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LEGAL BASES OF NON - COMPETITION COVENANT IN UAE

In this article we will discuss the legitimately and enforceability of the Non- Competition Covenant, Share Sale Restrictive Covenants and Employment Protective Covenants according to the UAE Civil Transaction Law and  UAE Labour Law our discussion will be limited  to the following  points

BASES OF RESTRCITED COVENANT LAW 

A covenant not to compete is a promise by an employee not to compete with his employer for a specified time in a particular place. A covenant not to compete, also known as non- competition agreement, may be a clause in an employment agreement or separate contract standing by itself.

An employment agreement will frequently contain numerous restrictions upon an employee, both during the term of employment and thereafter. These can include the following restrictions.

1. Restrictions upon the employee not to engage in competing activity at least during the continuation of his employment.

2. An undertaking not to disclose any business secrets.

3. Competing with the employer after the term of the agreement.

4. Soliciting the customers or employees of the employer after the expiration of the contract.

It should to be noted that UAE Civil Transaction Law limits on public policy grounds the right of the employer to restrict the ability of an employee to engage in lawful occupation.

Section 909 of the UAE Civil Transaction Law states the following.

1. If the employee shall perform work which permits him to gain the knowledge of secrets of work and was very close to the customer of the establishment, the two parties may agree that the employee shall not compete with the employer or participate in a competitive work after the termination of the contract.

2. But the agreement shall not be acceptable unless it is restricted in the time, place and type of work to the extent necessary for the protection of the legitimate interest of the employer.

3. It is not allowed for the employer to claim the legitimacy of the non- competition agreement if the employer has terminated the employee services without any justified reasons. It is also not allowed for the employer to enforce the non- competition clause if the employee’s resignation was due to the employer’s unlawful act or unjustified act.

Moreover Section 910 of the Civil Transaction Law has the non- competition clause which includes this provision. In case of an employee breach of the non- competition clause, he will then liable for damages.

This Section also states the following “If two parties agree that the employee shall, in the case of a  breach of refrain from competition be liable for the damages to the exaggerated extent for the purpose of obliging him to stay with the employer , this stipulation shall be invalid.

Section 127 of UAE Labour Law pointes out the elements required by the law if the employer wishes to protect its interest through a non- competition clause, so the non- covenant to compete is valid and enforceable. Where the work assigned to an employee to allow him to become acquainted with the employer’s customer’s or become familiar with the secrets of the employer’s business , the employer may require him to refrain after termination of his contract to work for competitors with him or participating in any enterprise which the competing with his own. Such agreements shall be valid on the condition that:-

1. The employee is at least 21 years of age at the time of its conclusion.

2. The agreement is limited as regards to the place.

3. The agreement is limited as regards to the time.

4. The agreement is limited as regards to the nature of  the business.

5. To the extent necessary to safeguard the employers lawful interest.

The Commercial Transaction Law No: 18 of 1993 stated in Sec. 3, Article 64, that “the traders may not solicit the employees or the workers of another trader who is in competition with him, to help him dispossess such tradesman of his customers, or induce them to leave the service of such tradesman join his service or to show him the secrets of his competitor, and such acts shall be considered illegal and shall be compensated for.

Discussion 

Based upon the above, this area of law comes under Labour Law, Civil Transaction Law and Commercial Transaction Law. However the courts, under these laws, are often reluctant to enforce contracts for restraint of trade. One partial exemption is the agreement of the employee restricting his post - employment freedom to compete with his employer. Courts are willing to enforce certain non- competition agreements and reject others and hold it as invalid if it is overly board and contains general and unreasonable restrictions and not limited to time, place and activity.

In this context (post- employment covenant), a restrictive covenant will be subject to specific enforcements to the extent of that:

1. It is reasonable in the time and area.

2. Necessary to protect the employer’s legitimate interest.

3. Not harmful to the general public interest.

4. Not unreasonably prudent for the employee.

Further more the Ministry of Labour has clarified Restrictive Covenant not to compete. In September 2002, Dr. Khalid Al Khazraji , the Under Secretary of the Ministry of Labour And Social Affairs ( Ministry) for Labour Affairs stated in an interview with (KT) that employers did not have any right to ban their former employees from working in UAE for the fear of being recruited by a competitor. 

Dr Al Khazraji went on to say that many employers had misinterpreted Article 127 of UAE Labour Law No. 8 of 1980 ( as amended) and were using the provisions of this Article to prevent their employees, on expiration or termination of their employment contracts, from being employed by a competitor of the employer. He went on to say that certain provisions in their employment contracts restricting the employment contracts by banning the employees from working any where in the UAE.

To avoid arbitrary application of Article 127 by employers, Dr Al Khazraji has issued a circular specifying a uniform rule for implementing the Article.

For a restrictive covenant clause to be included in an employee’s employment contract then, the clause is to specify the area to which the ban is applicable. The area can be a specific emirate or more than one emirate or the entire UAE. The ban cannot extend outside the UAE. The restrictive covenant clause must also specify the duration of the ban which may not extend two years from the date of expiry or termination of employment contract and the exact nature of the job to which the ban applies must be specified.

By way of example, Dr. Al Khazraji, used that of an employee working as a technician in the Information Technology (IT) for a particular IT company, the employer could not prevent him from working in the same industry for another IT company provided that the employee was carrying out a different type of job or commercial activity for the new employer.

Furthermore, Dr: Al Khazraji’s circular prevents the Ministry from accepting any employment contract containing a restrictive covenant clause unless the three requirements mentioned above are contained in the clause. As  a general caveat, Dr: Al Khazraji stated that the Ministry would ignore the provisions of the restrictive covenant if it seeks to prevent an employee from working any where in the UAE and the Ministry would permit the employee to seek as an  alternative employment in the UAE.

Dubai Court Cessation (on Appeal No: 368 of 1998 and appeal No. 266 of 1997) rejected the two appeals with regard to the enforcement of the non – competition clause and ruled that the claim of the employee compensation based on the employee’s breach of non- Competition Clause was not acceptable and the employer must refer his claim to the Labour Department as per the clause (6) of Labour Law.

Notwithstanding the above, the covenant not to compete is a contract of adhesion ( I zaan ) section of  266 para 2 of Civil Transaction Code the burdens of which fall entirely on the employee by virtue of his lesser bargaining power. Afraid to lose his end of services benefits, the agreement was broader than necessary to protect the legitimate interests of the employer which makes the broader restriction unreasonable which may not be enforced by the Court. In principle, and in practice this means that the narrower the restriction in time, place and activity the more likely for it to be enforced against the employee. But in our case the period is more than what ministry of Labor’s circular issued in this regard which specifies that the period must not exceed two years.

In addition to the nature of job, time and place the non-competition clause should also protect the legitimate interest of the employer which is limited to preventing disclosure of trade secrets and release of information.

BY KAMEL ABU SAQER

Senior Legal Consultant & Author.