Wednesday, March 1, 2017

Effective Non-Competition Clauses

There are a number of reasons that an employer may wish to include a non-compete clause (otherwise known as a restrictive covenant) in an employment contract with an employee, for example, to protect goodwill and trade secrets.  Such provisions have been contemplated in the Civil Transactions Law issued by Sultani Decree 29/2013 (the “Civil Code”).  Under the Civil Code, if an employee has knowledge of the “secrets” of his/her employer in terms of how the entity conducts its business, or if the employer is familiar with the employer’s clients, the employment contract may contain a clause to prevent the employee from doing the following after termination of the employment contract:

• gaining employment at a competitor of the employer; or

• participating in competitive work.

However, it is important to note that a restrictive covenant, such as a non-compete clause (in accordance with Article 661) will only be effective if it is reasonable, such that it is “restricted in time, place and type of work to the extent necessary for the protection of the legitimate interests of the employer”.

How to draft non-compete clauses?

Omani court judgement (Case No. 426/2014) considered the issue of the validity of non-compete clauses.  In this case, the contract of employment stipulated that the employee (i.e., the defendant) would not assume any similar position in the Sultanate for 12 months after the termination of his service with the employer (i.e., the plaintiff).  It further stipulated that the employee would maintain the confidentiality of business secrets and the data/information related to the employer.  The plaintiff submitted that the defendant joined another firm (the second litigant) prior to the end of the 12 month term and disclosed such business secrets to that litigant.  Subsequently, the plaintiff sought to:

a) revoke the contract of employment between the defendant and the litigant and thereby revoke the residence visa of the defendant; and

b) obligate the defendant and the litigant to together pay the plaintiff compensation in damages incurred as a result of the alleged illegal competition.

With regard to whether the defendant had breached the relevant clause of his employment contract, the courts held that he had not.  The contract between the plaintiff and the defendant provided that the defendant could not accept any job or connect with any business activities inside the Sultanate that was similar to, or competitive with, any of the operations conducted by the plaintiff.  The non-compete provisions in the Civil Code can prevent a contracting party from undertaking a specific type of work within a certain period or area, however, such restriction should not be so broad as to include all types of work in every place and time.  Any provision aiming to do such a thing, would violate the principal of the freedom to work.  Accordingly, the court in this instance found the non-compete clause between employee and employer to be invalid, since the condition violated the public order of the principal of freedom to work.

Whether a non-compete clause is valid or not is up to the assessment of the judiciary.  What counts as a reasonable restrictive covenant is therefore likely to depend on the nature of an employer’s business and the level of restriction imposed on an employee as set out above.  As general guidance, the following points should be considered:

Time: As to the length of time, a non-compete clause is likely to be acceptable if it restricts an employee for working for a competitor for a defined period of time, although the acceptable period of time would likely be considered on the basis of the employee’s role and level of seniority.  A non-compete clause that sets out a prolonged period or for an indefinite period of time is likely to be invalid.

Place: As to geographical location preventing a former employee from working for a competitor, what is deemed acceptable will likely depend on whether the employer’s business is situated in one location, or multiple locations and/or regions. A non-compete clause restricting an individual from working for any competitor within the whole of the GCC region will likely be unenforceable if the said business is situated in Oman for example with no dealings in the GCC region.

• Type of work: As to type of work, a non-compete clause attempting to restrict an employee from working in the same industry which would prevent an employee from attaining a different role and function entirely; a role which could not possibly cause damage to the former employer’s business (e.g., by sharing secrets, business know-how, client information etc.) may be considered unreasonable.

A non-compete clause should be drafted so as to protect the legitimate interests of the employer.  The provisions should strike a balance between protecting the legitimate interests of the employer while permitting an employee to work and earn a living at another company.

Non-compete clauses and the expatriate visa ban

Given the Civil Code says that a non-compete clause must be proportionate to protect the legitimate interests of the employer it will be interesting to see how the Courts view what is and is not an acceptable restrictive covenant in light of the two year expatriate visa ban (the “Ban”).

By way of overview, the Ban, which was imposed by the Expatriate Residency Law (issued by Sultani Decree 16 of 1995 (as amended)) and reinforced by the Ministry of Manpower (“MOM”) in July 2014, effectively restricts expatriates from obtaining employment with a new employer in the Sultanate for a period of two years after termination of employment with their current employer in Oman. An expatriate is only eligible to join another company in the Sultanate prior to the expiry of two years from the date of termination of employment if he or she can obtain a Non Objection Certificate (“NOC”) from his or her current employer.

The Ban was part of the MOM’s objective to regulate the labour market.  For those employers willing to give an NOC, it is important therefore, to consider a carefully worded non-compete clause in this instance.

How a non-compete clause could be invalid?

An employer cannot seek to enforce a non-compete clause in an employment contract if the employee’s employment was terminated by the employer without just cause.  In addition, a restrictive covenant shall be deemed invalid if the employer commits an act that justifies the termination of the contract by the employee.

Pursuant to Article 662 of the Civil Code, in the event a former employee violates the terms of its non-compete provision, compensation may be payable to the employer for breach. However, where the compensation amount as set out in the non-compete clause is excessive and intended to force employees to remain employed by the employer, the said non-compete clause shall be void.