Enforceability of post-termination restrictive covenants in Employment Contracts in Nepal: Legal Insights
A post-termination restrictive covenant is a clause in an employment contract that seeks to limit what an employee can do after leaving the company or any other enterprise. Its purpose is to protect the employer’s legitimate interests by preventing former employees from engaging in activities that could potentially harm the business once they have departed.
The enforceability of these post-termination restrictive clauses is a contentious issue because it involves balancing employers and employee rights. While employers seek to protect proprietary knowledge and prevent the loss of skilled talent to competitors, these clauses can also restrict workers' freedom to pursue better job opportunities, limit their career growth, and hinder their ability to use their skills in the wider job market. Finding a fair balance between these competing interests is key.
In Nepal, the legal landscape surrounding such post-restrictive clauses is nuanced. The most common type of post-termination restrictive clauses is reflected in employment agreements through non-compete, non-solicitation and non-disclosure clauses. While there is no specific legislation on these clauses, their enforceability can be assessed using a combination of legal frameworks, including the National Civil (Code) Act, 2017 (2074) (Civil Code) and the Labour Act, 2017 (2074) (Labor Act).
The Civil Code, which governs contracts in general, provides a foundational legal basis for determining the validity and enforceability of the post-termination restrictive clauses.
The enforceability of such clauses depends on their specific terms. Section 517 (1) of the Civil Code renders contracts that excessively restrict anyone from exercising any profession, trade or business which is not prohibited by law to be void. However, under Section 517 (2) (a) (4) reasonable restraints, such as those in business partnerships or agreements preventing employees from working with competitors for a specified period after employment, are permissible. This provision creates a framework for the potential inclusion of post-termination restrictive clauses through the use of non-compete clauses under Nepali law. It is also worth noting the Labour Act ensures that employees have the right to voluntarily resign, and employers must accept such resignations. Any attempt to prevent voluntary resignation, whether directly or indirectly, could be considered forced labour. If this occurs, Section 164 of the Labour Act imposes criminal penalties on the employer, who would also be required to pay the aggrieved employee double the remuneration, allowances and benefits owed. Even though employers cannot restrict an employee’s freedom to resign, they may impose some limitations on where such employee may work next and provide restrictions on sharing certain information through post-termination restrictions, provided they are reasonable and aligns with prevailing laws.
While the Civil Code does not have specific provisions on non-disclosure and non-solicitation clauses, the Labour Act envisages for the inclusion of non-disclosure provisions in employment contracts, and enforcement thereof during the employment period. Section 131 (4) (h) of the Labour Act specifies that an employee may be dismissed for misconduct if they collaborate with a competitor, engage in competitive business, or disclose confidential information to a competing employer.
Section 537 of the Civil Code allows the aggrieved party in a breach of contract to seek compensation for actual losses and foreseeable damages, which may be relied upon for the enforcement of post termination restrictive covenants, including non-disclosures. This compensation could include losses like the loss of competitive advantage, unauthorised use of confidential information, or the recruitment of employees in violation of the agreement. If the contract specifies a pre-agreed compensation amount, the party may be able to claim it, as long as it is reasonable. In the absence of such a specified amount, the party may be able to claim compensation for direct losses, but not for indirect damages. Since these types of claims have not yet been tested in Nepali courts, it is uncertain how courts would rule in this matter. Therefore, similar cases in other jurisdictions can provide guidance, allowing Nepali courts to establish a precedent. Ultimately, decisions may vary depending on the specific facts of each case, giving the courts flexibility to shape legal practice in this area.
Additionally, receiving compensation does not prevent pursuing other remedies, such as injunctions to prevent further breaches.
The legal framework surrounding post-termination restrictive clauses in Nepal is still evolving, employers must exercise caution, as the lack of clear case law or specific legislation does not exempt them from complying with broader contract, labour laws. To mitigate risks associated with post-termination restrictive clauses, employers should ensure the post-termination restrictive clauses are effectively drafted with several key factors in mind. First, the duration of the restriction should be reasonable and specific, depending on the nature of the business and the employee’s role. Overly long restrictions may be deemed unreasonable and unenforceable. Next, the territory covered by the clause should be narrow and directly related to the employer’s business interests, such as limiting the restriction to a specific geographic area where the company operates, to avoid unjustly limiting an employee’s ability to work in unrelated markets. The consideration provided in exchange for agreeing to the post-termination clause is also crucial; employers should ensure that employees receive adequate compensation, to justify the restriction. Additionally, the scope of the restriction must be focused on protecting legitimate business interests, such as preventing the loss of trade secrets, client relationships, or competitive advantage, rather than unnecessarily restricting the employee’s ability to pursue their career. Finally, the position of the employee should be considered, as senior position employees with access to sensitive information may warrant stricter restrictions. By carefully considering these elements, employers can craft post-termination clauses that are fair, reasonable, and more likely to be enforceable, ensuring the protection of their business interests while respecting the rights of employees.
In conclusion, although post-termination clauses remain a grey area, they must be carefully crafted to avoid conflicts with the prevailing legislation. Further, employers should ensure these clauses are fair, justified and legally enforceable to minimise regulatory scrutiny or legal penalties.
