It is standard for any serious employment contract to contain a restraint of trade clause. Many people consider it a clause that is more bark than bite. However, it can have devastating effects on future employment. A restraint of trade clause is commonly included in an employment contract to enable an employer to protect his business from competition from ex-employees. In terms of a restraint of trade agreement, an employee is prevented from starting his own business in competition with his employer. The employee is also estopped from working for competitors for a specified period in a specified geographical area after the termination of his employment contract. This is usually because the employee would have access to confidential information that could be used against his previous employer.
What is restraint of trade?
Lord Justice Diplock in Petrofina (Great Britain) Ltd. v. Martin:
“A contract in restraint of trade is one in which a party (the covenantor) agrees with the other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons, not parties to the contract in such manner as he chooses. “
There are four types of restraint on trade:
a. Restraints imposed on employees by employers;
b. Restraints imposed on the vendor of business by the purchaser of that business;
c. Restraints arising from combinations for the regulation of trade relations. That is, the regulation of supplies or promotion; and
d. Restraints accepted by distributors or merchants.
The focus of this paper/ discussion shall be on restraint on trade by employers on employees. The restrictions, in most cases, is in two phases. Restriction during the pendency of the employment and restriction immediately after the relationship is determined. Restraint of trade clauses are generally acceptable as parties are bound by agreements they enter into, and the existence of onerous terms is insufficient to void such an agreement.
Why do companies Restrain trade of employees?
Business is cutthroat with rivals seeking to trump each other through cleaner manoeuvrings. Therefore, companies and employers generally need to protect their businesses from employees whose actions can, affect the income of the business due to privileged information acquired during the pendency of the employment. This can be through various forms such as client poaching, use of trade secrets or privileged information for personal benefit.
Additionally, it is not all employees that leave voluntarily or on good terms and as such past employees that left under unceremonious circumstances are in a position to hurt the company and past employers. Similarly, most businesses have competitors, and often the employees of a company are targets for a competitor who seeks to not only grow but capitalise on the industry knowledge of the employees. These are reasons for the need to protect a business through restraint of trade clauses.
What is the Nigerian position of restraint of trade?
When it comes to restraint of trade clauses by employers, the Nigerian Courts aim to balance the employee’s right to work, with the employer’s desire to protect his/her business from competition threats due to knowledge owned by the ex-employee.
The Court will weigh the reasonability of the restrain and assess factors in the determination of the relationship and the interest of the public. The Supreme Court of Nigeria in the case of Andreas I. Koumoulis v. Leventis Motors Ltd stated that: “Generally, all covenants in restraint of trade are prima facie unenforceable in common law. They are enforceable only if they are reasonable with reference to the interest of the parties concerned and the public“.
In a more recent Nigerian case Tanksale v Rubee Medical Centre Ltd , the position of the Court of Appeal was consistent with the older Supreme Court decision. The Court held that:
“… prima facie such contracts are void. But where it can be established that such restrictions are justifiable in the circumstance as being reasonable from the points of view of the parties and the public, they are valid and binding.“
Therefore, the Court will be willing to protect an employer by recognising a restraint of trade clause when the past employee has acquired trade secrets, or would have gained influence over the employer’s customers either because they will have relied on the employee’s skill and judgment, or because they will have dealt exclusively with that employee. A trade restraint agreement which imposes far-reaching restraints including a restriction of constitutional rights is one which should be viewed with suspicion in the interest of the larger society whose norms must not be compromised in such an agreement.
From the decisions cited above, the Court as a general rule frowns upon restrictive covenants such as restraint of trade clauses. However, if the clause is reasonable and justifiable due to the need to protect the business, it may be upheld.
What is the American and British position?
The position in Nigeria is similar to that of the United Kingdom and the United States. Ever since the pronouncement in United States v. Addyston Pipe & Steel Co, the United States position to the recognition of restraint of trade has echoed the requirement of reasonability. For as stated by William Taft “we do not think there is any question of reasonableness open to the courts to such a contract.”
In the case of Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co, Lord Macnaghten ruled that while can promise to “not make guns or ammunition anywhere in the world” it was an unreasonable restraint to “not compete with Maxim in any way.” These cases have cemented the requirement reasonability as a criterion in the United Kingdom and the United States.
Restraint of trade in the entertainment industry
A particular area of difficulty has arisen in relation to contracts entered into by songwriters, or pop musicians, with music publishers or recording companies. These often require the artists to commit themselves to one company for a lengthy period, with no necessary obligation on the company to promote, or even publish, the artists’ work. The validity of this kind of ‘exclusive dealing’ agreement was considered in the following case.
Our key case study is Schroeder Music Publishing Co Ltd v Macaulay  where the plaintiff was a young and unknown songwriter who entered into a standard form agreement with music publishers (the defendants). The copyright in all the plaintiff’s compositions for the next five years was assigned to the defendants, with an automatic extension for a further five years if royalties exceeded £5,000. The defendants could terminate the agreement on one month’s notice, but there was no similar power for the plaintiff. The defendants were under no obligation to publish any of the plaintiff’s work. The plaintiff sought a declaration that the agreement was in restraint of trade and void.
The House of Lords held that, where there was unequal bargaining power, a standard form agreement has to be looked at to see if, amongst other things, the restrictions it contains only go so far as is reasonably necessary to protect legitimate interests. In this case, the contract was adjudged an unreasonable restraint of trade. In contrast, the plaintiff was committed to the defendants. The defendants were not obliged to publish anything.
See also African Songs Limited v Sunny Adeniyi (aka Sunny Ade) wherein the Court upheld what was arguably an extremely unfavourable agreement to Sunny Ade – albeit Sunny Ade was able to recover his master tapes and damages after the Federal High Court (FHC) declared that the agreement had expired.
Another example is the case between musician, Brymo and his erstwhile record label Chocolate City. arising from his where the Court was inclined to grant CC an injunction preventing Brymo from engaging commercially in music without CC’s approval in light of a subsisting agreement between the parties.
Given the decisions of Nigerian courts over the years on such contractual issues in the entertainment business, it is unlikely that a court will interfere with the terms of a contract especially in the absence of any substantive evidence of duress, undue influence, fraud or misrepresentation. In the case of a purported termination, it would have to be shown that such termination was not in accordance with the contract terms and is as such invalid.
How does a company protect against losing a skilled employee and company trade secrets without running afoul of the law?
Companies and businesses must carefully use restraint of trade clauses as a term in the employment contract of employee. These clauses should be reasonable and not appear to be punitive and overly prohibitive by the Court. Reasonability of the clause is dependent on several factors ranging from the period for restraint of trade, the geographical limit, the knowledge of the employee and the extent of the restraint in the business sector.
While many employees consider restraint clauses as unfriendly to ‘workers’ rights, there is always a need to properly balance the interests of the employer and the employee in order to prevent situations where ’employer’s restraint the trade rights of their employees. Accordingly, employers should ensure to draft restraint of trade agreements narrowly and only to the extent necessary to protect their protectable interests. Similarly, employees should ensure they understand the extent and content of the restraint of trade agreement they enter into, as the onus is on the employee to prove its unreasonableness and thus its unenforceability. Therefore, businesses need to seek legal advice on the management of the risk of poorly drafted restraint of trade clauses to avoid unwanted consequences.
The restraint of trade is not enforceable if it is contrary to public policy on account of it unreasonably restricting a person’s right to trade or practice a profession. In order to determine the reasonableness of a restraint of trade agreement, all the circumstances of the case must be taken into consideration. The circumstances to be taken into account are not restricted to those existing at the time the restraint was entered into but must be widened to include circumstances that prevailed since the restraint was entered into, as well as the circumstances existing at the time enforcement of the restraint, is sought.