Whether to protect trade secrets, customer lists, or general trade competitiveness, restrictive covenants can be a useful tool at times.
Restrictive covenants are a regular feature of employment contracts in the UAE, restricting the employee’s scope of activities that could impact the business after the employment contract concludes. They can be used with partners and shareholders to prevent competition or disclosure of sensitive information even after the contract is concluded. Confidentiality agreements such as non-disclosure agreements (NDAs) are a blanket tool that can be used to prevent the disclosure of sensitive business information in a range of contexts. Disclosure of sensitive confidential information is also a criminal offence in Article 379 of the UAE Penal Code (Federal Law No. 3, 1987), whether there is an agreement or not.
While on the face of it, this may inspire confidence in UAE businesses that their sensitive and confidential information is secure. They can sleep soundly assured that their partners and shareholders cannot compromise a businesses’ market share with unwanted competition. These protections, however, do require some warning labels.
Restrictive covenants in employment contracts that limit an employee’s ability to secure employment with a competing firm, or setting up a competing business, has limitations.
Article 127 of the UAE Labour Law will only be enforced if the employee is 21 years old, and the restriction is “limited as to time, place and the nature of the business, to the extent necessary to safeguard the employer’s lawful interests”. This means that the employer will have to provide evidence a legitimate business interest is being protected, and that the restrictions are reasonable.
Article 909 of the Civil Code contains similar limitations, though this provision provides an option to include a penalty clause in the event of breach. The penalty clause will not be enforced if it is unreasonable, however so caution is advised. Indeed, one should worry any time that a court is provided with an opportunity to determine when something is ‘reasonable’.
In these circumstances there is a potential for the decision to be influenced by a range of factors. For example, a court may not be inclined to support a restrictive covenant against a low-paid, lower-level employee that might impact on his or her ability to continue to make a living. When drafting these clauses, one should therefore be circumspect, and be careful not to overreach. In addition, enforcement is also a concern. Without the remedy of an injunction in UAE law, damages is the only remedy and can be hard to prove.
Commercial law provides restrictions against current partners and shareholders from competing with the business, and is fairly comprehensive as is usual in commercial law. Restrictive covenants, however, can still be used to prevent competition or disclosure of confidential information with partners and shareholders. As these are outside the employer/employee relationship, these contracts can be executed between partners and shareholders putting in restrictions against competition and protecting sensitive and confidential information. These contracts will generally be enforceable, so long as the contract is enforceable and fall under general contract law. Caution is still advised over overly onerous provisions, as Article 246 and 106 of the UAE Civil Code allows courts to prohibit a party form unreasonably causing damage to the other party. An unreasonable post-sale restrictive covenant, for example, could be unenforceable.
A wider range of options exists in relation to confidential information. Confidentiality agreements such as NDAs are a common feature in the business landscape, and are regularly enforced so long as they are clearly and specifically drafted. There are also a criminal alternative to prevent the disclosure of confidential information. Article 379 of the UAE Penal Code makes it a criminal offence to disclose confidential information “for his own personal interest or for the interest of another person, unless authorized by the confiding person to disclose or use it”. In the private sector the penalty is a minimum one year sentence, and/or a minimum 25,000 AED fine. For a public servant the penalty is a term not exceeding five years. This offence can be equally applied to employees and partners and shareholders.
UAE law provides a range of tools to protect businesses. An overview of the law suggests however that less may be more in private agreements, specificity and precision in drafting is key, and there are other alternatives to protect an interest that may be more effective.
By Dr Tracie Lea Scott, assistant professor at Heriot-Watt University, Dubai.
