29 Sep 2014

BUSINESS PROTECTION IN THE DIFC: THE SHIELD AND THE SWORD

Authored by: Jamie Liddington

BUSINESS PROTECTION IN THE DIFC: THE SHIELD AND THE SWORD

Competition is rife among certain businesses/sectors within the DIFC to the extent that poaching of staff is likely to become a big issue as the market continues to recover from the 2008 global financial crisis. The concerns facing businesses are not just the loss of talented staff and the investment (both time and money) made towards the development of those staff but also the fact that, when they leave, they take with them confidential information and “client connections”. Jamie Liddington (Senior Associate) considers the steps which employers ought to take to mitigate any potential harm and to protect their business in the event of staff defections to competitors.
 
In brief:

  • This article considers only the DIFC legal position and not the position in the wider UAE (or other free zones);
  • The best means of protecting legitimate business interests is to have a well drafted contract of employment in place from the outset;
  • Where an employee acts in breach of the contract and, in particular, any confidentiality obligation or post termination restriction, the employer may face the prospect of this resulting in significant financial losses;
  • The DIFC legal system is based on English common law and unlike the UAE Courts, the DIFC Courts have at their disposal the power to grant injunctions (i.e. an order to prevent an employee from continuing to act in breach or to compel them to perform a prescribed act);
  • Employers should take care when responding to an alleged breach of post termination restrictions as injunction applications are costly and must be weighed against the commercial risks facing the business. However, where there is a real risk of losing key clients or that confidential information is likely to make its way into the hands of a competitor, an injunction may be the most effective defence.

Background
 
The DIFC was established with the dual aims of (a) providing a platform for business and financial institutions to access and serve the emerging markets of the region and (b) creating an environment for growth, progress and economic development in the UAE and the wider region by providing the needed legal, business and physical infrastructure benchmarked against international standards.To a significant extent, the DIFC has achieved its intended purpose and has attracted the vast majority of the most prestigious names in the financial services, insurance, legal services, accounting and consulting sectors.
 
The DIFC has its own common law judicial system with exclusive jurisdiction over all employment law matters within the defined boundary of the DIFC (an area of approximately 110 hectares and home to around 15,000 employees). The DIFC Courts (the “Courts”) apply DIFC law (first and foremost in the context of this article – DIFC Law No. 4 of 2005 (as amended) (“DIFC Employment Law”) and DIFC Law No. 7 of 2005 (“DIFC Law of Damages and Remedies”) and, where necessary, in order to interpret any ambiguous or untested provision, the DIFC Courts will consider judgments from other common law jurisdictions.
 
Prevention
 
As the saying goes, prevention is better than cure. To that end, the starting point when trying to protect any business’s interests is to ensure that all employment contracts contain well drafted (tailored) clauses which address, among other issues, confidentiality, post termination restrictions and “garden leave”.  Without a well drafted contract, there may be no basis on which to assert any right to prevent a former employee from divulging confidential information or soliciting clients of their former employer.

Taking a closer look at each of the clauses referred to above in turn:
 
Confidentiality

Neither DIFC Employment Law nor DIFC Law of Damages and Remedies contains a definition of “confidential information”. In the absence of any legislative definition, confidentiality obligations are governed by both "common law" (i.e. obligations which are implied into every contract of employment as a result of case law over the years), and specific obligations which are included as express terms of the employment contract. Therefore, it is important that a careful approach should be taken in order to ensure that the contract of employment adequately defines what information will be considered confidential and that the definition is specific to the employee’s role in the business.
 
Post Termination Restrictions

Post termination restrictions are express contractual provisions which seek to limit an individual's freedom to act (for example his freedom to work for others or solicit business from the employer’s clients) after termination of his employment.
 
Post termination restrictions will only be enforceable where the employer can show that it has a legitimate business interest to protect, and the protection sought is no more than is reasonably necessary to protect that interest.
 
Legitimate business interests capable of protection may include:

  1. trade secrets and other equivalent highly confidential information;
  2. trade/customer connections (i.e. client relationships/the client base);
  3.  stability of the workforce (i.e. the retention of a stable workforce).

 These interests have to be balanced against the employee's interest in continuing to work.
 
Garden Leave

During an employee's notice period the employee will continue to be subject to all the terms of the employment contract, in particular the implied duties of fidelity (encompassing the duty not to compete) and confidentiality. However, the employer may not want the employee to remain in a position where he is privy to obtaining confidential information or strengthening client connections. One solution is the use of a "garden leave" clause. An employee taking garden leave is not required to come to work during his notice period (unless asked). However the employee will remain entitled to receive his basic salary and contractual benefits during this time (although some employers seek to vary some contractual entitlements during this period e.g. bonus).
 
In some circumstances, where they don’t already exist, it may also be worth considering the inclusion of a liquidated damages clause and the introduction of employee benefit schemes which defer payment of bonuses and allow alternative methods of award other than cash (e.g. shares, share options or restricted stock units). This may result in employees feeling less inclined to leave their employment until such time as any deferred award has fully vested.
 
Cure
 
No matter how well the contract has been drafted, there will always remain the possibility that an employee will be lured away by the promise of better prospects. In some cases, the shield afforded by the contract may not offer enough protection on its own. Very often the departing employee is immediately placed in a position in his new employment where his own personal interests (e.g. earning a promotion, commission or bonus as a result of winning new clients or passing on a competitor’s secrets) are diametrically opposed to the former employer’s interests. Placed in this position, the temptation to solicit or deal with the former employer’s clients can be significant. In some cases, the new employer actively encourages or instructs the new joiner to try to entice his former employer’s clients away despite knowing that the employee remains within the term of contractual post termination restrictions with his former employer.
 
In the employee’s case, this may lead to an action against him to recover damages for breach of contract. In the new employer’s case, there may follow allegations that the new employer has committed the economic tort of inducement to breach of contract.
 
In the circumstances described above, the former employer’s foremost concern is likely to be putting an immediate halt to the continued breach / procurement. A claim for damages is all well and good but preventing more significant loss / damage is the priority.
 
This is where the DIFC legal framework offers a significant advantage to employers.   Unlike the area outside of the DIFC (including other free zones), the DIFC Courts have the power to grant injunctions where the applicant employer can show evidence that; (i) an enforceable post termination restriction has been or is likely to be breached, (ii) damages would not be a sufficient remedy, (iii) the “balance of convenience” is in favour of granting an injunction and (iv) an injunction is proportionate to the wrongdoing.
 
Interim remedies and, specifically, injunctions fall within the scope of Chapters 2 and 3 of the DIFC Law of Damages and Remedies as well as Part 25 of the Rules of the DIFC Courts.
 
Specifically, Article 38 of the DIFC Law of Damages and Remedies states that:

  • The Court may by order grant an injunction in all cases in which it appears to the Court to be just and convenient to do so, including such order as shall:
    • restrain a party from doing a particular act (either within a period of time or in perpetuity); or
    • compel a party to do an act within a specific period of time.
  • Any such order may be made either unconditionally or on such terms and conditions as the Court thinks just.

As a cautionary note, employers should be aware of the potential difficulties faced in enforcing an injunction outside of the DIFC. In all cases, it would be necessary to submit the DIFC Court Order to an execution (enforcement) judge in the Dubai Courts. However, the Dubai Courts are less familiar with the concept of injunctions. The DIFC Court Enforcement Guide notes that there is no record of the execution of any DIFC Court search orders by the Dubai Courts and suggests that “this is due to the practice of the Dubai Courts of only enforcing applications for the execution of orders against assets but not, by contrast, against documents and other evidence”.
 
Prognosis
 
Employers alleging that a former employee has acted in breach (or has shown that he intends to act in breach) of a restriction would be sensible to tread carefully (but not slowly!) when dealing with post termination restrictions and, in particular, applications for an injunction.
 
It is sensible to form a view at an early stage on the enforceability of the contractual clause which the (in most cases, former) employee is alleged to have breached so as to ensure that it is not considered too wide to be enforceable. To this end, it is useful to instruct external counsel who may offer the advantage of objectivity and up to date knowledge of the Courts’ views on granting of the injunctive relief.
 
As part of the early stages of the injunction process, after the former employer’s application has been made, the employee may agree to provide an undertaking not to breach the clause in question (even though he maintains that it is not enforceable) until what is known as the “return date” (being the date upon which the former employer’s application is substantially dealt with by the Court). In consideration of the former employee’s undertaking, the applicant employer will be expected to give a cross undertaking in damages. If the applicant employer then fails to convince the Court that it would be “just and convenient” to grant an injunction (e.g. on the basis that the clause in question is likely to be held unenforceable at the full trial where the Court is asked to determine any losses and award of compensation) then the applicant employer will be ordered to pay damages to the former employee and, possibly, the new employer.  In addition to having to satisfy the undertaking and paying damages, the unsuccessful party is normally ordered to pay the reasonable costs incurred by the successful party.
 
Given the volume of work required in a very short space of time, legal fees up to and including the hearing are likely to be substantial. However, this will need to be balanced against the risks faced by the business in allowing the breach to occur or go unchallenged.  There can be no doubt that the injunction process is potentially a bitter pill for employers to have to swallow but it is necessary in some cases and may be a vital step in protecting the business from irreparable harm.
 
Unlike the wider UAE area where employers find it extremely challenging to enforce post termination restrictions, the DIFC offers employers the option of obtaining almost immediate relief in the face of a former employee’s breach of contract. Where a senior employee who has had access to the former employer’s crown jewels and/or has formed close client connections then proposes to join a competitor, the availability of injunctive relief may be the employer’s knight in shining armour.

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE