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- Non-compete protection laws; Partners & Shareholders in UAE
Non-compete protection laws; Partners & Shareholders in UAE
Kushagra Ashok Arora Partner, Mahmood Hussain Law Firm, Dubai
The United Arab Emirates has been building its reputation and infrastructure for the past decade to become the number one “go-to” country for new business. A variety of legal and economic reforms have been introduced over the past years to enhance its stance and attract foreign investments. However, questions on certain obstacles that may worry business owners and/or partners still exist. In the following article, Kushagra Ashok Arora, Partner at Mahmood Hussain Law Firm, provides and in-depth dive on the provisions of the law and their enforceability regarding one of these obstacles: non-compete protection.
A deep-dive into UAE laws for business partners and shareholders.
The United Arab Emirates (UAE), a global business centre, has over the past decade rapidly become a preferred country for business and professional pursuits. With a penchant for economic growth, the UAE has been at the forefront bringing in reforms, business and legal, which position the country as a favourable choice for business owners, professionals, and corporations.
Restrictive covenants relating to non-compete, confidentiality, and non-solicitation are a common practice in the UAE to safeguard sensitive trade details. Over the years, with encouragement and support, several changes in covenants and inclusion of restrictions have been made to indemnify the interests of all involved. Resultantly, the UAE has drawn in expatriates to work and build lives in this robust economy, making them a majority of the working populace.
While the UAE Labour Laws distinctly mention conditions of non-compete in an employment agreement, it’s only when backed with expertise and experience, can the various provisions in UAE laws that allow for these inclusion clauses for business partners and shareholders be explicated.
PROVISIONS OF LAW
The UAE Labour Laws and Civil Law Code provide measures to protect confidential information and strengthen enforcement of non-compete with employees, outside the scope of covenants. The implication, however, varies for employees and between business partners and shareholders.
UAE Labour Laws
Article 127 of the UAE Labour Law  states that:
“Where the work assigned to a worker allows him to become acquainted with the employer’s clients or to become familiar with the secrets of his business, the employer may require him to refrain, after the termination of his contract, from competing with the employer or participating in any enterprise that is in competition with the employer’s own business. Such agreement shall be valid only on condition that the worker is at least 21 years of age at the time the agreement is entered into and that the agreement is limited as to time, place and the nature of the business, to the extent necessary to safeguard the employer’s lawful interests.”
The provisions in Article 127 though safeguard the employees’ interests, they restrict the use of terms of non-compete through the following limitations:
- Minimum age of the employee must be 21 years for the non-compete agreement to be valid;
- Non-compete has to be limited with respect to geographical territory, time, nature of business; and
- Nature of business and information cannot be disclosed.
UAE Civil Code
Article 909 of UAE Civil Code  states that:
“If the work of the employee is such as to permit him to have access to work secrets or to make acquaintance with the customers of the business, it shall be permissible for both parties to agree that it shall not be permissible for the employee to compete with the employer or to engage in an employment which competes with him after the termination of the contract.” (2) “Provided that such agreement shall not be valid unless it is limited in time, place and type of work to such extent as may be necessary to protect the lawful interest of the employee”
Article 909 clearly states that Article circumstance where the employee has direct access to the company’s secrets - trade secrets and/or confidential information pertaining to customers, clients, partner, etc. – the employer can enter into a non-compete in order to protect their sensitive information. However, for the admissibility of such non-compete clause, following limitations must be considered to ensure enforceability:
- The non-compete has to be limited for a certain period of time;
- It has to be specific as to the geographic location;
- It has to be limited to the type of work and activity; and
- Nature of restrictions imposed & the nature of information that cannot be disclosed.
Under Article 910 of UAE Civil Code , the employer can also include a liability clause of a penalty as part of the covenant. Such a clause can specify a reasonable amount which will be payable upon breach of clause by the employee. However, the said clause can be deemed invalid in Court if the compensation is exorbitant.
UAE Penal Code
Even though a reference can be drawn from the aforesaid provisions, the said codes are not capable of enforcing the rights of business partners and shareholders in a similar fashion as they would for an employer.
It is here that we consider Article 379 of UAE Penal Code :-
“Shall be sentenced to detention for a minimum period of one year and/or to a minimum fine of twenty thousand dirhams, whoever by virtue of his profession, craft, position or art is entrusted with a secret and divulge it in cases other than those allowed by law or if used for his own personal interest or for the interest of another person, unless authorized by the confiding person to disclose or use it.
The penalty shall be imprisonment for a term not exceeding five years in case the perpetrator is a public servant or a person in charge of a public service who was confided the secret because or on the occasion of discharging his duties or performing his service”
Article 379 provides that any disclosure of confidential information by a professional in UAE is a potential crime. Even if protection of confidentiality falls outside of the covenant’s purview, it can still be enforced to protect one’s professional confidential information.
DIFC Contract Law, 2004
The application of the DIFC Contract Law is limited to the jurisdiction of Dubai International Financial Centre, which is exempt from a few Federal Laws.
Under Article 10 of the Contract Law, 2004, the binding nature of a contract has been defined as:
‘A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in this Law’.
As the said section is generically worded, we find that it is applicable to all contracts, including one between business partners and shareholders.
A non-compete between business partners and shareholders is further reinforced in Article 29 which discusses the duty of confidentiality, stating:
“Where information is expressly given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.”
With the above provisions under the DIFC law, business partners and shareholders can easily enter into a non-compete; as it is in the nature of a valid contract defined under Article 10. The enforceability is also governed by the express provisions of the Contract Law, 2004.
Commercial Companies Law :
In a limited liability company in the UAE, a foreigner is only a minority shareholder. Article 10 of the Commercial Companies Law of UAE categorically mentions any company established in the State shall have one or more UAE partners holding at least 51% of the share capital of the company.
The said law has several provisions which act as a non-compete and confidentiality clause amongst business partners and shareholder.
- Article 46 bars a joint partner from carrying out any activity competing with the activity of the company without the consent of other partners, either from his/her own or a third-party account. If he/she does so, they will be liable to pay to the company all such profits gained from such activity.
- Article 86 bars a manager of the company to undertake any management of a competing company or a company with objects similar to those of the company, without the consent of the General Assembly of the company. If it so happens, the manager is liable to pay compensation to the company.
- Article 111 binds the shareholders in a company to Articles of Association of the company. If the said Articles find mention of a non-compete, the shareholders are duly bound by the terms of the Association.
- Article 152 states that the related parties i.e. The Chairman and other members of the board of directors and the senior executive management of the company and working therein, and the companies in which any of such persons holds at least 30% of their share capital and subsidiary, associated or sister companies, shall not utilize the information in the possession of any of them due to its membership or occupation to achieve any interest for them or for others as a result of dealing in the securities of the company and any other transactions.
With a significantly strong legal infrastructure that works to protect all interests, it is paramount to understand that all rigorous restrictions in the contracts cannot be enforced in the courts of UAE. In order to enforce the contract, the business partner or employer must prove that the violation of the said non-compete have caused damages. Without effective evidence, the court may not entertain the plea.
The courts in UAE have the option to amend the said clause in case they are of the view that the same are unsuitable. At the time of enforcing the non-compete covenant, the court evaluates various parameters like value of information, amount of damages, among others to decide enforceability. Therefore, it is highly advisable that the covenants are framed tightly, to avoid any ambiguous interpretations.
LEVERAGING LAWS FOR STRONG PARTNERSHIPS
The strongly crafted covenants protect interests and prohibit anti-competitive activities. While the language provides a requirement for shareholders or partners to refrain from directly or indirectly competing with business of the enterprise/company, it also provides a blanket confidentiality covenant for information received by both parties. And finally, it provides for a non-solicitation clause, prohibiting shareholder/partners from soliciting for their own purpose and benefits, clients from the company/firm.
The legal infrastructure offers the canvas to make business holders’ and shareholders’ relationship conducive in the short and the long term, undoubtedly providing UAE a well-deserved reputation as a dynamic business environment. A non-compete agreement built with the right inference of existing UAE laws protects the interests and rights of both, the company and the partnership entities. Akin to the progressive nature of the UAE, its laws deal with the importance of confidential information through various provisions.
Author: Kushagra Ashok Arora, Partner, Mahmood Hussain Law Firm, Dubai
 Federal Law No 8, For 1980, On Regulation of Labour Relations.
 Federal Law No. 1 of 1987
 Federal Law No. 1 of 1987
 Federal Law No. 3 of 1987 (Penal Code)
 Federal Law No. 2 of 2015: Abrogating Federal Law No. 8/1983