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16 Mar 2021

Competition and Covid-19: are your restrictive covenants enforceable?

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The Covid-19 pandemic has brought unprecedented disruption to businesses and it is arguably more important than ever before for employers to have adequate protections in place to stop employee competition. Whilst the pandemic may be new, it's worth remembering the law governing restrictive covenants is well-developed.

In this e-alert, we set out the fundamental concepts relating to restrictive covenants that employers should be aware of and how they differ in each of the following jurisdictions:

United Kingdom

This note sets out guidance on the law relating to restrictive covenants as it applies in England and Wales, and is enforced in the Courts of England and Wales.  Whilst the law relating to the interpretation and enforceability of restrictive covenants is similar in Scotland, there are significant areas of divergence between the two jurisdictions.  The key difference is the civil court procedure applicable to the enforcement of restrictions, namely the difference between obtaining interim interdicts (in Scotland) and interim injunctions (in England and Wales) and the different tests that apply in doing so.  However, there are also differences in the factors relevant in determining the validity of the restrictions in Scotland compared to England and Wales, such as the requirement for consideration and the effect of an employer's breach of contract.  We have flagged these differences on a high level basis for the purpose of this alert however, as with all of this  guidance, legal advice should always be taken in individual circumstances on the applicable jurisdiction, applicable laws and enforcement mechanisms that apply in each case.

1  What are the legitimate business interests an employer can protect?

Preventing competition by an employee is not, of itself, sufficient to amount to a legitimate business interest. Instead, an employer must demonstrate it has a defined business interest that needs protecting.

Broadly, the categories of interests that will be protected by a court in England and Wales are as follows:

  • Existing, and potential business connections and relationships – with customers/clients and suppliers;
  • Goodwill;
  • The stability of the employer's workforce; and
  • Trade secrets and other confidential information.

2  What basic test must a restrictive covenant pass to be enforceable?

A contractual term seeking to restrict an employee's activities post-termination is prima facie void for being in restraint of trade and contrary to public policy but will be enforceable if the employer can demonstrate that:

  • it protects a legitimate business interest; and
  • the protection sought goes no further than is reasonably necessary to protect that interest, having regard to the interests of the parties and the public.

Key factors relevant to the reasonableness of a restrictive covenant include the nature of the restriction, the duration and the geographical locations it covers.

In a limited number of cases public interest factors may be relevant. For example, a restriction preventing an inventor of a new ventilator for use in hospitals from competing with his former employer failed because the Court held that the restriction would inhibit the development of inventions which would benefit the public. Considering the Covid-19 pandemic, it would not be surprising for employees engaged in research and development in the medical or scientific professions to rely on public interest factors when challenging the reasonableness of their restrictive covenants.

Enforceability is assessed at the time the restrictive covenant was entered into.  That may be at the beginning of the employment relationship or when the employee takes on a new role or responsibilities or when any circumstances change that necessitate a need for the restrictive covenants to be updated.

3  Is a covenant that prohibits an ex-employee joining a competitor potentially enforceable?

Yes, provided it goes no further than is reasonably necessary to protect the employer's legitimate business interests which is typically where restrictions on dealing with/ soliciting  customers/clients may not provide sufficient protection. Non-competition covenants are generally the appropriate choice where the legitimate business interest to be protected is confidential information.

Due to the potential severity of their impact on the ex-employee, non-competition covenants are the covenants that the Courts will scrutinise most closely.

4  Is a covenant that prohibits an ex-employee dealing with or soliciting the business of customers/clients potentially enforceable?

Yes, provided there is a suitable nexus between the ex-employee and the client. Normally the nexus is material dealings between the ex-employee and the customer/client within a specified period, usually around the 12-month mark. In some instances, access to confidential information relating to the customer/client may be an appropriate connection. The covenant should also be limited in time, the duration being linked to the customer/client cycle i.e. how frequently the customer/client would normally be expected to deal with the employer's business.

For some client-centric professions, such as financial advisors or insurance brokers, non-solicitation and non-dealing covenants can be more important than generic non-competition covenants.

5  Can an ex-employee be prevented from poaching his former colleagues

Yes. Maintaining a stable workforce is recognised by the Courts as a legitimate business interest which an employer is entitled to protect. The restriction should be limited in time and should only prevent  the ex-employee from poaching usually senior employees of importance to the business and with whom the ex-employee had material dealings in a limited period prior to termination of the ex-employee's employment or about whom they held confidential information. In very small businesses that may be all employees but those cases are exceptional.

6  In general terms what length of covenants will the Courts uphold?

Each case will depend on its own facts, and will involve balancing a multiplicity of factors. However, as a general rule covenants of more than 12 months are relatively rarely enforced.

Non-competition covenants are often deliberately shorter than other covenants because of their more significant impact on the ex-employee. Where the legitimate interest being protected is confidential information the shelf-life of that information will be key. 6 months is relatively standard with 12 months applying for key senior executives.

For non-solicitation and non-dealing covenants, the duration should be related to the time it will take for another employee to establish a relationship with the customers/clients. Where a replacement has to be recruited that will include the time to recruit and train that employee. 12 months is a relatively standard period.

For non-poaching covenants, the duration should be related to the time it would take for the employer to recruit a replacement employee and for that replacement to build relationships with the staff to minimise the impact of the ex-employee's departure. 12 months is a relatively standard period, although 6 months is also not unusual.

As a general rule the Courts are reluctant to enforce lengthy restrictions on employees only employed for a short period of time or who have short notice periods.

7  Must ex-employees receive compensation specifically for the restrictive covenants for them to be enforceable?

In England and Wales, it is not necessary to make payment to an employee entering into a restrictive covenant at the commencement of  employment, and it is not common practice to do so. However, if restrictive covenants are introduced or changed during the course of employment, some additional consideration or payment will be required to be made at the time and specifically attributed to the new covenants to ensure that those covenants are enforceable. Continued employment alone is unlikely to constitute adequate consideration for new covenants. The position in Scotland is different, in that no consideration is required for covenants entered into during the course of employment to be enforceable.

Currently, it is not a requirement that an ex-employee be paid during the period of a restrictive covenant. However, as part of its plans to boost the economy the UK Government has conducted a consultation on measures to reform post-termination non-competition covenants. Included in those proposals is an option that in line with other European jurisdictions employers will have to make some payment to an ex-employee for the duration of a non-competition covenant. The Consultation closed on 26 February and we are now awaiting the outcome. Mandatory compensation would be a significant change for employers and we will be monitoring developments and providing updates as the situation develops.

8  Can the courts re-write restrictive covenants to make them enforceable?

The Courts of England and Wales have no power to re-write a restrictive covenant to make it enforceable if it is too broad. However, the Court can strike out, or sever, wording which would otherwise result in the covenant being too wide and thereby save the covenant provided three conditions are satisfied. Those conditions are that  (i) it is possible to remove the wording without the necessity of adding to or modifying what remains (ii) the remaining wording is supported by adequate consideration and (iii) removal of the offending wording does not change the overall nature/character of the restriction. When crafting their covenants employers are ill-advised to rely on this principle of severance as a means of saving an over broad covenant; severance is an argument of last resort.

9  If an employer is in fundamental breach of the employment contract what effect does that have on restrictive covenants?

Where the fundamental breach is accepted by the ex-employee as terminating the contract they will be discharged from the restrictive covenants. However, the Courts of England & Wales have not been sympathetic to employees who seek to manufacture a breach in order to avoid their restrictive covenants. The Courts scrutinise arguments of fundamental breach very closely and regularly reject them.  Under Scots contract law, the position is not as clear cut.  Although the restrictive covenants are likely to be unenforceable where an employer is in fundamental breach of contract, and prudent employers should proceed with care on that basis, there may be more scope to argue that the post-termination restrictions can still be enforced in this scenario.

10  What remedies are available for breach of an enforceable restrictive covenant?

The most commonly sought remedy is an interim injunction to restrain breach (or further breach if there is evidence that some breach has already occurred).  In Scotland, an employer would seek to obtain an interim interdict for these purposes, and the procedure and tests for doing so vary to those that apply in obtaining an interim injunction in England and Wales.

To succeed in interim injunction proceedings in the Courts of England and Wales, the employer must show that there is a serious issue to be tried and that the balance of convenience lies in the employer's favour.

Alternative remedies are a claim for damages or a claim for an account of profit.

In addition, an employer may bring a claim against an ex-employee's new employer for inducing breach of contract if it can show that the new employer was aware of the covenants and encouraged the employee to act in breach. 

UAE

For the purpose of this alert, we have focused on the legal requirements that currently apply to:

  • Private sector employers and employees based "onshore" in the UAE and subject to Federal Law No. 8/1980 (the “UAE Labour Law”) and certain other relevant UAE laws in the context of post-termination restrictive covenants, including UAE Federal Law No. 5/1985 (the "UAE Civil Code") and UAE Federal Law No. 18/1993 (the "Commercial Transactions Law"); and
  • Private sector employers and employees based in the Dubai International Financial Centre (“DIFC”) and subject to DIFC Law No. 2/2019 (the “DIFC Employment Law”) and other potentially relevant DIFC laws in the context of post-termination restrictive covenants, including DIFC Law No. 6/2004 (the "DIFC Contract Law"), DIFC Law No. 5/2005 (the "DIFC Law of Obligations") and DIFC Law No. 7/2005 (the "DIFC Law of Damages and Remedies").

The concept of post-termination restrictive covenants is recognised, and they are commonly used, both onshore and in the DIFC; however, their enforceability is largely untested and there is little case law under either regime.

Subject to certain requirements (which are considered below) both the UAE Labour Law (Article 127) and UAE Civil Code (Articles 909 (1) & (2)) expressly recognise an employer's ability to protect its business by way of non-compete post-termination restrictive covenants.

The DIFC Employment Law does not expressly recognise the concept of non-compete (or any other type of) post-termination restrictive covenants.  However, the notion of protecting the employer's business by way of such covenants has been recognised by the DIFC Courts.  As at the time of writing, there is limited reported DIFC case law in this respect; however, given the significant level of consistency as between the employment law frameworks under DIFC and English law, DIFC employers and employees seeking direction in relation to post-termination restrictive covenants are likely to find the more established and detailed English case law and guidance on this area instructive.

1  What are the legitimate business interests an employer can protect?

There is no statutory definition in the relevant onshore or DIFC laws (or any other definitive guidance) as to what constitutes a legitimate business interest for the purpose of post-termination restrictive covenants. 

In the DIFC, the Courts have held that the employer will need to identify some advantage or asset inherent in the business which can properly be regarded as the employer's property and which it would be unjust to allow the employee to appropriate.

As the relevant onshore statutory provisions expressly refer to an employee becoming acquainted with the employer's clients and/or having access to its business secrets, the protection of clients and confidential information are commonly understood to be protectable interests onshore.  The same would be true in the DIFC where, in addition (based on the approach under English common law), the protection of a stable workforce is also likely to be considered a legitimate business interest.

2  What basic test must a restrictive covenant pass to be enforceable?

Under the UAE Labour Law and UAE Civil Code, where the nature of the employee's work means that the employee will become acquainted with the employer's clients and/or have access to its business secrets, onshore employers and employees can agree to non-compete covenants, provided that the restriction:

  • is limited in terms of duration, geographical scope, and the type of work restricted; and
  • goes no further than is reasonably necessary to protect the legitimate interests of the employer (as to which, see Question 1).

In addition, the UAE Labour Law specifies that the employee must be at least 21 years old at the time of agreeing to the restriction.

There are no such statutory restraints within the DIFC Employment Law itself.  However, the DIFC Courts have upheld the English common law principle that restrictive covenants are prima facie void as unlawful restraints of trade unless the employer can show that they go no further than is reasonably necessary to protect the employer's legitimate business interests.  DIFC post-termination restrictive covenants should, therefore, also be limited in terms of duration, geographical scope and the type of activity that is being restricted; and consideration should be given as to whether a lesser form of restraint (for example, a non-solicitation covenant rather than a non-compete covenant) would afford the employer adequate protection.

Neither the onshore nor the DIFC statutory regimes further expand on how the reasonableness of a post-termination restrictive covenant is to be determined; this will be a question of fact depending on the particular circumstances of each case.  Employers who apply a 'one-size fits all' approach to post-termination restrictive covenants without considering, for example, the seniority and specific role of each individual employee, and tailoring the covenants accordingly, are likely to face difficulties in enforcing the covenants (albeit they may take the view that the 'deterrent effect' of simply including the covenants in the employment contract – or ancillary document -  is sufficient).

Some general best practice guidance in respect of the key scoping elements is as follows:

Duration: Post-termination restrictive covenants that exceed 6 months are unlikely to be enforceable unless the employee is in a very senior, executive or key business role (see further under Question 6).

Geographical Scope: Covenants are commonly restricted to the Emirate or freezone in which the employee works or, at most and if justified due to the nature and reach of the employee's role/the employer's business, the broader UAE.  Whether the covenant can be expanded to cover the Middle East or even further afield will depend on the facts of each case, and it will be necessary for the employer to take local advice in regions outside the UAE to assess the potential enforceability of such covenants in those jurisdictions.

Type of Work: Typically an employee should only be restricted from undertaking activities that they performed for the employer.  A more blanket ban on any activities whatsoever will be harder to enforce, save perhaps in the case of very senior employees in roles that involve having control over business decisions, operations and confidential information, and who therefore have greater potential to damage the business when they leave. 

Although there are no equivalent provisions for other post-termination restrictive covenants in the onshore or DIFC laws (such as non-solicitation of customers/clients, and non-poaching of employees) it is likely that the enforceability of such provisions would be interpreted by the Courts in a similar way to that described above. 

3  Is a covenant that prohibits an ex-employee joining a competitor potentially enforceable?

Yes, non-compete post-termination restrictive covenants are expressly recognised under the UAE Labour Law and UAE Civil Code, and have been recognised in principle at least by the DIFC Courts; however, in both jurisdictions the covenant must genuinely be necessary for the protection of the employer's legitimate interests and satisfy the scoping requirements outlined above. 

4  Is a covenant that prohibits an ex-employee dealing with or soliciting the business of customers/clients potentially enforceable?

Onshore, only non-compete post-termination restrictive covenants are specifically provided for in the UAE Labour Law and UAE Civil Code.  However, provisions that restrict an employee from dealing with and/or soliciting the business of customers/clients of the employer are commonly included in onshore employment contracts alongside non-competes; and, as considered at Question 2 above, given the wording of the onshore laws, it is likely that customer/client connections will constitute a legitimate business interest of the employer. 

In the DIFC, the Courts have recognised the concept of non-solicitation post-termination restrictive covenants. 

As with non-competition covenants, the UAE and DIFC Courts will likely consider the extent to which such restrictions are reasonable and necessary to protect the employer's legitimate business interests in determining whether they are enforceable.  Employers should therefore consider limiting such covenants to customers/clients that the employee has dealt with in the 6 to 12 months leading up to the termination date, and/or listing the specific customers/clients that the employee is restricted from dealing with or soliciting.

5  Can an ex-employee be prevented from poaching his former colleagues?

Again, covenants preventing the poaching of colleagues are not specifically recognised under the UAE Labour Law, UAE Civil Code or the DIFC Employment Law, but are commonly included in employment contracts on the basis that maintaining a stable workforce is, potentially, a legitimate business interest for the employer to protect. 

To increase the likelihood of enforceability, such covenants should be limited to employees employed at the departing employee's termination date, and who have had substantial dealings with the departing employee in the 6 to 12 months leading up to his or her termination.

6  In general terms what length of covenants will the Courts uphold?

Each case will depend on its own facts, including such matters as the seniority and role of the employee concerned.  However, as general best practice guidance:

  • Non-compete clauses for a period of more than 6 months will be open to challenge, unless the employee is in a very senior, executive or key business role that warrants a longer period of restriction.
  • If covenants preventing the solicitation and/or dealing with clients/customers restrict the employee in a way that ultimately amounts to a non-compete (i.e. in that the employee is not able to work with any other employer unless they have access to particular clients/customers – often the case in smaller sectors or where there are more limited clients/customers in the market) then again, the restriction should be no longer than 6 months for most employees (12 months for the most senior employees).  Otherwise, the duration should be based on the time that the employer genuinely believes it will take for the business to re-establish or solidify the existing client/customer relationship in the absence of the departing employee (but ideally should not exceed 12 months).
  • For a covenant seeking to restrict the poaching of colleagues, again the duration should be limited to the time that the employer genuinely believes it will take for the employer to recruit a replacement employee and for that employee to establish working relationships to minimise the impact of the ex-employee's departure.  A period of restriction of 6 months is generally acceptable for most employees (12 months for the most senior employees).

For any longer periods, the onus will be on the employer to produce credible evidence and explanations as to the necessity of restricting the employee for the relevant amount of time by reference to the potential damage that may be done to the business if the period were to be shorter.

7  Must ex-employees receive compensation specifically for the restrictive covenants for them to be enforceable?

No compensation is required to be paid to the employee to make the covenants enforceable either onshore or in the DIFC.

8  Can the courts re-write restrictive covenants to make them enforceable?

In the author's view, in line with the English common law approach, the DIFC Courts are very unlikely to re-write a post-termination restrictive covenant in order to make it enforceable.  It is more likely that the DIFC Court would 'blue pencil' the covenants, that is, strike out the offending part(s) of a particular covenant and, provided that it still makes sense, uphold the remaining portion(s).

In contrast, the UAE Courts have been known to amend covenants as they see fit and may well do so if they consider a restriction to be have been drafted wider than is necessary.  This makes it even more uncertain for onshore employers who are seeking to enforce covenants in Court, and they may be better served by seeking to negotiate a mutually acceptable compromise with the employee before proceeding to litigation. 

In either jurisdiction, we cannot over emphasise the importance of drafting post-termination restrictive covenants carefully from the outset.

9  If an employer is in fundamental breach of the employment contract what effect does that have on restrictive covenants?

The UAE Labour Law and DIFC Employment Law are both silent on the effect on post-termination restrictive covenants of a repudiatory breach of contract by either party. 

Claims of repudiatory breach (or 'constructive dismissal') are frequently raised under English law by employees as a means of seeking release from any otherwise enforceable restrictive covenants; however the DIFC Courts have demonstrated that they are likely, in line with the approach under English common law, to scrutinise such claims closely, particularly claims made by highly paid individuals and teams moving to competitors.

Onshore, Article 909(3) of the Civil Code provides that an employer cannot rely on a non-compete post-termination restrictive covenant in the following circumstances:

  • If it dismissed the employee 'without cause', i.e. if the employee was dismissed for a reason not attributable to the employee, for example, redundancy; or
  • If the employee resigned in response to the employer's actions, for example, if the employer breached the employment contract or otherwise treated them unlawfully.

Generally speaking, it will be easier for an employer to enforce covenants in the UAE Courts if the employee has resigned rather than been dismissed (unless that dismissal is for cause).

10  What remedies are available for breach of an enforceable restrictive covenant?

Damages generally

In both the onshore and DIFC jurisdictions, employers can claim damages for breach of an enforceable post-termination restrictive covenant.  To do so successfully, the employer must generally be able to show that it has suffered a quantifiable financial loss as a direct result of the employee's breach of the relevant restriction. 

Whilst both the UAE Labour Law and DIFC Employment Law are silent on the measure of damages, a number of other laws fill that void.  For example, the DIFC Contract Law (Articles 111 and 117) and the DIFC Law of Damages and Remedies (for example, Articles 8, 10, 16, 23, 25 and 30) contain provisions which govern the calculation of damages and the duty to take reasonable steps to mitigate the harm/loss caused by the breach.  Articles 386-390 of the UAE Civil Code provides for the assessment of damages onshore.

In practice, it can be difficult to evidence the necessary causal connection between the employee's breach to found a claim for general damages.  One potential alternative in the DIFC comes in the form of Article 160(1)(b) of DIFC Law of Obligations, which provides that an employee who breaches a fiduciary duty may be liable to 'account' to the employer for any 'benefit' acquired from the breach (which is reminiscent of the English law concept of an account of profits).

Liquidated damages

Both onshore and DIFC employers can also consider including a liquidated damages clause to sit alongside any post-termination restrictive covenants in employment contracts.  Such clauses typically state that the employee will automatically be required to pay the employer a certain amount of compensation if they breach the restriction.  This can help to deter the employee from breaching the restriction in the first place and also to leverage the employer's position in the event of a dispute.  It is also beneficial in that it generally shifts the burden of proof from the employer to the employee, who will then be required to prove why the stated amount is not reasonable or justified – which can be difficult. 

The main drawback of liquidated damages clauses is that pre-estimating the potential damage that could occur post-termination of employment, before the employee has even started their role, is difficult.  The figure proposed may not be reasonable or enforceable on termination.  For onshore employers, if the figure is so high as to compel an employee not to leave their employment, it won't be valid (see Article 910 of the Civil Code); if it is too low, it may not have the desired effect.  For DIFC employers, whilst the starting assumption will be that the employer is entitled to the agreed liquidated sum regardless of the actual loss suffered, the amount can be reduced by the Court if it is considered to be 'manifestly disproportionate' (see Article 21 of the DIFC Law of Damages & Remedies) or 'grossly excessive' (see Article 122 of the DIFC Contract Law) to the loss envisaged.  Further, employees may be reluctant to agree to such provisions at the outset of their employment.

Injunctive relief

For onshore employers it is not possible to obtain injunctive relief in the UAE Courts which means that even if the post-termination restrictive covenant is enforceable, the employer cannot legally restrain an employee from joining a competitor (or otherwise complying with the covenant), and damage to the business is likely to have already been done by the time any judgment on enforcement is issued and/or damages are awarded.

Injunctive relief is however available for DIFC employers, for example, under the DIFC Law of Damages and Remedies (see Article 38).  DIFC-based employers can apply to the DIFC Courts to for interim or final injunctive relief to prohibit the employee from undertaking the restricted activity, for example, competing with the business or soliciting clients or employees.

Other potential remedies / causes of action

The DIFC Law of Obligations contains a number of other provisions that can be relevant in the context of employee competition.  For example, by virtue of Articles 158(2)(b) and 159, unless the contrary is demonstrated it is presumed that employees owe fiduciary duties to their employers (the details of which are set out in Schedule 3 to that law and include: loyalty; no conflicts of interest; no secret profits; confidentiality; care skill and diligence).  An action for breach of fiduciary duty will sound primarily in damages (or perhaps an 'account' to the employer – see above). 

The DIFC Law of Obligations also sets out a number of economic torts, for example, Article 32 covers the economic tort of inducing or procuring a breach of legal obligations (which could include procuring a breach of a post-termination restrictive covenant - an allegation commonly made against poaching employers) and Article 36, which covers the economic tort of unlawful conspiracy (and which could easily arise in the context of a team move).

Onshore employers can also consider seeking damages from a poaching employer under Article 64 of the Commercial Transactions Law if that entity has knowingly induced employees to join the poaching employer, to disclose to it the employer's confidential information and/or to usurp the employer's clients/customers.  It may also be possible for an onshore employer to seek a labour ban against an ex-employee who has been found guilty of breaching an enforceable non-compete covenant by the UAE Courts (see Ministerial Resolution No. 297/2016).

Finally, there are criminal sanctions that can be imposed against both onshore and DIFC employees for disclosing their employer's confidential information to a third party, under UAE Federal Law No. 3/1987 (the "UAE Penal Code").

11  Covid-related considerations

Although many employees have returned to the office either on a full- or part-time basis in the UAE, many remote-working arrangements continue.  When employees are not physically working from the office, it can be more difficult for employers to monitor their behaviour.  This may make it easier for employees to access or misappropriate confidential information and/or make plans to leave their role, including engaging in discussions with potential future employers, customers/clients and colleagues regarding plans that may be in breach of their restrictions (see our alert on disciplinary matters arising in COVID times, HERE, for further details).  This makes it even more crucial for employers to be monitoring employees where possible and lawful, and reviewing and updating post-termination restrictive covenants in employment contracts where necessary to ensure that they are suitable to the employee's current role.  There has also been an increase in redundancies and workforce restructuring as a result of the pandemic, which can have a knock-on effect on remaining employees' roles.  Many employees will be expected to take on new work and responsibilities that will necessitate the need for amended or new post-termination restrictive covenants.

Hong Kong

1  What are the legitimate business interests an employer can protect?

In Hong Kong, the legitimate business interests which are capable of protection fall within the following categories:

  1. Trade secrets or confidential information of the employer;
  2. Trade connections, including relationship with suppliers and customers; and
  3. Stability of the employer’s workforce.

2  What basic test must a restrictive covenant pass to be enforceable?

In general, a post-termination restrictive covenant is prima facie void unless, it is reasonable in the interests of the parties concerned and the general public.

The employer must first establish that the restrictive covenant is put in place to protect a legitimate business interest of the employer. After the test of legitimate interest is satisfied, the employer then needs to show that the restriction is reasonable and goes no further than necessary to protect the particular interest by reference to duration, geographical and scope sought to be covered by the covenant.

3 Is a covenant that prohibits an ex-employee joining a competitor potentially enforceable?

Yes it may be enforced. It is preferable that the non-compete clause is not a blanket clause. Where a non-solicitation, a non-dealing and a non-poaching clause exists a blanket non-compete clause will generally be considered unnecessary and unenforceable unless the restriction would be difficult to police.

4 Is a covenant that prohibits an ex-employee dealing with or soliciting the business of customers/clients potentially enforceable?

Yes it may be enforced. The clause should only restrict the employee to deal with customers/clients with whom the employee had substantial dealings during a specified period before the employment termination date which should not go back further then 12 months in time immediately before the termination of the employment.

5 Can an ex-employee be prevented from poaching his former colleagues?

Yes if a non-solicitation of employees clause is contained in the employment contract. Maintaining a stable workforce is a legitimate business interest for the employer to protect. The restriction should be limited to employees employed at the termination date who have had substantial dealings with the departing employee.

6 In general terms what length of covenants will the Courts uphold?

Each case will depend on its own facts.

For non-compete clause, restrictions of more than 4 months will be open to challenge.

For non-solicitation of clients and customers clause, the duration should be related to the time it takes the employer to recruit a replacement employee who then needs to be trained and given time to establish a relationship with the employer’s clients/customers. A non-solicitation clause of up to 6 months will stand a good prospect of success in terms of enforceability. For longer periods of time, the employer will need to adduce evidence to show why a longer duration is necessary.

For a non-poaching clause, the duration should be limited to the time it would take for the employer to recruit a replacement employee who will then need time to build relationships with the staff so that the influence of the ex-employee can be eliminated. A period of restriction of 6 months is generally acceptable.

7 Must ex-employees receive compensation specifically for the restrictive covenants for them to be enforceable?

No. In Hong Kong, it is not essential to make an additional, specific payment to enforce a restrictive covenant if such covenant is included in the contract of employment at the commencement of that employment. However, if the restrictive covenants are only introduced during the course of employment, some additional consideration or payment will usually be required.

Although making additional payment to enforce a restrictive covenant is not essential, paying the employee may be a relevant factor when assessing reasonableness. Some borderline clauses in terms of reasonableness have been considered to be more acceptable because the employee is being paid a sum of money in return for enforcement of the restriction. It is however important to note that each case will depend on its own facts and paying money, of itself, will not turn an unenforceable covenant into an enforceable one.

8 Can the courts re-write restrictive covenants to make them enforceable?

The Court will not re-write a restrictive covenant to make it enforceable. However, the Court can strike out offending wording which it deems is invalid/unreasonable and uphold the remainder of the covenant. The Court will only do so if the clause does not change the overall nature/character of the restriction.

9 If an employer is in fundamental breach of the employment contract what effect does that have on restrictive covenants?

If an employer is held to be in fundamental breach of the employment contract, the restrictive covenants will be unenforceable.

10 What remedies are available for breach of an enforceable restrictive covenant?

The common remedy is an injunction from the High Court so long as the employer can show that the balance of convenience lies in its favour and the damage which it would suffer if the employee was not restrained could not be compensated in damages. The employer can seek an injunction to prevent the employee from soliciting customers/employees or from competing with his ex-employer for the duration of the period of the restrictive covenant. Alternatively, the employer may seek damages for breach of the restrictive covenant.

Since the Covid pandemic, many employers have been downsizing their workforce resulting in staff taking on additional responsibilities compared to those stated in their employment contracts. Employers should ensure that where employees are promoted or take on additional roles that their contracts including any restrictive covenants are reviewed to see if they need to be amended.

Singapore

1  What are the legitimate business interests an employer can protect?

Broadly, the categories of right that will be protected by a Singaporean court are as follows:   

  • business connections and relationships – with clients, customers or suppliers;
  • employee connections; and
  • trade secrets and other confidential information.

2  What basic test must a restrictive covenant pass to be enforceable?

A contractual term seeking to restrict an employee's activities post-termination is prima facie void for being in restraint of trade and contrary to public policy but will be enforced if the employer can demonstrate that:

  • it has a legitimate business interest that it is appropriate to protect; and
  • the protection sought goes no further than is reasonably necessary in order to protect that interest, having regard to the interests of the parties and the public.

3  Is a covenant that prohibits an ex-employee joining a competitor potentially enforceable?

Yes, provided it goes no further than is reasonably necessary to protect the employer's legitimate business interests and in situations where restrictions on solicitation of customers/clients and employees may not provide sufficient protection. However, due to the potential severity of their impact on the ex-employee, such provisions are likely to be more closely scrutinised than other, less restrictive, covenants. They must also be reasonable in scope, both in terms of geography and the restricted business, and in time.

4  Is a covenant that prohibits an ex-employee dealing with or soliciting the business of customers/clients potentially enforceable?

Yes. However, the restriction is more likely to be upheld if the clause only restricts the employee from dealing with customers/clients with whom the employee had contact with during a specified period (often 12 months) before termination. The restriction should also be limited in time.

5  Can an ex-employee be prevented from poaching his former colleagues?

Yes. Maintaining a stable workforce is recognised by the Courts as a legitimate business interest which an employer is entitled to protect. The restriction is more likely to be upheld if it is limited to employees employed at the termination date and, unless there are a very small number of employees, is also further limited to those who worked with or knew the departing employee or those in a senior capacity. The restriction should also be limited in time.

6  In general terms what length of covenants will the Courts uphold?

Each case will depend on its own facts, but Courts are generally reluctant to enforce covenants with a duration of more than 12 months. As a general matter of market practice, this period is often far shorter (3 to 6 months) for more junior employees.

For non-competition covenants, the Courts will consider how long it will be before competitive activity by the departing employee no longer represents a significant threat to the employer's business.

For non-solicitation and non-dealing clauses, the duration of covenants should be related to the time it takes the employer to recruit a replacement employee who then needs to be trained and given time to establish a relationship with the employer’s clients/customers.

For a non-poaching of employees clause, the duration should be limited to the time it would take for the employer to recruit a replacement employee who will then need time to build relationships with the staff so that the influence of the ex-employee can be eliminated.

7  Must ex-employees receive compensation specifically for the restrictive covenants for them to be enforceable?

No. In Singapore, it is not necessary to make payment to an employee in order to enforce a restrictive covenant if the covenant is included in the contract of employment at the commencement of that employment. However, if restrictive covenants are introduced or changed during the course of employment, some additional consideration or payment will usually be required in order to ensure the contractual change is enforceable. Continued employment alone is unlikely to constitute adequate consideration for new covenants.

Further, although making an additional payment to enforce a restrictive covenant is not essential, the fact that consideration was paid in return for agreeing to the restraint may be a relevant factor when assessing reasonableness.

8  Can the courts re-write restrictive covenants to make them enforceable?

In the event that a covenant is found to be too wide, it is not open to the employer to argue that he will not seek to enforce the unreasonable parts of the covenant.

The Court will also not re-write a restrictive covenant to make it enforceable if it is too broad. Neither will it construe a broad restriction as having implied limitations in order to make it enforceable. However, the Court can strike out offending wording which it deems are unreasonable and uphold the remainder of the covenant if by doing so, this does not change the overall nature/character of the restriction. In addition, a Court will treat separate promises as severable from one another, so that one unenforceable covenant will not render the remainder of the covenants in a contract unenforceable.

It is also unlikely that the Court will strike out offending wording in a cascading restrictive covenant, i.e. where the clause provides for a few different periods of restraint or a few different areas of restraint.

9  If an employer is in fundamental breach of the employment contract what effect does that have on restrictive covenants?

If an employer is held to be in fundamental breach of the employment contract, the restrictive covenants are likely to be unenforceable.

10 What remedies are available for breach of an enforceable restrictive covenant?

If the employee has breached the clause in question and the employer is not in repudiatory breach of the contract, then the employer may enforce a restrictive covenant which is reasonable by way of damages.

The employer may also seek an injunction, including an interim injunction before trial. In order to succeed in obtaining an injunction, the employer must show that there is a serious issue to be tried (that is, it is not obviously frivolous and vexatious) and that the balance of convenience lies in its favour.

Aside from going after the ex-employee, the employer may also have a claim against the ex-employee’s new employer for inducement of breach of contract if it can show that the new employer was aware of the covenants and encouraged the employee to act in breach of the same. 

The Singapore section of the article was written by Jason Yang and Christine Ong at Virtus Law LLP (a member of the Stephenson Harwood (Singapore) Alliance). For more information, please do not hesitate to contact any of the team at Stephenson Harwood (Singapore) Alliance.

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