Employment agreement and non-compete clauses: topical issues to consider in Nigeria

Alicia Adefarasin

Dentons ACAS-Law, Lagos

alicia.adefarasin@dentons.com

Michael Akinleye

Dentons ACAS-Law, Lagos

michael.akinleye@dentons.com

Introduction

Nigerian law recognises the right of parties in an employment relationship, to freely determine the terms of their employment relationship, except for employment with a statutory flavour.^[1] As a result, parties to employment contracts would be bound by the terms in the employment contract where it is determined that they freely entered into it. It is pursuant to this general principle that non-compete clauses are contained in employment contracts. This clause is essentially a provision that seeks to restrain an employee from taking up employment with a rival company after their exit from the employee’s current company. The argument for imposing such limits on employees is that they have access to sensitive and proprietary information, as well as intellectual property related to the employer, which, if used while working for a rival entity, result in an unfair commercial advantage.

The fact that the parties freely entered into a contract of employment does not automatically validate a non-compete clause in a contract of employment. There are certain factors that determine the validity and enforceability of such clauses. The courts are always confronted with balancing the conflicting interest between the employee’s right to earn a living^[2] and the employer’s right to protect their business.

This article seeks to consider the challenges employers of labour have to deal with in the face of tradtional employment rules regulating restraint of trade in Nigeria.

The traditional position of the law in Nigeria on non-compete clauses

Nigerian courts have followed the common law position on restrictive covenants such as non-compete clauses. Common law is part of the received English law^[3] in Nigeria and, as such, the principles of common law are applicable in Nigeria. One of the first reported cases on non-compete clauses under Nigerian law is the case of Koumoulis v Leventis Motors Ltd^[4] in which the Supreme Court stated the general principle on non-compete clause as follows:

‘generally, all covenants in restraint of trade are prima facie unenforceable at common law. They are enforceable only if they are reasonable with reference to the interests of all parties concerned and of the public.’

The above decision forms the traditional view on non-compete clauses in Nigeria: that a non-compete clause is ordinarily not enforceable. However, based on recent decisions and statutory provisions, the law has evolved and non-compete clauses are now enforceable in Nigeria subject to certain factors, including reasonableness.

From the decisions of Nigerian courts, reasonableness is a key factor in determining the enforceability of a non-compete clause. The reasonability or otherwise of a non-compete clause is dependent on the peculiar facts of each case. The courts usually have recourse to certain principles in determining the issue of reasonableness including but not limited to the nature of the business, trade or corporation, the geographical area which the restraint is to be imposed and the given period for which it is to continue.^[5]

Important decisions of the courts on non-competes clauses

Most important decisions of the court have bordered on the issue on reasonableness. In Vee Gee (Nigeria) Ltd v Contact (Overseas) Ltd,^[6] the Court of Appeal held that the courts would enforce negative covenants in restraint of trade where such covenants are not wider than reasonably necessary for the protection of the covenantee and are not injurious to the public interest.

In Overland Airways Ltd v Captain Raymond Jam,^[7] the National Industrial Court enforced a training bond against the defendant, a former employee of the plaintiff who sponsored him for a training programme in aviation. The defendant was bonded to serve the plaintiff for a minimum of four years after his training. Having acquired the required training and qualifications, the defendant repudiated the bond and attempted to leave the service of his employer. The court ruled in favour of the plaintiff and upheld the restrictive covenant against the defendant. The court also considered the state of the law in other jurisdictions and concluded that the restriction was reasonable and enforceable.

In iROKOtv.com Ltd v Michael Ugwu,^[8] the claimant sought to enforce a non-complete clause against the defendant who was based in the UK at the time of his employment and had to move back to Nigeria on the claimant’s request. The defendant had worked for two months before the claimant issued letters of employment and an Employee Non-Disclosure Agreement (ENDA) for acceptance and execution by the defendant. Part of the terms of the ENDA was that the defendant could not work for another enterprise which is directly competitive with that of the claimant until two years after the termination of the employment relationship. In its reasoning, the court held that the claimant’s act of changing the terms of employment to the detriment of the defendant after the latter had commenced work, intended to put the defendant in a difficult position of a fait accompli in which the defendant would have no choice than to dance to whatever the dictates of the claimant might be, was an unfair labour practice.

Relying on the case of Koumoulis v Leventis Motors Ltd,^[9] the court held that the claimant had not shown the legitimate interest (namely trade secrets) which it sought to protect by the non-compete clauses and added that even if such an interest existed, the restraint would nonetheless, be unreasonable as the interests of the defendant and the public were not balanced with that of the claimant. The court also noted that it is not in the interest of the public for a citizen or resident of a country to be disallowed the legitimate use of his skill and from being gainfully employed which would result in lower revenue for the state as well as social vices and criminal tendencies. The court further stated that the non-compete clause was contrary to the defendant’s interest to continue to be employable, employed and to be able to put his skill to optimal use in contributing to his immediate environment. Accordingly, the court held that the said restraining clause was unreasonable, contrary to public policy, illegal, invalid and unenforceable.

These cases show the emphasis placed on reasonability by the courts.

Recent developments: towards a principle of reasonableness and a balance of interests?

There have been welcoming and intriguing developments in the law relating to the enforceability of non-compete clauses in Nigeria. These changes can be seen in the Constitution, legislation and case law.

By the Third Alteration to the Nigerian Constitution in 2011, the National Industrial Court was created, and sections 254A–254F, among other sections, were added to the Constitution. Section 254C(2) of the Constitution of the Federal Republic of Nigeria 1999 (as amended) empowers the National Industrial Court to deal with matters connected with the application of international conventions, treaties or protocols relating to labour, employment, workplace, industrial relations or related matters. Section 254C(1)(f) of the Constitution confers jurisdiction on the National Industrial Court in civil matters connected with unfair labour practice and international best practices in labour, employment and industrial matters. Furthermore, section 7(6) of the National Industrial Court Act 2006 mandates the National Industrial Court, in exercising its jurisdiction, to have regard for international best practices in labour or industrial relations.

Consequently, there have been decisions wherein the courts in Nigeria recognised their power to enforce not only relevant international conventions, but also international best practices in disputes relating to labour or industrial relations where the circumstances are justified.^[10] In Oak Pensions Ltd & Olayinka,^[11] the National Industrial Court granted damages worth N27,000,000.00 (Naira) as compensation for unfair labour practices and international best practices against the defendants. On appeal, the Court of Appeal held that the issue of good or international best practice in labour and industrial relations is a question of fact which a claimant is required to prove satisfactorily, consequent upon which the National Industrial Court can judiciously have regard to it in determining the case before it.

Additionally, the Federal Competition and Consumer Protection Act 2018 (FCCPA) was recently introduced. From the provisions of this Act, there appears to be a change in the principles governing non-compete agreements in Nigeria. Section 59 of the FCCPA 2018 expressly prohibits agreements in restraints of competition. However, section 68(e) of the FCCPA 2018, provides that a contract in restraint of trade for a period not exceeding two years will not be prohibited. It provides as follows:

‘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. Any agreement among undertakings or a decision of an association of undertakings that has the purpose of actual or likely effect of preventing, restricting, or distorting competition in any market is unlawful and, subject to section 61 of this Act, void and of no legal effect.’

In the case of Interswitch Ltd v Christopher Esumeh,^[12] the National Industrial Court delivered a landmark decision on what can be characterised as a novel point in the employment law jurisprudence in Nigeria. The claimant sought to enforce a non-competition/solicitation clause which restricted the defendant from joining a rival entity that carried on a similar business with the claimant within one year of his exit from the claimant company. The defendant challenged the enforceability of the clause, contending that it totally restricted him from taking up employment in any other organisation all over the world for a period of one year and therefore, was unreasonable and in contravention of his Constitutional rights. The claimant, on the other hand, relied on the exception contained in section 68(e) of the FCCPA 2018 which provides that restrictive covenants are enforceable if they do not subsist for a period exceeding two years. In determining whether the non-compete clause was reasonable and enforceable, the court relied on the decision of the Supreme Court in Koumoulis v Leventis Motors Ltd^[13] and section 17(3)(a) of the Constitution of the Federal Republic of Nigeria and held that since the clause restricted the defendant from exercising his skill and securing adequate means of livelihood for a period of one year, the restriction was unreasonable and violated the defendant’s constitutional rights.

The court frowned at the duration of the restrictive covenant and favoured the view that three months of restraint was sufficient in this context. This decision of the court appears to have departed from the provisions of the FCCPA, which provides that restrictive covenants not exceeding two years can be enforceable. It may be argued, though, that the clause in Interswitch’s case was unreasonable in view of it not being limited in scope, given that it attempts to prevent the defendant from taking up employment in any other organisation all over the world for a period of one year, such that even if the business of the new organisation is different from that of the claimant, the defendant would still be restrained.

Recommendations for employees and employers

From the above, it becomes clear that to be enforceable, a non-compete clause should be reasonable, specifically demonstrate the interest that the employer seeks to protect and balance the competing interests of the employer, employee and the public.

Employers would be advised to ensure that any proposed non-compete agreement is reviewed by a qualified lawyer experienced in contracts and employment law to guarantee that the agreement is in accordance with the legal framework regulating such clauses.

It is also vital to keep in mind the recent decision of the court in Interswitch’s case wherein the court viewed a restraint of one year as being too long a time to restrain an employee from taking up employment with another company. Accordingly, it would be safe for employers who wish to include non-compete clauses in employment contracts to ensure that the restraint does not exceed three months and to be specific with the wording in terms of the scope of employment, the number of years as opposed to using clauses that vaguely or generally seek to restraint an employee. Also, from the decision, it appears that sending an employee on professional training will not be sufficient to include restrictive covenants in an employment contract; therefore, employers are advised to designate a separate budget for staff training which should form part of the employment benefits of the employee.

Employees, on the other hand, are advised to engage the services of a lawyer versed in labour/employment law to advise them on the terms of their employment contracts before signing, as the court will enforce such contracts if they pass the tests of reasonability and balanced interests.