Effect of the Enactment of the Privatisation Act, 2023
Enforceability of Non-Compete Clauses in Employment Contracts in Kenya
Market Insight 17 January 2024 17 January 2024
Employment, Pensions & Immigration
Businesses today inevitably have to contend with competition. It is the edge that pushes enterprises and entrepreneurs to provide better goods and services to consumers and clients.
This notwithstanding, it is now commonplace to find non-compete clauses in many employment agreements with employers requiring employees to agree to certain restrictive terms in the event of termination of the employment relationship. The question therefore arises on how to balance the interests of the employer vis-à-vis those of a former employee taking into account the competitive business landscape.
Under Kenyan law, the Contracts in Restraint of Trade Act (the Act) gives the High Court discretion to interpret and enforce restrictive clauses in contracts upon considering, inter alia, the nature of the profession, trade, occupation or business concerned, the period of time and geographical area within which the restrictive clauses is expressed to apply and whether or not the covenant is not reasonable either in the interests of the parties or in the interest of the public.
Restraint Should be Reasonable
The Employment and Labour Relations Court, which has the status of the High Court in considering an application for enforcement of a non-compete clause, held that “business competition is the essence of free markets. Whereas it would not be right to allow practices that unfairly and unduly open up one’s business secrets and market edge to its rivals, it would on the other hand not be right to encourage a practice where in order to survive the competition, such business shackles its employees from obtaining employment with its competitors.”
The Employment Court took the view that for a non-compete clause in a contract to be enforceable, the employer has to prove that the employer only seeks to restrain the use of that which is uniquely that employer’s secret and that the employer does not seek to restrain the knowledge and skill that the employee has which can be acquired by learning, experience or development in technology. It was emphasised that the experience and expertise that an employee garners from working for a particular employee cannot be reasonably restrained without stunting the employee’s career.
According to the Act, a non-compete clause should include a geographical area limitation. This simply means that a former employee cannot compete with the former employer within that specific location. The restriction can be determined in terms of a radius around the employer’s offices or in terms of specific towns in which the employer conducts business. As a general rule, the broader the geographical area, the less likely the non-compete clause is likely to be enforceable.
In a case by an institution of higher learning against its former manager, the High Court considered a non - compete clause that prohibited the former manager from operating a similar institution within 5 kilometers radius from any of the former employer’s institutions of higher learning for a period of 2 years from the date of termination of their employment contract. Upon termination of the employment contract, the former manager immediately opened a similar institution within the 5 kilometers radius of one of his former employer’s institutions in direct competition with his former employer. The High Court agreed with the former employer and issued a partial restraint against the former manager. The former manager, his partners, servants and/or agents were restrained from soliciting the staff, parents and or pupils admitted at the former employer’s institutions within the contracted two years management period as set out in the non-compete clause.
Conversely, in a subsequent case, the Employment Court declined to enforce a non-compete clause which after termination of employment had provided that the former employee was not to engage in the same business as the former employer within the entire capital city for a period of 6 months. The Employment Court found that the non-compete clause was too broad and not reasonable in the context of a free market and as such unenforceable.
Similarly, according to the Act, a non-compete clause should also include a limitation on the duration of the non-compete period. A time period of between 6 months to 1 year may be considered a reasonable non-compete time frame. The longer the duration of the non-compete period, the more likely a court will find it unenforceable.
In considering the time limitation applicable to non-compete clauses, the Employment Court agreed with the former employee that an employer cannot restrain an employee from seeking employment with a competitor, however the Court upheld part of the non-compete clause that restrained the employee from contacting the former employer’s customers for a period of 1 year.
Kenyan courts have taken the position that it is necessary to ensure that the business environment remains competitive in order to thrive. Non-compete clauses in employment contracts will only be enforced if the restraint they impose is reasonable and subject to geographical and time limitations.
For more information on enforceability of non-compete clauses in Kenya please reach out to us on email@example.com.