Recent Restrictive Covenant Cases Show Trend Against Employers

Employers had a difficult time enforcing restrictive trade clauses (RTCs) during 2017. While the Employment and Labour Relations Court has held that RTCs are constitutional and generally enforceable if reasonable, they need to be balanced against the employee’s circumstances, and it is the latter that has prevailed in recent cases.

RTCs must comply with the Contracts in Restraint of Trade Act (Chapter 24, Laws of Kenya)(CRTA), to stand any chance of enforcement. This requires that RTCs are sufficiently limited as to time, scope, and geographical coverage and are reasonable.

This needs to be balanced against an employee’s right to employment that has—in recent cases—been prioritized over the employer’s right to protect its business interests. A key example is Credit Reference Bureau Holdings Ltd v Kunyiha, decided in 2017, which left many questioning the effectiveness of an RTC.

In the Credit Reference Bureau case, Steven Kunyiha, the former chief executive officer of Credit Reference Bureau Holdings Ltd (CRBH) was prohibited from entering into employment with any competitor of CRBH for a period of 12 months after the termination of his employment and from disclosing any confidential and proprietary business information to CRBH’s competitors. After learning of Kunyiha’s engagement with a direct competitor, CRBH sought injunctive orders restraining him from taking up employment on the grounds that its competitor would gain access to its confidential and proprietary business information and an unfair advantage over CRBH in its business operations.

The court declined CRBH’s application. The court referred to another case in which the court held that any damage that might be caused to the employer was secondary to the impact an injunction would have on the employee’s ability to find another job.

In this regard, the court held that “in a country like Kenya where unemployment is soaring every single day, subjecting the defendant to loss of employment on the basis of a restrictive clause would be unreasonable and not in the interest of either party. Indeed such an action would be contrary to public policy” as courts should not be seen to be unduly impeding upon a person’s right to earn a living.

In the Credit Reference Bureau case, the court also declined to enforce the RTC as it held that CRBH had failed to discharge the burden of proof. The court stated that the RTC must seek to restrain the use of that which is uniquely the employer’s secrets rather than restrain the use of experience, knowledge, and skill gained from working for the employer. However, CRBH had failed to demonstrate the nature of the secrets or information to which Kunyiha had gained access and the manner in which he was likely to divulge or use the same in his new employment to the detriment of CRBH. Further, CRBH had not shown that Kunyiha had in his possession classified information, which if used at his new workplace would prejudice the employer’s business interests.

Comment

Despite the gloomy picture these cases paint for employers, the door is not completely closed on an RTC being enforced by employers in appropriate circumstances. Recent cases perhaps simply reflect the current high levels of unemployment in Kenya, which have made it harder, but not impossible for employers to obtain relief. The tests used by courts in Kenya are not unique and will be familiar to employers around the world, especially in common law countries. In appropriate cases, injunctions are still possible and in the Credit Reference Bureau case the court stated that, as a principle, it would not be right to allow practices that unfairly and unduly open up business secrets and market edge to its rivals.

To improve their chances of having an RTC enforced, employers can: (1) draft the RTC in a way that ensures that it is reasonable and appropriately limited; (2) move to court as soon as they are made aware of the breach of the RTC; and (3) discharge the evidential burden of proving the harm suffered if the RTC is not enforced.

Written by Sonal Sejpal, Tabitha Joy Raore, and Milly Mbedi of Anjarwalla & Khanna and Roger James of Ogletree Deakins