Practical Guide to Restrictive Covenants in Contractors

More employees are increasingly requiring their employee to sign restrictive agreement that prohibits them from starting a competition business or taking up employment with a competitor for a certain period after leaving employment. 

A restrictive covenant is an agreement that restricts a party to a contract from engaging in certain actions. Restrictive covenants are usually included in various types of contracts such as distributorship agreement, franchising agreement, contractors’ agreement, ICT & software development agreement, shareholders agreement, partnership agreement and any other sorts of business agreement.

Restrictive agreements are becoming more common standard covenants in employment contracts. They restrict an employee from competing with an employer either during employment or after termination of employment or from soliciting and dealing with the customers of the employer or prohibit employees from disclosing sensitive or confidential information to third parties.

Restrictive covenants may also prevent a competitor from poaching of employees. Restrictive covenants can also be applicable to directors and other officials and professionals dealing with the company such as consultants and independent contractors.

Restrictive covenants should however, only be used to protect a legitimate business interest – for example, client contacts, trade secrets, confidential information, formulas, business processes and procedures, strategies – and not simply to stifle or prevent competition.

The usual restrictive clauses used in contracts include:

• Non-Competition Covenant: Non-compete clause prevents an ex-employee from competing completion with an employer either during employment, like having a “side-hustle” business that is in direct competition with the employer’s business or after termination of employment, for example, setting up a competing enterprise or working for a competitor in a similar market as that of the employer;
• Non-Solicitation Covenant: Non-solicit clause prevents an ex-employee from soliciting or canvassing with the clients, customer, or suppliers of the former employer with the aim of inciting them to trade with the ex-employee thereby taking away their business from the former employer.
• Non-Dealing Covenants: Non-dealing clause is similar to the non-solicitation clause in that it prohibits an ex-employee from dealing with clients, customers, or suppliers of the former employer with the only difference being that it does not matter which party approached the other.
• Non-Poaching/Anti-Raiding Covenants: Non-Poaching/Anti-Raiding Clause prevents an ex-employee from poaching the other employees or where a competitor entices or poaches the employees to come work for them. This may arise, for example, in a team-move where a competitor poaches the whole team of employees working in a certain division from their competitors. Non-poaching covenants are often used by vendors to prevent its customers or clients from poaching the vendor’s employees in an attempt to avoid using the vendor by bringing the vendor’s expertise in house. When this happens, the vendor loses not only a key employee, but also, in many cases, a client.

Generally, an employee is obliged not to compete with the employer during employment. This is a natural consequence of the employment relationship. However, an employee cannot be prevented from undertaking activities for another (non-competing) employer.

There is an implied duty of loyalty, fidelity, trust and confidence imposed on existing employees, including directors and officers dealing with the company, which restricts employees from doing action that would be detrimental to the employer including competing with the employer or assisting a competitor. Related to the duty of loyalty, an employee is required to disclose any potential conflict of interest. The employer must consent to the conflict of interest.

If the employer does not consent to the conflict of interest, the employee may be compelled to resign and will be liable for any damages suffered by the employer caused by the conflict. This obligation can and usually is further extended and/or defined by incorporating restrictive covenants in the employment contract.

It is therefore vital that employee, as well as directors and other officers of a company fully disclose any conflict of interest that may result in assisting a competitor of a company. Such disclosure should be in writing and updated from time to time if circumstances alter.

In the absence of any express restrictions, an employee who has left employment is free to engage in any legal profession, trade, business or occupation and compete with their former employer. However, most employment contracts have certain duties or obligations that survive the termination of employment, most notably the obligations regarding trade secrets and confidential information and the rights to intellectual property. These will only provide limited protection. Employer should ensure that they have comprehensive restrictive covenants in their employment contracts that protect the employers from unfair practices by their ex-employee and competitors. The restrictive covenant should be just wide enough to protect the legitimate interests of the employer but not too restrictive as to negatively affect the employee and deny his right to earn a living.

Restrictive covenants are lawful and enforceable in Kenya. Section 2 of the Contract in Restraint of Trade Act (Cap 24), makes lawful any agreement or contract that restrains a party from exercising any lawful profession, trade, business or occupation, save for where the contract is unreasonable or contrary to public policy. However, the courts can declare a restrictive covenant to be void and therefore unenforceable where the Court is satisfied that the covenant is not reasonable either in the interest of the parties or is against public interest. In determining whether a restrictive covenant is reasonable, the court will consider the following;

• the nature of the profession, trade, business or occupation to be restrained;
• the duration of the restraint;
• the geographical area within the restraint applies, and
• all the circumstances of the case,

Reasonableness is in respect of the interest of the parties or against public interest. In the case of Esso Petroleum v Harpers Garage 1967 All ER the court said about the reasonableness of a restrictive covenant as follows;

“Courts will not enforce a restraint which goes further than affording adequate protection to the legitimate interest of a person in whose favour it is granted. This you must think, to be because too wide a restraint is against the public interest”

Kenyan courts have applied the same principles to declare restrictive covenants in employment contract void.

• LG Electronics Africa Logistics FZE vs. Charles Kimari [2012]eKLR
• Credit Reference Bureau Holdings Limited versus Steven Kunyiha [2017] eKLR
• Bridge International Academies Limited versus Robert Kimani Kiarie [2017]eKLR

An employer who includes restrictive covenants in their contracts of employment should take care that these reflect the circumstances of individual staff and their profession, trade, business or occupation to avoid the risk of them being held by the courts to be unreasonable and therefore unenforceable.

Garden leave are increasingly being included in employment contracts alongside restrictive covenants to increase the chances of the courts upholding and enforcing a restrictive covenant. Garden leave is where an employee, who has left employment, stays at home and is restricted from engaging in any employment for a specified period but continues to be paid by his former employer during the gardening leave period. Garden leave must be provided for in the contract and it is subject to the test of reasonableness in terms of duration. The rationale for having a garden leave clause is that it prevents the employee from taking up another employment with a competitor for that period and hopefully the employee will not still have the knowledge of the confidential information or the information would have been outdated and of no significant use. On the employees’ side, he will continue earning an income during the garden period. It is therefore a win-win situation.

The main remedies on the part of an employer for breach of a restrictive covenant by an employee are an injunction and compensation.

Injunctive Order Injunction order seeks to prevent the employee from continuing with the breach of the restrictive covenants. It can be combined with an order for deliver-up of the confidential information.

Damages The employer can claim damages for financial loss suffered for breach of a restrictive covenant by the employee such as loss of profits diverted due to breach by the employee. The employer can also seek damages from the competitor who poached the employee leading to the breach the restrictive covenant.

Restrictive covenant area valuable tool that protects a party against unfair competition and exploitation of the parties sensitive information. Employers should consider include restrictive covenant for their key employees. The restrictive covenant should not be too restrictive. They should not be too wide than is reasonably necessary for the protection of legitimate business interests. They should not deny the employee the right to earn a living. It’s also important to inform the employees and competitors of the existence of the restrictive covenant to deter them from breaching the same. The employer should ensure that they remind the departing employee of the restrictive covenant they had previously signed.