LEGAL UPDATE: Did you know that a court in Vietnam recently upheld the enforceability of a non-compete and non-disclosure agreement ("NDA") between an employer and employee and ruled in favour of the employer?

For years, employers often require key employees to sign an NDA pursuant to which the key employee would agree not to disclose trade secrets and not to work for a competitor for a certain period of time if the employment relationship ends. These provisions are either set out in a separate contract or are part of the labour contract. 

Until recently, the enforceability of these agreements are unclear, as there are provisions in the Labour Code of Vietnam that provide an employee has the freedom to work and to find work. The Labour Code even allows an employee to hold multiple jobs at the same time. Thus, employers often see NDA provisions as "nice to have", "morally binding" and "better to have them than not."

A recent court case has changed all of the above.

In that case, the employee, who was the head of the human resource department, signed a 1 year contract with her employer. She also signed a separate NDA which provides she would not work for a competitor for one year after her employment ends for whatever reason. Breach of this commitment will lead to a penalty. Following 1 year of employment, the employer renewed her contract but ended her employment a few days later.

The company subsequently discovered that she had started work at a competitor and initiated proceedings before the Vietnam International Arbitration Centre ("VIAC") as agreed in the NDA and requested that she paid a penalty equal to 3 months' salary. VIAC ruled in favor of the employer.

The employee then filed a case before the Vietnamese court and argued that the dispute was not within the jurisdiction of VIAC because the NDA was a part of the labour contract and therefore was a labour matter that had to be handled by the court rather than VIAC. The employee further argued that the NDA breached the Labour Code provisions allowing employees the freedom to find work.

The court rejected these arguments on the basis that:

1. In the NDA, the parties had agreed that disputes would be resolved by VIAC and because the VIAC is authorised by law to resolve "commercial" disputes where one of the parties is carrying out commercial activities, VIAC had jurisdiction to resolve the dispute.

2. The provisions of the NDA do not violate the relevant provisions of the Constitution of Vietnam, the Civil Code or the Labour Code on the right of an individual to choose one's profession, type of job, type of work and freedom to work anywhere one chooses. The courts ruled that the Civil Code allows the parties to freely agree on rights and obligations that are not contrary to the law, practice and ethics in establishing commercial relationships and the State of Vietnam respects such rights to contract. Thus, on the basis that the parties willingly entered into such arrangements, the provisions of the NDA are valid and enforceable.

Of course, there is continuing debate on whether VIAC can resolve such disputes and whether NDAs should be considered as valid and enforceable.

Our take aways from this are:

1. NDAs should indeed be signed as a separate agreement from the labour contract so that it will be without dispute that on the termination of the labour contract, the provisions of the NDA remain valid for the period after termination. 

2. To avoid forum shopping as the employee did in this case because she was unhappy with the ruling of the arbitrators, NDAs should contain provisions that the parties agree to submit to the exclusive jurisdiction of either the court or VIAC and will not make a claim later to the contrary. Alternatively, to avoid the jurisdiction issue, perhaps it is best to select the court as the dispute resolution venue. 

3. In other jurisdictions such as the US or UK, the non-compete must be reasonable in scope. In this case, the employer was not seeking to stop the employee from working. The company was simply asking for her to pay 3 months' salary. Thus, any NDA should take the scope into consideration. Finding the right balance is in the interest of both the employer and employee. 

4. This ruling should be seen as limited in scope. The outcome may be very different if the employer had sought specific performance to stop the employee from working at the new job. 

Nonetheless, it is still a groundbreaking one in recognizing the jurisdiction of VIAC and the freedom to contract.

DNLegal (23 July 2018)