10 May 2011

NON-COMPETE CLAUSES IN EMPLOYMENT CONTRACTS IN THE UAE

Authored by: Olaide Esan and Alexander McGeoch

NON-COMPETE CLAUSES IN EMPLOYMENT CONTRACTS IN THE UAE

Since Hadef & Partners’ article on the enforceability of non-compete clauses in our November 2009 Hadef Highlights newsletter, there have been several court decisions on the subject, notably among them a judgment of the Dubai Court of Cassation on 22 December 2008 where the court ruled, amongst other things, that the absolute prohibition of an employee from working for a competitor is tantamount to a restriction of the employee’s liberty. We discuss below the salient aspects of the judgment.

In brief

  • Non-compete clauses, which are often included in contracts of employment to protect the interests of employers, may not always be enforceable.
  • This may seem contrary to the expressly agreed intentions of the parties, as set out in the contract. However, a non-compete clause may be rendered unenforceable by the actions of the employer resulting in a waiver of rights.
  • Enforceability of non-compete clauses is subject to over-riding considerations of public policy. In particular, the scope of the clause (with regard to time and area) must be strictly limited. Clauses which exceed what is necessary to protect the essential interests of the employer will not be enforced. The liability of the employee to work scientifically is paramount.

Dubai Court of Cassation Case No. 87/2008/ Labour Petition: Issued on 22 December 2008

Claim
A labour case was filed by an employer (‘plaintiff’) seeking AED5 million in compensation from an ex-employee (‘defendant’) for inter alia breach of a non-compete clause contained in the employment contract signed by both parties which stipulated that the employee could not join a competitor within two years of the termination of the employment contract.

Facts
The plaintiff company in its petition claimed that the defendant, an ex-General Manager (Director-General), left the company to work for a competitor before the expiration of two years from the end of the employment relationship, contrary to a non-compete clause in the employment contract. The plaintiff further claimed that it had sustained substantial monetary loss due to the actions of the defendant and sought AED5 million in compensation from him.

Court of First Instance
The Court of First Instance ruled in favour of the defendant and dismissed the case basing its decision on the submissions made in an Expert’s Report. The Report stated inter-alia that the transfer of the defendant’s employment visa from the plaintiff, to the competitor took place with the knowledge and approval of the owner of the plaintiff as confirmed by its sponsor and partner; the plaintiff executed commercial transactions with the competitor after the defendant joined it and it was not evident that the defendant gave any facilities to the clients of the plaintiff during the time he worked for the plaintiff. The plaintiff appealed against this judgment to the Court of Appeal.

Court of Appeal
The Court of Appeal upheld the reasoning of the Court of First Instance based on the Expert’s Report and its findings and on that basis dismissed the appeal. The court found that some of the grounds of appeal were a mere repetition of the plaintiff’s arguments before the Court of First Instance and held that these had been sufficiently covered in the ruling of the Court of First Instance. The plaintiff further appealed to the Court of Cassation on the grounds that the appealed judgment misapplied the law, lacked rationale, and was contrary to evidential findings. The plaintiff submitted that the Expert’s Report and the judgment of the lower court disregarded the grounds of his claim, was based on defective findings of fact and faulty reasoning and should be overruled.

Court of Cassation
The Court of Cassation rejected the plaintiff’s arguments. The court based its reasoning on the provisions of Article 127 of the Labour Law and Article 909 of the Civil Code.

Article 127 of the Labour Law (in translation) states:

“Where the work assigned to a worker allows him to become acquainted with the employer’s clients or to become familiar with the secrets of his business, the employer may require him to refrain, after the termination of his contract, from competing with the employer or participating in any enterprise that is in competition with the employer’s own business. Such agreement shall be valid only on condition that the worker is at least 21 years of age at the time the agreement is entered into and that the agreement is limited as to time, place and the nature of the business, to the extent necessary to safeguard the employer’s lawful interests.” 

Article 909 (1) (2) of the Civil Code (in translation) states:
 
(1)     “If the work of the employee is such as to permit him to have access to work secrets or to make acquaintance with the customers of the business, it shall be permissible for both parties to agree that it shall not be permissible for the employee to compete with the employer or to engage in an employment which competes with him after the termination of the contract.” (2) “Provided that such agreement shall not be valid unless it is limited in time, place and type of work to such extent as may be necessary to protect the lawful interest of the employer.”

The court held inter alia that:

  • the court examining a question regarding enforcement of a non-compete agreement has the discretion and power, based on the evidence available to it, to conclude the following:

(a)     whether the conditions that determine the validity of the non-compete agreement as outlined in Articles 127 of the Labour Law and 909 of the Civil Code are met, and 
(b)     whether there has been a violation by an employee of the non-compete clause. 
 

  • an absolute prevention or ban from competition constitutes a restriction on the freedom and liberty of the employee and a non-compete clause should be included in the contract only if:

(a)     there is mutual agreement between the parties as to the precise terms of the non-compete restriction;

(b)     there is a serious interest of the employer to be protected such as where the employee is acquainted with the clients of the employer and has access to the employer’s trade secrets;

(c)     the ban is restricted as to time, place and type of business and is directed towards reasonable protection of the employer’s legitimate interests.
 

  • an employee is obliged to pay compensation for violating a non-compete clause if found by the examining court to be in violation of the same and an examining court has the power to determine if an employee complied with or violated the non-compete clause based on the evidence before it;

 

  • in the instant case the court ruled that it is evident from the Expert’s Report that the transfer of the defendant’s employment visa from the plaintiff to the competitor took place with the knowledge and approval of the plaintiff. This indicates that the plaintiff, despite the existence of the non-compete clause, waived such clause by its approval of the transfer.

Conclusion
The Court of Cassation made an important point in the present case in relation to Article 127 of the Labour Law and Article 909 of the Civil Code in regard to non-compete clauses in employment contracts. Where an ex-employee joins a competitor of the employer with the knowledge and approval of the employer, such employer is deemed to have thereby waived his right to enforce the non-competition clause and to have forfeited his right to claim compensation for violation of the clause by the employee. In the same vein, the examining court has the discretion and power to determine the validity of a non-compete clause and to determine whether or not an employee has violated the provisions of the clause, based on the evidence available to the court.

Nevertheless, although the Cassation Court’s ruling in this case is welcome, insofar as it lays down the conditions that must be met in order for a non-competition clause to be enforceable, the legal community in Dubai awaits with interest a judgment of the same court, declaring an appropriately limited non-compete clause to be reasonable in its scope and enforceable in accordance with its terms and awarding the plaintiff a substantial amount by way of compensation.