HOW DOES A RESTRAINT OF TRADE CLAUSE PROTECT YOUR BUSINESS?

Introduction

A client recently learnt a costly lesson in business protection.

His ex-employee has been sabotaging his business so that his clients will drop him and retain the ex-employee instead. The result? Millions lost in revenue and goodwill.

Unfortunately, the client had no legal safeguards in place to prevent the ex-employee from poaching his clients. The outcome could have differed if he had included a Restraint of Trade (RoT) Clause in the employment contract.

This article discusses the importance of an RoT Clause in protecting your business. 

What is a Restraint of Trade Clause?

A Restraint of Trade (RoT) Clause is a contractual term that restricts an employee from engaging in activities that harm the employer's business interests during or after employment. Its primary goal is to prevent key employees from leveraging their access to the intimate parts of the employer’s business to harm the employer's business interests. 

An RoT Clause protects:

1. Client Relationships – by preventing employees from poaching customers;

2. Intellectual Property – by preventing the disclosure of sensitive business information; and

3. Workforce Stability – by preventing ex-employees from luring away their former colleagues.

An RoT Clause can come in any of the following varieties:

1. A Non-Compete Clause restricts an employee from starting or working for a competing business.

2. A Non-Solicitation Clause prohibits an employee from directly approaching your clients or customers for business.

3. A Non-Poaching Clause restricts an ex-employee from recruiting your employees into their new business.

4. A Confidentiality Clause ensures employees do not disclose sensitive business information even after leaving.

Each of these clauses serves a specific purpose, and a lawyer who is adept at drafting complex contract terms can combine them to address the employer's pain points effectively and protect the business from unruly employees. 

Is a Restraint of Trade Clause Valid?

Although the court initially frowned on an RoT Clause because it restricted the subject's right to earn a living,[1] it has now set the following criteria that can constitute a valid RoT Clause:

1. It must protect a legitimate business interest;

2. It must be reasonable in scope, geography, and duration; and 

3. It should not contravene public policy or unduly restrict the subject’s right to earn a living.[2]

The major challenge in establishing the validity of an RoT Clause lies in whether or not the scope, geography, and duration of the restraint are reasonable. This ties in closely with the other criteria listed above, because an employer should not violate the employee's right to earn a living simply because the employer seeks to protect their business interests. Therefore, a blanket statement will not suffice. 

Thus, a clause restricting an employee from competing with the employer or working with the employer’s competitor anywhere in the country/city after leaving the employer would be deemed unreasonable.[3] A good alternative would be: “within one year immediately following the termination of this employment, the Employee shall not work in a similar capacity in any business with competing interests to that of the Employer in Lagos except with the Employer’s prior written permission, which permission will not be unreasonably withheld”. This is a more specific restraint ensuring that the parties are clear on protecting the employer’s business by moderately limiting the employee's right to earn a living in a similar role within the location and timeframe stipulated. 

Furthermore, Section 68(e) of the Federal Competition and Consumer Protection Act 2019 caps the duration of RoT Clauses at 2 (two) years. It follows, therefore, that besides ensuring that the RoT Clause is reasonable, employers must limit the restraint to 2 (two) years to be able to enforce it against unruly ex-employees.

How to Enforce a Restraint of Trade Clause

1. Formally demand that the ex-employee stop the prohibited activities through a Cease & Desist letter. A refusal to comply would constitute grounds to sue them.

2. Obtain a court order preventing the ex-employee from continuing their actions and claim damages for losses resulting from the breach. However, the employer must establish the validity of the RoT Clause.

Conclusion 

A well-drafted Restraint of Trade (RoT) Clause is an important tool for protecting your business from unfair competition, client poaching, and intellectual property leaks. However, for it to be legally enforceable, it must be reasonable, justified, and not exceed 2 (two) years. 

Employers should work closely with a legal expert to ensure that their RoT clauses are tailored to their specific business needs while balancing the rights of employees to earn a living. A poorly drafted or overly broad clause will be struck out by the court, leaving your business exposed to the very risks you sought to prevent. 

If you’re an employer looking to protect your business interests within the bounds of the law, now is the time to review and strengthen your employment contracts. A proactive approach today can save your business from costly legal battles tomorrow. 

Do you need a well-drafted Employment Contract? Contact us today! 

DISCLAIMER: This article is only intended to provide general information on the subject matter and does not serve as legal advice. Readers are urged to consult a legal expert for tailored legal advice and solutions. 

References:

[1] Herbert Morris Limited v. Saxelby (1916) 1 A.C 688.

[2] Koumoulis v. Leventis Motors Ltd. (1973) LPELR-1710(SC).

[3] John Holt & Co (Liverpool) Ltd. v Chalmers (1918) 3 NLR 77.