Business-employee rights ‘balance’ required in use of restrictive covenants

Restrictive covenants are clauses inserted into a contract that limit or prohibit an employee from competing with their ex-employer for a certain period once they have left the organisation, or prevent the employee from using their knowledge or contacts gained during the employment to solicit or deal with former customers and co-workers.

The enforceability of a restrictive covenant depends on the jurisdiction where it is to apply, the length of the restriction, the geographical scope and the type of covenant, which can include:

• non-competition covenants, restricting former employees from working in a similar role for a competitor;
• non-solicitation covenants, which prevent the soliciting or poaching of clients, customers and suppliers; and
• non-poaching covenants, which prevent an employee from poaching their former colleagues or subordinates.

Many businesses – and their staff – operate across the Middle East and Africa, and will want to ensure that their information and interests are protected in both regions. Comparing how restrictive covenants are treated by the courts throughout the different countries across the Middle East and Africa offers a window into the complexity of enforcement between each jurisdiction.

Reasonableness

Both the United Arab Emirates (UAE) and South African courts apply a ‘reasonableness’ test to determine if a restrictive covenant is enforceable. The UAE places a stricter burden on the employer to prove that the covenant is both necessary and reasonable, while in South Africa the onus is on the employee to prove that the enforcement of the covenant is unreasonable or against public policy.

Restrictive covenant agreements in South Africa are valid and binding as a matter of principle and are enforceable unless considered to be unreasonable and thus contrary to the public policy. Where an employer does not have a proprietary interest to protect, a restrictive covenant will not be enforceable. Even if an employer has a proprietary interest to protect, the restrictive covenant may still be unreasonable in relation to its scope, duration or geographical area. Restrictive covenants which merely seek to exclude or eliminate competition will be unenforceable and contrary to public policy. The courts have given extensive guidance on what would constitute a proprietary interest in South Africa which includes information received by an employee about business opportunities for the employer, product pricing, marketing or submissions made to procure business and information that is potentially useful to a competitor who would find value in it.

Length of restriction

Onshore in the UAE and in Saudia Arabia, restrictive covenants, including non-compete clauses, are enforceable up to two years after employment has ended. In Qatar, employers were previously able to include non-compete clauses into contracts that could last a maximum of two years after termination, however, the permissible length has been reduced to one year. In South Africa the period of the restrictive covenant must be found to be reasonable, but generally speaking two years is the maximum.

Geographical scope

Courts within the UAE have made findings that a post-termination restriction that covers the entirety of the country is too wide in scope and have suggested that restrictions should be limited to particular freezones, or onshore. In South Africa, the geographical scope of a restraint will only be enforced to the extent that such enforcement is reasonable – which will be assessed by considering whether the employee worked in a particular area.

Enforceability

There is a growing trend of imposing and enforcing post-termination restrictions in the UAE due to ongoing difficulties attracting and retaining talent. However, enforceability in onshore jurisdictions is challenging given the lack of availability of injunctive relief, meaning that employers wanting to rely on covenants cannot prevent the breach from happening and are limited to seeking to claim damages which can be challenging given the need to prove financial loss. In the Dubai International Finance Centre (DIFC) freezone, however, injunctive relief is available, and we are seeing more litigation in this space.

This highlights the differing rules contained within the DIFC freezone and onshore jurisdiction, as well as other freezones. Employers must take care to navigate the different legal systems and approaches the courts will take to the validity and enforceability of restrictions in order to ensure their business interests are protected between each freezone or jurisdiction.

In South Africa, restrictive covenants will be enforced where there is a proprietary interest to protect and the restrictions are reasonable in respect of scope, duration and geographical area. In making this assessment, South African courts will balance the possibly competing constitutional values and public interests of contractual autonomy, the requirement for parties to comply with their contractual obligations, and each person’s right to be economically active.

The use of restrictive covenants will be influenced by future legal development, economic growth, labour market dynamics and social changes in the Middle East and Africa. For example, countries with high unemployment rates may be more inclined to limit the use of restrictive covenants in an effort to promote job creation and economic mobility, while technological advancements and uptake in remote work may add complexity to enforcement in those jurisdictions where businesses want to enforce restrictions.

The Middle East and Africa exhibit significant differences in economic, societal, and public policies. Economically, the Middle East, particularly the Gulf Cooperation Council (GCC) countries, benefits from oil wealth, leading to higher GDP growth rates compared to many African nations, which often rely on agriculture and face greater economic instability. Societal policies across the Middle East and Africa are also extremely different. Employers in both regions face very different pressures which range from high youth unemployment, economic uncertainty, attracting and retaining talent, skills shortages and the need for workforce upskilling. These pressures influence the use of restrictive covenants, with courts in the Middle East and Africa balancing the protection of business interests against employees' rights to work.

Co-written by Alex du Plessis and Rati Thobejane of Pinsent Masons.