It is expected that an employer would equip its employees with the necessary tools and resources required for the effective operation of its business. This would ordinarily include trade secrets, strategies, clients, and different forms of confidential information. It is therefore understandable that, due to the nature of information and secrets to be disclosed, the employer would want to take steps to protect such, bearing in mind its employee(s) might leave at any time, not only with the skill and expertise acquired during the job, but also the trade secrets of the employer. Thus, the employer, being fully aware of this risk, and even the greater risk of having the said ex- employee join a competitor, devises a non-compete clause, seeking to restrain the employee from joining a competitor, and disclosing the employer's trade secrets. The acceptable parameters of such 'restraint' however is a question that was tested by the National Industrial Court ("the Court/NIC") in the case of Infinity Tyres Limited v. Mr. San jay Kum ar & 3 Ors. (Sui t No - NICN /LA /170/ 2014).
In 2011, Mr. Sanjay Kumar ("Mr. Kumar") entered into a contract of employment with Infinity Tyres Limited ("Infinity"). A condition of his employment was that Mr. Kumar would not join any other company in Nigeria for one year upon the termination of the contract. With this in view, the company made the necessary arrangements to enable Mr. Kumar relocate to Nigeria and work for it.
Sometime in 2013, Mr. Kumar was accused of being involved in financial misappropriation. He reportedly admitted to this in his response to the query issued by the company, and was consequently, terminated. In less than a year of being terminated, Mr. Kumar took up employment with Kewalram Nigeria Limited ("Kewalram"), Asahi Brand Limited ("Asahi") and Tanzanite Limited ("Tanzanite"), who were, according to Infinity, in direct competition with it. Accordingly, Infinity wrote to Mr. Kumar, notifying him of his breach of the non-compete clause under the erstwhile employment contract between it and Mr. Kumar; it also notified Kewalram, Asahi and Tanzanite of the said breach and requested for the immediate termination of the employment.
Following the failure of Mr. Kumar and Kewalram, Asahi and Tanzanite to comply with its demands, Infinity proceeded to commence an action at the NIC, claiming, amongst other things:
- A declaration that the employment of Mr. Kumar by Kewalram, Asahi and Tanzanite is a breach of the non-compete clause of the employment contract between it and Mr. Kumar.
- An order of cessation of employment of Mr. Kumar with Kewalram, Asahi and Tanzanite, as the said employment is wrongful and lawful.
- An order restraining Kewalram, Asahi and Tanzanite from further inducing the breach of the employment contract between the company and Mr. Kumar.
- Damages in the sum of N100, 000, 000 (one hundred million Naira) and cost of the action.
After a careful review of the submissions of both parties, the Court held as follows:
1. Covenants in restraint of trade (non-compete clauses)
The NIC noted that whilst covenants in restraint of trade are generally unenforceable, there will be an exception where such clauses are shown to be reasonable. Reasonability will be determined by the circumstances of each case, considering factors such as geographical area of coverage, economic activity covered, and the duration of the non-compete clause. It is the party seeking to enforce such a clause therefore that has the burden of proving that such a covenant is reasonable.
2. The words of the non-compete clause
The non-compete clause as drafted in the employment contract between Mr. Kumar and Infinity states: "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." This, by the literal interpretation of the Court, the clause as drafted was stated as being very broad, to cover any organization whatsoever, whether in the line of the company's business or not. Thus, whilst the restraint for one year, and within Nigeria was reasonable, the non-compete clause restraining Mr. Kumar from joining "any other company in Nigeria" was unreasonable and unenforceable.
3. Breach of Contract
On whether Kewalram, Asahi and Tanzanite's employment of Mr. Kumar amounted to inducing a breach of contract, the Court held that since the covenant in restraint of trade (non-compete clause) is unenforceable for being unreasonable, Kewalram, Asahi and Tanzanite cannot be liable for inducing a breach of the covenant.
4. Applicability of the African Charter
In Mr. Kumar's counter-claim, he argued that the non-compete clause constituted an infringement on his fundamental right of employment to work under equitable and favorable conditions. In arguing his case, Mr. Kumar relied on The African Charter on Human and Peoples' Rights (Ratification and Enforcement) A rned African States to protect the human rights of their citizens within the territorial jurisdiction of their countries. Thus, Mr. Kumar, being an Indian citizen, cannot rely on Article 15 of the African Charter to make his claim.
In all, the Court held that neither Infinity's claims nor Mr. Kumar's counterclaim succeeded, and the case was accordingly dismissed.
Generally, covenants in restraint of trade are viewed as unenforceable, except where they are shown to be reasonable, with references to the interest of the parties concerned, and of the public. What then is reasonable?
The Supreme Court has held that if the covenant affords adequate protection to the covenantee (the employer), the requirement that it must be reasonable in the interest of the parties is satisfied. Furthermore, depending on how the covenant is framed, an employer can lawfully prohibit the employee from setting up his own business, or accepting a position with one of the employer's competitors, so as to be likely to adversely affect the employer's trade by a misuse of the employee's acquaintance with the employer's clients, or trade secrets. These are instances therefore of reasonability, depending on the facts of each case.
Some may be quick to argue that regardless of the severity or broadness of the non-compete clause, the employee was aware of the contract he was signing, and parties are by law bound by contracts freely entered into. However, the courts have argued that, in many cases an employee cannot really be said to have a bargaining power in the negotiation of employment contracts. In fact, in Iscare Nigeria Limited V. Mrs Victoria Akinsanya, Mr Bankole Emmanuel Abimbola NICN/LA/484/2012, the court held that "I find that the 1st Defendant had no bargaining power and was in a weak position on account of her 'unemployed status'. In the circumstances of inequality of bargaining power, her freedom to contract by the operation of the doctrine of sanctity of contracts was in my view an illusion.......".
In Mr. Kumar's case, the concern of the Court was not the restraint itself, but the reasonability of the restraint. Without a doubt, the achilleas heel in the employer's case arose from the poor drafting of the non-compete clause. Perhaps the Court may have reasoned differently if the restraint was limited to "companies in direct line of competition with the employer". However, the reasonableness of such a request (industry and specialization considered), in light of the geography and timing would need to be measured as well. Indeed, points to ponder.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.