Employment Law: Non-Compete Clauses And Training Bonds In Nigeria

Employers invest significant resources in developing their businesses and training their employees. It is therefore common for employers to include contractual provisions intended to protect their business interests after an employee leaves employment or to recover the cost of substantial employer-funded training.

Two common mechanisms are non-compete clauses and training bonds. However, the fact that an employee has signed an employment contract does not automatically make either provision enforceable.

Under Nigerian law, restrictions affecting an employee’s ability to work may amount to restraints of trade. The courts therefore balance the employer’s legitimate business interests against the employee’s freedom to work and earn a livelihood.

The Supreme Court established the principal common-law position in Andreas I. Koumoulis v Leventis Motors Ltd, holding that covenants in restraint of trade are presumed to be unenforceable unless the party seeking enforcement establishes that the restriction is reasonable in the interests of the parties and the public.

Subsequently, the National Industrial Court of Nigeria (NICN) has applied this principle in numerous employment disputes. The Federal Competition and Consumer Protection Act 2018 (FCCPA) has also introduced a statutory dimension to employment-related restraints.

This article aims to give employers a better understanding of the limits of these clauses before including them in employment contracts.

What is a Non-Compete Clause?

A non-compete clause is a contractual provision restricting an employee from competing with an employer after the employment relationship ends.

Depending on its wording, it may prevent an employee from working for a competitor, establishing a competing business, or engaging in a specified business or activity for a particular period or within a defined geographical area.

A non-compete is generally regarded as a restraint of trade because it restricts an individual’s freedom to carry on a trade, profession, business, or employment.

Although the law does not prohibit such clauses outright, they are not automatically enforceable merely because it appears in a signed employment contract. Instead, their enforceability depends principally on whether the restriction is necessary to protect a legitimate business interest.

Are Non-Compete Clauses Enforceable In Nigeria?

Yes, they may be enforceable, but the restriction must be reasonable and directed at protecting a legitimate business interest.

Legitimate interests may include confidential information, trade secrets, and valuable customer or business relationships. A clause that simply seeks to prevent an employee from competing, without a legitimate interest requiring protection, may be difficult to enforce.

The court may consider factors such as the duration of the restriction, its geographical scope, the nature of the activities restricted, the employee’s role and access to confidential information or customers, and the legitimate business interest the employer is seeking to protect.

For example, in Infinity Tyres Limited v Sanjay Kumar & 3 Others, the NICN considered a one-year restriction reasonable in duration but found the attempt to extend the restriction to “any other company in Nigeria” too broad.

Similarly, in 7th Heaven Bistro Ltd v Amit Deshpande, a three-year restriction preventing the employee from working anywhere in Nigeria was found to be excessively broad and unenforceable.

These decisions illustrate the importance of tailoring a restriction to the interest it is intended to protect.

The Federal Competition and Consumer Protection Act 2018 adds a statutory dimension to restrictive arrangements. Section 68(1)(e) provides for a two-year limit in the context of certain restraints involving individual employment and service relationships.

The two-year limit should not, however, be regarded as conclusive evidence that a restriction is enforceable simply because its duration does not exceed two years. A clause may fall within the statutory period and still fail the common-law test of reasonableness because its scope or purpose is excessive.

Employers should therefore comply with both the applicable statutory framework and the common-law requirements.

What Is a Training Bond?

A training bond is an agreement under which an employer funds an employee’s training in return for the employee remaining in employment for an agreed period after completing the training.

The agreement may require the employee to repay some or all of the training expenses if the employee leaves before the agreed period expires.

Training bonds are commonly used for specialised training, professional qualifications, aviation training, and other forms of substantial employer-funded development.

Unlike a conventional non-compete clause, the principal purpose of a training bond is generally to protect the employer’s investment in training, rather than to prevent competition after employment ends.

Be that as it may, the courts may scrutinise a training bond where it places excessive restrictions or financial obligations on an employee. Therefore, a training bond should be based on the employer’s actual training investment and should not impose an excessive financial burden on an employee who leaves before the agreed period.

Are Training Bonds Enforceable in Nigeria?

Yes, training bonds can be enforceable where their terms are reasonable, proportionate, and connected to the employer’s genuine training investment.

In Overland Airways Ltd v Captain Raymond Jam, the NICN upheld training bonds involving 36-month and 12-month bonding periods. The Court considered the circumstances and found the arrangements reasonable.

Importantly, the Court in its decision demonstrated that where the agreement is breached, the employer can only recover the training costs relating to the period the employee failed to serve, rather than the full cost of the training.

However, the courts will not enforce an excessive or punitive bond merely because the employer incurred some training expenses.

In Iscare Nig. Ltd v Victoria Omotayo Akinsanya, the Court found a ₦5 million training bond unconscionable where the actual training cost was only about ₦569,108, highlighting the importance of ensuring that the bond is proportionate to the actual training costs.

It is also important to note that an employer must honour its own obligations. Where an employer changes the agreed training arrangements or otherwise fails to perform its side of the bargain, enforcement of the bond may fail.

Thus, a training bond should serve as a reasonable means of recovering training costs, rather than operating as a penalty for resignation.

SEE ALSO: Laws and Regulatory Bodies Governing the Aviation Sector in Nigeria

What Factors will the Court Consider?

There is no hard and fast rule for determining the reasonableness of a restrictive covenant; rather, it is assessed on a case-by-case basis, having regard to the circumstances of each case. Relevant factors include:

1. Duration

To protect the employer’s legitimate business interest, the duration should not be longer than necessary. For non-compete clauses, the FCCPA limits the restriction to two years. The circumstances of each case will still determine enforceability.

2. Scope and Geography

The geographical scope of a restrictive covenant must be limited to what is reasonably necessary to protect the employer’s legitimate business interests.

A restriction covering an entire country or extending worldwide may be considered excessive where the employer’s business activities, customer base, or market presence are confined to a particular area. An excessively wide geographical restriction makes it more difficult to justify.

3. Nature of the Restricted Activity

The clause should identify the activity, business, or competition being restricted.

A broadly worded restriction that prevents an employee from taking up “any employment” is more likely to be considered unreasonable than a narrowly tailored clause that targets specific competitive activities.

4. Legitimate Business Interest

The employer should identify the interest requiring protection, such as confidential information, trade secrets, or customer relationships.

5. Training Cost and Repayment Amount

For training bonds, the employer should be able to establish the nature and actual cost of the training. The repayment amount should therefore reflect the actual training expenses. A repayment amount calculated according to the period the employee has already served is generally more defensible than an amount that does not reflect the actual cost incurred.

6. Employee’s Role

The employee’s seniority, access to confidential information and relationship with customers may affect the reasonableness of a restriction.

7. Public Policy and Right to Work

The court may consider whether the restriction effectively prevents an employee from earning a livelihood or is otherwise contrary to public policy.

What should Employers do when drafting these Clauses?

Employers should ensure that employment agreements are carefully tailored to protect legitimate business interests.

For non-compete clauses, the duration, geographical scope, and restricted activities should be reasonable and appropriate to the employee’s role, avoiding overly broad restrictions on future employment.

For training bonds, employers should clearly identify the training being funded, keep evidence of the actual training costs, specify the bonding period, clearly state the repayment obligation, ensure the repayment amount is proportionate to the training investment, and ensure that the employer also performs its obligations under the training arrangement.

Proper documentation is important because an employer seeking to enforce a restrictive covenant or training bond must be able to establish the basis for the restriction and its reasonableness.

What Happens if a Restriction is Unreasonable?

Where a court finds that a non-compete or training bond is unreasonable, the employer may be unable to enforce it.

In 7th Heaven Bistro Ltd v Amit Deshpande, the three-year nationwide restriction was found excessively broad and unenforceable.

This decision shows that simply including a restrictive covenant in a signed contract does not make it enforceable. The restriction must also be reasonable and comply with the law.

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Conclusion

Non-compete clauses and training bonds can provide employers with valuable contractual protection, but they are not automatically enforceable merely because an employee has signed an employment agreement.

Nigerian courts generally require restrictive covenants to be reasonable, proportionate, and connected to a legitimate interest.

For non-competes, employers should carefully consider duration, geographical scope, and the nature of the restricted activity.

For training bonds, the actual training investment, bonding period, repayment obligation and conduct of the employer are particularly important.

The FCCPA must also be considered in relation to applicable employment restraints, while constitutional and public-policy considerations may arise where a restriction substantially interferes with an employee’s ability to work.

Employers should therefore avoid broad or punitive provisions because carefully drafted and properly tailored provisions are more likely to withstand legal scrutiny than broad or punitive restrictions.

Do you need expert assistance with drafting employment contracts, non-compete clauses, training bonds, or other employment-related documents?

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Disclaimer: This publication is for general informational purposes only and does not constitute legal advice. The information provided should not be relied upon as a substitute for professional legal advice. For guidance specific to your circumstances, please consult a qualified legal practitioner.

WRITTEN BY:

UCHEAGWU CHIEFO, LL.B., B.L.
LEGAL ASSOCIATE
TCORPORATE LEGAL ADVISORY