The Use of and The Reasonableness of Restraints of Trade in Employment

Introduction

Restraint of trade can be defined as any agreement or contract which contains a provision or covenant whereby a party is restrained from exercising any lawful profession, trade, business or occupation. The restraint shall not be declared void if it does not prove reasonable whereas any such provision or covenant shall be void in any case where an employer terminates the services of an employee in contravention of the terms of the contract of service. These provisions have been guaranteed under the chapter 24 contracts in restraint of trade act section 1 and 2. Since the restraint serves both public and private interest the restraints is based on its validity and form this whether it is reasonable in the sense that portrays fairness both to the employer and to the employee. Article 41(1) of the constitution states that every person has the right to fair labor practices and this includes both employers and employees and here the law can be applied in relation to the restraint of trade.

In this concept of restraint of trade in employment, there is the factor of determining whether the restraint is valid and reasonable. A restrain is rendered valid if the restraint goes no further than necessary reasonable for the protection of the covenanter’s interests. Therefore for one to determine reasonability of a trade restraint, one looks at the relationship between the interest and the covenant. James .A. Holland and Stuart Burnett in their book: Employment Law 2008 (page 197) state that,” …the foundation of the modern law may be summarized as follows: All covenants in restraints of trade are prima facie void, but may be shown to be valid if reasonable in the interests of the parties and in the interests of the public (in which case a remedy inform of may be sought from the court of law if the covenant concerned is breached)”. From this statement, it is very clear that the authors meant to state that the foundational concept in question is reasonableness which is divided into two sub-aspects in that the clause must be reasonable in the interest of the parties and secondly, the clause must be reasonable in the interest of the party.

Moreover, reasonableness should be legitimate in nature in that they can be defended in-case of a breach of contract. The reasonableness of the restraint must be established by the person who seeks to enforce the contract. It is worth noting that, the question of reasonableness and public interests are questions of law, so that it becomes inaccurate to claim that the party claiming enforcement has the onus of proving that the covenant is reasonable.

What he or she must do is to prove the circumstances from which, the court may conclude the ratio between the restraints and the interest is reasonable. Michael Furmstone and others in his book The Law Of Contract 4th edition (page 1167) states, “…the foundation of the modern law may be summarized as follows; all covenants in restraints of trade are prima face void but may be shown to be valid if reasonable in the interests of the parties and in the interest of the public under which an injunction order may be sought if the covenant concerned is breached…” Therefore, the following factors are key to determine whether a trade restraint can be rendered reasonable or not reasonable by the courts of law:

Duration of the restraint- the question whether a restraint is invalid for excessive duration depends on the nature of the business to be protected, if it is one to which customers or clients are likely to resort for a long time, a restraint for lifetime of the covenanter may be valid this is seen in the case of Credit Reference Bureau Holdings Limited vs. Steven Kunyiha whereby it was held that since there is no guarantee that one can be employed in time in Kenya the restraint cannot be enforced since Kenya’s employment opportunities are scarce regarding to the field of the respondent.

Where the business to be protected is at a mere fluctuating nature, long restraints are unlikely to be upheld in the case of fixed period in Bridge vs. Deacons (1984) AC 705 the Privy council there upheld a covenant by a partner in a firm of solicitors not to act as solicitor in Hang Hong for any client at the firm for five years after ceasing to be a partner.

Scope at restraint- a restraint must not extend to an activity which is irrelevant to the interest to be protected such as a restraint in a tailor’s service contract against working as a hatter is unreasonable. Nor can an employer use his proprietary interest in trade secrets and confidential information to support a covenant restraining an employee from disclosing any information whatsoever relating to the company.

Reasonableness and fairness -the law at restraint at the trade has recognized two principle; that adequacy at consideration is relevant to the validity at restraint and that the law has regard to the relative bargaining strengths of the parties hence this does not mean that a restraint is invalid merely because it was undertaken by the weaker party; to this extent the fairness at the bargain is a necessary condition of the validity of the restraint.

Restraint operating during employment - in the employment case so for discussed, the issue has been as to the validity at covenants operating after the end of the period of service. Restriction is generally reasonable, having regard to the interests of the employer and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question but the contract may be a long-term one and the main purpose at the restraint may be not to secure faithful service, but to protect the employer from competition by sterilizing the employee’s working capacity. In such a case the restraint may be invalid even though employee can require serving and even if it is valid, the court may refuse the remedy of an injunction to the employer.

Establishing validity at restraint-the reasonableness of the restraint of the restraint must be establishes by the person who seeks to enforce the contract; it is then up to the party resisting enforcement to establish that the restraint is contrary to the public interest hence in the normal case in which the covenantee sues to enforce the restraint, he must establish its reasonableness and covenanter its tendency to injure the public it has further been held that where a stipulation in restraint of trade is contained in an agreement to the settlement of a genuine dispute relating to it, then it is not up to the party seeking to enforce the settlement to show that is reasonable. The public policy against restraint of trade here appears to come into the conflict.

Hence it seems that reasonableness here refers to the genuineness of the underlying dispute the questions of law so that it is strictly inaccurate to say that the party claiming enforcement has the onus of the proving that the covenant is reasonable. What he must do is to prove the circumstances from which the act may conclude that the ratio between the restraint and the interest is reasonable.

Hardship to a particular group. An agreement may cause hardship to a particular group of persons, without being contrary to the interests of the public at large

Area Covenants is the area referred to in the restraint of trade clause too big-wide.

In this situation, an employer who has proprietary interests in his relations with clients or customers can restrain his or her employees from working where his/her clients or customers live. This is also even when the inhabitants of the area where the employer’s customer live are not all the employer’s customers or clients. Why is this? This is because proprietary interests also engulf the concept of classified information or trade secrets. The restraints may be necessary for the protection of the employer as the actual infringement of his proprietary interest could be very hard to establish. For instance, if the employee was allowed to work for a competitor maybe in the same area as the employer, he or she could trade business secrets to the competitor. Restraints on trade on area covenants are mainly against employees mainly serving the purpose of restraining competition. The courts have stated that, a restrictive covenant will be rendered void if it covers as much larger area than is needed for protection of the employer’s interests. This can be drawn from the common law case of Mason Vs. Resident Clothing and Supply Limited whereby in this case, there was a canvasser who was employed to sell clothes in Islington were under a covenant of restraint not to enter into a similar business within 25 miles of London.

The court held the covenant void. This is due to the fact that the area of the restraint was just about 1000 times as large as that in in which the canvasser had been employed. It was said that the employer could have been protected himself by a covenant restricted to the area whereby the employer had been working. Also, in the case of Lg Electronics Africa Logistics Fze vs. Charles Kimari (2012) the plaintiff sought the following orders, that an injunction be issued restraining the Defendant from using or conveying all the confidential information relating to the Plaintiff’s business within his knowledge whether by himself either as an employee of the Plaintiff’s competitors, by his own agent, servants, or as a consultant, shareholder or through any Plaintiff’s competitors , to any person, business or organization, their servants or agents.

The Plaintiff also sought that pending the hearing and determination of this application, an injunction be issued restraining the Defendant from setting up or from seeking employment within the Plaintiff’s Competitors’ in the country for a period of 12 months from the date of termination of his employment with the Plaintiff, or setting up business in any nature that will compete with the Plaintiffs business. The defendant on his part stated that he was not engaged in the process of manufacturing any products of the Plaintiff and also his duties in sales and marketing entail any confidential matter that would imperil the Plaintiff’s operations. He claims that he was restricted from seeking employment elsewhere for reasons of better prospects and also due to open discrimination by the Plaintiff Company against local employees.

The learned judge in his view stated that a restraint clause would be unconstitutional if that restraint does not meet the limitations imposed under Section 2 of the Contracts of Restraint of Trade Act. He continued to state that article 24 of the Contract fairly captures the elements contemplated in Section 2 of the Act and would, on the face of it not be unconstitutional. He also continued to state that, since employment in Kenya is a grave issue, it would be generally unfair to enforce to restraint basing his argument in regards to the restraint to conduct trade within the country and therefore stated that he was hesitant to find that the Plaintiff is entitled to the injunctive orders he had sought as in his analysis, it has failed to demonstrate a prima facie case for the grant of such orders. In addition to this, if the area is very large and the employer and the employee have only dealt with a small number of customers within it, an area covenant will not be upheld.

Moreover, there arose a question as to employees employed in jobs not confined to a specific country or area, in other words unlimited area. Here, it was decided that where an employer is entitled to protect trade secrets which has no clear geographical limits, the covenant of restraint is rendered unlimited in nature and may be enforced against the employee. This is because; the employees may disclose information to other companies similar to the companies (competitors).Therefore a worldwide restraint is issued.

Edwin Peel in his book The Law of Contract 13th edition page 510 states that “...However, a worldwide restraint may not be upheld against an employee who discloses confidential information if the information in question only relates to a business or businesses done by an employer in a limited Geographical area.” This was evident in the case of Lansing Linde Limited vs. Kerr (1991) 1 W.L.R 251 at 259 whereby the court of appeal stated that the High Court was entitled to refuse an employer's application for an interim injunction restraining a former employee from working for a competitor in breach of a restrictive covenant and releasing trade secrets. The court based its arguments on the unrestricted covenants in relation to a worldwide geographical area. Therefore from these provisions, a trade restraint against an employee can be rendered reasonable if it satisfies this provision on area (geographical area).

Uses of Restraint of Trade

The restraint of trade issue relates around the competing interest of the employers and the employee. This is where an employer has a right to protect its business interest against unfair attack by either former or current employee. Restraint of trade in several occasions is of the benefit of the employer. It protects the employer’s business in many ways. The restraint of trade helps employer in protecting the business proprietary information. Such information when leaked can cause severe loss to the business. The information can be like confidential trade information, trade connections, business goodwill, customers and trade secrets.

In the case of IYS and tees limited vs. Evelyn Madegwa & another [2009] plaintiff was suing the respondent on claims of non-confidentiality of the employer’s secret allegations the defendant denied. The judge stated that since the plaintiff had proved beyond doubt that the respondent had violated the restraint terms of her covenant the restraint was upheld and an injunction against her was issued to ensure that the knowledge acquired fraudulently is not used to the advantage of defendants at the expense of the plaintiff.

1. trade connection is a basic categorical term in which it implies to;
2. The employer’s customers and clients.
3. The employer’s supplies.
4. Existing employees.
5. Trade connections; Customers, Clients and suppliers.

They are commonly referred to as the employer’s “goodwill”. This is because they sum up the basis of the range of the employer’s contacts and therefore the operational value of the business. A scenario is such that, a distributor’s clients are treated no differently e.g. a milkman’s customer’s. The professional connection with those clients does not carry with it some form of implied restraint of trade.

Recruiting another employer’s employee is not unlawful provided that those employees are not induced to breach their existing contracts. The question that arose from this was such as; can an employer set up a restraint of trade clause that prevents one of its employees from poaching fellow employees when he/she leaves? Secondly can employer’s employees be regarded to as legitimate interest?

It is a common law rule that the legitimate interest in maintaining a stable workforce within limits of reasonableness, Unhelpfully adding that it does not have to be fully be the case on the basis that it is suggested that any non-poaching clause can relate only to employees who were former colleagues and probably only to those of senior status although this can be overturned in certain scenarios.

It is common in some cases for a departing senior employee to take with him/her to his/her new establishment teams of former colleagues provided that there is no inducement to breach in contract or the restraints on the individuals are ineffective or missing.

This is in the light of a scenario whereby an employee may have legitimately brought to the business useful connections that he/she wishes to carry forward to the next employment. The question brought forth is to what extent such connections become property of the employer.

In the case of Web tribe Limited T/A Jambopay v Jambo Express Limited [2014] In this case, the Plaintiff claimed that the Defendant Company employed the Plaintiff’s former employees who during their employment with the Plaintiff, had access and exposure to the Plaintiff’s business. The Plaintiff further claimed, that the Defendant’s services continue to create confusion among the Plaintiff’s customers hence eroding the Plaintiff’s goodwill in the online payments services market. It was decided that the longer an employee worked for an employer the more their “property” in their previous contacts is eroded.

Conclusion

In conclusion, from the above study on the issue of restraint of trade in employment under labor law, for a restraint to be valid all parties should consider usefulness and reasonableness of a restraint of trade in the sense that both parties should be left satisfied especially under contracts so as not to leave negative impacts on either parties.