It is a well-established legal principle that two parties may freely enter into a contractual arrangement based on mutual agreement. Generally, courts will uphold such agreements, provided that their terms are not illegal or contrary to public policy.
A Non-Compete Agreement between an employer and an employee may either exist as a standalone contract or as a clause within a broader employment contract. A non-compete clause is a contractual provision that restricts an employee from engaging in competitive activities with the employer both during the course of employment and for a specified period after the employment relationship has ended. In addition, such clauses often include prohibitions against the disclosure of confidential information obtained during the period of employment[1].
Elements of a Non-Compete Clause
For a non-compete clause to be enforceable, it must typically meet the following criteria:
- Legitimate Business Interest – The employer must demonstrate that the restriction is necessary to protect legitimate business interests, such as trade secrets, client relationships, or proprietary information.
- Reasonableness in Scope – The clause must be reasonable in terms of:
- Duration – Courts often scrutinize the length of post-employment restrictions. A period of six months to two years is generally more enforceable, whereas excessively long durations may be struck down.
- Geographical Limitation – The restriction should be confined to areas where the employer conducts business. A global or nationwide restriction without justification may be deemed unreasonable.
- Nature of Restricted Activities – The clause should specify the type of competitive activity prohibited rather than impose an overly broad or vague restriction.
Common Law Position on Non-Compete Clause
Under common law, non-compete clauses also known as restraint of trade clauses are generally regarded as prima facie unenforceable, as they are seen as restrictions on an individual’s ability to earn a livelihood. However, courts will uphold such clauses if they are reasonable, not against public policy and necessary to protect legitimate business interests.[2]
Statutory Position on Non-Compete Clause
While section 59 of the Federal Competition and Consumer Protection Act, 2018(FCCPA) [3]explicitly prohibits agreements that obstruct competition, deeming them unlawful and void if they hinder competition within any market, section 68 (e)[4] Federal Competition and Consumer Protection Act, 2018 provides thus;
“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..;”
Judicial Position on Non-compete Clause
In Koumolis v Leventis Motors Ltd.[5] (1973) NSCC 557;
…..the Supreme Court provided a subjective test that weighs the reasonability of the non-compete clause or agreement to ascertain its enforceability or otherwise. The court provides 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.
The court in the case of 7th Heaven Bistro Limited v Mr. Amit Desphande (Unreported) Suit No: NICN/LA/396/2015;[6]
…..ruled that a non-compete agreement restricting an employee from pursuing employment in Nigeria for a three-year period after leaving the employer was considered inhuman and stifling. The court found such an agreement to be an unfair labor practice.
Remedies Available For Breach of Non-Compete Clause
- Damages[7]
- Injunction
- Any other reasonable remedy jointly included in the agreement by the parties.
Conclusion
Non-compete clauses play a significant role in protecting an employer’s legitimate business interests, such as trade secrets, client relationships, and proprietary knowledge. However, their enforceability depends on their reasonableness in terms of duration, geographical scope, and restricted activities.
In Nigeria, while statutory provisions under the FCCPA 2018 allow for non-compete agreements, they must not exceed two years and must be justifiable to avoid being struck down as oppressive or contrary to public policy. Judicial precedents emphasize that non-compete clauses should not unreasonably restrict an individual’s right to work, as seen in cases where courts have ruled against overly broad or lengthy restrictions.
To ensure enforceability, employers must carefully draft non-compete agreements to balance their business interests with employees’ rights. Ultimately, a well-structured, fair, and reasonable non-compete clause is more likely to withstand legal scrutiny and achieve its intended purpose without infringing on employees’ rights.
[1] An Analysis of Non-Compete Clauses Agreement in Nigeria, O.M ATOYEBI, SAN
Accessed at https://omaplex.com.ng/an-analysis-of-non-compete-clauses-agreement-in-nigeria/#post-3493-footnote-3
[2] Non-Compete Agreements in Nigerian Employment Contracts: Key Insights, Best Practices, and Practical Scenarios, Grateful Pepple
accessed
[3] Section 59, Federal Competition and Consumer Protection Act, 2018
[4] Section 68 (e)[4] Federal Competition and Consumer Protection Act, 2018
[5] 1973) NSCC 557
[6] NICN/LA/396/2015
[7] 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//