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The Courts’ Decisions on Covenants In Restraint of Trade in Employment Contracts

CM Advocates > Legal News  > The Courts’ Decisions on Covenants In Restraint of Trade in Employment Contracts

The Courts’ Decisions on Covenants In Restraint of Trade in Employment Contracts

The Contracts in Restraint of Trade Act

The Contracts in Restraint of Trade Act is a law that gives validity to contracts that are in restraint of trade.

Section 2 of the Act defines contracts in restraint of trade as:

Any agreement or contract which contains a provision or covenant whereby a party thereto is restrained from exercising any lawful profession, trade, business or occupation shall not be void only on the ground that the provision or covenant is therein contained.”

The Act goes on to give the High Court authority to declare such contracts void after considering certain circumstances, such as the nature of the profession, trade, business or occupation concerned, and the period of time and the area within which the contract is expressed to apply.

Ultimately, in deciding whether or not to give effect to a contract in restraint of trade the court also determines what would be reasonable in the circumstance. In applying the reasonable test, the courts are guided by:

  1. The interests of the parties,
    The contract should not provide more than adequate protection to the party in whose favour it is imposed against something against which he is entitled to be protected.
  2. The interests of the public
    The provision or covenant should not be injurious to the public interest.

Hon. Justice Abuodha in Credit Reference Bureau Holdings Limited v Steven Kunyiha [2017] Eklr, observed that, unlike ordinary contracts where the court has to observe the sanctity of the contract, Section 2 of the Contracts in Restraint of Trade Act (cap 24), empowers the Court to declare the provisions of such contract containing restraint in trade clauses void where the Court is satisfied that the covenant is not reasonable either in the interest of the parties or against the public interest.

This means that in as much as parties are bound by the covenants, they willingly execute and cannot whimsically wiggle out of the performance of the obligations under the agreement; there is a general reluctance by the courts to give effect to such covenants and specifically, for general non-compete agreements.

Covenants in restraint of trade include, Non-compete, Non-solicitation and Anti-poaching agreements and are a common feature in Employment contracts, for obvious reasons.

Below we highlight the provisions of the Contract in Restraint of Trade Act and look at how the courts have applied those provisions in two precedents.

Craft Silicon Limited v Niladri Sekhar Roy [2018] Eklr

In an interim application by the employer to enforce a non- compete clause as well as a non-solicitation clause in the employment contract executed by the employee, the court established that it would have to first determine the point of competition between the previous employer and the respondent’s current employer to determine the validity of the non-compete clause. This, the court found, would be costly for both parties.

In denying granting the Applicants the order sought for a temporary injunction, the court determined that standing on its own, the non-compete clause stifled the claimant’s own right to earn a living and that the clause was vague and not caped within any geographical boundaries.

However, the court gave effect to the non-solicitation clause which provided that the Respondent should not contact the Claimant’s customers in the intervening period, until the determination of the hearing of the main suit or until the period of restraining elapses whichever was shorter.

NRG Media Limited v Andrew Kibe Mburu & another; Radio Africa Limited (Proposed Interested Party) [2019] eKLR

In this case, the court had issued a temporary order of injunction barring the respondent, who was a radio personality from performing services for, carrying or being engaged, or indirectly or publically identifying with the promotion of, any other radio station within the Republic of Kenya or in any business which competes with the business of the Applicant.

The order sought to enforce a non-compete clause in the respondent’s employment contract.  In granting the temporary injunction, the court had taken into consideration the fact the employment contract also provided that the respondent would be entitled to full pay during the non-compete period in order to ensure fair labour practices.

The respondent had subsequently entered an employment contract with the interested party in breach of the non-compete clause in the respondent’s employment contract with the Applicant.

The interested party moved the court in an application seeking r that the court order be vacated. The court in refusing to vacate the orders it had issued stated:

That should the Court vacate its orders the Claimant/Respondent would be greatly prejudiced because it has already paid the Respondents their salaries and the Respondents have been unjustly enriching themselves by earning from two employers.”

Conclusion

In this case, the court had issued a temporary order of injunction barring the respondent, who was a radio personality from performing services for, carrying or being engaged, or indirectly or publically identifying with the promotion of, any other radio station within the Republic of Kenya or in any business which competes with the business of the Applicant.

The order sought to enforce a non-compete clause in the respondent’s employment contract.  In granting the temporary injunction, the court had taken into consideration the fact the employment contract also provided that the respondent would be entitled to full pay during the non-compete period in order to ensure fair labour practices.

The respondent had subsequently entered an employment contract with the interested party in breach of the non-compete clause in the respondent’s employment contract with the Applicant.

The interested party moved the court in an application seeking r that the court order be vacated. The court in refusing to vacate the orders it had issued stated:

That should the Court vacate its orders the Claimant/Respondent would be greatly prejudiced because it has already paid the Respondents their salaries and the Respondents have been unjustly enriching themselves by earning from two employers.”

With the high rate of unemployment, in Kenya, it is not surprising that the courts would be generally reluctant to enforce, restrictive trade covenants and especially those that are broad and general in their construction.

Justice Mutava remarks in LG Electronics Africa Logistics FZE vs. Charles Kimani [2012] Eklr where he weighed the impact of non-compete clauses on the Defendant’s Employment contract, captures the general attitude of the court about such covenants.

 “In a country like Kenya where unemployment is soaring every single day, subjecting the defendant to loss of employment on the basis of a restrictive clause would be unreasonable and not in the interest of either party.  Indeed, such an action would be contrary to public policy.”

However as illustrated, courts will more readily enforce Non-solicitation and Anti-Poaching Agreements as opposed to non-compete agreements. It is therefore important to ensure that one engages legal counsel to assist in the proper crafting of such covenants and that one also gets proper advice before getting into such agreements.

At CM Advocates, our team of expert Corporate and Employment lawyers will Advise you on how to navigate through restrictive trade provisions in your Commercial or Employment contract and also provide a comprehensively drafted contract bespoke to your particular circumstances. These contracts can also be accessed at our portal here

Related Services: Corporate Law

Written By: Susan MWANGO AGWATA

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