Non-compete clauses in Cyprus: void unless the law saves them

An employee hands in notice and is reminded of a clause: no work for a competitor, anywhere in Cyprus, for two years. A buyer pays for a business and wants the seller to stay out of the market. Cyprus law answers both differently from the precedents that many such clauses are copied from.

The answer comes from section 27 of the Contract Law, Cap. 149. It makes an agreement void to the extent that it restrains anyone from exercising a lawful profession, trade or business, and saves three kinds of restraint: one for the seller of a business's goodwill and two for partners. Everything else is void to that extent, however reasonable it looks. An employer who wants protection has to build it from other materials.

A restraint is void unless an exception saves it

Cyprus law does not ask whether a non-compete is reasonable. It asks whether the clause falls within an exception. Section 27(1) provides that every agreement, to the extent that it restrains the freedom to exercise a lawful profession, trade or business of any kind, is void. Section 27(2) lists the only agreements that escape.

The Supreme Court settled the approach in Prokopis Symeonides and Others v. Karabet Kalaydjian (V15) 1 CLR 90, decided in 1937 on section 27 of the Contract Law of 1930, which also voided restraints "to that extent" subject to three exceptions. Ice manufacturers in Nicosia and in Limassol had agreed, until the end of November 1935, not to send ice to each other's town. The District Court enforced the agreement; the Supreme Court held it void.

Thomas J noted that under English law an agreement in restraint of trade is valid if it is reasonable between the parties and not injurious to the public, and continued: "The law in Cyprus knows no such distinction, and renders void any agreement in restraint of trade except in three cases set out in sub-section 2 of section 27." He adopted a commentary's statement of the test: "To escape the prohibition, it is not enough to show that the restraint created by an agreement is partial, and not general; it must be distinctly brought within one of the exceptions."

A restraint limited to two towns and four months was still void, because it fitted no exception.

The judgment also disposes of a common argument. The direction that the Law is interpreted according to the principles of legal interpretation obtaining in England, now in section 2(1) of Cap. 149, does not import the English law of restraint of trade: construing the same direction in the 1930 Law, Thomas J said that interpretation according to the principles of English law and according to the principles of legal interpretation is "a very different thing". A clause copied from an English precedent rests on rules Cyprus did not adopt.

Employees: the clause that applies after you leave

A promise by an employee not to work for a competitor, or not to set up in competition, after leaving restrains the exercise of a profession or trade, and none of the exceptions in section 27(2) concerns employment. On the words of the section and the reasoning in Symeonides, such a clause is void to the extent of the restraint, and confining it to one year or one district does not bring it within an exception.

An employer holding such a clause may also find that the court will not stop the employee working while the dispute is decided. In Logicom Solutions Ltd v. G. Ch., Action 400/22, the contract forbade a senior employee, during the employment and for two years after it, to work for any competitor, client or supplier of the employer. On 30 August 2022 the District Court of Nicosia set aside the interim orders the employer had obtained without notice. It left the validity of the clause for the trial, but held that the alleged loss could be compensated in money, and that the hardship to an employee unable to work where he wished was much greater than the employer's.

That does not free an employee from the rest of the contract: promises about clients and confidential information are tested separately. Our employment practice acts for employers and employees on contracts of this kind.

While the job lasts, the position is different

During the employment, working for a competitor against the employer's interests can justify dismissal, but a blanket ban on outside work is not allowed. In Antenna Ltd v. Konstantinos Konstantinou (2010) 1 A.A.D. 392 the Supreme Court said that providing services to a competing business in a way that conflicts with the company's interests would without doubt be a justified and lawful ground for dismissal. The employer still lost, because it had not proved that the employee had done so.

Section 16 of Law 25(I)/2023 now sets the limits. An employer may not prohibit an employee from working for other employers outside the hours fixed in the contract, or treat the employee adversely for doing so. It may restrict parallel employment at recruitment, by setting out in writing specific objective reasons connected with health and safety, the protection of business confidentiality, the integrity of the public sector or the avoidance of conflicts of interest. Our article on Law 25(I)/2023 covers the rest of that Law.

Clients and confidential information are a different question

A promise not to poach clients, or not to use the employer's confidential information, does not stop anyone working, and the courts have treated it differently from a ban on competing.

In Hydrotech (Water and Environmental Engineering) Ltd v. Ioannides and Another, Action 4419/10, a manager had agreed that for eighteen months after leaving he would not interfere with, visit or otherwise influence the employer's clients in order to draw them away. While still employed he formed a company doing the same work. Soon after leaving he put in a proposal through it to a client of the employer, for a project whose agreement he had prepared on the employer's behalf, and his company won the work. On 30 November 2015 the District Court of Limassol rejected the argument that the clause was void, holding that it had no relation to the restriction in section 27(1), and awarded the employer its lost profit against him and his company. It is a first-instance judgment, and an appeal was lodged against it in January 2016.

The same line was drawn at the interim stage in Eurofast Ltd v. Kasapi and Another, Action 115/19. On 4 July 2019 the District Court of Nicosia kept in force orders forbidding a former audit manager to use the employer's confidential information or to approach its clients in order to draw them away, but refused an order that he have no dealings at all with the clients he had handled, because it would interfere drastically with his ability to work in his field.

The statutory protection is Law 164(I)/2020, on trade secrets. Under section 2, information qualifies if it is secret, in the sense that it is not generally known among or readily accessible to people who normally deal with that kind of information; has commercial value because it is secret; and has been the subject of reasonable steps, in the circumstances, to keep it secret. Section 5 treats as unlawful its acquisition without the holder's consent by unauthorised access to or copying of the files that contain it, and addresses use or disclosure in breach of a confidentiality agreement. The court may stop the use or disclosure, on an interim basis under section 10 and finally under section 13, and award damages under section 16, although section 16(2) limits the liability of an employee who acted without intent.

The same Law protects the employee's side. Section 3(3) provides that it does not justify restricting an employee's use of information that is not a trade secret, or of experience and skills lawfully acquired in the normal course of the work, or imposing through employment contracts restrictions beyond those provided for by law.

Selling a business: the goodwill exception

A buyer can take an enforceable promise not to compete from the seller, but only in the shape section 27(2)(a) allows. The person who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits, for the period during which the buyer, or a person deriving title to the goodwill from the buyer, carries on a similar business within those limits, provided the court considers the limits reasonable having regard to the nature of the business.

Each element matters in the drafting: a sale of goodwill, stated local limits, a period tied to the buyer's continuing business, and limits the court will find reasonable. In Kimon Tutorial Centre (Private Tutorials) Ltd v. Elli Gavriel (1998) 1 A.A.D. 2069, an appeal about the appointment of an arbitrator under an agreement for the sale of a business, the Supreme Court observed that where the agreement has the sale of goodwill as its object, the restraint is tolerated if the court finds it reasonable.

Share deals need particular care. The exception speaks of the person who sells the goodwill of a business; a seller of shares sells shares, and the goodwill stays with the company, so the words of the section do not by themselves settle whether a share seller's covenant fits. In Peristeronopighi Transport Co. Ltd v. Toumazou (1970) 1 CLR 196 an article forbidding a bus company's members to carry on any competing business was held void under section 27(1) by the District Court of Famagusta. The Supreme Court decided the appeal on another ground, "leaving the legal aspect of the question entirely open to argument, if raised in another case". A buyer of shares should have the covenant drafted around the goodwill being acquired, and the structure of the deal considered with it. Our corporate and commercial practice prepares and reviews the sale and purchase agreements in which these covenants sit.

Partners: during the partnership and when it ends

Partners have two exceptions of their own. Under section 27(2)(c), partners may agree that, while the partnership continues, some or all of them will not carry on any business other than that of the partnership. Under section 27(2)(b), on or in anticipation of the dissolution of a general or limited partnership, they may agree that some or all of them will not carry on a similar business within local limits of the kind the goodwill exception describes.

The Partnerships and Business Names Law, Cap. 116, adds a duty that needs no agreement. Under section 32, a partner who, without the consent of the other partners, carries on a business of the same nature as the firm's and competing with it must account for and pay to the firm all the profits made from it. Section 31(1) requires every partner to account for any benefit derived, without that consent, from any use of the partnership's property, name or business connection.

These rules are for partnerships. Under section 5(2) of Cap. 116, the relation between members of a company registered as a limited company is not a partnership within the meaning of that Law.

The restraint is void only to its extent

A void restraint does not, of itself, bring down the contract around it. Section 27(1) voids an agreement only to the extent that it restrains, and in Kimon Tutorial Centre the Supreme Court said in passing that the invalidity is confined to the part of the contract affected. It also held that an arbitration clause survives, save in exceptional cases, even where the contract is void for illegality. For an employee, the clause that cannot stop you working sits beside terms that may still bind you; for a buyer, a covenant drafted outside the exception may leave the business without the protection the price assumed.

What this means in practice

Employers: protect what the law protects. A ban on working for a competitor after the employment ends fits none of the exceptions. The promises enforced in the decisions above concern clients and confidential information, and Law 164(I)/2020 protects only information kept secret by reasonable steps. Draft those clauses precisely, and keep a record of the steps. Restrictions on outside work during the employment belong in writing at recruitment, with reasons that fit section 16 of Law 25(I)/2023.

Employees: separate the clauses before deciding anything. A non-compete alone is unlikely to stop you working, but a promise about clients or confidential information is tested on its own terms. Do not take files when you leave: copying documents that contain a trade secret without authorisation is unlawful acquisition under section 5 of Law 164(I)/2020.

Buyers and sellers: build the covenant on the goodwill. Section 27(2)(a) protects the buyer of goodwill, within stated local limits that the court considers reasonable, for as long as the buyer carries on a similar business there. In a share deal, decide the covenant and the structure together.

Partners: agree the terms at or before dissolution. While the partnership lasts, section 32 of Cap. 116 already makes a competing partner account for the profits.

Questions we are asked

Sources

• Contract Law, Cap. 149, consolidated text, sections 2(1) and 27, CyLaw
• Partnerships and Business Names Law, Cap. 116, consolidated text, sections 5, 31 and 32, CyLaw
• Transparent and Predictable Working Conditions Law of 2023, 25(I)/2023, consolidated text, section 16, CyLaw
• Trade Secrets Law of 2020, 164(I)/2020, consolidated text, sections 2, 3, 5, 10, 13 and 16, CyLaw
• Prokopis Symeonides and Others v. Karabet Kalaydjian (V15) 1 CLR 90, Appeal No. 3567, Supreme Court of Cyprus, 13 April 1937
• Kimon Tutorial Centre (Private Tutorials) Ltd v. Elli Gavriel (1998) 1 A.A.D. 2069, Civil Appeal 9725, Supreme Court of Cyprus, 11 November 1998
• Peristeronopighi Transport Co. Ltd v. Toumazos Th. Toumazou (1970) 1 CLR 196, Civil Appeal 4868, Supreme Court of Cyprus, 19 June 1970
• Antenna Ltd v. Konstantinos Konstantinou (2010) 1 A.A.D. 392, Civil Appeal 297/2007, Supreme Court of Cyprus, 19 March 2010
• Hydrotech (Water and Environmental Engineering) Ltd v. Ioannides and Another, Action 4419/10, District Court of Limassol, 30 November 2015
• Eurofast Ltd v. Kasapi and Another, Action 115/19, District Court of Nicosia, interim decision, 4 July 2019
• Logicom Solutions Ltd v. G. Ch., Action 400/22, District Court of Nicosia, interim decision, 30 August 2022

This article is provided for general information purposes only and does not constitute legal advice.

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