Post-employment restrictions: non-compete clauses

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Selvamalar Alagaratnam
Messrs Skrine, Kuala Lumpur
sa@skrine.com

Corrinne Chin
Messrs Skrine, Kuala Lumpur
corrinnee.chine@skrine.com
 

Introduction

Restrictive trade covenants are common in employment contracts. They are often drafted to apply during the post-employment period, and typically include: non-competition with the ex-employer; and non-solicitation of the ex-employer’s customers and/or employees.

This article will provide an overview and comparative analysis of the law on post-employment non-compete clauses in selected Asia Pacific jurisdictions: Malaysia, Singapore and Hong Kong.

Non-compete clauses

Non-compete clauses prevent ex-employees from competing against their ex-employers, by restraining them from engaging in a particular trade or business which may be demarcated by geographical area and/or limited for a period of time.

Malaysia

Section 28 of the Malaysian Contracts Act 1950 (section 28) states that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.

There are three exceptions to section 28, namely: agreements involving sales of goodwill of a business; partners prior to dissolution; and continuance of the partnership. The Malaysian Court has interpreted the inclusion of such exceptions to section 28 as a clear indication of the legislature’s intention to make section 28 exhaustive.^[1]

The consequence is that if a particular covenant is a covenant restraining trade, the Malaysian courts have no discretion but to declare it void under section 28, except in respect of the above exceptions.^[2]

Consequently, post-termination non-compete clauses in employment agreements, which do not fall within any of the above exceptions, will be subject to section 28. They are therefore void and unenforceable.^[3]

Although Malaysia’s employers are unable to seek recourse through civil action for breach of post-termination non-compete clauses, it is not uncommon for them to incorporate such clauses in employment agreements to deter employees from becoming engaged in their competitors’ business.

It is noteworthy that the Malaysian position on the enforceability of non-compete clauses differs from the common law position. In common law, post-employment restraints of trade are, unless reasonable, void. In Malaysia, the validity of non-compete clauses is not subject to the test of ‘reasonableness’ under common law.^[4] See below for further discourse on the enforceability of non-compete clauses in Singapore and Hong Kong, both of which adopt the common law position.

Singapore

Generally, all covenants in restraint of trade are prima facie void and unenforceable. This principle is well-established in the context of employment and, therefore, would cover post-termination non-compete clauses in employment agreements.^[5]

To show that a post-termination non-compete clause is enforceable, the ex-employer must demonstrate that such clause:^[6]

• protects the ex-employer’s legitimate proprietary interest, such as the protection of confidential information and trade secrets belonging to the ex-employer and trade connection, and the maintenance of a stable and trained workforce; and
• is reasonable in the interests of the parties concerned and the public. Reasonableness is determined based on, among others, the duration of operation, geographical scope and activity scope of the clause.

Furthermore, Singaporean courts will enforce the non-compete only if it goes no further than necessary to protect the legitimate proprietary interest concerned.^[7] If such legitimate proprietary interest is already protected by another clause in the employment agreement, the ex-employer must demonstrate that the non-compete clause covers a legitimate proprietary interest over and above the already protected interest, failing which the non-compete clause will be rendered unenforceable.^[8]

In light of the above, the non-compete’s net should not be cast too widely. Reasonableness is in the details, and the non-compete clause should be drafted to cater to the particular category of employee and in the context of, among others, the particular industry/sector and geographical area in which the employer is conducting business. Periodic review of the non-compete clauses may also be necessary to ensure that they reflect the developments in the employer’s business.

Should there be a breach of a valid post-termination non-compete clause, the ex-employer may claim for damages and/or an injunction against the ex-employee to prevent the ex-employee from working for their new employer.

Hong Kong

All covenants in restraint of trade including non-compete clauses are prima facie void and unenforceable.^[9]

Similar to the position in Singapore, post-termination non-compete clauses in employment contracts may be enforceable subject to the ex-employer proving that such clauses protect legitimate proprietary interest including trade secrets and customer connections, and is no wider than reasonably necessary in terms of duration, scope or geographical restriction.^[10]

Ex-employers may claim for damages and/or an injunction against the ex-employee for breaching the post-termination non-compete clause.

Comments

Malaysia is one of the few countries in the Asia Pacific region that does not recognise post-termination non-compete clauses. The Malaysian courts are in favour of rigid interpretation of section 28 which means that this position is unlikely to change in the near future. Its counterparts in the Asia Pacific region have, on the other hand, embraced the common law position which accords the employers some form of assurance that prized employees will be far less likely to put their skills to use with competitors, subject to careful drafting of the non-compete clause.