30 Nov 2009

POST TERMINATION RESTRICTIONS AND NON-COMPETITION CLAUSES: HOW ENFORCEABLE ARE THEY UNDER UAE LAW?

Authored by: Olaide Esan

POST TERMINATION RESTRICTIONS AND NON-COMPETITION CLAUSES: HOW ENFORCEABLE ARE THEY UNDER UAE LAW

Olaide Esan looks at the enforceability of post-termination restrictions and non-competition clauses in employment contracts under UAE law.
 
In Brief:

  • In the UAE it is common to include clauses prohibiting an ex-employee from joining the company’s competitors or having any business dealings with the company’s clients or prospective clients. Soliciting or enticing the company’s clients or employees are also often included within the prohibited activities.
  • Post termination non-competition clauses are in principle binding between employers and employees and are recognised and permitted under UAE law subject to certain qualifications.
  • An employer, however, cannot rely on or enforce the terms of a post-termination non-competition clause if terminating the employment contract of an employee for an unjustifiable cause or if the employment contract is terminated by the employee as a consequence of acts by the employer justifying such termination.

The purpose of non-competition clauses 
Most UAE employment contracts contain post-termination non-competition clauses which are intended to protect the interests of the company/employer post the employee’s period of service. It is important to include these clauses in the contracts of employees who have access to the company’s secrets and/or who are likely to become personally acquainted with the company’s clients. In practice, however, some employers tend to insert non–competition clauses in all of their employment contracts regardless of the nature of the employee’s work.

A ‘non-compete’ covenant often prohibits an ex-employee from the following:

  • joining a company’s competitors
  • having any business dealings with the company’s clients or prospective clients
  • soliciting or enticing away past, present and/or future clients and employees of the company.

The duration of the prohibition ranges between six months and two years. Some such clauses include a penalty for breach of the terms of the prohibition, while others do not impose any specific financial deterrent but rely on the courts to assess the appropriate level of compensation.

Are they enforceable under UAE law? 
No matter what the wording and contents of post-termination non-competition clauses, the crucial question is whether they are, in principle, binding on the parties and how enforceable are they under UAE law.      

The answer to these questions is that post-termination non-competition clauses are binding between employers and employees and are recognised/permitted under UAE law subject to certain qualifications. The relevant provisions which deal with non-competition clauses are contained in Article 127 of the UAE Labour Law and Article 909 of the UAE 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 effect of both Article 127 of the Labour Law and Article 909(1) and (2) of the Civil Code is that the inclusion of non-competition clauses in employment contracts is valid and lawful under UAE law. However, this rule is subject to the proviso that there are clear limitations as to time, place and type of business activity such that the terms of the covenants can only be as wide as is necessary to protect the lawful interest of the employer.

Employers should ensure that non–competition clauses are always included in the employment contracts of relevant employees, namely those who either have access to sensitive or protected information or those who are likely to become closely acquainted with the clients of the business. Such clauses should be explicit in terms of duration, geographical location and the type of business to which they relate. In the event of a dispute arising in relation to the enforcement of a non-competition clause, the UAE courts will consider the circumstances of each case (the sensitivity and value of the information, the role and seniority of the employee concerned, the damage to the company if the employee entices clients, etc) and base their decision on the merits of the case. In our experience, the courts normally reduce lengthy periods of time (eg two years) and wide geographical coverage (eg the entire UAE, the GCC etc).    

The wording of post-termination non-competition clauses is important. In addition to this, and of equal importance, employers should consider the circumstances under which a court may decide that they are unable to rely on the terms of their non-competition clause.

Under Article 909(3) of the Civil Code, an employer cannot seek to rely on or enforce the terms of a post-termination non-competition clause if he terminates the employment contract of an employee for an unjustifiable cause or if the employment contract is terminated by the employee due to an act(s) of the employer justifying such termination.

Conclusion
It may be said that post-termination restrictions and non-competition clauses are binding and enforceable under UAE law provided they comply with the conditions stipulated under the law and include reasonable and fair terms necessary to protect the lawful interest of the employer.  It may be added that there are practical issues, in regard to enforcement, because of the current lack of powers, on the part of courts in the UAE (with the exception of the DIFC court), to issue restraining orders (or “injunctions”) to prevent a person acting in breach of a restrictive covenant.  However, this is a procedural matter and does not affect the fundamental principles of law analysed in this article.