What are Restrictive Covenants?

Restrictive covenants are contractual provisions that impose limitations on a party's actions, which are often found in employment and property agreements.

The most common types of restrictive covenants include:

1. non-compete clauses, which prevent employees from working for competitors or starting similar businesses within a specific time and area after leaving a job;
2. non-solicitation clauses, which forbid former employees from poaching clients or colleagues; and
3. non-disclosure agreements, which protect confidential information.

From a real estate perspective, restrictive covenants might limit the use of a property, such as restricting certain developments or activities.

Why include a Restrictive Covenant?

These covenants are primarily used to protect legitimate business interests, such as safeguarding customer relationships, maintaining confidentiality, and preventing unfair competition. However, for a restrictive covenant to be enforceable, there are certain guidelines and limitations one must adhere to, and generally it is the Court which establish the latter, through its judgements.

Restrictive Covenants in the Maltese Context

Currently there is no specific law that caters for restrictive covenants in Malta between an employer and an employee. Whilst the loss suffered by the employer is a factor in determining whether the covenant is enforceable or not, in the case of non-compete clauses, very strong emphasis has been placed by the Maltese courts on whether the terms of the non-compete clause can be deemed to be fair or not.

Restrictive Covenants in Malta are guided by general legal principles, particularly those under Article 985 of the Maltese Civil Code, as further set out below. Naturally, the enforceability of such clauses is in the discretion of the Court. As a result, Maltese courts have provided thorough assessments of restrictive covenants, serving as guidelines as to what they shall include and what they shall be limited to. In this respect, most typical court cases concern employment contracts.

Legal Framework and Principles

According to Article 985 of the Maltese Civil Code, contracts must not contain clauses that are:

1. impossible,
2. prohibited by law,
3. or against public policy.

Selwyn’s Law of Employment establishes the principle that non-solicitation clauses shall be unenforceable if they extend to customers with whom the employee had no personal dealings.

In the Nordenfelt vs. Maxim Nordenfelt Guns and Ammunition Co. Ltd case[1], which was delivered by the UK House of Lords, it was emphasised that the restraints of trade are contrary to public policy unless they are justified by special circumstances. Conversely, the Maltese courts have adopted this principle, in order to ensure that any restraint placed is reasonable and in the public interest.

Maltese Jurisprudence

The Antonio Camilleri pro et noe vs Salvatore Sicurella case[2], highlighted the enforceability of restrictive covenants, especially with respect to non-compete clauses.

The court emphasised that such clauses must be reasonable, limited in scope, and time-bound, and should not infringe on public policy.

The Court highlighted that clauses restricting trade must be evaluated individually, with the burden to be placed on the employer to prove that the trade restriction is reasonable. Whilst at the outset, the Court held that jurisprudence indicates that post-termination restrictions on employees are generally upheld by the courts, it further explained that this may only be done if the employer can demonstrate that the restriction protects a legitimate business interest, is reasonable, legal, and grounded in employment law.

However, the court also held that whether or not a post-termination restriction is to be upheld, such determination must be carried out based on the specific circumstances of each case. Thus, if a restriction exceeds what is necessary to protect the employer's business interests, it will not be enforceable.

In determining the reasonableness of such clauses, the Court considered various factors, including:

1. the nature of the business,
2. the employee’s role, position, salary, duration of employment, and
3. the timing and scope of the restriction.

The Court of Appeal also affirmed that the clause must be equitable, benefiting both parties without disproportionately favouring one, as an imbalanced restriction could unjustly limit an employee's right to work, a fundamental human right protected by the Maltese Constitution.

The Eurosupplies Limited (C17473) vs Paul Tihn Case[3],and the Cutrico Services Limited vs Joseph Penza case,[4] reaffirmed the Court’s stance as was delivered in the Antonio Camilleri pro et noe vs Salvatore Sicurella case.

Courts’ Main Conclusions and Guidelines

Maltese courts consistently strive to balance employers' interests in protecting their business with the fundamental rights of employees, particularly the right to work. In determining the reasonableness of a restrictive covenant, the courts consider:

1. Reasonableness and Balance:

Restrictive covenants must be reasonable in terms of duration, geographic scope, and the nature of the restricted activity. They should balance the interests of the parties involved and avoid unduly restraining trade or an individual’s right to work.

2. Public Policy and Fairness:

Courts are cautious about upholding covenants that might be contrary to public policy or where they may be deemed as unfair. In fact, overly broad or oppressive covenants may be struck down or modified to align with principles of fairness and public interest.

3. Clarity and Specificity:

For a restrictive covenant to be enforceable, it must be clearly drafted and specific in its terms. The courts are wary of ambiguities, which can render a covenant unenforceable.

4. Employment Context:

In employment-related cases, the courts assess whether the covenant is necessary to protect legitimate business interests, such as trade secrets or customer relationships, while ensuring it does not unreasonably restrict the employee’s ability to earn a livelihood.

Judicial Flexibility

The Maltese courts, apart from penalising those who impose unlawful covenants or those who breach lawful ones, may choose to instead modify overly restrictive covenants to ensure they are reasonable, rather than invalidating them entirely, thereby preserving the enforceability of the covenant while respecting legal standards.

Conclusion

As has been demonstrated in this article, due to the lacuna in Maltese Law with reference to Restrictive Covenants, by referring to Maltese Jurisprudence, clear guidelines may be identified as to what constitutes a reasonable and enforceable restrictive covenant, emphasising the careful balancing act between business protection and individual rights.

Author: Dr Catriona Cuschieri

For guidance on the interpretation and drafting of Restrictive Covenants, please contact us at info@gtg.com.mt

You may also also be interested in reading the following articles:

When Can an Employee Sue their Employer Under Maltese Law?

Redundancy in Malta: Legal Framework, Specific Considerations, and Case Law

[1] ([1894] AC 535)

[2] 25^th May 2021,Court of Appeal in its Inferior Jurisdiction, 100/2018/1

[3] 30^th June 2021, Civil Court, First Hall, 482/2011

[4] 4^th May 2022, Court of Appeal