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

We receive a significant number of inquiries from both employers and employees seeking clarification on the enforceability of Non-Compete and Non-Disclosure Contracts (NCDAs) in Pakistan. Additionally, there is a considerable interest in understanding the enforceability of restrictive covenants within business contracts. In this article, we endeavor to provide comprehensive insights into these complex and vital aspects of contractual law through the lens of case law. In this article aim is to shed light on the nuances of NCDAs, the legal framework surrounding them, and the factors that influence their enforceability, all with the assistance of actual Pakistani legal cases.

NCNDAs in General 

NCNDA agreements in business and employment can be unfair. Non-Circumvention and Non-Disclosure Agreements (NCNDAs) are designed to protect confidential information and trade secrets, but they can also be used to stifle competition and innovation.

General principles 

Some of the ways that NCNDAs can be unfair include:

  • They can be overly broad: NCNDAs can be overly broad, prohibiting employees from disclosing any information that they learned while working for the company, even if the information is not confidential.
  • They can be too restrictive: NCNDAs can be too restrictive, prohibiting employees from working for competitors for a certain period of time, even if the employee has no access to confidential information.
  • They can be unenforceable: NCNDAs can be unenforceable if they are not reasonable or if they violate local law.

Here are some of the times when NCNDAs are potentially illegal:

  • When they violate antitrust laws: NCNDAs can violate antitrust laws if they are used to unreasonably restrain trade or to fix prices.
  • When they violate employment laws: NCNDAs can violate employment laws if they are used to prevent employees from exercising their right to free speech or to organize a union.
  • When they violate privacy laws: NCNDAs can violate privacy laws if they are used to collect or use personal information without the employee’s consent.

If you are considering signing an NCNDA, it is important to carefully review the agreement.You can consult with the Josh and Mak International Team to ensure that your NCNDA is fair and enforceable.

Here are some tips for negotiating an NCNDA:

  • Do your research: Before you start negotiating, it is important to do your research and understand the company’s business and its need for confidentiality. You should also research the terms of other NCNDAs to get an idea of what is fair.
  • Be prepared to walk away: If you are not comfortable with the terms of the agreement, be prepared to walk away. There are other companies out there, and you don’t want to get stuck with an agreement that is unfair to you.
  • Get everything in writing: Once you have agreed on the terms of the agreement, make sure that everything is in writing. This will help to avoid misunderstandings and disputes down the road.
  • Get it reviewed by the Josh and Mak International Team. It is always a good idea to have a competent attorney review any contract before you sign it. Our team can help you to understand the terms of the contract and make sure that it is fair to you.

Enforcement of NCNDAs in employment contracts in Pakistan

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.
See also  Pakistani Law on Willful Default

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.
See also  Copyrights Law in Pakistan

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 and 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:

  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.

How is a restrictive or negative covenant like an NCNDA?

A restrictive or negative covenant, often referred to as a non-compete or non-disclosure agreement (NCNDA), shares similarities with other types of restrictive covenants. These covenants are contractual clauses that impose certain limitations or restrictions on one or more parties involved in an agreement. Here’s how a restrictive or negative covenant is similar to an NCNDA:

  1. Limitation on Activities: Both types of clauses impose limitations on the actions or activities of one party. In the case of non-compete agreements, the restriction typically prevents an individual or entity from engaging in competitive activities with the other party. In non-disclosure agreements, the restriction pertains to the disclosure or sharing of confidential information.

  2. Protection of Interests: Restrictive covenants, including NCNDAs, are often used to protect the legitimate interests of one party. In the case of non-compete clauses, this protection extends to the business’s market share, trade secrets, and customer relationships. Non-disclosure clauses aim to safeguard confidential information and proprietary knowledge.

  3. Duration and Scope: Both types of covenants specify the duration and scope of the restrictions. For example, a non-compete agreement might specify the geographic area and the duration (e.g., one year) during which the individual cannot compete. Non-disclosure agreements outline what information is considered confidential and for how long it must be kept confidential.

  4. Enforceability: The enforceability of both types of clauses can be subject to legal scrutiny. Courts often evaluate whether the restrictions are reasonable, whether they protect legitimate business interests, and whether the party agreeing to the restriction received adequate consideration in exchange.

  5. Consequences of Breach: In case of a breach of either type of covenant, there are typically consequences outlined in the agreement. This can include financial penalties, injunctive relief, or legal action to seek damages.

  6. Confidentiality Obligations: Both non-compete and non-disclosure agreements often include confidentiality obligations. In non-compete agreements, the individual may be prohibited from disclosing certain competitive strategies or market insights. In non-disclosure agreements, the obligation is more comprehensive and pertains to all confidential information.

  7. Customization: Both types of covenants can be customized to meet the specific needs and concerns of the parties involved. They can be tailored to address unique business circumstances and the nature of the relationship.

While non-compete agreements primarily focus on preventing competition, and non-disclosure agreements center on protecting confidential information, both are tools used to safeguard the interests of parties entering into a contractual relationship. Understanding the similarities and differences between these types of covenants is essential for drafting effective and legally enforceable NCNDA clauses in employment & business agreements in Pakistan.

NCNDAs and Business Agreements in Pakistan

The case of Syed Shabih Haider Zaidi v. Shaikh Muhammad Zahoor Uddin (2001 C L C 69 Karachi) provides valuable insights into the enforcement of restrictive covenants and Non-Compete and Non-Disclosure Agreements (NCNDAs) with regard to goodwill in business contracts. Here are the key takeaways from this case:

  1. Restraint of Trade and Goodwill: The case revolves around a dispute related to the sale of goodwill in a business. Goodwill represents the reputation and customer base associated with a business. In this context, the plaintiff had purchased a shop along with its equipment, fixtures, and goodwill from the defendant.

  2. Restraint on Business: The agreement between the parties imposed a restraint on the defendant, preventing them from carrying on a similar business not only in the city but in the entire province. This restraint on trade was the crux of the dispute.

  3. Principle of Reasonableness: The court highlighted that courts are empowered to consider restraints on trade, especially in cases involving the sale of goodwill, upon the touchstone of reasonableness. It emphasized that a broad principle of reasonableness should be applied, particularly when goodwill is being sold.

  4. Public Interest Consideration: When assessing the enforceability of restrictive covenants in business contracts related to goodwill, the court noted that such restraints should be in the interest of the parties and justified in the public interest.

  5. Balancing Individual Rights: The court considered the defendant’s expertise as a skilled photographer and the potential impact on residents of the city. It recognized that it would be unfair to deny the defendant’s expertise to the public. Therefore, it sought to balance the plaintiff’s interests in protecting goodwill with the defendant’s right to pursue his profession in the interest of the public.

  6. Scope and Duration of Restraint: The court concluded that placing a just, reasonable, and fair restraint on the defendant, both in terms of geographical scope and time, was possible. However, the restraint as contemplated by the original agreement, which covered the entire province, could not be justified.

  7. Outcome: As a result, the defendant was restrained from engaging in the same photography business only in certain areas specified by the High Court for a period of five years.

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This case underscores the importance of reasonableness and the public interest when assessing the enforceability of restrictive covenants, including NCNDAs, in business contracts, especially when goodwill is involved. It emphasizes that such restraints should not unreasonably curtail an individual’s ability to practice their profession while also protecting the legitimate interests of the party selling goodwill. Balancing these interests is crucial in determining the enforceability of such covenants.

Case Note: Syed Shabih Haider Zaidi v. Shaikh Muhammad Zahoor Uddin (2001 C L C 69 Karachi)

Before: Sarmad Jalal Osmany, J

Parties:

  • Plaintiff: Syed Shabih Haider Zaidi
  • Defendant: Shaikh Muhammad Zahoor Uddin

Case Reference:

  • Suit No. 115 and Civil Miscellaneous Application No. 507 of 2000
  • Decided on: 19th June 2000

Relevant Laws:

  • Contract Act (IX of 1872), Section 27 – Restraint of trade
  • Specific Relief Act (I of 1877), Sections 42 & 54
  • Civil Procedure Code (V of 1908), Order XXXIX, Rules 1 & 2

Key Points:

  1. Background: This case centers on a dispute regarding the sale of goodwill in a photography business. The plaintiff had purchased a shop from the defendant, which included the shop’s equipment, fixtures, and goodwill.

  2. Restriction Imposed: An agreement was executed between the parties that imposed a restraint upon the defendant, preventing him from carrying on a similar photography business not only in the city but throughout the entire province.

  3. Denial and Novation: The defendant denied the existence of this agreement and relied upon another agreement, suggesting that it was a novation of the agreement produced by the plaintiff.

  4. Plaintiff’s Contention: The plaintiff contended that the defendant should not be allowed to engage in the same photography business throughout the entire province.

  5. Court’s Findings: The court considered the defendant’s expertise as a skilled photographer and concluded that it would be unfair to deny his expertise to the residents of the city, as doing so would not be in the public interest. However, the court also recognized the need for a reasonable restraint on the defendant in terms of both space and time.

  6. Restrained Areas and Duration: Therefore, the court allowed the application and restrained the defendant from conducting the same photography business in certain specified areas as determined by the High Court. This restraint was applicable for a period of five years.

Legal References:

  • The court referred to various legal precedents and principles, including the need for reasonableness and public interest when considering restraints on trade. Notable references include H.B.F.C. v. Shahinshah Humayun House Building Cooperative Housing Society, Ltd., Nordenfelt v. Maxim Nordenfelt Co., and Unichmichem Corporation v. Abdullah Ismail, among others.

Representation:

  • Plaintiff: Khawaja Shamsul Islam
  • Defendant: Khawaja Naveed Ahmed, Shaukat Hayat, Munawar Ghani, and Nasir Shaikh

Conclusion: This case highlights the importance of balancing the interests of parties involved in the sale of goodwill while also considering the public interest. It emphasizes the need for restraint to be just, reasonable, and fair in terms of geographical scope and duration. The court’s decision reflects a pragmatic approach in addressing the enforceability of restraints on trade in the context of goodwill in business contracts.

Restraint Clauses in Franchise Contracts /Sole Distribution Contracts (these are not NCNDAs exactly as the Contract Act deals with them separately but it is worth looking at the case below when looking at restraint clauses in Franchise Agreements.

Case Note: PAK CHINA CHEMICALS v. DEPARTMENT OF PLANT PROTECTION (2006 C L D 210 Lahore)

  1. Nature of Agreement: The case involved a franchise agreement or sole distribution agreement that imposed conditions on both the principal (seller) and the agent (buyer). These conditions included restrictions on the principal selling goods through other agents and on the agent dealing with competing goods.

  2. Validity of Restraint Clause: The court determined that such conditions, if operated during the currency of the contract, could not be regarded as one-sided or in restraint of trade. It recognized that global trade often relies on such agreements, and a restraint clause in such an agreement would not be void if it was reasonable, based on equal bargaining strength, not unilateral, and operated during the contract’s term.

  3. Termination of Agency: The court clarified that an agency, once appointed as a sole agent, has the right to act exclusively in that capacity, excluding others. However, such an agency automatically terminates after the prescribed period, and the agent ceases to have any right.

  4. Stay of Proceedings: The court addressed the issue of whether proceedings should be stayed due to an arbitration agreement. It concluded that the filing of a written statement in such proceedings does not render them liable to be stayed.

  5. Temporary Injunction: The case also involved a request for a temporary injunction by the agent to continue the business under the agency contract after its expiration. The court found that the term of the agency had expired, and the business objective of the agency had been accomplished. Therefore, no prima facie case existed in favor of the plaintiff, and the request for a temporary injunction was declined.

  6. Jurisdiction: The court emphasized that parties, by mutual consent, cannot confer or take away jurisdiction from a court, even if vested.

  7. Jurisdiction Based on Cause of Action: It further clarified that a court in Pakistan, where the cause of action has arisen, has jurisdiction to entertain a suit irrespective of the residence of the defendant. This is particularly relevant when disputes involve international aspects, such as agreements for goods importation.

Legal References:

  • The court referred to various legal precedents, including Sultan Textile Mills Ltd. v. Muhammad Yousaf Shami, Gujrat Bottling Company Limited v. Coca Cola Ltd., and other relevant cases to support its findings.

Conclusion: This case underscores the importance of balanced contractual agreements, the enforceability of reasonable restraint clauses, and the jurisdiction of courts in cases involving international agreements and cause of action. It also provides valuable insights into the termination of agency agreements and the application of arbitration agreements in legal proceedings.

Some general Q&A on Drafting Non-Disclosure Agreements (NDAs)

Q1: When drafting an NDA, is there anything else that can be added to the definition of “Representative”?

A1: The definition of “Representative” in an NDA should be comprehensive to ensure proper protection of confidential information. It typically includes employees, business affiliates, directors, managers, officers, members, partners, subsidiaries, agents, professional advisors, or authorized representatives. However, additional considerations may arise, such as distinguishing between employees and contractors, or specifying which third parties can access the confidential information. The definition can also vary based on the specific needs of the parties and the nature of the information being protected.

Q2: How can you ensure that only relevant parties within a counterparty’s organization have access to your confidential information?

A2: To control access to confidential information, you can include provisions in the NDA that limit disclosure to individuals or entities with a “need to know” the information for the purposes of the agreement. You can also require the counterparty to provide you with a list of individuals or entities who will have access and ensure they are bound by the terms of the NDA. This way, you can specify who within their organization can access your confidential information and hold them accountable for any breaches.

Q3: What are the potential risks of including an expansive list of representatives in the definition?

A3: An expansive list of representatives in the NDA’s definition may have risks, especially in early-stage discussions. It can inadvertently expose your confidential information to a wide range of individuals or entities within the counterparty’s organization. This could lead to unintended disclosures or breaches. It’s essential to balance the need for protection with practicality and specificity, especially in the early stages of negotiations.

Q4: How can you address the distinction between personal service contractors (PSCs) and true service contractors (TSCs) in an NDA?

A4: Distinguishing between PSCs and TSCs in an NDA can be addressed by treating them differently based on the nature of the work they perform. For PSCs doing work akin to an employee, you may include them under the “employee” category in the NDA, with similar indemnification provisions. However, for TSCs who provide specialized services independently, you may require them to sign their own NDA with the disclosing party or provide an indemnity for any breaches. The key is to tailor the NDA to the specific relationship and risk associated with each type of contractor.

Q5: How can you ensure that third parties allowed to view confidential information are bound by similar terms as the NDA?

A5: To ensure third parties are bound by similar terms as the NDA, you can require the counterparty to have these third parties sign their own NDA directly with you or your organization. This way, you can extend the confidentiality obligations to those third parties and protect your confidential information effectively. Additionally, you can specify in the NDA that the counterparty is responsible for ensuring their representatives and affiliates comply with the NDA’s terms and conditions.

By The Josh and Mak Team

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