Non-Compete Agreement in Employment Relationships

In a bid to maintain a competitive advantage over other players in an industry, it is not usual for organizations to include a non-compete clause in a contract of employment between the company and an employee. While there are several arguments against the inclusion of these clauses in a contract of employment, it has also been held in some quarters to be a child of necessity, especially in some highly competitive industries. The purpose of this article is to consider non-compete agreements and their implications for employees in Nigeria.

Definition of a non-compete agreement

This is an agreement or a clause in a contract of employment that prohibits an employee from engaging in any paid employment or setting up a business that will directly compete with the business of the employer, after the conclusion of the employment period. An employee who signs this agreement is also prevented from revealing the trade secrets and proprietary information of the employer that he comes across during the period of employment. The clause is also known as a contract in restraint of trade or a covenant not to compete.

Restrictions typically included in a non-compete agreement

The restrictions typically included in a contract of restraint of trade include the following:

1. Prohibition from working with a competitor upon the termination of the contract of employment for a specific period of time and usually within a specific geographical location.

2. Prohibition from establishing a company with the same objects as the employer, which could directly compete with the business of the employer.

3. Prohibition from luring the employer’s clients or other employees to a new company where he is employed or to a new business he established, which could compete with the business of the employer.

4. The employee could also be prohibited from sharing trade secrets, confidential internal information, or business strategies of the employer.

Why include a non-compete clause?

There are several reasons that could prompt an employee to include a non-compete clause in a contract of employment. These include the following:

1. Protection of proprietary information and trade secrets

One of the main features of successful organizations across the world is that they have a unique value proposition that distinguishes them from competitors. This could be in the form of a trade secret or proprietary information which guides the operations of the company. Permitting employees to leave with such valuable assets without protection could put the future of a company in jeopardy, and that is why they put in place the necessary checks to prevent such.

2. To avoid strengthening competitors

No organization exists in isolation, there are always competitors who are trying to outshine one another. When employees cross from one competitor to another, they leave with the knowledge acquired and in some cases the secrets. These will go a long way to strengthen the competitors and that’s why companies frown at it.

3. To prevent employees from leaving with customers and business connections

Where employees are in client-facing departments such as Marketing and Customer Relations, there are tendencies that they will have access to the customers or client base of the organization. It is therefore important for companies to prevent their employees from establishing their own companies to compete directly with the employer, or to prohibit them from joining an already established competitor.

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Enforceability of non-compete agreements in Nigeria

Due to the colonial history of Nigeria, a bulk of the traditional legal provisions in the country are derived from the English Common Law system.

In the case of Koumoulis v. Leventis Motors[1], the Supreme Court held that, “Generally all covenants in restraint of trade are prima facie unenforceable in common law. They are enforceable only if they are reasonable with references to the interest of the parties concerned and of the public.”

Similarly, in Tanksale V. Rubee Medical Centre Ltd[2] the Court held that, “A contract in restraint of trade is one in which a party covenants to restrict his future liberty to exercise his trade, business or profession in such a manner and with such persons as he chooses. Prima facie such contracts are void. But where it can be established that such restrictions are justifiable in the circumstance as being reasonable from the points of view of the parties and the public, they are valid and binding.”

It can be inferred from the above that the court’s approach towards a non-compete agreement is based on whether it is reasonable to apply it or not, based on the circumstances of each case. Some of the factors the court considers in determining reasonability are the nature of the business in question, how long the restraint is meant to last and how large is the geographical radius covered under the agreement.

An attempt to make a legislative provision on the subject was done under the Federal Competition and Consumer Protection Act which provides that, “Nothing in this Act prohibits, a contract of service or a contract for the provision of services in so far as it contains provisions by which a person, not being a body corporate, agrees to accept restrictions as to the work, whether as an employee or otherwise, in which that person may engage during or after the termination of the contract and this period shall not be more than two years.”[3]

This implies that the law recognizes the inclusion of restraint of trade in a contract of employment, as long as it doesn’t exceed a period of two years.

Other similar clauses in a contract of employment

There are other similar clauses used in a contract of service to protect an employer against competition or unnecessary exposure from an employee. These include

1. Non-disclosure agreement

This is also known as a confidentiality clause and it is used by an employer to prevent its employee from sharing confidential information or trade secrets of the employer. This agreement is usually valid through the period of employment and a specific period of time after termination of the contract of employment.

2. Non-solicitation agreement

This is a clause usually inserted in a contract of employment in a bid to prevent employees from enticing or soliciting fellow employees, customers, vendors, and other stakeholders of the company after the termination of their contract of employment. This is especially used for management-level employees who might command respect and influence as a result of their position in the organisation.

3. Training bond

This is used where an employer requires an employee to remain in its employment for a specific period of time as a result of receiving certain training or acquisition of new skills and certificates at the expense of the employer. This bonds usually include a clause that allows the employee to pay the estimated cost of training if he decides to leave before the end of the fixed period. The National Industrial Court of Nigeria in the case of Overland Airways Limited v. Captain Raymond Jam, enforced a training bond between an aviation company and its employee on the grounds that it was reasonable.

Consequences of breaching a non-compete agreement in Nigeria

Where an employee is found to breach a legally enforceable contract of restraint of trade, the remedies available to an aggrieved employer include the following:

1. Damages

The essence of the damages is to compensate the employer for the loss suffered as a result of the employee’s default. The goal is to restore the employer to the same position he would have been if the employee had not breached the contract. This is usually monetary. Therefore, before you breach a valid contract of restraint, you should consider the cost you will likely incur if you breach the terms.

2. Injunction

An employer could also seek an injunction to prevent an employee from joining a competitor or establishing another competing business either before or after the breach of the terms. In this case, the employer doesn’t need to prove that loss had been incurred as a result of the breach.

Conclusion

The article has considered the meaning of a non-compete agreement and also considered other terms used to refer to such agreements. The position of the Nigerian law on the subject and consequences for breach of the agreement has also been considered. It is important that you consult a legal practitioner before signing a contract of employment in a bid to avoid inadvertently agreeing to a non-compete clause.

[1] (1973) LPELR-1710(SC)

[2] (2013) LPELR-21445(CA)

[3] Section 68(1)(e) of the FCCPA 2018