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.
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.
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.
“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:
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:
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.
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.
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:
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”.
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.
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.
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.
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.
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.
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.
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
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
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
Fitch v. Dewes
(1921) 2 AC 158
·
Herber Moris
Ltd v. Saxelby (1916) 1 AC 688.
Herber Moris
Ltd v. Saxelby (1916) 1 AC 688.
·
International
Journal of Advanced Legal Studies and Governance, Vol 4, No 2, August 2013
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
John Holt
& Co (Liverpool) Ltd v Chalmers (1918) 3 NLR 77
·
Koumoulis v
A.G. Leventis Motors Ltd (1973) All N.L.R. 789,
Koumoulis v
A.G. Leventis Motors Ltd (1973) All N.L.R. 789,
·
M & S
Drapers V Reynold (1956) 3 All ER 814
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)},
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
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)
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.
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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