What are Non-solicitation Clauses? How can you use non-solicitation clauses in Pakistan, to secure your business?

A non-solicitation clause is a type of contract clause that prohibits one party from soliciting the other party’s employees, customers, or suppliers. These clauses are often used by businesses to protect their confidential information and trade secrets.

Non-solicitation clauses are typically enforceable in court, but there are some limitations. For example, the clause must be reasonable in scope and duration. It cannot prevent an employee from seeking employment elsewhere or from doing business with a customer or supplier that they were not involved with while working for the company.

Here are some of the key features of non-solicitation clauses:

• Scope: The scope of a non-solicitation clause determines who is prohibited from being solicited. It can be limited to employees, customers, or suppliers.
• Duration: The duration of a non-solicitation clause determines how long the restriction applies. It can be for a set period of time, such as one year, or it can be indefinite.
• Geographic scope: The geographic scope of a non-solicitation clause determines where the restriction applies. It can be limited to a specific area, such as a city or state, or it can be nationwide.

If you are considering using a non-solicitation clause, it is important to consult with an attorney to ensure that it is enforceable and that it meets your specific needs.

Here are some of the reasons why businesses use non-solicitation clauses:

• To protect confidential information: Non-solicitation clauses can help to protect a company’s confidential information by prohibiting employees from soliciting their former colleagues to join them at a new company. This can help to prevent the loss of trade secrets and other confidential information.
• To protect customer relationships: Non-solicitation clauses can help to protect a company’s customer relationships by prohibiting employees from soliciting their former customers to do business with them at a new company. This can help to prevent the loss of revenue and goodwill.
• To ensure a smooth transition: Non-solicitation clauses can help to ensure a smooth transition when an employee leaves a company. By prohibiting the employee from soliciting their former colleagues and customers, the company can minimize the disruption caused by the employee’s departure.

Here are some of the potential drawbacks of non-solicitation clauses:

• They can be difficult to enforce: Non-solicitation clauses can be difficult to enforce, especially if the employee moves to a different state or country.
• They can discourage employees from leaving: Non-solicitation clauses can discourage employees from leaving a company, even if they are unhappy with their job. This can lead to a loss of talent and productivity.
• They can be seen as unfair: Non-solicitation clauses can be seen as unfair by employees, especially if they are overly broad or restrictive. This can lead to resentment and decreased morale.

Overall, non-solicitation clauses can be a valuable tool for businesses, but they should be used with caution. It is important to weigh the potential benefits and drawbacks before using a non-solicitation clause.

How can you use non-solicitation clauses in Pakistan, to secure your business?

Non-solicitation clauses are commonly used in employment contracts to prevent employees from soliciting clients or customers of the employer after leaving the company. Although non-solicitation clauses are not specifically regulated under Pakistani law, they are generally enforceable as long as they are reasonable and necessary to protect the legitimate interests of the employer. To use a non-solicitation clause in Pakistan, employers should ensure that the clause is clear and specific in its terms. The clause should define the scope of the prohibited activities, such as soliciting clients or customers, and specify the duration of the restriction, which should be reasonable and proportionate to the interests being protected. The clause should also provide for a mechanism for enforcement, such as a penalty or damages for breach. It is important to note that non-solicitation clauses must be reasonable and necessary to protect the legitimate interests of the employer. If the clause is too broad or restrictive, it may be considered unreasonable and unenforceable. Employers should also ensure that the clause complies with any applicable employment laws and regulations in Pakistan. In addition to using non-solicitation clauses, employers in Pakistan can also take other measures to secure their business, such as implementing confidentiality and non-disclosure agreements, restricting access to confidential information and trade secrets, and implementing effective exit procedures for departing employees.

The 2018 SCMR 1057 case from the Supreme Court of the UK involving Morris-Garner and One Step (Support) Ltd provides important insights into the judicial approach towards non-solicitation clauses and the assessment of damages for their breach.

In this case, the defendants, a former director and a manager of the claimant company, breached restrictive covenants that prohibited them from competing with the claimant or soliciting its clients. The core issue was whether the claimant was entitled to ‘negotiating damages’—a kind of damage calculated based on the amount that would have been agreed in a hypothetical negotiation for releasing the defendants from their covenant obligations.

The Supreme Court’s decision highlighted several key points:

1. Nature of ‘Negotiating Damages’: The court clarified that ‘negotiating damages’ could be awarded for a breach of contract where the loss suffered by the claimant was best measured by the economic value of the breached right, considered as an asset. This approach views the right as something valuable that has been taken away from the claimant, for which they are entitled to compensation.

2. Use of Hypothetical Negotiations: The court noted that the concept of a hypothetical negotiation is merely a tool for determining the economic value of the breached right. It does not fundamentally alter the compensatory nature of contractual damages.

3. Applicability in Non-Pecuniary Losses: Importantly, the court recognized that ‘negotiating damages’ could be applicable even in the absence of direct financial losses that are measurable in the conventional way. This is particularly relevant in cases where the claimant has effectively been deprived of a valuable asset.

4. Quantification of Loss: The Supreme Court emphasized that the difficulty in quantifying the financial loss does not justify abandoning attempts to measure it. Even if the loss is hard to quantify, it remains a familiar type of loss for which damages are frequently awarded, and efforts should be made to estimate it as accurately as possible.

5. Trial Judge’s Role: The court asserted that the basis on which damages are awarded is not a discretionary matter for the trial judge. The trial judge must aim to measure the actual financial loss sustained by the claimant as accurately as possible.

6. Relevance of Hypothetical Release Fee: While evidence regarding a hypothetical release fee might be presented, its relevance and weight are for the trial judge to determine. However, such a fee is not itself the measure of the claimant’s loss in cases like this one.

The ruling in this case signifies a nuanced understanding of the complexities involved in assessing damages for the breach of non-solicitation clauses. It emphasizes a compensation approach grounded in the actual value of the breached right, rather than a more abstract negotiation-based calculation. This approach ensures that claimants are fairly compensated for their losses while maintaining the compensatory nature of contractual damages.