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A restraint of trade clause is a clause in a contract of employment that restricts an employee from working with competitors of their employer for a period of time after their employment is terminated. The intention behind this is to safeguard the interests of the business by preventing the employee from using trade secrets or confidential information garnered in the course of his employment to give his new employer an unfair advantage.[I]
Also, read; Employer’s Duty to the Employee Under Nigerian Labour Law
Restrictive covenants are only enforceable when they effectively protect an employer’s goodwill. However, it is important to craft these clauses to precisely align with the unique circumstances at hand. In other words, a one-size-fits-all approach is ineffective; instead, these clauses must be tailored to meet specific business needs without overreaching.
Competition for talent in the employment market is more prominent today than ever before and knowing the limits of restraints of trade clauses is valuable for both business and their workers to ensure the best interests of both parties are maintained.
WHAT IS A RESTRAINT OF TRADE
Restraint of trade is a practice whereby an employer and his employee enter into a contract for the purpose of restricting the right of the employee to engage in particular or specific types of business activities within a given area or locality and or within a stipulated period of time
Restraint of trade is where an employee agrees to restrict his right to engage in a similar business of his employer for a specific period of time after the termination or end of his employment contract. It is a restrictive clause found in employment contracts that limits the liberty of the employee with respect to future employment.
Restraint of trade clauses are mostly post-employment contracts. This means it mostly arises immediately after the termination of an employment relationship. A restraint of trade clause seeks to prohibit an employee from engaging in a similar business of his employer, whether on his own or in the employ of another.[ii]
The primary reason for the use of restraint of trade clauses is to safeguard an employer’s legitimate business interests. These encompass, but are not limited to, the following essential elements:
One of the paramount objectives of these covenants is to preserve any proprietary knowledge that is intrinsic to the company’s operations. This includes any closely guarded strategies, formulas, methodologies, or recipes that give the company a distinctive edge in the market.
Restraint-of-trade clauses also play a crucial role in protecting the company’s long-standing client relationships, which are fundamental to its success. These clauses aim to prevent departing employees from soliciting or “poaching” clients, thereby preserving the company’s loyal customer base.
Often, companies possess confidential proprietary information that, if disclosed or mishandled, could jeopardize not only the company’s interests but also the privacy and trust of its clients. This may include customer databases, pricing strategies, marketing plans, or product development roadmaps. Restrictive covenants ensure that such sensitive information remains confidential and is not exploited to the detriment of the company.
Reasonable test a Restraint of Trade clause must pass
A restraint of trade clause is generally not enforceable against an employee of a company under Common Law. For it to be enforceable, it must pass the test that was laid down in Murgitroyd & Company Ltd. v. Purdy [2005] IEHC 159 where the court held that:[iii]
“A restraint on a person working or being engaged in one or more lines of business is by definition a restraint of trade. It is well settled that such a term will not be enforced by the courts unless it meets a twofold test:
– a. it is reasonable as between the parties; and
– b. it is consistent with the interests of the public”.
HOW TO ENFORCE A RESTRAINT OF TRADE
In Nigeria, the general rule before the establishment of the Federal Competition and Consumer Protection Act (FCCPA) 2018 is that an employer must show that the restraint seeks to protect his business interest and it is not contrary to public policy. If a party breaches a restraint clause, the other party can seek enforcement through the Court. To assess the reasonableness of the restraint, the Court will evaluate whether the party imposing it has a legitimate interest that needs protection.[iv]
Factors considered include the geographical scope, duration, covered activities, and the nature of the business. If the Court determines that the restraint is necessary for adequate protection, does not exceed what is required, and aligns with the public interest, it will be deemed reasonable and enforceable. Conversely, if the Court finds the restraint clause to be unreasonable, it will be invalid and unenforceable.
However, with the establishment of the Federal Competition and Consumer Protection Act (FCCPA) 2018 which seeks to protect the rights of consumers and regulate competition, there is now a shift in the position of the law.
The Act permits an employer to restrain the liberty of an employee with respect to future employment insofar as the restrictive agreement does not exceed two years.
This is a shift from the reasonability requirement explained previously which has been a product of case law over the years. It, therefore, follows that employers in Nigeria can restrain an employee’s employment liberty, but it must not exceed 2 years. It is, however, arguable that in addition to this 2-year criteria, the court may still consider the reasonability factors when called upon.
CONCLUSION
In conclusion, restraints of trade clauses help safeguard a company’s interests when a non-disclosure agreement alone is insufficient. These clauses must be narrowly tailored to protect only what is necessary. If a restraint of trade clause is considered overly restrictive, it may be deemed unenforceable.
[i] https://www.linkedin.com/pulse/restraint-trade-employment-contracts-setanta-landers/ accessed on 20/08/2024
[ii] https://nigerianlawforum.com/restraint-of-trade-in-employment-contracts/ accessed on 21/08/2024
[iii] https://www.linkedin.com/pulse/restraint-trade-employment-contracts-setanta-landers/ accessed on 20/08/2024
[iv] https://www.lexology.com/library/detail.aspx?g=0b20de75-450c-4106-8b53-2fe5dc6e526e#:~:text=Why%20do%20you%20need%20one,and%20contractor%20or%20employee%20relationships. Accessed on 21/08/2024
Written by Elizabeth Olalekan for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com