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Thou Shalt Not: Restrictive Covenants And Their Enforceability

Restrictive covenants are contractual agreements that serve to prevent individuals from doing or saying certain things by virtue of their relationship with another party. They come up primarily (but not solely) in the context of employment or services agreements and govern behavior both during and after the termination of such agreements. Restrictive agreements are commonplace and often enforced by courts, so should therefore never be ignored.

Companies utilize such provisions to protect the confidentiality of their proprietary information, the stability of their workforce, and to guard their relationships with their customers or clients. It’s not uncommon for some employees who know they’ll be leaving to leverage those assets to their advantage and the former employer’s detriment. Companies around the world have been known to seek redress in the courts in such instances, often resulting in monetary damages and injunctions.

Common examples of restrictive covenants are those preventing the misuse or disclosure of any confidential or proprietary information derived during the course of the relationship, including intellectual property rights and other know-how. Other examples might be a non-solicitation clause, which seeks to prevent a former employee from persuading clients to move their business away from the company after the employee leaves his or her present position and follow them over to the employee’s new company, or a non-employment or non-poaching clause preventing former employees from actively recruiting former colleagues into their new company, or even just passively persuading them to join the new business.

Perhaps the most common and controversial restrictive covenant is a so-called non-compete clause that seeks to prevent an employee from simply taking up any other role that might in any way compete with the company or the position in which they are presently employed. These are the usually the most sensitive provisions for courts to deal with simply because they strike at the heart of one’s ability to make a living for oneself. Public policy in most any jurisdiction encourages that opportunity due to the greater ancillary and overall societal benefits resulting from more market participants.

In order to be enforceable, a restrictive covenant must therefore be reasonable in its scope and application, and grounded in a legitimate, legally defensible and necessary business principle. A company’s relationships with its customers, clients, and suppliers, its confidential information, and the stability of its workforce all past this test, yet the clause(s) must be carefully written and narrowly construed in order not be considered an unlawful restraint of trade. Some jurisdictions, for example, may even prohibit non-competition clauses outright, yet allow other types of restrictive covenants, simply as a matter of public policy.

For example, the period(s) of time referenced in the covenants have to be reasonable in order to be enforceable, particularly in the case of non-compete clauses. The precise amount of time will vary depending not only on the jurisdiction but also on the level of seniority that the former employee held in the previous workplace, or their access to certain levels of information. Generally speaking, in most jurisdictions it’s probably hard to enforce a non-compete clause against most people for more than twelve months, although Thailand, for example, recognizes their validity for up to twenty-four months after the termination of an employment relationship. The geographic scope of the restriction is also another factor for consideration, the likelihood being that preventing someone from working in another part of the country becomes more challenging as distances increase.

Another test of reasonability, and therefore enforceability, will be whether the terms of the restriction align with the parties’ circumstances. Did the person at issue even have access to confidential information, or direct contact with any outside clients or suppliers? Were they at a very senior level, or were they what some jurisdictions define as a low-income worker? Conversely, if the employee was previously a highly visible C-suite manager, it’s probably not reasonable to prohibit them from working at an entirely lower level at another company. Restrictive covenants that are held by courts to be unreasonable will typically be voided and dismissed as unenforceable.

So, what can you do if you’re presented with a contract containing one or more restrictive covenants? You can always, on your own accord, request amendments to (or the deletion of) those clauses. That said, restrictive covenants are fairly commonplace and enforceable so it may be that such requests will fall on deaf ears, or prompt a withdrawal of the contract altogether. If at some point thereafter you plan to leave the relationship to join a competitor, or to start your own competing operations, you should probably seek advice to ensure your proper understanding on the covenants’ interpretation, how they may affect you, and steps you can take to minimize associated risks, including negotiated exclusions or so-called “carve-outs” allowing otherwise restricted activities. Alternatively, certain parties may determine for any number of reasons that in their particular situation an opportunity exceeds a risk, and elect on balance to ignore the restriction in the hopes of not getting caught.

In Thailand, restrictive covenants are legally permissible and enforceable, subject to various provisions of the Civil and Commercial Code, the Unfair Contract Terms Act B.E. 2540 (1997), the Labour Protection Act B.E. 2541 (1998), and the Trade Competition Act B.E. 2560 (2017). All of the foregoing types of restrictions discussed above are therefore commonplace in locally executed employment and services agreements. Whether you’re a company looking to protect your assets and minimize your risk, or an individual looking to protect your competitiveness and maximize your freedom, take the time to have your contracts properly drafted or reviewed by a qualified advisor.

(c) 2023 Frank Rittman

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