spite of the presence of the above essentials in a standard non-compete agreement however, the real test of validity is whether the agreement is in itself enforceable or not. This is because having an employee append his signature to a non-compete agreement and being subsequently able to enforce it are two different things entirely. While it is a trite principle of law that the court will not hesitate to enforce the terms of a mutually consensual contract and parties will be precluded from refuting their claims and liabilities under such, a non-compete clause which prime facie appears meticulously crafted may be unable to withstand the objective scrutiny of the court. 

Therefore, as tempting as it is for an employer to draft an expansive, seemingly iron clad agreement, concerted regard should be had to the likelihood of the agreement’s chances at withstanding the test of validity and enforceability. Generally, the courts frown at restraint of trade and are exceedingly wary of clauses that restrict an employee’s chances to future employment. This modern law principle against restraint of trade was laid down in the locus classicus Nordenfelt v Maxim Nordenfelt (1894) A.C 535; (1891 – 4) ALL ER Re. 1.111) where the court held that all clauses in restraint of trade are contrary to public policy and as such, void ab initio save only there are special circumstances which justify them. 

Nevertheless, the right of an employer to the protection of his confidential trade secrets and business is fairly recognized. Hence, the court may be inclined to enforce the agreement if evidence is sufficiently led to show that it is reasonable in scope, nature and extent and regard is had to the interest of the parties and the general public. In Koumoulis v A.G. Leventis Motors Ltd (1973) All N.L.R. 789, the court observed that:
“The covenant, the subject of the complaint was reasonably necessary for the protection of the business interest of the respondent and was therefore valid and enforceable in law”.
It should however be noted that an employer will not be afforded the protection of an expansive non-compete clause to shield himself from healthy business competition by a former employee. 

Another determinant factor of enforceability of non-compete agreements is its geographical scope. Where the contemplation of the agreement is an expanse of area too wide to be adjudged reasonable, the court will refuse to enforce it, with the consent of the employee notwithstanding. This principle is notably consistent in all jurisdictions and was sufficiently highlighted in the decision of the court in John Holt & Co (Liverpool) Ltd v Chalmers (1918) 3 NLR 77

While a court may alter an unreasonable term or terms of a non-compete agreement, it also reserves the power to invalidate the agreement in totality if it is reasonably satisfied that the employer intentionally included overly broad language that renders it unreasonable and oppressive. In Mesop Kholopikiaan v Metal Furniture Nigeria Ltd {(unreported) HCL, Ikeja Judicial Division, Suit No IK/180/69 delivered on 5th March 1974)}, a non compete clause which covered a radius of 800 miles from Ikeja, Lagos where the defendant was based was held unreasonable and therefore void for it does not only span the whole of Nigeria but extends into some neighboring west African states.

As an additional test of enforceability, the court may take into account the nature of the information had and the knowledge acquired by the employee. N.M Selwyn, the renowned author on labour law texts is of the opinion that a distinction should be drawn between subjective and objective knowledge. According to him, objective knowledge comprises trade secrets, list of customers etc, all which comprise the employer’s property and therefore merits protection from infringement. Subjective knowledge on the hand entails the general knowledge of the trade and industry and organizational ability acquired by the employee during the subsistence of his employment, the restraint of which would be unfair. In Herbert Moris Ltd v Saxelby (1916) 1 AC 688), a 7 year non compete clause precluding an engineer from taking up employment with an competitor after the determination of his employment was voided on the ground that it was a restraint on his technical skill and knowledge which was acquired by virtue of his industry, observation and intelligence.

Duration may also play a significant role in the determination of enforceability. A non-compete clause which is couched to restrict trade for a lengthy period may, if considered alongside other relevant circumstances, be adjudged an unreasonable cloak against competition. In M & S Drapers V Reynold (1956) 3 All ER 814, a restraint on a collector’s saleman of a drapery firm not to solicit his employer’s clients for five years was voided on the ground that the restraint was too long in view of his humble position in the company. Similarly, in Esso Petroleum Ltd v Harper’s Garage (Stourport) Ltd (1967) UKHL 1, the court voided a twenty year restraint imposed on a petrol station owner under a solus agreement for being too unreasonably lengthy. It should however be noted that each case ought to be treated on its merit, as the length of the restraint is considered alongside other extenuating factors including but not limited to the employer’s business and the position of the employee in the company. The courts have held that a lengthy restraint on an employee’s trade would not ordinarily be voided if it is revealed by the circumstances of the case that that the restraint is necessary for the reasonable protection of the employer’s proprietary interests.


CONCLUSION
Intellectual property is indubitably one of the most invaluable assets in the intricate web that is the global business sphere, largely because of the time and resources expended in its contrivance. Hence the need to safeguard proprietary interest in trade secrets and confidential information from abuse by insiders becomes even more apparent by the day. This is why it is almost impossible to see a contemporary contract of employment devoid of a non-compete or confidentiality clause. Fortunately, a non-compete agreement, if painstakingly drafted, can obviate the dangers which it seeks to circumvent. However, a small oversight can effectively vitiate a part or the entirety of the agreement to the detriment of the employer and the benefit of the employee and vice versa. Thus, it is suggested that when drafting a non-compete agreement, strict regard should be had to its scope, duration and enforceability. The agreement should be tailored to match the business and employee in contemplation and caution should be exercised in the reckless use of templates that are lifted verbatim from the internet. Better still, it would be prudent of an employer to outsource the drafting of non-compete agreements to a competent attorney who is adequately versed in the art of corporate commercial legal drafting and handling contractual matters to ensure that the agreement is apposite, reasonable and fair.

LIST OF AUTHORITIES
·        Esso Petroleum Ltd v Harper’s Garage (Stourport) Ltd (1967) UKHL 1 John Holt & Co (Liverpool) Ltd v Chalmers (1918) 3 NLR 77
·        Fitch v. Dewes (1921) 2 AC 158
·        Herber Moris Ltd v. Saxelby (1916) 1 AC 688.
·        International Journal of Advanced Legal Studies and Governance, Vol 4, No 2, August 2013
·        John Holt & Co (Liverpool) Ltd v Chalmers (1918) 3 NLR 77
·        Koumoulis v A.G. Leventis Motors Ltd (1973) All N.L.R. 789,
·        M & S Drapers V Reynold (1956) 3 All ER 814
·        Mesop Kholopikiaan v Metal Furniture Nigeria Ltd {(unreported) HCL, Ikeja Judicial Division, Suit No IK/180/69 delivered on 5th March 1974)},
·        N.M. Selwyn, Law of Employment 3rd ed. (London, Butterworths, 1980) Pp. 282-3
·        Nodenfelt v Maxim Nordenfelt (1894) A.C 535; (1891 – 4) ALL ER Re. 1.111)
·        The Validity of the Doctrine of Restraint of Trade under the Nigerian Labour Law – Uko, E.J.
     
     Temitayo Ogunmokun Esq. 

    
Temitayo Ogunmokun is legal practitioner based in Lagos, Nigeria. His areas of practice include corporate commercial law, energy, taxation and international adoptions. He presently works at a commercial law firm in Victoria Island, Lagos. He is a volunteer legal adviser for the Literacy Integration and Formal Education (LIFE), an NGO specialized in international adoptions and a published fictional writer and poet. 


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