Malta: Employment Contracts: May Certain Clauses Be Considered Unreasonable?

In the case ZP Services Limited (the "Plaintiff") vs. Gennaro Lanza (the "Defendant") (collectively "the Parties") Honourable Judge Christian Falzon Scerri delved into and examined certain clauses which were included in the employment contract (the "Contract") which regulated the employment of the Defendant with the Plaintiff company. The case was decided on the 19 September 2022, before the First Hall Civil Court (the "Court").

Post-termination of such contract, the Court was tasked with determining whether (i) the Defendant was in breach of certain provisions which had previously been included in the said Contract and (ii) whether such provisions were to be considered unreasonable and hence unenforceable.

The Court proceeded to examine such provisions by referring to the Employment and Industrial Relations Act (Chapter 452 of the Laws of Malta) (the "Employment Act") and the Civil Code (Chapter 16 of the Laws of Malta) (the "Civil Code").

The facts of the case are as follows: On the 10 August 2016, the Parties entered into an employment contract which stipulated that the Parties were entering into such Contract for a period of two (2) years. Clause 6 of the Contract stated that for one year following the termination of Contract, the Defendant could not negotiate or attempt to negotiate with persons who (i) at the date of termination of were either clients or (service providers) of the Plaintiff or (ii) were clients or service providers of the Plaintiff within the last preceding year prior to such termination or (iii) were prospective clients of the Plaintiff within the last preceding year prior to termination. The Contract went on to state that the Defendant would not use any property of the Plaintiff for his own use, unless given consent to do so by the Managing Director of the Plaintiff Company.

Furthermore, it was also stated that in the case of a breach of one or more of the conditions within the Contract, the Defendant will be liable to pay the Plaintiff a sum equal to his annual salary.

On the 20 December 2016, the Defendant also signed a non-disclosure declaration ("the Non-Disclosure Declaration") whereby he declared the following: (i) that he never released or kept to himself any confidential information pertaining to the Plaintiff company, and that he will not share any such information with any third party, during as well as after the stipulated period of employment (ii) that neither during nor after his employment would he use any of the confidential information known to him about the Plaintiff company to his advantage (iii) that neither during, nor after the stipulated period of employment would he work for any of the clients as listed within Annex A of the Non-Disclosure Declaration and that (iv) if one of these provisions is breached, the Defendant would be obliged to pay pre-liquidated damages in the amount of EUR 1,000,000.

On the same day, the Contract between the Parties was terminated, and the Defendant moved on to set up a company with two (2) other individuals.

Plaintiffs Claim

The Plaintiff is claiming that the Defendant breached not only the Contract, but also the Non-Disclosure Declaration. The Plaintiff went on to state that the Defendant contacted their (the Plaintiff's) employees as well as their (the Plaintiff's) clients, seeking to employ them as well as to entice such clients to begin using the Defendants services (which the Plaintiff is claiming were in direct competition with those of the Plaintiff company).

The Defendants Counterclaim

The Defendant claimed that (i) he was neither in breach of the contract of employment, and nor was he in breach of the Non-Disclosure Agreement which he had entered into with the Plaintiff as he had not entered into any employment contract with other persons previously employed by the Plaintiff, and neither had he approached, and offered his services to, any of the clients of the Plaintiff (ii) he is not in possession of any confidential information of the Plaintiff company (iii) that clause 6 of the Contract (dealing with the payment of a sum equal to one year's salary in the case of a breach of contract) is null as the provisions of Article 19 of the Employment Act were not observed, and (iv) that such clause is contrary to public policy and hence in accordance with Article 985 of Chapter 16 of the Civil Code "cannot be the subject matter of a contract".

Courts Considerations

The Court began by delving into points (iii) and (iv) of the Defendants counterclaim. The Court delved into Article 19 of the Employment Act, which states the following:

The Court stated that there have recently been different interpretations of this clause, however , in this case, the Court ruled that Article 19 of the Employment Act could not be instituted in this case given that, (i) such Article spoke of "fines" and not "pre-liquidated damages" and that (ii) approval from the Director responsible for Employment and Industrial Relations was only necessary when the employee was still in employment with the employer and not in relation to damages which could have only become due post-termination of an employment contract (as was the case here).

The Court also commented on the fact that it may be time for the legislator to revisit Article 19 of the Employment Act to potentially state that approval from the Director responsible for Employment and Industrial Relations is required when an employer is deciding on the amount of pre-liquidated damages which would/could be due post-termination of an employment contract.

The Court went on to examine whether Clause 6 of the Contract (dealing with the payment of a sum equal to one year's salary in the case of a breach of contract) went against public policy and hence could not be enforced.

The Court started by stating that if the provisions within the contract are (i) reasonable (that is, the effective of which is limited to that which is solely necessary to ensure that no damage is caused to the, in this case, Plaintiff), then once cannot deem such clauses to be unenforceable.

The Court then went on to examine the reasonableness of Clause 6 of the Contract, which has been detailed above.

The Court ruled that given that the provisions of such clause was limited to one year following termination, such clause appears to be reasonable. However, the Court went on to examine the clause in light of the Contract of employment, and stated that that part of Clause 6 which stated: "that for one year following the termination of Contract, the Defendant could not negotiate or attempt to negotiate with persons that were prospective clients of the Plaintiff within the last preceding year prior to termination" was unreasonable given that there would not have been any business relationship between the Plaintiff and the prospective client at that point in time.

Additionally, the Court went on to state that given that the Contract was for a fixed duration of two (2) years and that the Defendant was only employed for four (4) months, the request for payment of one year's salary in the case of a breach seems to be excessive and hence unreasonable.

For the above-mentioned reasons, the Court ruled that Clause 6 was unenforceable given that it was deemed to be unreasonable and brought with it conditions which were disproportionate to the nature of the contract.

The Court's Decision

In conclusion, for the above-mentioned reasons, the Court decided that:

Firstly, the inclusion of Clause 6 did not require the approval of the Director responsible for Employment and Industrial Relations. Secondly, that Clause 6 could not be enforced between the Parties, for the above-mentioned reasons. Thirdly, that the Defendant was not in breach of his obligation as the Plaintiffs failed to bring the required proof to show otherwise.

This article was first published in the Malta Independent (28 September 2022).

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