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The Extent and The Applicability of Non-Compete Clause in Employment Agreement



Employment agreements are commonly drafted by the employers hinged on the provisions envisaged in the Employment Act 1950 and comprises of critical terms and conditions which contractually bind the employers and employees throughout the course of employment. Nevertheless, time and again the employers tend to overlook the provisions propounded in the Contracts Act 1950 which governs the contractual facet of the agreement, the aspects of statutory duties stipulated in the Companies Act 2016 as well as the fundamental liberties propounded in the Federal Constitution. As a consequence thereof, there exists a tendency for void and unenforceable clauses to be serendipitously incorporated into the employment agreements, inter alia, the draconian construction of non-compete clause which is also known as a restraint of trade which will be primarily dissected in this article.


Legal framework governing the restraint of trade


Section 28 of the Contracts Act 1950 clearly stipulates that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void unless if it falls under the exceptions thereto[1]. The proviso of section 28 further lays down the exceptions of the aforementioned general rule as follows: -

  1. Agreement not to carry on business of which goodwill is sold whereby one who sells the goodwill of a business may agree with the buyer to refrain carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein subject to the test of reasonableness of such limits and the nature of the business[2];

  2. Agreement between partners prior to dissolution whereby the partners may, upon or in anticipation of a dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits; or[3]

  3. Agreement during the continuance of the partnership whereby the partners may agree that someone or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership[4].

It is therefore apparent that the law bars the restraint of trade to any person as it is in breach of the natural justice and it contravened the general principle of section 28 of the Contracts Act unless it can be proven that it falls under the ambit of one the above-mentioned exceptions. However, the test of reasonableness must be applied in construing a restraint of trade clause in the context of the interest of parties as well as the public[5] in order for the first and second exceptions to be invoked.


It is worth noting that pursuant to the Court of Appeal decision in the case of Nagadevan a/l Mahalingam v Millenium Medicare Services[6], the Court emphasized on the word “partner” mentioned in the second exception whereby it was held that it is apparent from the wordings thereof that the said exception only apply to an agreement made between partners, and that the same was made upon or in anticipation of the dissolution of the partnership. As such, in order to invoke the second exception, it must be well established that the execution of the agreement which inclusive of the non-compete clause is only executed after the existence of a partnership or in anticipation of the partnership and the party involves in the agreement shall be the partner during the execution of the partnership. In the event one is not even a partner of the firm and/or company, it cannot be said that the agreement is made in anticipation of dissolution[7].


Restraint of trade during the employment and post-employment


The third exception deals with an enforceable non-compete clause during the course of employment. Visu Sinnadurai J. in the case of Polygram Records Sdn Bhd v The Search held that section 28 is only applicable in cases where a person is restrained from carrying on his trade or profession in the post-contract period and not during the currency of the contract[8]. It appears to the judge that the covenant whereby the defendants undertook to provide exclusive recording rights to the plaintiffs during the currency of their recording contract is not a covenant in restraint of trade and is therefore not rendered void under section 28 of the Contracts Act.


However, in this matter there exists two separate restraint of trade clauses whereby another clause is a post-contract restraint. It was further held that the validity of the post-contract restraint stands on a different footing given that the Plaintiff had prohibited the Defendants from making any recordings without the written consent of the Plaintiff within two (2) years after the contract ends. The Court had also make a remark that this clause is most inelegantly drafted. Therefore, the effect of the post-contract restraint clause in any covenant and/or agreement is void ab initio and unenforceable.


Restriction to use the knowledge, skills and information acquired during the course of employment


The law does not debar former employees from making any use of or drawing on a fund of knowledge and experience or skills that had been acquired while working for the former employers[9]. That would be tantamount to depriving the person of his livelihood. [10]The law only imposes on the employees a general duty to act in good faith, such as a man of average intelligence and honesty would think proper[11]. As such, there shall be no clause in the employment agreement that restrict the former employees from making use of the knowledge and skills they have acquired during the course of their career as it is not in line with the natural justice. Besides, there is no law and/or provision which restricts the former employees from competing with their employers by canvassing or doing business with the latter’s former customers[12].


Notwithstanding the foregoing, the former employees may be restricted from utilizing the confidential information of the former employer’s customers and/or clients. The duty of good faith will be broken if an employee makes or copies a list of the customers of the employer for use after his employment ends or deliberately memorizes such a list[13]. As such, the employers are entitled to incorporate a clause in the employment agreement which restraints the employees and/or former employees from divulging the company’s customers and/or clients’ personal information, using the information with intention to solicit the customers and/or clients or using the confidential information for the employees’ own benefit post-employment with the company. It is in breach of the implied terms of fidelity and good faith owed by the employees towards the employers which is also known as breach of fiduciary duties[14].


Conclusion


Based on the above, it is apparent that the non-compete clause is void and unenforceable in Malaysia unless if it falls under any of the exceptions whereby the Court laid down a high threshold for the claimant to establish that it falls under the ambit of the exceptions. It is also worth noting that the former employees shall not be estopped from conducting any business in competition with the employers, joining a rival company or setting up a company with the other former employees from the same company as long as any confidential information of the company is not utilised for their own benefits as the law protects the employers with regard to the company’s secret trade and confidential information.


Besides, no person shall be deprived of utilising their own knowledge and skills as the restriction is not consonant with section 28 of the Contracts Act 1950 and natural justice. It is undeniable that the employers would want their rights to also be protected in the employment agreement considering that the provision enunciated in the Employment Act 1950 mainly in favour of the employees. However, the construction of the employment agreement shall be in line with the legal provisions in Malaysia and void clauses shall be avoided at all costs as it carries no weight.


[1] Act 136

[2] Ibid

[3] Ibid

[4] Ibid

[5] Worldwide Rota Dies Sdn Bhd v Ronald Ong Cheow Joon [2010] 8 MLJ 297

[6] [2011] 4 MLJ 739

[7] Ibid

[8] [1994] 3 MLJ 127

[9] Svenson Hair Center Sdn Bhd v Irene Chin Zee Ling [2008] 7 MLJ 903

[10] Ibid

[11] Ibid

[12] Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617

[13] Robb v Green [1895] 2 QB 315

[14] Schmidt Scientific Sdn Bhd v Ong Han Suan [1997] 5 MLJ 632


Authored by Nurin Husnina Hussein

Edited by Kevin Wu


Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, please email office@kevinwuassociates.com

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