What are non-compete clauses?

A non-compete, also known as a noncompetion agreement is an agreement where one party promises not to engage in conduct that would increase competition for the other party for a specific period of time. Such conduct may include;

A non-compete clause is often found in an employment contract and can have effect either during the term of the employment, post-termination, or both.

What is the legal framework governing non-compete clauses?

Non-compete clauses have for long been generally governed by the general principles of contract law that are outlined in the Contracts Act, Cap 298. The Act under Sect. 21(1) provides that any agreement that restrains a person from exercising a lawful profession, trade, or business of any kind is void to the extent that it imposes an unreasonable restraint. However, there are exceptions where such restraints are considered reasonable in respect of the parties concerned and in respect of the public, therefore, they would be enforceable.

The Competition Act, Cap. 66 was also recently enacted. This Act does not specifically prohibit non-compete clauses in employment agreements or sale of business contracts but rather it focuses on prohibiting anti-competitive practices and agreements that have an adverse effect on competition in the market. Under Section 9, the prohibition is on anti-competitive practices and agreements, particularly those that:

a) Fix purchase or selling prices
b) Limit or control production, supply, markets, technical development, or investment
c) Share markets or sources of production supply
d) Involve bid-rigging or collusive tendering

These are often referred to as “horizontal agreements” when they occur between competitors at the same level of the market, and “vertical agreements” when they occur between entities at different levels of the production or distribution chain.

Non-compete clauses in employment agreements or sale of business agreements do not fall under the specific categories of prohibited agreements outlined in the Act unless they lead to anti-competitive effects in the market, such as significantly restricting competition or creating barriers to entry for new competitors.

What is the enforceability of non-compete clauses?

The enforceability of these clauses in Uganda is on a case-to-case basis but largely depends on their reasonableness. Courts may generally assess the reasonableness of a non-compete clause based on three main factors:

a) Duration: The length of time for which the restriction is to apply must be reasonable. Clauses that impose overly long restrictions may be deemed unenforceable.

b) Geographical Scope: The area within which the restriction applies should be reasonable and not overly broad. A clause that restricts competition across an entire country may be excessive unless justified by the nature of the business.

c) Interests Protected: The non-compete clause must protect a legitimate business interest, such as trade secrets, confidential information, or client relationships. Courts are more likely to enforce a clause if it is designed to protect such interests.

What are the key considerations for drafting effective non-compete clauses?

When drafting non-compete clauses, it is crucial to strike a balance between protecting the legitimate interests of the employer or business and respecting the rights of the employee or business partner. The following should be considered;

What are the associated challenges and limitations?

While useful, non-compete clauses present certain challenges and limitations. They are mostly seen as a barrier to employment and business opportunities, and there is a risk that overly restrictive clauses could be deemed unenforceable.

Additionally, the evolving nature of business and technology can make it difficult to predict what constitutes reasonable restrictions in the future and as they say, a good non-compete clause is as good as its limits.

Conclusion

As in other jurisdictions, non-compete clauses are an important tool for protecting business interests in Uganda. However, they must be carefully drafted to ensure they are enforceable. It’s essential for parties to seek legal advice when entering into agreements containing non-compete clauses. This ensures that their interests adequately protected and that the clauses comply with Ugandan law.

DISCLAIMER: This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice. For any further information or advice relating to this article, please contact us.