Restraint of Trade Clauses in Employment Contracts

AUTHOR: DR VERONICA CAMPBELL

From the risk of the abuse of employees by their employers to allegations of anti-competitive practices, the use of restraint of trade clauses within employment contracts has been the subject of debate in many legal systems, Malta being no exception. While these clauses are neither defined nor specifically regulated by Maltese law, Dr Veronica Campbell provides an analysis of Maltese case law which is intended to shed some light on the manner in which such clauses may be enforced.

Published on 28th October, 2021

What are restraint of trade clauses?

One often comes across restraint of trade clauses within employment contracts. Such clauses are utilised to restrict the employee’s exercise of his trade or profession following termination of the employment contract in question and are intended to protect the business interests of the employer. The Maltese Courts have upheld Norman Selwyn’s position[1] that there are four legitimate interests in respect of which an employer is entitled to limited protection against his employees, namely:

  • Trade secrets and confidential information;
  • Existing customers and connections;
  • Working for competitors; and
  • Enticing existing employees.

Indeed, the most typical restraint of trade clauses inserted in employment contracts are the following:

  • Non-disclosure clause – this prohibits the employee from disclosing any confidential information or trade secrets relating to the employer’s business to third parties.
  • Non-solicitation clause – this prevents the employee from contacting and soliciting the employer’s current clients and / or employees for a period of time following termination of the employment contract.
  • Non-compete clause – this prevents the employee from entering into an employment relationship with competitors and / or clients of the employer for a period of time following termination of the employment contract.

Pre-liquidated damages

Restraint of trade clauses in employment contracts are typically tied to a provision for pre-liquidated damages. The question has arisen before the Maltese Courts as to whether such a provision for pre-liquidated damages would constitute the imposition of a fine on the employee in terms of Article 19 of the Employment and Industrial Relations Act,[2] in which case the said provision within the contract would require prior approval from the Director of Employment and Industrial Relations. In Bugeja Mark et pro et noe vs Camilleri Geoffrey,[3] the Court of Appeal held that a restraint of trade clause stipulating pre-liquidated damages does not qualify to be subject to Article 19. This was also confirmed in the judgement Bugeja Mark et pro et noe vs Grech Melljora.[4] Moreover, in Camilleri Antonio pro et noe vs Sicurella Salvatore,[5] the Court elaborated on this position, stating that the scope of Article 19 is limited to an act or omission committed by the employee during his employment, such that the employer is entitled to deduct a fine imposed on the employee for such act or omission from his wages, having obtained prior approval of the relevant contract of employment imposing such fine from the Director of Employment and Industrial Relations. The Court went on to state that the protection afforded to employees by Article 19 against abusive fines imposed upon them by their employers cannot be deemed to extend beyond the period of employment and after termination of such employment.

The Maltese Courts have, however, remarked that pre-liquidated damages tied to restraint of trade clauses, while technically permissible and intended to act as a deterrent vis-à-vis the employee, must nonetheless be of a reasonable amount in consideration of the circumstances at hand, including the employee’s salary.

When are restraint of trade clauses in employment contracts deemed to be valid and enforceable?

Maltese case law has demonstrated that the Courts are strict in their views on the use of restraint of trade clauses in employment contracts and do not tolerate excessively restrictive clauses of such kind. The Courts follow the general principle that a restraint of trade clause is generally only valid and enforceable if the employer can prove that he has a legitimate interest in imposing such clause on his employee and that the clause is reasonable within the relevant context. In assessing the validity and enforceability of restraint of trade clauses, the Maltese Courts take into account several factors, including the legitimate and essential needs of the employer’s business, the nature of such business, the role and salary of the employee and the effective period of service, as well as the elements of the duration, purpose and scope of the restriction.

Generic or ambiguous restraint of trade clauses

In the spirit of clamping down on abuse by employers, the Courts have rejected restraint of trade clauses deemed to be too wide or generic, particularly when their applicability is unlimited in duration or scope. Indeed, the Courts have exhibited a degree of scepticism as to the employer’s motives when restraint of trade clauses in employment contracts are left so vague as to become all-encompassing and excessively constrictive on the employee’s exercise of his trade or profession following termination of his employment. In the above-mentioned judgement Camilleri Antonio pro et noe vs Sicurella Salvatore,[6] the Court declared unacceptable a restraint of trade clause due to its scope being so ambiguous as to render the extent of its applicability to be at the employer’s discretion. The clause prohibited the employee, for a period of six months following termination of employment, from engaging in any activity, whether on his own behalf or on behalf of another person, which could directly or indirectly compete with that of his then-former employer or prejudice the latter’s interests. Despite its operation being temporally limited, the clause was nonetheless so extensive in its scope that it would effectively prevent the employee from exercising his trade in any manner for the stipulated period. Significantly, the Court found the imposition of this clause to be tantamount to the stifling of the employee’s right to work as afforded to him under the Constitution of Malta.[7]

The element of competition

In the last-mentioned judgement Camilleri Antonio pro et noe vs Sicurella Salvatore,[8] the Court also examined a non-solicitation clause concerning the employer’s customers. The Court quoted English case law wherein it was held that, while an employer is entitled to limited protection against an ex-employee dealing with existing customers since this forms part of the goodwill of the business which has been built over the years, a provision restricting the right to entice away former customers should be limited to customers with whom the ex-employee had personally had some dealings. Otherwise, the restraint would likely be regarded as being designed to prevent competition, thus rendering it unenforceable. In the above-cited judgement of the Court of Magistrates,[9] the clause in question precluded the employee from engaging in any business whatsoever with any person who had been a customer of or in business with his employer at any time during his period of employment. The Court concluded that the scope of the clause, though limited temporally by a period of six months, was much too wide to be considered reasonable or justifiable, thus deeming it invalid and unenforceable.

A somewhat parallel position was taken by the Maltese Courts (both the First Court[10] and the Court of Appeal)[11] in the same case Camilleri Antonio pro et noe vs Sicurella Salvatore with regard to a clause prohibiting the employee from enticing away from the employer any person who was, at any time during the employee’s contract of employment, employed or engaged by the employer. The First Court had immediately rejected this clause as unenforceable, citing Selwyn’s view that a restriction which seeks to prevent a person from poaching employees irrespective of their expertise or rank, and which could also apply to employees who were not still in the same employment at the time when such person left the employment himself, was anti-competitive in nature and therefore void. This highlights that, notwithstanding an employer having, in theory, a valid purpose to seek protection against employees, the level of protection sought cannot be unreasonable, nor may it extend beyond such purpose. The First Court had drawn upon Selwyn’s position to conclude that the non-solicitation clause described above was not included in the employment contract by the employer for legitimate reasons but rather to stifle competition, as the employer would have no incentive left to offer better conditions to his employees, having effectively limited their employment opportunities elsewhere. The Court of Appeal also concluded that the clause was intended solely to curb the freedom of employees to seek better employment conditions than those offered by the employer in question. This, once again, underlines the importance of employers having a reasonable justification for the imposition of restraint of trade clauses on their employees.

A final word should be afforded to the subject of the potentially anti-competitive nature of restraint of trade clauses in employment contracts. In Eurosupplies Limited vs Tihn Paul,[12] the Court of Appeal asserted that such clauses may breach competition both by their object as well as their effect. For this reason, these clauses must be moderated so as to safeguard the public interest against the adverse effects of anti-competitive practices. The Court stressed that clauses resulting in an unjustified restriction of competition constitute a blatant violation of Maltese public policy and are therefore invalid in terms of Article 985 of the Civil Code[13] and thus unenforceable. The Court went on to remark that the curbing of anti-competitive practices forms part of Malta’s obligations as a European Union member state, thus playing an integral role in the bigger picture where competition policy constitutes a vital element of the internal market.

Final remarks

Employers are advised to submit any proposed restraint of trade clauses to a ‘reasonability test’ so as to determine whether such clauses are genuinely necessary in order to achieve a legitimate interest. Moreover, employers are cautioned to avoid using generic or vague restraint of trade clauses and are instead urged to be as precise as possible in stipulating any restriction to be imposed upon their employees, which restriction should be limited to what is strictly necessary and reasonable in light of all relevant circumstances. In view of the ever-increasing use of restraint of trade clauses in employment contracts, there is no doubt that the Maltese Courts will continue to analyse, interpret and elaborate upon this subject in the future.

 

For more information on how we may assist with your employment law needs, please contact:

Dr Antonio Depasquale, Managing Partner –

adepasquale@thecitylegal.com

Dr Emma Grech, Partner –

emma.grech@thecitylegal.com

Dr Veronica Campbell, Associate –

veronica.campbell@thecitylegal.com

DISCLAIMER: The information contained in this document does not constitute legal advice or advice of any nature whatsoever. Although we have carried out research to ensure, as far as is possible, the accuracy and completeness of the information contained in this article, we assume no responsibility for errors or other inconsistencies herein.

 

[1] Norman Selwyn, Selwyn’s Law of Employment (21st edn, Oxford University Press 2020).

[2] Chapter 452 of the Laws of Malta.

[3] Bugeja Mark et pro et noe vs Camilleri Geoffrey, Court of Appeal (Inferior Jurisdiction), 28 June 2013, Reference 345/2008/2 GC

[4] Bugeja Mark et pro et noe vs Grech Melljora, Court of Appeal (Inferior Jurisdiction), 27 May 2015, Reference 144/2011/1 EG.

[5] Camilleri Antonio pro et noe vs Sicurella Salvatore, Court of Magistrates (Civil), 30 October 2019, Reference 100/2018 RM.

[6] Ibid.

[7] The Constitution of Malta, 1964.

[8] Camilleri Antonio pro et noe vs Sicurella Salvatore, Court of Magistrates (Civil), 30 October 2019, Reference 100/2018.

[9] Ibid.

[10] Ibid.

[11] Camilleri Antonio pro et noe vs Sicurella Salvatore, Court of Appeal (Inferior Jurisdiction), 26 May 2021, Reference 100/2018/1 LM.

[12] Eurosupplies Limited vs Tihn Paul, First Hall, Civil Court, 9 March 2016, Reference 482/2011 JPG.

[13] Chapter 16 of the Laws of Malta.