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Enforceability of Non-Competition Clauses under UAE Law

Guiding Principle
The law of the United Arab Emirates generally acknowledges the possibility to agree on non-competition clauses in employment contracts as long as its contents complies with the principles of the UAE-Labour Law (= “UAE-LL”), Federal Law No. 8 of 1980 (as amended) and the UAE-Civil Code (= “UAE-CC”), Federal Law No. 5 of 1985. However, the clauses may not always be enforceable subject to over-riding considerations of public policy.

1. Conditions of a non-competition clause under UAE law
Art.127 UAE-LL serves as a guideline for the application of a non-competition clause in employment contracts and reads as follows:

“If the job allotted to the employee allows him to know the employer’s clients or to know the secrets of the job, the employer may stipulate that after the end of this contract, the employee shall not compete with him or share in any competing project.” The employee has to be 21 years old or over at the time of signing the contract for this agreement to be legal. The agreement shall be, as far as time, place and nature of work are concerned, limited to what is necessary to protect the legal interest of the employer.”

Save any further explicit regulations in the UAE-LL as “lex specialis”, also the provisions as included in the UAE Civil Code, in particular Art. 897-923 UAE-CC relating to “Contracts of Employment” may be applied.

Art.909 UAE-CC mirrors the contents of Art.127 UAE-LL, and refers to three essential conditions for the admissibility of a non-competition clause apply in employment contracts. As far as a non-competition clause is required to serve to protect the legal interests of the employer the clause must
* be limited for a certain period of time;
* be specific as to the place and area of work; and
* limited to the type of work and activity,
in order to be valid and enforceable.

Non-competition clauses in the UAE can be agreed on if the employee in the course of his occupation is acquainted with and/or has direct access to company secrets i.e. trade secrets of the employer and/or other confidential information on customers, clients, partners and other persons, companies or authorities, which have direct or indirect relations with the employer[1] .

This includes as well, although not expressly stated, not to canvass the customers of the old employer or to work for a customer who is a direct competitor of an employer.

2. Validity of a Non-competition clause
Hence, a non-competition clause usually may be considered valid and effective if it complies with the above requirements. However, in case of a dispute before a UAE court the court generally will evaluate the circumstances of each case, e.g. the value of information available to the employee, the importance of his role and seniority within the company and the damage to the company. Based on such evaluation a non-competition clause may still be found to be invalid in cases where for example the amount of compensation payable in case of violation of the non-competition clause included in the labor contract is fixed at an exorbitantly high amount and the employee therefore will be forced to remain with the old employer, Art.910 UAE CC.

Similarly, if the employer terminates the employee without giving a reason or the employer committed an act, which would justify a termination of the employee, the non-competition clause does not apply and is ineffective, Art.909 UAE CC.

The employer may also not rely on the non-competition clause, if the employee transferred to the new employer with his knowledge and possibly his assistance. If, for example, a certificate of non-objection was issued to the employee to facilitate the official transfer to the new employer, the old employer cannot refer to the non-competition clause.

For the non-competition clause to be effective, it is therefore not only relevant to comply with the legal requirements in the drafting of its wording but it is also equally important when and how the employer got notice and gained knowledge of the transfer of the employee to the new employer[2].

Concerning the timely limitation, a reasonable duration for a non-competition clause normally ranges between 3 months to 2 years from the date of termination of the employment contract. In the past, it was often held that the (previous) automatic employment ban of 6 months after termination have a similar effect as a non-competition clause i.e. preventing the employee to enter the country during this time; hence, it was concluded that a specific non-competition clauses included in the employment agreement should only be limited to 6 months as well.

Based on the above it can be held that non-competition clauses must be “reasonable” to be enforceable and are more likely to be upheld by UAE courts if the geographical range is quite small, the duration is short and the type of work is specified. The clause cannot be used merely as a means to prevent the movement of the employee to another company and is more likely to be accepted if it is restricted solicit the former employer’s customers. This always provided, however, that reason of the non-competition clause is an underlying desire to protect a genuine business interest and the restriction is not being used simply to prevent competition.

3. Enforceability of non-competition clause i.e. claim for damages:
Concerning the claim for damages, the conclusion of a crucial decision of the Supreme Court Dubai was that an employer indeed has the right to demand compensation for damages. In the relevant case, the employee took on a new working relationship with a direct competitor in breach of the non-compete period within 2 years after leaving the former employee. However, it was also held that compensation can be awarded, and thus was denied in this procedure, only if the employer can provide evidence that they indeed incurred the damages in the claimed amount.[3] The onus of proof lies with the employer.

Occasionally employers claim that the employee has agreed to the payment of so-called “liquidates damages” i.e. a fixed sum in the event of a breach. In such event, the proof of damages is not supposed to be required and the employer is entitled to the contractually fixed amount (as long as it is reasonable). However, in practice the court will always request the employer to demonstrate actual damages even if a fixed amount as compensation was agreed on. Furthermore, the employee has the possibility to provide evidence to the contrary; i.e. he can in turn demonstrate, that no damage was or could have occurred and if evident, no compensation will be awarded.

In a case before the Court of Cassation the court stated that “Although the workers did indeed violate the non-competition clause there is no damage to the employer. The documents presented in the proceedings did not produce enough substantial evidence to award damages and thus the case should be dismissed and the claim for payment from the non-compete obligation should be rejected.”[4]

4. Result:
In judicial practice it is therefore extremely difficult to enforce payment of a non-compete obligation if no specific and definite damages can be proven. In most cases the courts and its judges in this respect rely solely on the findings of an expert or experts and if in doubt rather tend to conclude that the evidence was not sufficient to evidence the claimed damages.

Although some decisions rendered in the past have clearly confirmed
– that generally the employer can exercise his claims arising from a non-competition clause (as per the context specified in the clause and provided that the period does not exceed 2 years); and
– that employee (in the relevant cases)); actually violated the non-competition clause
no compensation was in fact awarded in any of the previously decided cases. In none of the known court cases or those quoted in the literature, the courts did see sufficient evidence to confirm a claim.

Presumably, the tendency of the courts, particularly the courts of first and second instance, will not change unless the Court of Cassation renders a decision, where it is decided that enough evidence was presented to positively confirm a claim of an employer for damages,.

[1] Dubai Court of Cassation, Petition No. 105/2008, judgement of 30.08.2009; Dubai Court of Cassation, Petition No. 87/2008, judgment of 22.12.2008

[2] Dubai Court of Cassation, Petition No. 105/2008, judgement of 30.08.2009; Dubai Court of Cassation, Petition No. 87/2008, judgment of 22.12.2008

[3] Dubai Court of Cassation, Petition NO. 58/2008, judgment of 28.09.2008

[4] Dubai Court of Cassation, Petition No. 122/2006, judgment of 17.12.2006

April, 2016 Elena Schildgen
Meyer-Reumann & Partners, Dubai Office
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