The Court of Appeal, presided over by Madam Justice Edwina Grima, in the case Mark Bugeja et pro et noe versus Mellyora Grech, on May 27, 2015, held, among others things, that a penalty clause in an employment contract which imposed pre-liquidated damages did not fall under article 19 of the Employment and Industrial Relations Act and that the concepts of a ‘fine’ and of a ‘contractual penalty’ are different in an employment scenario.

Mark Bugeja, as an employer, filed a lawsuit against Mellyora Grima in the Court of Magistrates requesting the court to order the former employee to pay the sum of €4,658.75 (Lm2,000) as required by clause 7.5 of her employment contract.

Clause 7.5 of the contract stated that “the employee cannot take up employment for a minimum period of two years after date of termination of employment with the firm, with any person, firm or company who for two years prior to termination of this agreement were clients of the firm. In such case, the parties agree that the employee will pay the firm by way of agreed damages the sum of Lm 2,000”.

Bugeja claimed that Grima became an employee of an entity which was a client of the company with which she was formerly employed.

Grima pleaded that clause 7.5 infringed article 19 of the Employment and Industrial Relations Act (the EIRA). She alleged that clause 7.5 also breached article 985 of the Civil Code.

She submitted that, in a number of judgments, the courts held that restrictions imposed on former employees which are generic, last for a long period of time and which are in restraint of trade are null and, consequently, the restriction imposed by her employer in clause 7.5 were null.

She also pleaded that the defendant could not negotiate the contract with the plaintiffs because they adopted a ‘take it or leave it’ approach.

The Court of Magistrates accepted the defendant’s first plea and declared that clause 7.5 was in breach of public policy and consequently, invalid.

The company appealed on the following grounds:

• the Court of Magistrates was wrong when it decided that clause 7.5 infringed article 19, EIRA; and

• clause 7.5 was not ‘in restraint of trade’ and it could have been incorporated in the contract.

The Court of Appeal noted that Grima had entered into the contract with the company on December 20, 2004. She resigned on July 23, 2008, and got a job with the Malta Financial Services Authority (MFSA), which was Bugeja’s client. Bugeja felt that Grima breached clause 7.5 so the company took action to make the former employee pay the damages agreed to in clause 7.5 in the event of a breach.

The Court of Magistrates had rejected the Bugeja’s request on the basis of article 19, of the EIRA. It held that, in order to include a penalty clause in an employment contract, the employers were obliged by article 19 of the EIRA to obtain authorisation from the director of employment and industrial relations. Such authorisation was not requested and clause 7.5 was invalid.

In its appeal, the company alleged that clause 7.5 imposes pre-liquidated damages, and not penalties as contemplated in article 19 of the EIRA. So article 19 did not apply.

Furthermore, the company contended that clause 7.5 was not in restraint of trade.

Article 19, EIRA states that “where (a) the terms of any written contract of service signed by the employees or the terms of a written statement signed by an employer in accordance with article 7 specify in detail the fine or fines to which the employee may become liable in respect of an act or omission; and (b) the terms of any such contract or the terms of any such statement have been previously approved by the director, it shall be lawful for the employer to make such deductions as may be authorised by such contract or such written statement”.

The Court of Appeal did not consider the clause to be unreasonable because the defendant was only prohibited from working for her former employer’s client for a limited period of time following termination of employment with the company

The Court of Appeal observed that the Magistrates Court relied heavily on the judgment Mark Bugeja et noe v Geoffrey Camilleri (March 29, 2012, Court of Appeal) wherein the court held that penalty clauses attached to the breach of a restraint of trade clause fell within the definition of a ‘fine’, and thus required the approval of the director of employment and industrial relations for validity in terms of the EIRA. It decided that clauses which were similar to clause 7.5 fell within the parameters of article 19, EIRA and, therefore, the director’s authorisation had to be obtained.

The Court of Magistrates had also concluded that, since clause 7.5 fell under article 19 of the EIRA, the plaintiffs were obliged to obtain the director’s authorisation but such authorisation was not requested and so the contract went contrary to public order because it was in restraint of trade and was consequently invalid.

The Court of Appeal noted that, in Mark Bugeja et noe v Geoffrey Camilleri, the plaintiffs had filed an application for a procedure in terms of Maltese law for the case to be heard again, based on the premise that the Court of Appeal applied the wrong law (also known as retrial).

The Court of Appeal had upheld the plaintiffs’ application for retrial and on June 28, 2013, it held that the penalty clause in question did not fall under article 19 of the EIRA and that the concepts of a ‘fine’and of a ‘contractual penalty’ are different in an employment scenario. Consequently, there was no need to obtain the director’s consent.

In the case against Grima, the Court of Appeal followed the same line of reasoning and held that clause 7.5 did not fall under article 19. So it accepted the plaintiffs’ first ground of appeal that article 19 of the EIRA did not apply.

Then the Court of Appeal focused on the second ground of appeal that the contract was in restraint of trade.

It referred to Joseph Xerri nomine v Brian Clarke (July 31, 1969, Commercial Court) wherein it was held that “it may safely be asserted that if clauses in restraint of trade may be impugned at all – and they certainly can in deserving cases – the heading under which an exercise of this sort may be attempted is section 1028 [today known as article 985] of the Civil Code which provides that things which are impossible, or prohibited by law, or contrary to morality, or to public policy, may not be the subject matter of a contract.”

In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd (1894, House of Lords) and other judgments it was held that:

• All restraints of trade, in the absence of justifying circumstances, are contrary to public policy and therefore void;

• A restraint can only be justified if it is reasonable (a) in the interests of the contracting parties, and (b) in the interests of the public;

• The onus of showing that a restraint is reasonable between the parties rests upon the person alleging that it is so... The onus of showing that, nothwithstanding that a covenant is reasonable between the parties, it is nevertheless injurious to the public interest and therefore void, rests upon the party alleging it to be so... But once the agreement is before the court it is open to scrutiny in all its surrounding circumstances as a question of law.

The author, Norman Selwyn, states that “there are four legitimate interests in respect of which the employer is entitled to limited protection, namely (a) trade secrets and confidential information, (b) existing customers and connections, (c) working for competitors, and (d) enticing existing employees”.

Clause 7.5 was not “in restraint of trade” because the condition imposed was reasonable and it was imposed for a limited period of time. The condition also discouraged employees from getting a job with a client of the company because the client could be a competitor.

The Court of Appeal did not consider clause 7.5 to be unreasonable because the defendant was only prohibited from working for her former employer’s client for a limited period of time following termination of employment with the company.

Therefore, clause 7.5 did not completely eliminate the employee’s freedom to work for whom he or she wishes. The damages imposed were reasonable.

Apart from this, the court noted that Grima had freely accepted the conditions and she was aware of the risks involved when she accepted the restrictions imposed on her by the contract in the event that she chose to terminate her employment. The restriction was reasonable as it prevented disclosure of confidential information and loss of clients to competitors.

Grima’s decision to become an employee of her employer’s client infringed clause 7.5. Furthermore, the condition in clause 7.5 applied because it was a ‘fair and reasonable condition’ that the parties wanted to be bound by.

Therefore, the Court of Appeal accepted the company’s second ground of appeal since clause 7.5 was not in restraint of trade.

The Court of Appeal annulled the Court of Magistrates’ judgment and condemned Grima to pay €4,658.75 to her former employer as damages, together with interest which commenced to run from the date of this judgment.

Rebecca Micallef is a lawyer at Ganado Advocates.