Restriction in a Contract: Professional / Employment / Trade Freedom

13 March 2014

Companies and firms in Pakistan usually contain a non-compete clause in their agreements. The wording of such clause can range from restricting another company from partaking in competitive work while engaged with the restricting party to restricting an employee from working with a competing firm after resignation.

Is such a clause valid and enforceable in Pakistan?

Yes, provided that it is reasonable.

Although Section 27 of the Contract Act, 1872 provides that any agreement that restrains a person from exercising a lawful profession, trade or business is void to that extent; the courts in Pakistan have held that a restraint of trade clause or a non-compete clause in an agreement is valid and is not hit by Section 27 provided that it is “reasonable”.

The test then falls simply on the question of whether such clause is “reasonable” which is evaluated on a balance of probabilities and evidence.

The High Court of Sindh in Exide Pakistan Limited vs. Abdul Wadood, 2008 CLD 1258 (Karachi) provided that:

reasonableness of the clause will vary from case to case and will inter alia, depend upon the following:–

the extent of duration;

the extent of the geographical territory.

The case law in Pakistan, briefly, illustrates the following principles:

(1) The restraint of trade clause should only be aimed at protecting interest of the employer and not aimed at penalizing the employee or causing him inconvenience.

(2) The clause should not be vague and generalized but should be rather specific.

(3) The clause shall only be the applicable to the particular type of business in which the employer is actually engaged in and not to any business activity in which the employer would possibly engage in the future.

(4) The restriction cannot be termed to be unreasonable as to time and scope i.e. “for eleven (11) months in XYZ Company”. By such covenant the defendant is not restrained from getting employment in an organization other than XYZ Company which is neither fair nor reasonable (see, Al-Abid Silk Mills Limited vs. Syed Mudassar Rizvi, 2003 MLD 1947 (Karachi)).

(5) A restriction may be placed as a form of good-will on the part of an ex-employee and to protect the ex-employer from having to compromise the fruits of his business because an ex-employee has opened up a competitive business in the same neighbourhood (see, generally, Shabih Haider Zaidi vs. Muhammad Zahoor Uddin, 2001 CLC 69 (Karachi)).

(6) In global contracts, incorporation of a restraint clause cannot be said to be hit by doctrine of restraint of trade, provided it is reasonable, on equal bargaining strength, is not unilateral and operates during the currency of the agreement (see, generally, Pak China Chemicals vs. Department of Plant Protection, 2006 CLD 210 (Lahore)).

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com