An Analysis Of Non-compete Clauses Agreement In Nigeria -By Oyetola Muyiwa Atoyebi & Tobenna Mogbo

INTRODUCTION

The bedrock of any organization is founded on the ability to ensure that confidential information and trade secrets are kept safe. Although, due to the need for manpower that is essential in all forms of enterprises and corporate bodies, it might be quite tasking to protect these sensitive information as employees, of a necessity, are privy to business strategies, formulas, financial strategies, marketing modules, and all such information that are necessary and incidental to the effective dispensation of their duty.

Consequently, in order to avoid contravention of several laws, it is not permissible to prevent employees and contractors from terminating their contracts of/for service. To protect the confidential information that is transferred within an organization, non-compete clauses are included in employment contracts and become increasingly pertinent when employees leave an organization. Hence, the need for the inclusion of this clause or the agreement in itself is further highlighted by the need for terms and conditions in an employment contract to clearly reflect the intentions and agreement between the parties regarding the rules governing their relationship.

This is traceable to the principle of sanctity of contract as courts do not have the authority to alter the agreements made by the parties, making individuals typically bound by the terms they willingly agree to[1]. To this end, this article analyses non-compete clause, the legal impaction and remedies for breach below.

NON-COMPETE CLAUSES

A non-compete clause alternatively referred to as a non-competition clause or covenant not to compete is a clause included in an employment contract or a separate agreement between an employer and an employee. This means that a non-compete agreement can be included as a clause in an employment contract or as a separate agreement in itself.

As the name implies, this clause or agreement is for the purpose of restricting an employee from engaging in certain competitive activities during and/or after the pendency of the employment. The primary purpose of a non-compete clause is to ensure that the employer’s competitive edge is not lost as a result of a transfer of skills or information that is termed as confidential.

It should be noted that the nature of a non-compete clause or agreement is dependent on the terms stipulated in the clause or the agreement, which means that an agreement might preclude the employee from working for a competitor within a time frame set or prohibit the transfer of certain information[2].

Under common law, the conventional position was that any clause considered as restricted is opposed to public policy, void ab initio, and unconstitutional. However, in the case of Koumolis v Leventis Motors Ltd[3], the Supreme Court held that where a non-compete clause is reasonable, it is enforceable. This was supported by the trite principle that parties are bound to their agreement unless avitiating element can be proven as ad idem of parties is treated as sanctimonious.

THE LEGALITY OF NON-COMPETE CLAUSES

There is a long-standing debate on the enforceability or otherwise of non-compete agreements as there are a plethora of authorities for and against the notion.

Restrictive covenants are generally not embraced as the law is set in motion to protect the employee as the more vulnerable party, more often than not. In the case of Koumolis v Leventis Motors Ltd[4], the Supreme Court provided a subjective test that weighs the reasonability of the non-compete clause or agreement to ascertain its enforceability or otherwise and the court held that the nature of the business should first be considered. Another major factor to test the reasonableness of the agreement is the geographical span of the restriction and the period of the restriction. These should all be considered and tested on the subjective scale of reasonability.

Where it can be concluded that such a time frame or territorial scope is such that it frustrates the right of the employee to seek employment, the court would be inclined to rule that such a clause or agreement be deemed unenforceable. While the court respects the sanctity of the contract and gives life to the intention of parties, an exception is where such agreement is contrary to public interest or policy and this can be tagged under this umbrella.

Similarly, the Federal Competition and Consumer Protection Act (FCCPA) 2018, expressly prohibits agreements that hinder, competition within the Nigerian market. The inclusion of a non-compete clause can be viewed a sa limit to competition, and this Act might as well have outrightly forbidden non-compete clauses as the Act seeks to prohibit any form of market dominance abuse and monopolies[5]. Conversely, the Constitution guarantees that citizens should not face discrimination in terms of employment opportunities and compensation based on any criteria that can be extended to include any agreement.

However, it can be argued that certain non-compete clauses are not discriminatory in nature as the duration is a reasonable period and it can be further argued that such an agreement does not necessarily eliminate or limit competition. In summary, each agreement shall be regarded as enforceable or otherwise, depending on the circumstance of each case and the terms in the non-compete clause.

LEGAL IMPLICATION OF NON-COMPETE CLAUSES

The first test of validity for a non-compete clause or agreement is enforceability. Enforceability is dependent on the reasonability of the restriction of the terms of the clause or agreement as the clause cannot be used to prevent healthy competition.

The nature or scope of the restriction of a non-compete clause must be guided by the rule of reasonableness as the agreement determines acts that constitute a breach.

The implication of the inclusion of a non-compete clause or non-compete agreement is that where the agreement is validly enforceable, any breach of the terms of the agreement affords the employer a right of action in court.

The terms of the clause might be of such a manner that prevents the employee from being engaged by a competitor for a specific period dependent on the nature of the industry and the geographical location of the employer or prevents the employee from using certain skills for a specific period.

REMEDIES FOR BREACH

Where an employee or former employee breaches any term stipulated in the non-compete agreement within the time frame agreed upon, the employee is liable for breach of contract and the employer is entitled to certain remedies such as[6]

1. Injunction: this is the most common form of relief sought as it dispenses with the need to prove damages. All that the employer needs to prove is that there is a valid agreement that the employee is in breach of it. The employee should then be restrained from continuing in such breach, which more often than not translates to the employee quitting the new employment that constitutes such breach.
2. Damages: under this remedy, the employer is expected to prove that damage has been suffered, or that loss occurred by the breach of the agreement, and punitive or compensatory damage is awarded against the employee to mitigate such loss or damage.

It should be noted that where parties specify the nature of relief for breach of the agreement or clause and same has been included in the agreement, the court would grant the remedy specified in the agreement where the agreement or clause is validly enforceable.

CONCLUSION

The major concern of a restrictive clause or agreement is to protect the intellectual property of the employer as time and effort have been expended.

However, there is also a need to ensure that the employer does not use the agreement to eliminate healthy competition. The onus is therefore on the court to put the interest of both parties on the scale of reasonability and equity and determine the enforceability of such agreement.

Keywords: non-compete clause, non-compete agreement, employer, employee, restrictive covenant.

Snippet: The implication of the inclusion of a non-compete clause or non-compete agreement is that where the agreement is validly enforceable, any breach of the terms of the agreement affords the employer a right of action in court.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Corporate and Commercial Practice and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: Tobenna Mogbo

Tobennais a member of the Dispute Resolution Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Commercial Practice.

He can be reached at tobenna.mogbo@omaplex.com.ng

[1] Cooperative Development Bank Plc V Arc. Mfon Ekanem [2009] 16 NWLR (PT. 1168) 585; Shell Petroleum Development Company of Nigeria Limitedv Monday Amadi (CA) [2010] 13 NWLR (PT. 1210) 83

[2] Julie Bouchard et. al., (2013), A practical guide to the enforcement of non-competes in the EU, K & L Gates LLP.

[3] [1973] NSCC 557

[4] [1973] NSCC 557

[5]Otu Jacob: “Challenges and Prospects to the Implementation of the Nigerian Federal Competition and Consumer Protection Act, 2018” https://www.abacademies.org/Challenges and Prospects to the Implementation of the Nigerian Federal Competition and Consumer Protection Act, 2018 / last accessed on 20 September 2023

[6]Momolamken LP “United States: What Relief Is Available For Breach Of A Non-competition Agreement” https://www.mondaq.com/What Relief Is Available For Breach Of A Non-competition Agreement? – Trade Secrets – United States//last accessed on 20 September 2023