17 Aug 2015

“TEAM MOVES” IN THE UNITED ARAB EMIRATES

Authored by: Jamie Liddington

“TEAM MOVES” IN THE UNITED ARAB EMIRATES

When a business wants to bolster its operations or enter into a new market (either geographically or in terms of product/service offering), there are – broadly speaking – two options available: (1) grow talent organically by developing existing resources, or (2) look for a more immediate fix and revenue increase by making a lateral hire of an individual or multiple individuals (the latter being referred to as a “team move”). But the stakes are high and navigating the legal minefield can be a difficult task. In this article, Jamie Liddington (Head of Employment) provides a brief summary of the legal landscape surrounding team moves under both UAE Laws and DIFC Laws and some practical suggestions about how to handle a team move, whether you are the employer at risk of losing a team or the competitor looking to hire a team.

Team Moves

Team moves can appear to offer the advantage of speed of entry into market and reduction of the period in which the company can expect to see a return of profit.  A business could go from having no specialism or presence to being a leading player in one fell swoop.  Another possible advantage is that as well as strengthening or creating the business’s own team, it significantly weakens the competitor’s.

One common theme of team moves is that there will be a substantial degree of planning between the competitor and the target employees. During the planning stage it is not unusual for the employees to disclose confidential information (voluntarily or upon request by the competitor). Normally, there then follows an execution of the plan which is likely to involve the target employees breaching post termination restrictions contained within their employment contracts. This situation raises legal issues for both the employees and the competitor which can lead to serious consequences if a breach of any legal obligation can be proven. These consequences may include compensation, fines, imprisonment and even deportation.

Relevant Law

When considering the applicable legal obligations in each relevant jurisdiction, it is necessary to consider legal obligations arising under both the contract and relevant statutory codes.

UAE

Contract

It is very often the case that employers will seek to impose contractual obligations relating to confidential information and its disclosure.  Even where the contract of employment is silent on confidentiality, Federal Law No.3 of 1987 (as amended) (the “Penal Code”) imposes a duty not to divulge trade secrets without first obtaining the employer’s consent. A breach of this provision of the Penal Code may lead to a fine and/or imprisonment.

Federal Law No.8 of 1980 (as amended) (the “UAE Labour Law”) provides that employers may include non-compete obligations within their contracts of employment.  Federal Law No.5 of 1985 (as amended) (the “Civil Code”) specifies that in order for a non-compete clause to be enforceable, any such non-compete clause must be limited in time, place and type of work to such extent as may be necessary to protect the lawful interests of the employer.

Negligence

In addition to the contractual obligations, the Civil Code also sets out negligence obligations that can apply between employers, employees and competitors.   These negligence obligations derive from the Majella (Ottoman code).  However, it should be noted that there are key differences between these concepts as they exist under the common law and what exists under the Civil Code. In the case of a claim for negligence (otherwise referred to as “civil harm”) it must be shown that the accused has committed an act which has, as a direct consequence, caused harm.  In the context of team moves, the harm is likely to require proof of financial loss. Separately, it may also be possible to claim that the new employer has been unjustly enriched by its actions to the detriment of the former employer.

Furthermore, Federal Law No.18 of 1993 (the “Commercial Code”), makes it unlawful for one employer (“Competitor”) to induce the employees of another company (“Employer”) to:

  1. assist the Competitor in usurping the customers of the Employer, or
  1. leave the Employer’s employment in order to take up employment with the Competitor; or
  1. divulge secrets of the Employer.

With the exception of the Penal Code obligations in relation to confidential information, any breach of the contractual or civil obligations set out above may lead to a successful claim for damages where the unlawful act can be shown to have caused financial harm. However, the UAE Courts are unable to grant an injunction to prevent the occurrence or continuation of the harmful acts.  In essence, the applicable civil laws make the existence of harm an absolute requirement rather than providing a means of preventing the harm.  As a result, employers are often tempted/advised to look for evidence of a breach of the Penal Code obligations (e.g. – a disclosure of confidential information) as the prospect of a criminal prosecution and the consequences of being found guilty affords one of the only effective methods of stopping the competitor/employees from carrying out the plan to leave and take other staff and/or clients with them.

DIFC

Contract

The DIFC is a federal financial free zone. It has its own common law legal system and courts distinct from those of the wider UAE, with jurisdiction over corporate, commercial, civil, employment, trusts and securities law matters. However, the UAE Federal criminal law and immigration law still applies within the DIFC.  As a result, the considerations set out above in relation to disclosure of confidential information also apply to the DIFC.

DIFC Law No.6 of 2004 (“DIFC Contract Law”) contains no express provision relating to post termination restrictions and the DIFC Courts have not yet been called upon to consider post termination restrictions under DIFC law in detail. However, it is anticipated that the DIFC Courts will follow the position under English law. As a starting point, clauses contained within a contract of employment which attempt to restrict an employee’s right to compete are unenforceable because they are viewed as unlawful restraints of trade. An employer may, however, enforce a post termination restriction which is drafted in a manner that is designed to go no further than reasonably necessary to protect the employer’s legitimate business interests.

Unlike the UAE Labour Law (which refers only to non-compete clauses), a greater variety of restrictions are frequently included in contracts in common law jurisdictions (e.g. non-solicitation, non-dealing and non-poaching clauses) and there is a body of case law analysing the application of the law to each of these respective types of restriction.

Employers may also seek to introduce clauses which oblige employees to notify the employer of their receipt of any offer of employment or approach from a competitor and to inform the employer if and when the employee becomes aware of any other employee receiving any approach or offer.

Tort

DIFC Law No.5 of 2005 (the “DIFC Law of Obligations”) includes a number of highly relevant obligations falling within the category of “economic torts” including; liability for inducing or procuring a breach of contract, unlawful interference with contract, unlawful conspiracy and breach of confidence.

The DIFC Law of Obligations also expressly states that there is a presumption that all employees owe their employers a fiduciary duty.  The DIFC Law of Obligations states that:

  1. a fiduciary (i.e. – employee) is under an obligation of loyalty to his principal (i.e. - the employer);
  1. the fiduciary must not place himself in a position where his own interests conflict with that of his principal; and
  1. a fiduciary must only use confidential information obtained in confidence from his principal for the benefit of the principal, and must not use it for his own advantage or for the benefit of any other person.

In the DIFC Court of Appeal decision in Raul Silva v United Investment Bank Limited Chief Justice Michael Hwang provided some useful guidance in relation to fiduciary duties under the DIFC Law of Obligations.  In particular, Chief Justice Hwang noted that the effect of the relevant provision is that an employee is presumed to be a fiduciary unlike the English common law position where employees do not generally owe fiduciary duties to their employers. Chief Justice Hwang went on to consider leading cases on fiduciary duties from the English courts which clearly express the view that fiduciary obligations cannot be seen along the lines of “one size fits all”. Each case must be determined on its own merits and the employee’s seniority and exposure to confidential information will play a large part in deciding the extent of any fiduciary duties.

The most significant difference between the UAE and the DIFC positions is the availability of an injunction as an interim remedy in the DIFC Courts.  In many team move scenarios, it may be difficult to prove what (if any) financial losses have been caused by the employees’ actions. Employers faced with departing teams will therefore need to carefully consider the availability of “springboard” injunctions as an interim remedy. A springboard injunction prevents an employee from taking advantage of an unfair competitive headstart obtained through unlawful activity.

Practical Suggestions

Team moves present a number of challenges (legal and practical) but the following tips should be helpful to those who find themselves involved in a team move scenario:

Recommendations for the hiring party

  • Carefully plan and devise a strategy. This may require legal assistance and the involvement of headhunters, as an intermediary to create a level of separation among the key players, should be considered
  • Make approaches to individuals and not groups. Avoid the temptation to cut corners by arranging meetings with the team or any form of communication to the whole group
  • All target employees’ employment contracts should be reviewed to ascertain what duties exist and ensure that relevant contractual obligations are understood (perhaps even encouraging employees to obtain independent advice)
  • Do not disclose to any of the target employees that offers or approaches have been made to any other named individuals as this may trigger the employee’s reporting obligations to his/her employer
  • Do not request or discuss confidential information belonging to the target employees’ employer

Recommendations for the targeted employer

  • Act quickly! Any delay is likely to be fatal to any attempt to stop the move (e.g. – by way of an injunction)
  • Carry out a fast and thorough investigation (use forensic IT services if justified)
  • Interview any relevant employees but be careful not to tip anyone off
  • Avoid being drawn into any aggressive action so as to reduce the risk of the employee framing a successful argument that you have breached the contract (e.g. – the implied duty to act in good faith and/or reasonably under DIFC Contract Law)
  • Where the contract contains a “garden leave” provision, consider exercising the right to place the employees on garden leave so as to divide the team and focus your efforts on persuading key team members to stay

 

 

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 developing jurisdiction of the UAE.