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Restraint of trade in employment contracts

Introduction

In recent times, employees have become more aware of restrictions placed on their employment liberty at the end of their employment relationship. This restriction is usually due to a restraint of trade clause contained in some employment contracts.

It is a settled principle of law that parties are free to enter into a contract and are therefore bound by the terms of the contract. In the absence of misrepresentation, duress, fraud, or undue influence, the court is slow to intervene in contractual agreements because parties enter into contractual relationships freely and should therefore be bound by the terms.

However, there are certain instances where the court will intervene and not enforce contractual agreements. A restraint of trade agreement in employment contracts falls within the ambit of such contracts that are not quickly enforced by the court.

What is restraint of trade?

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.1 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.

There are four categories of restraint of trade contracts2. The focus of this article will be on the first category out of the four listed below:

  • Restraints imposed on employees by employers.
  • Restraints imposed on the vendor of a business by the purchaser of that business.
  • Restraints arising from combinations for the regulation of trade relations. That is, the regulation of supplies or promotion.
  • Restraints accepted by distributors or merchants.

Rationale behind restraint of trade contracts

The rationale behind restraint of trade agreement lies in the employer’s desire to protect his business interest with reference to confidential information, trade secrets, and client’s information, of which the employee must have acquired in the course of his employment.

Position of the law

Restraint of trade contract is a common law principle that emanated from England. It states that all agreements in restraint of trade are void and not enforceable unless there are special circumstances justifying them.3 This means that the law will not enforce any contract of restraint of trade unless the restraint is reasonable to protect the employer’s business. The restraint must be reasonable with reference to the interests of the parties concerned and the interest of the public.4

Nigeria has followed this common law principle, and this is evident in a number of decided cases.5 In a recent judgment in 20156, it reiterated the common law principle by stating that an employer must show that the restraint seeks to protect his business interest and it is not contrary to public policy. However, the establishment of the Federal Competition and Consumer Protection Act (FCCPA) 2019, brought a changing view on this principle. Before we discuss the effect of the FCPPA, let us briefly expatiate on what amounts to a reasonable restraint.

Reasonableness test in restraint of trade cases

Reasonableness test in restraint of trade cases

It has been noted that the court will only enforce restraint of trade contracts that have reasonable circumstances justifying them. In reaching the decision of reasonableness, the court guides itself with certain factors. These factors are not standard as the court will look into the peculiarity of each contract of trade agreement in reaching a decision. Now, in no order of priority, let us move on to discuss the factors often considered by the court.

To start with, the court looks at the geographical coverage of the restraint of trade. Where the area which the restraint seeks to cover is too wide, the court will not enforce it. This means that a restrictive covenant should not cover an area wider than the scope of the employer’s business.

For example, a company that operates in 2 states out of the 36 states in Nigeria but seeks to restrain an employee from engaging in a similar business anywhere in Nigeria, will be held unreasonable and therefore, unenforceable. This is because the operational scope of the employer’s business is small and the restraint is wider than necessary to protect his business interest. An employer who runs a small business in a village cannot generally impose a nationwide restraint on a former employee.7

Also, the court will consider the duration of the restriction8. The length of time for a restrictive covenant must be reasonable if the court is to enforce it. An employer who seeks to restrain an employee for an indefinite period of time is highly unlikely to prove that it is reasonable to protect his business interest. Such restraint without limitation can be seen as a scheme of the employer to prevent competition. The court will therefore not enforce it as the law frowns at any restraint that seeks to prevent competition outrightly.

In addition, the restraint should be confined to the employee’s area of specialization under his former employer. It therefore, follows that an employer should not restrain an employee from working in an area of business that is different from that which he previously worked9. Where an employee’s new job description or area of specialisation is not similar to his previous employment, it will be difficult for the employer to show that the restraint seeks to protect his business interest.

Lastly, a restraint of trade seeks to protect the legitimate interest of the employer.10 An employee, who in the course of his employment acquired relevant and confidential information such as client details, trade secrets, or trade connections, might be restrained by his employer. This is because information of such nature is necessary to protect business interests.

These are the factors the court will look into in determining if a restraint is reasonable in the interest of the parties. Additionally, the court considers the interest of the public by determining whether the restraint on an employee’s employment skill or service will deprive the community of benefiting from such services.

The Federal Competition and Consumer Protection Act 2019

The FCCPA 2019 is Nigeria’s principal legislation which protects the rights of consumers and regulate competition. 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.

1 Furmston, (ed.), Cheshire and Fifoot Law of Contract 13th ed. (London: Butterworths, 1996)

2 I. E. Sagay, Nigerian Law of Contract 2nd ed. (Ibadan, Spectrum Law Publishing, 2000) Pp. 427-428.

3 Nordenfelt v Maxim Nordenfelt (1894) A.C.535

4 O. Ogunniyi, Nigerian Labour and Employment Law in Perspective 2nd ed. (Ikeja, Folio Publishers Ltd, 2004) p.109

5 Andreas I Koumoulis v. Leventis Motors Ltd (1973) 11 S.C

6 7th Heaven Bistro Ltd v. Amit Desphande (NICN/LA/396/2015)

7 Forster and Sons v Sugget (1918) 35 TUR 87

8 Esso Petroleum Ltd. V. Harper’s “Garage (Stourport) Ltd (1968) A.C 269

9 Attwood v. Lamont (1920) 3 KB 571.

10 Fitch v Dewes [1921] 2 AC 158

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