Ghana: Enforceability Of Clauses In Restraint Of Trade Under Ghanaian Law

Introduction

The right to work is highly recognized under international law. In fact, it occupies a central position in international human rights law, such that the right to work, the right to free choice of employment, the right to just and favourable conditions of work, and the right to protection against unemployment are guaranteed.¹ Article 6(1) of the International Covenant on Economic, Social and Cultural Rights (‘ICESCR')² affirms this right by mandating every state to recognize the right of everyone “to the opportunity to gain his living by work which he freely chooses or accepts, and will take appropriate steps to safeguard this right.”³

Locally, the right to work is guaranteed under the 1992 Constitution of Ghana. Specifically, Article 24(1) provides thus,

This implies that a person's right to work cannot be curtailed or restricted by any person unless otherwise provided by law.

Bhattacharjee has argued that the barriers to the right to work are not just structural and economic but also extend to legal prohibition⁴, one of which is generally referred to as Contracts or Clauses in restraint of trade. The purpose of this paper is to critically assess this inroad that the law makes into the right to work and to ascertain the enforceability of such clauses in Ghana.

What are Clauses in Restraint of Trade?

Clauses in Restraint of Trade generally refer to terms in a contract that limits a person's freedom to carry on his or her trade, business, or profession in the future. These terms may either be embedded in employment contracts between an employer and an employee or business agreements regarding the sale and purchase of a business. It can also be a full contract on its own. The principal aim of these clauses or contracts is to protect the legitimate business interests of a party following the severance of the employment or business relationship.⁵

Clauses in Restraint of Trade may typically take the form of non-compete clauses, non-solicitation clauses, and non-poaching clauses.⁶

• Non-compete clauses: These seek to prevent employees or agents of a business from taking up employment or starting a similar profession or trade in competition with their former employers or the business they represented.⁷
• Non-solicitation clauses: Seeks to prevent employees from soliciting the clients or customers of their former employers.⁸
• Non-poaching clauses: Seeks to prevent former employees from soliciting the employees of their former employers.⁹

Generally, Clauses in Restraint of Trade are considered as restrictions on a person's right to work since they limit and define the scope of work a person can engage in after the severance of the employment or business relationship.

Restraint of trade clauses is a common feature of most, if not all sale of business agreements. It may safely be concluded that the inclusion of these clauses is deemed “mandatory” for the protection of the purchaser who has paid a huge price for the seller's business. In the absence of such clauses, the vendor may set up a similar business in competition with the business he sold which would ultimately depreciate the value of the goodwill.¹⁰ Thus, these restrictions enhance the value of the business and influence the price to be paid and are necessary to ensure that the vendor gets the highest price for what he has to sell and that the purchaser gets the whole value of the business he has paid for.¹¹

On the other hand, it is quite common for employees to overlook the potential impact of restraint of trade clauses in their employment contracts, as they are often caught up in the thrill and excitement of starting a new job. However, once their employment comes to an end, they are quickly confronted with the reality of being bound by certain restrictions in their next line of activity.

Whether contained in an employment contract or business sale agreement, the fundamental question is whether these clauses are enforceable, a breach of which would give the aggrieved party the right to pursue any legal action for a remedy.

Enforceability of Clauses in Restraint of Trade in Agreements

Even though Clauses in Restraint of Trade are not statutorily prohibited in Ghana, there is currently no specific legislative framework governing them. Ghana's current Labour Act, (Act 651) is silent on the inclusion of such clauses in employment contracts executed between employers and employees. Moreover, there is a dearth of Ghanaian case law on the subject matter. As is the practice in such circumstances, Ghanaian courts are inclined to resort to the persuasive nature of English precedents.

Thus, in determining the enforceability or otherwise of clauses in restraint of trade within the Ghanaian legal framework, the fundamental principles of common law will be extensively discussed in this article. This would provide some guidance and give an indication of the posture of the Ghanaian courts when faced with such cases in the Ghanaian context.

It is a well-established principle under common law that generally, all contracts in restraint of trade are contrary to public policy and thus unenforceable. This is because it is in the public interest that people should be free to practice their professions and pursue their trades. However, exceptions are created for such contracts or terms that are deemed reasonable.¹² The principles regarding the enforceability or otherwise of restrictive covenants of trade have been painstakingly developed under the common law. The familiar authorities like Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd,¹³ Herbert Morris v Saxelby,¹⁴ Home Counties Dairies Ltd & Anor v Skilton & Anor,¹⁵ The Littlewoods Organization Ltd v Harris,¹⁶ and Marion White Ltd v Francis¹⁷ have clearly outlined the key principles to be considered when assessing the enforceability of such contracts or clauses.

Particularly, Lord McNaughten in the case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd¹⁸  espoused the governing principles, where he stated that:

In this case, Thorsten Nordenfelt, a manufacturer of guns and other ammunition, sold his business to Hiram Stevens Maxim for $287,500. The parties agreed that for a period of 25 years, Nordenfelt would not make guns or ammunition anywhere in the world. The House of Lords upheld the contract and deemed it reasonable to protect the proprietary interest of the purchaser and further held that the agreement was not injurious to the public.

Following this decision, clauses in restraint of trade may be enforced if the following conditions are met:

• The terms seek to protect a legitimate interest;
• The terms are reasonable between the parties involved; and
• The terms are reasonable considering the public interest or policy.

Protecting a legitimate interest.

Any restriction imposed on a former employee must be reasonably required for the protection of the employer's business interests such that a failure to restrict the employee's post-employment activities would substantially and adversely affect the employer's business.

In Herbert Morris v Saxelby,¹⁹ a contract in restraint of trade between an employer and an employee was held to be unenforceable as being too wide in scope. The restraint clause sought to restrict the employee from engaging in any activity regarding his specialized engineering skill for a period of seven years in the whole of the United Kingdom or Ireland following the severance of the employment relationship.

The Court found that the covenant in restraint of trade was wider than reasonably necessary for the protection of the employer's interests. There was no evidence to prove that the employee ever came into personal relations with any of the company's clients or that he had any personal influence or acquaintance with any of them to enable him to entice their clients to any other firm.

Furthermore, all documents containing confidential information were closely monitored and the information they contained was so detailed that it would be impossible for any employee to carry it away in his head. Given the circumstances, the Court found that the interest that the employer was seeking to protect could not be described as legitimate and thus held the terms unreasonable and unenforceable.

In effect, any restriction merely aiming to prevent the threat of competition from a former employee will not be enforced by the court. The Courts would only interfere to protect the legitimate business interests of the employer worthy of protection such as the employer's trade secrets or customer base. Restraint clauses that seek to impose more than is reasonably necessary for the protection of the employer's legitimate business interest would be unenforceable.

Determining Reasonableness based on the interests of the parties involved

As earlier highlighted, it is a fundamental requirement that any contract or clause in restraint of trade must be proven to be reasonable, considering the interests of all parties involved. In Marion White Ltd v Francis,²⁰ a clause in the contract of employment of a hair stylist sought to prevent her from working with a rival salon within a relatively short distance from the previous salon, within a year after the termination of her employment. The court upheld the clause as enforceable primarily because the distance and duration of the restraint were deemed reasonable.

It is clear that the court carefully balanced the interests of the two parties. While the employer's ability to establish itself as a skilled stylist and to maintain its customers was protected, the right of the employee to earn a living was also not curtailed because the ambit of the restriction was fair and reasonable in terms of the distance and duration.

It must be noted that where there has been an express post-termination agreement between an employer and an employee, the courts will likely intervene to ensure that there is a fair balance between the competing rights of the employee and the employer. That is, the right of the employee to earn a livelihood using his skills and experience even if these were acquired while in the employ of the employer, and the right of the employer to protect his business from unfair competition and in effect, prevent any employee from using information obtained in the service of the employer to the detriment of the employer.

In assessing the reasonability or otherwise of clauses in restraint of trade, it can be deduced that the Courts are likely to consider the scope of the restriction, the duration of the restriction, and the geographical area to which the restriction applies.

Determining Reasonableness based on the public interest or policy.

Clauses in restraint of trade must be reasonable in relation to the public interest. Particularly because the public stands to gain some advantage from the skills a person possesses.²¹ Thus, any restriction on the utilization of a person's skills should also be considered in light of the public interest to ensure that the public is not unduly deprived of such admirable skills.

The Court in the Nordenfelt case indicated that the public interest considerations may vary when considering restraint of trade clauses between a seller and purchaser of a business and restraint of trade clauses between an employer and an employee.

The reasoning of the Court was based on the extent of the freedom parties enjoy when entering into a business sale agreement as opposed to an employment contract (freedom of contract). In this regard, parties in a business sale agreement have greater flexibility in defining the terms of their relationship and exercise a lot more freedom in negotiating the terms by which they would want their relationship to be bound.

In the case of Leather Cloth Co. v. Lorsont,²² the Court explained the different public interest considerations when it held thus, “Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labour, skill, or talent, by any contract that he enters into. On the other hand, public policy also requires that when a man has by skill or by any other means obtained something which he wants to sell, he should be at liberty to sell it in the most advantageous way in the market, and in order to enable him to do so, it is necessary that he should be able to preclude himself from entering into competition with the purchaser. In such a case the same public policy that enables him to do that does not restrain him from alienating that which he wants to alienate, and, therefore, enables him to enter into any stipulation however restrictive it is, provided that restriction is reasonable, having regard to the subject matter of the contract”.²³

Essentially, even though the public stands to gain from the admirable skills a person possesses, it is also in the public interest that a person is not cheated in an unfair bargain. Thus when considering clauses in restraint of trade contained in a business sale agreement, the courts are likely to uphold them as reasonable no matter how extensive or restrictive they may be whereas similar terms contained in an employment contract may be held unenforceable having regard to the peculiar circumstances of each agreement.

Particularly in business sale agreements parties usually have a greater bargaining power such that the high price payable for the transaction may be influenced by the extensive nature of these clauses in restraint of trade. In such circumstances, it is in the public interest that a person is held accountable by the agreement to protect the integrity and sanctity of the entire sale transaction. On the other hand, parties in an employment contract, though free to contract do not have the same bargaining power. Unreasonable restraints of trade that restrict an employee's post-employment activities may open the floodgates to rendering employment contracts as contracts of servitude since an employee may feel bound to remain in the employer's service considering the extensive nature of the restrictions he may be required to comply with following the severance of the employment relationship; a phenomenon which cannot be encouraged in the public interest.

It is however imperative to note that, irrespective of whether the restraints relate to an employee or a seller of a business, the overarching principle is that the terms must seek to promote a legitimate business interest and must be reasonable between the parties and in the public interest.

Can Unreasonable Clauses in Restraint of Trade be Severed from the other Reasonable Provisions?

Another pertinent issue to be considered is whether an unenforceable or unreasonable portion of a restraint clause may be severed thus rendering an employee bound by the remainder of the agreement. The UK Supreme Court considered this issue in Tillman v Egon Zehnder Ltd  ²⁴  and espoused a tripartite test for severance of clauses in restraint of trade as follows:

1. The unenforceable provision must be capable of being removed without the need to add to or modify the remainder of the words (“the blue pencil test”);
2. The remaining terms must be supported by adequate consideration. The Court noted that this criterion could be ignored in the usual post-employment disputes; and
3. Finally, the removal of the unenforceable provision must not generate any major change in the overall effect of all the post-employment restraints in the contract.

Highly considered an employer-friendly decision, the Tillman case has clarified and outlined a clear criterion for assessing the enforceability of otherwise unenforceable restraint clauses. The implication of this decision is that terms embedded in restraint of trade clauses that are considered too wide or unreasonable may in appropriate circumstances, be severed thus rendering the other parts of the clause enforceable.

Remedies for Breach of Clauses in Restraint of Trade

It is a widely accepted principle that equity would not suffer a wrong to be without a remedy.²⁵ Generally, where a person breaches an agreement, the affected person has an inherent and equitable right to institute an action for damages as compensation for the harm or injury suffered by him.²⁶ An aggrieved party may also file an injunction to restrain the non-compliant party from further breach of the agreement.²⁷

The law affords similar remedies under the Protection Against Unfair Competition Act, 2000 (Act 589).

Section 5(1) of Act 589 provides:

The provision further provides that the disclosure, acquisition, or use of secret information by another person without the consent of the rightful owner may, in particular, result from a breach of a contract.²⁸

Pursuant to the provisions of Section 8(1),

1. an order of injunction to prevent the act or further acts of unfair competition;
2. a provisional order to prevent unlawful acts or to preserve relevant evidence;
3. the award of damages as compensation; and
4. any other remedy as the court may consider fit to order.

This notwithstanding, a person may also institute an action for the enforcement of his intellectual property rights²⁹.

Conclusion

Clauses in restraint of trade may be deemed a necessary evil for the protection of the interests and rights of employers or purchasers of a business following the severance of the business relationship. Although there is no specific legislative regime governing the enforceability or otherwise of these agreements, Ghanaian courts are likely to enforce such agreements provided the business interests sought to be protected are legitimate and reasonable between the parties and in the public interest.

Notwithstanding that in appropriate circumstances unenforceable terms may be severed thus rendering an employee bound by the remainder of the agreement, it is important that restraint clauses are meticulously and intricately crafted to ensure that the terms are reasonable. Ultimately, the enforceability of such agreements or clauses is keenly dependent on the peculiar facts of each case and may vary on a case-by-case basis.

Footnotes

1. Universal Declaration of Human Rights, G. A Res. 217A, U.N Doc A/810 (December 12, 1948), Art. 23(1)

2. International Covenant on Economic Social and Cultural Rights, 993 UNTS 3 (December 16, 1966)

3. Ibid, section 6(1)

4. Bhattacharjee, S. “Situating the Right to Work in International Human Rights Law: An Agenda for the Protection of Refugees and Asylum-Seekers”, (2013) 6 NUJS Law Review 41

page 43

5. Herbert Morris v Saxelby [1916] 1 AC 688

6. Practical Law Employment, ‘Restrictive Covenants in Employment Contracts (England and Wales)' (Practice Note, Practical Law) <https://uk.practicallaw.thomsonreuters.com/> accessed 25th September 2023

7. Ibid

8. Ibid at note 7

9. Ibid at note 7

10. Herbert Morris v Saxelby [1916] 1 AC 688

11. Ibid

12. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535; [1891-94] All ER 1

13. [1894] AC 535; [1891-94] All ER 1

14. [1916] 1 AC 688

15. [1920] 1 All ER 1227

16. [1978]1 All ER 1026

17. [1972]3 All ER 857

18. [1894] AC 535; [1891-94] All ER 1

19. [1916] 1 AC 688

20. [1972]3 All ER 857

21. Herbert Morris v Saxelby [1916] 1 AC 688

22. (1869) L.R. 9 Eq 345

23. Leather Cloth Co. v. Lorsont (1869) L.R. 9 Eq 345

24. [2019] UKSC 32

25. Ashby v White (1703) 92 ER 126

26. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

27. Lumley v Wagner (1852) 42 ER 687 High Court of Chancery; London & Blackwall Railway Co v Cross (1886) 31 Ch D 354; American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1

28. Protection Against Unfair Competition Act, 2000 (Act 589), Section 5(2)

29. Ibid, Section 8(2)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.