Can NCNDA agreements in business and employment be unfair? What times of NCNDAs in Pakistan are potentially illegal?

The cases discussed further below, namely, Colgate Palmolive (Pakistan) Ltd. v. Rai Tahir Iqbal (2019 PLC(CS)N 42 Karachi-High-Court-Sindh), Al-Abid Silk Mills Limited v. Syed Muhammad Mudassar Rizvi (2003 MLD 1947 Karachi-High-Court-Sindh), and Exide Pakistan Limited v. Malik Abdul Wadood (2008 CLD 1258 Karachi-High-Court-Sindh), collectively provide valuable guidance on drafting Non-Compete and Non-Disclosure Agreements (NCDAs) that are more likely to be upheld by Pakistani courts in employment contracts. Some key takeaways are as follows 

1. Specificity and Clarity: To increase the chances of enforcement, NCDAs must be specific and clear in their terms. Clearly define what constitutes confidential information or trade secrets that the employee is prohibited from using or disclosing. The agreement should leave no room for ambiguity.

2. Reasonableness in Time and Scope: Ensure that the restrictions imposed by the NCNDA are reasonable in terms of both duration and geographic scope. Overly broad or excessively long restrictions may face challenges in court. The restrictions should also be tailored to the specific role and responsibilities of the employee.

3. Protection of Legitimate Business Interests: Clearly articulate the legitimate business interests that the NCNDA is designed to protect. This could include protecting trade secrets, customer lists, specialized knowledge, or other confidential information that is genuinely critical to the employer’s business.

4. Avoid Coercion: Ensure that the NCNDA is not obtained under coercion or duress. Contracts obtained through improper means may be deemed voidable, and this could jeopardize the enforceability of the agreement.

5. Evidence of Confidential Information: Maintain clear records and evidence of the confidential information shared with employees covered by the NCNDA. This documentation can be crucial in establishing the need for the restrictive covenant and in demonstrating the nature of the confidential information at stake.

6. Prima Facie Case: To enforce an NCDA, the party seeking enforcement typically needs to establish a prima facie case. This means demonstrating that there is a legitimate need for the covenant and that the employee has access to specific confidential information that justifies the restrictions.

7. Consideration and Compensation: Ensure that the NCNDA includes adequate consideration or compensation for the employee agreeing to the restrictions. Providing fair compensation can help strengthen the enforceability of the agreement.

8. Review and Legal Counsel: Before including an NCNDA in an employment contract, it’s advisable to have the agreement reviewed by legal counsel who specializes in employment law. Legal experts can help ensure that the agreement complies with relevant laws and best practices.

9. Periodic Updates: Periodically review and update NCDAs as necessary to reflect changes in the employee’s role or in the nature of the confidential information being protected.

In summary, drafting an NCNDA that is likely to be upheld by Pakistani courts in an employment contract requires a careful balance between protecting legitimate business interests and ensuring that the agreement meets legal standards. Employers should be diligent in crafting these agreements, and employees should be aware of their rights and obligations under such contracts. Legal counsel can play a pivotal role in achieving a well-drafted and legally enforceable NCNDA.

Now lets review these cases individually.

In the case of Colgate Palmolive (Pakistan) Ltd. v. Rai Tahir Iqbal (2019 PLC(CS)N 42 Karachi-High-Court-Sindh), the issue at hand pertained to the breach of a negative covenant contained in the letter of appointment between the plaintiff-company, Colgate Palmolive (Pakistan) Ltd., and the defendant-employee, Rai Tahir Iqbal. This covenant restrained the defendant from competing with the plaintiff company and disclosing confidential information after the termination of his employment.

The plaintiff argued that the defendant’s actions were in violation of this non-competing and non-disclosure agreement. However, it’s important to note that the validity of such agreements hinges on certain legal principles under the Specific Relief Act (I of 1877), the Contract Act (IX of 1872), and constitutional provisions.

According to the court’s findings, the key factors in determining the enforceability of such negative covenants include:

• Protection of Goodwill or Business: The employer must demonstrate that the negative covenant, restraining the employee from competing for a specified period, is necessary for the protection of its goodwill or business interests.
• Conformity with Contract Act: Any restrictive covenant during the period of employment should not violate Section 27 of the Contract Act, 1872, which deems restrictions on trade as prima facie void.
• Reasonableness and Unconscionability: Restrictive covenants applicable during employment can only be challenged if they are found to be unconscionable, excessively harsh, or unreasonable.
• Duration, Nature, and Area: Negative covenants may be enforced if the employee possesses special knowledge and trade secrets acquired during their employment, but these restrictions must be reasonable in terms of time, nature of employment, and geographic area.
• Injunction Discretion: The court may grant an injunction to enforce a negative covenant, but this is subject to the court’s discretion. Injunctions may be refused if the contract’s performance cannot be specifically enforced.

In the case at hand, the court considered various factors. It found that the plaintiff had not invested in specialized training for the defendant-employee, and the employee was not privy to specific confidential data or records. Moreover, the agreement between the parties did not specify a definite period of employment, and they were not direct competitors. The court also noted that the defendant’s role as a Regional Sales Manager did not significantly influence consumer behavior.

Consequently, the court dismissed the application for a temporary injunction, highlighting the lack of reasonableness and balance of convenience in this particular case. It emphasized that injunctions in negative covenants could be granted in exceptional cases where the employer had imparted specialized technical knowledge or expertise to its employees.

In summary, this case underscores the importance of carefully crafting and enforcing non-competing and non-disclosure agreements in employment contracts in Pakistan. Employers must ensure that these agreements align with legal principles and protect legitimate business interests while maintaining a balance of reasonableness and fairness.

What does this case tell us about the enforcement of NCNDAS or Non-Complete and Non-Disclosure Contracts in Pakistan especially in employment contracts? 

The case of Colgate Palmolive (Pakistan) Ltd. v. Rai Tahir Iqbal provides valuable insights into the enforcement of Non-Compete and Non-Disclosure Agreements (NCDAs) in employment contracts in Pakistan. Here are the key takeaways:

• Protection of Business Interests: To enforce an NCDA in an employment contract, the employer must demonstrate that the restrictive covenant is necessary for the protection of its goodwill or business interests. This means that employers need to establish a legitimate reason for including such provisions in the contract.
• Compliance with Contract Act: NCDAs must comply with the Contract Act of 1872. Section 27 of this Act deems agreements in restraint of trade as prima facie void. Therefore, these clauses should be carefully drafted to ensure they do not violate this provision.
• Reasonableness and Unconscionability: The court will assess the reasonableness of the NCDA. If the covenant is found to be unconscionable, excessively harsh, or unreasonable, it may not be enforced. This emphasizes the need for employers to create balanced and fair agreements that protect their interests without unduly burdening employees.
• Duration, Scope, and Geographic Area: Negative covenants should specify a reasonable duration, the nature of employment, and the geographic area where the restrictions apply. Overly broad or indefinite restrictions are less likely to be enforced.
• Special Knowledge and Expertise: Courts may be more inclined to enforce NCDAs when an employee possesses special knowledge, trade secrets, or expertise acquired during their employment that can be genuinely protected by the employer.
• Injunction Discretion: The granting of injunctions to enforce NCDAs is at the discretion of the court. If the court finds that an injunction is not warranted, it may refuse to grant one, even if the NCDA is valid. Therefore, employers should be prepared for the possibility that injunctive relief may not always be available.
• Lack of Training Investment: If an employer has not made significant investments in training an employee or if the employee does not have access to specific confidential information, this may weaken the employer’s case for enforcing the NCDA.
• Competitiveness and Consumer Impact: The court may consider the competitive landscape and the extent to which an employee’s role directly impacts consumer behavior. If the employee’s role is not significant in this regard, the need for enforcing a non-compete clause may be diminished.
• Compensation for Livelihood: If an NCDA restricts an employee from joining a competitor for a certain period, the employer may be required to provide compensation to support the employee’s livelihood during this period.

In conclusion, the enforcement of NCDAs in employment contracts in Pakistan requires a careful balancing act. Employers should ensure that these agreements are legally sound, reasonable, and necessary to protect their legitimate business interests. It’s also crucial to consider the specific circumstances of each case, as the court’s discretion plays a significant role in determining the enforceability of these clauses.

Al-Abid Silk Mills Limited v. Syed Muhammad Mudassar Rizvi (2003 MLD 1947 Karachi-High-Court-Sindh):

This case centered on the enforcement of a negative covenant contained in a letter of appointment and the grant of a temporary injunction. The plaintiff, Al-Abid Silk Mills Limited, sought specific performance of the covenant, which prohibited the defendant, Syed Muhammad Mudassar Rizvi, from joining another organization of a similar trade for a duration of 11 months after leaving the plaintiff’s employment.

Defendant’s Defense:

The defendant contended that the restrictive covenant had been obtained under coercion. However, it’s crucial to note that the defendant had not taken any action during his employment to declare the contract voidable on this ground.

Validity of the Covenant:

The court considered the validity of the restrictive covenant. It emphasized that a contract obtained under coercion would be voidable rather than void. In this case, since the defendant had not chosen to have the covenant declared voidable during his employment, the court upheld the validity of the covenant.

Reasonableness of the Covenant:

The court also assessed the reasonableness of the covenant in terms of its duration and scope. It found that restricting the defendant from employment in a similar trade for 11 months in the home textile unit was not unreasonable. Importantly, the covenant did not prevent the defendant from seeking employment in organizations outside the home textile unit.

Constitutional and Legal Considerations:

The court examined whether enforcing the covenant contravened Article 18 of the Constitution of Pakistan (1973) or Section 27 of the Contract Act, 1872. It concluded that since the defendant had not challenged the legal remedy available to prevent the breach or enforcement of the covenant, there was no violation of Article 18 or Section 27.

Prima Facie Case:

The plaintiff offered a compelling case, and the court found a prima facie case in favor of the plaintiff. To address the situation, the High Court granted the application for a temporary injunction, with the condition that the plaintiff deposit three months’ salary for the defendant in court within a week.

Conclusion:

The case of Al-Abid Silk Mills Limited v. Syed Muhammad Mudassar Rizvi underscores the significance of upholding valid restrictive covenants in employment contracts when they are deemed reasonable and not obtained under coercion. It highlights the importance of timely legal actions to challenge the validity of such covenants and emphasizes the need for employers to offer equitable compensation when seeking to enforce them through legal proceedings. This case demonstrates the court’s role in balancing the rights and obligations of employers and employees in the context of negative covenants in employment agreements.

What does this case tell us about NCNDAs in employment contracts in Pakisan?

The case of Al-Abid Silk Mills Limited v. Syed Muhammad Mudassar Rizvi provides several insights into the enforcement of Non-Compete and Non-Disclosure Agreements (NCDAs) in employment contracts in Pakistan:

• Validity of Covenant Obtained Under Coercion: The case highlights that a restrictive covenant obtained under coercion may render the contract voidable, but it does not automatically make it void. In this case, the court did not void the covenant because the defendant had not taken any action during his employment to declare it voidable. Therefore, it’s essential for employees to promptly challenge such covenants if they believe they were obtained under duress.
• Reasonableness of Time and Scope: The court assessed the reasonableness of the covenant’s duration and scope. It found that restricting the defendant from joining a similar trade for 11 months in the home textile unit was considered reasonable. This suggests that courts in Pakistan are inclined to enforce NCDAs if they are deemed reasonable in terms of time and scope.
• Freedom to Seek Employment Outside the Restricted Area: Importantly, the covenant did not prevent the defendant from seeking employment in organizations outside the home textile unit. This demonstrates that courts may be more inclined to enforce NCDAs that do not overly restrict an employee’s ability to find alternative employment.
• Legal and Constitutional Considerations: The court examined whether enforcing the covenant violated the Constitution of Pakistan (Article 16) or the Contract Act (Section 27). It concluded that since the defendant had not challenged the legal remedy available to prevent the breach or enforcement of the covenant, there was no violation of these legal provisions. This suggests that legal remedies and challenges to the enforceability of NCDAs should be thoroughly considered and pursued if necessary.
• Prima Facie Case: The fact that the court found a prima facie case in favor of the plaintiff highlights the importance of employers presenting compelling arguments and evidence when seeking to enforce NCDAs. A strong case can influence the court’s decision to grant temporary injunctions or enforce such covenants.

In summary, this case illustrates that while enforcing NCDAs in employment contracts in Pakistan is possible, it depends on factors such as reasonableness, validity, and whether the covenant was obtained under coercion. Employees who believe their rights are being unfairly restricted should take timely legal action to challenge the covenant’s enforceability. Employers, on the other hand, must ensure that the terms of NCDAs are reasonable and legally sound to improve the chances of enforcement if necessary.

Exide Pakistan Limited v. Malik Abdul Wadood (2008 CLD 1258 Karachi-High-Court-Sindh):

Background:

This case revolves around the grant of an interim injunction and the enforceability of a restrictive covenant in an employment contract. The plaintiff, Exide Pakistan Limited, a manufacturing company, was in a dispute with the defendant, Malik Abdul Wadood, who was a former employee of the plaintiff.

Plaintiff’s Claim:

The plaintiff sought an injunction against the defendant, citing the existence of an agreement wherein the defendant undertook not to work for a period of two years with any competitor of the plaintiff after leaving his job. The plaintiff’s primary contention was that, during his employment, the defendant had acquired confidential information, which justified the enforcement of the restrictive covenant.

Validity of the Restrictive Covenant:

The court’s evaluation focused on the validity of the restrictive covenant between the parties. The court found that the restrictive covenant was problematic in that it was vague and generalized. It did not specify the particular specialized information that had been divulged to the defendant, which he would be prevented from using directly or indirectly in his employment with another employer.

Lack of Specific Information:

One critical factor in the court’s decision was the plaintiff’s inability to particularize what specific confidential information had been acquired by the defendant during his employment. The court emphasized that the plaintiff had not provided evidence regarding any trade secrets, secret formulas, or specific information that was specially acquired by the defendant beyond what was learned in the normal course of employment.

Failure to Establish a Prima Facie Case:

Due to the plaintiff’s failure to demonstrate what particular trade secrets or confidential information were acquired by the defendant, other than what would be expected in his regular job duties, the court concluded that the plaintiff had not established a prima facie case for the enforcement of the restrictive covenant.

Refusal of Interim Injunction:

Based on these considerations, the court refused to grant the interim injunction. It deemed the restrictive covenant unenforceable due to its vagueness and the lack of specific evidence of confidential information that would warrant such a restriction.

The case of Exide Pakistan Limited v. Malik Abdul Wadood underscores the importance of specificity and clarity in restrictive covenants within employment contracts. To enforce such covenants, employers must clearly define the confidential information or trade secrets at stake and provide evidence that justifies the need for such restrictions. Failure to do so may result in the unenforceability of these agreements. This case serves as a reminder to employers to draft legally sound and specific restrictive covenants to protect their interests effectively

What does this case tell usabout NCNDAs in employment contracts in Pakistan?

The case of Exide Pakistan Limited v. Malik Abdul Wadood (2008 CLD 1258 Karachi-High-Court-Sindh) provides several important insights into the enforcement of Non-Compete and Non-Disclosure Agreements (NCDAs) in employment contracts in Pakistan:

• Specificity and Clarity: One of the crucial aspects highlighted in this case is the need for specificity and clarity in NCDAs. The court found the restrictive covenant in the employment agreement to be too vague and generalized. It did not specify the particular specialized information or trade secrets that the employee was prohibited from using with another employer. This lack of specificity can render such agreements unenforceable.
• Identification of Confidential Information: Employers seeking to enforce NCDAs should clearly identify the confidential information or trade secrets that they aim to protect. Without specifying what specific information is confidential and merits protection, it becomes challenging to establish a prima facie case for enforcing the covenant.
• Prima Facie Case Requirement: To enforce an NCDA, the party seeking enforcement typically needs to establish a prima facie case. In this case, the court ruled that the plaintiff failed to meet this requirement because it couldn’t provide evidence of what specific confidential information was acquired by the defendant beyond what would be expected in the normal course of employment.
• Normal Course of Employment: The court’s decision suggests that merely acquiring information or knowledge during the normal course of employment may not be sufficient grounds for enforcing an NCDA. To justify enforcement, employers must demonstrate that the information in question goes beyond what is typical for the employee’s role.
• Clear and Specific Language: Employers should use clear and specific language in NCDAs, outlining the scope of the restrictions, the duration, and the type of information covered. Vague or overly broad restrictions may face challenges in enforcement.
• Evidence and Documentation: Employers should maintain clear records and evidence of the confidential information shared with employees to support their case in the event of legal disputes over NCDAs.

In summary, the case highlights that while NCDAs can be included in employment contracts in Pakistan, their enforceability hinges on factors such as specificity, clarity, and the ability to demonstrate the existence of specific confidential information or trade secrets. Employers should carefully craft NCDAs to ensure they are legally sound and capable of withstanding legal scrutiny. Employees, on the other hand, should be aware of the specific terms and limitations of such agreements and seek legal counsel if they have concerns about their enforceability.

A note on Article 18 and its interrelation with Enforcement of NCNDAs in Employment Contracts in Pakistan 

Article 18 of the Constitution of Pakistan pertains to the “Freedom of trade, business, or profession” and outlines the fundamental rights of citizens in this context. Here’s an interpretation of Article 18 with regard to Non-Compete and Non-Disclosure Agreements (NCDAs) in employment contracts in Pakistan:

• Fundamental Right: Article 18 recognizes the fundamental right of every citizen in Pakistan to engage in any lawful profession, occupation, or trade, and to conduct any lawful trade or business. This means that individuals have the freedom to pursue their chosen professions and engage in business activities, subject to certain qualifications that may be prescribed by law.
• Subject to Qualifications: While Article 18 guarantees this freedom, it is also subject to qualifications that may be imposed by law. This implies that the government has the authority to enact laws or regulations that impose certain restrictions or conditions on individuals’ freedom to engage in trade, business, or professions.
• Regulation and Licensing: The Article explicitly allows for the regulation of trades and professions through licensing systems. This means that the government can require individuals in specific professions or businesses to obtain licenses or permits to operate legally. This regulation is typically put in place to ensure certain standards, qualifications, or ethical practices are met.
• Protection of Free Competition: Article 18 also permits the regulation of trade, commerce, or industry in the interest of free competition. This provision acknowledges that it may be necessary to regulate economic activities to prevent anti-competitive practices and ensure a level playing field for businesses.
• Government Participation: The Article allows the Federal Government, Provincial Governments, or corporations controlled by them to engage in trade, business, industry, or services. This can be done to the exclusion, either complete or partial, of other persons. In other words, the government or government-controlled entities may compete in economic activities alongside private individuals or entities.
• Impact on NCDAs: In the context of NCDAs in employment contracts, Article 18 emphasizes the importance of balancing the individual’s right to pursue their chosen profession or trade with the government’s authority to regulate and protect public interests. NCDAs must align with the broader legal framework and cannot unduly restrict an individual’s right to engage in a lawful profession or trade.

In practice, NCDAs in employment contracts should be drafted carefully to strike a balance between protecting the employer’s legitimate business interests (such as trade secrets) and ensuring that the restrictions imposed do not unreasonably infringe upon an employee’s right to pursue their profession or trade as guaranteed by Article 18. Any restrictions in these agreements should be reasonable, specific, and supported by a legitimate business need to comply with the constitutional framework.

Article 18 of the Constitution of Pakistan pertains to the “Freedom of trade, business, or profession” and outlines the fundamental rights of citizens in this context. Here’s an interpretation of Article 18 with regard to Non-Compete and Non-Disclosure Agreements (NCDAs) in employment contracts in Pakistan:

1. Fundamental Right: Article 18 recognizes the fundamental right of every citizen in Pakistan to engage in any lawful profession, occupation, or trade, and to conduct any lawful trade or business. This means that individuals have the freedom to pursue their chosen professions and engage in business activities, subject to certain qualifications that may be prescribed by law.

2. Subject to Qualifications: While Article 18 guarantees this freedom, it is also subject to qualifications that may be imposed by law. This implies that the government has the authority to enact laws or regulations that impose certain restrictions or conditions on individuals’ freedom to engage in trade, business, or professions.

3. Regulation and Licensing: The Article explicitly allows for the regulation of trades and professions through licensing systems. This means that the government can require individuals in specific professions or businesses to obtain licenses or permits to operate legally. This regulation is typically put in place to ensure certain standards, qualifications, or ethical practices are met.

4. Protection of Free Competition: Article 18 also permits the regulation of trade, commerce, or industry in the interest of free competition. This provision acknowledges that it may be necessary to regulate economic activities to prevent anti-competitive practices and ensure a level playing field for businesses.

5. Government Participation: The Article allows the Federal Government, Provincial Governments, or corporations controlled by them to engage in trade, business, industry, or services. This can be done to the exclusion, either complete or partial, of other persons. In other words, the government or government-controlled entities may compete in economic activities alongside private individuals or entities.

6. Impact on NCDAs: In the context of NCDAs in employment contracts, Article 18 emphasizes the importance of balancing the individual’s right to pursue their chosen profession or trade with the government’s authority to regulate and protect public interests. NCDAs must align with the broader legal framework and cannot unduly restrict an individual’s right to engage in a lawful profession or trade.

In practice, NCDAs in employment contracts should be drafted carefully to strike a balance between protecting the employer’s legitimate business interests (such as trade secrets) and ensuring that the restrictions imposed do not unreasonably infringe upon an employee’s right to pursue their profession or trade as guaranteed by Article 18. Any restrictions in these agreements should be reasonable, specific, and supported by a legitimate business need to comply with the constitutional framework.