Terminating Labour Contracts: Restrictive Covenants

Many companies require their employees to sign confidentiality  agreements and labour contracts that include restrictions on the right of employees to reveal confidential information or to work in competing companies for a period of time after they leave the company. The legality of these restrictive covenants has been a source of concern, and has resulted in a number of court cases. While courts have reached different conclusions based on similar facts, some general principles are beginning to emerge based on national and local regulations and judicial practice.

A Typical Case

Mr Li was a director and assistant to the general manager of a food product joint venture (the JV) from February 1989 until November 1991. When hired, Mr Li signed a confidentiality agreement, which was notarized. The agreement prohibited Mr Li from revealing confidential information about the JV while employed by the JV, and from working for a company that produces similar or competitive products for a period of two years after termination of employment at the JV.

In December 1991, Mr Li left the JV when his contract expired to become the deputy general manager of another food company (Company B). In April 1992, Company B began to produce chocolate products similar in content and packaging to the JV's products. When the JV found out about these products, it sued Mr Li, requesting inter alia that the court order Mr Li to abide by the terms of the confidentiality agreement.1