It is common for employment contracts to contain a clause that prevents the employee from working for a competitor in the same industry for a predetermined period of time after the expiration or termination of the employee’s contract. Such a clause is commonly known as a “non-compete clause” and typically reads:
“The Employee shall not carry out any business activity or service that, or join another company or organisation whose nature of business, is similar to that of the Employer for a period of twelve months from the date of expiration or termination of this contract (as the case may be).”
This is essentially a form of restraint of trade. The question is: are non-compete clauses enforceable and valid? This article will discuss the enforceability of non-compete clauses and what else can be done to protect a business when an employee leaves for a competitor.
General Rule and Exceptions
Non-compete clauses are generally void and unenforceable in Malaysia. Non-compete clauses are a form of restraint of trade, and fall under Section 28 of the Contracts Act 1950 which renders void any agreement to restrain anyone from exercising a lawful profession, trade, or business:
28. Agreement in restraint of trade void
Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.
To balance the rights of the employer against those of the employee, Section 28 of the Contracts Act 1950 lays down three exceptions to the general rule:
Saving of agreement not to carry on business of which goodwill is sold
Exception 1— 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:
Provided that such limits appear to the court reasonable, regard being had to the nature of the business
of agreement between partners prior to dissolution
Exception 2—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 as are referred to in exception 1.
or during continuance of partnership
Exception 3—Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.
Post-Contract Restraint of Trade
Section 28 of the Contracts Act 1950 will only render void a restraint of trade clause that applies to the employee’s post-contract period. It will not apply to a restraint of trade during the currency of the employment contract. In the High Court case of Polygram Records Sdn Bhd v Hillary Ang & Ors (collectively known as “The Search”) & Anor [1994] 3 CLJ 806, it was held that Section 28 of the Contracts Act 1950 was only applicable to cases where a person is restrained from carrying on his trade or profession after the expiry of the contract, not during the contract. In Polygram Records, the second contract between the plaintiff and The Search contained a clause that read:
“During the continuance of this agreement and in the case of the artiste being released from the artiste’s obligation to make sound recordings for the company … or in the case of the termination of this agreement … then for a period of two years after the date upon which the company shall have released the artiste … the artiste shall not without the written consent of the company … render the artiste’s services … in any part of the world as a singer or performer of musical works for the purposes of making records…”
This position was reiterated by the Court of Appeal in Vision Cast Sdn Bhd & Anor v Dynacast (Melaka) Sdn Bhd & Ors [2015] 1 MLJ 424, even if the restraint of trade is for a short period. In this case, the defendants had sought to restrain the second appellant (“Cheok”) from pursuing a lawful trade or business when Cheok had incorporated Vision Cast Sdn Bhd about 15 months after Cheok had left the Dynacast Group of Companies. The Court of Appeal stated that any such restraint against Cheok to pursue a trade or business was unsustainable and bound to be struck down.
In Nagadevan A/L Mahalingam v Millenium Medicare Services Sdn Bhd [2011] 3 CLJ 529, Nagadevan had resigned from the partnership with Millenium Medicare Services Sdn Bhd and commenced practice at another medical clinic situated within a 15 km radius from one of Millenium Medicare Services Sdn Bhd’s medical clinics. Millenium Medicare Services Sdn Bhd contended that its partnership agreement with Nagadevan had a clause that restrained Nagadevan from practising as a medical practitioner within a 15 km radius of any of its medical clinics. However, the Court of Appeal held that a clause restricting the liberty of a person to carry on his trade in the future with other parties, effectively giving rise to a restraint of trade, would fall within the scope of Section 28 of the Contracts Act 1950 unless the restraint of trade falls within any of the three exceptions.
Knowledge, Experience or Skill gained from Previous Employment
The law does not prevent a former employee from using any knowledge, experience or skill gained during his time with a former employer. In the case of Ace Capital Growth Sdn Bhd v Kua Kee Koon & Ors [2021] MLJU 2118, the letter of offer of employment issued by the plaintiff and accepted by the first defendant had restrictive clauses, which read:
“Section-III: Restraint of Trade Clauses:
a) Employee, in any business or enterprise or association of persons, both corporate and unincorporated which carries on a competing business.
b) The employee agrees and undertakes in favour of the employer that during the restraint period Eight (8 months) and in Malaysia he/she will not directly or indirectly work for a direct competitor of Ace Global Metal Sdn Bhd and Ace Capital Growth Sdn Bhd.
c) The Employee Must Not canvas, or solicit the business of, or maintain any personal records of any client of Ace Global Metal Sdn Bhd and Ace Capital Growth Sdn Bhd.”
The High Court held that a former employer cannot restrict a previous employee from using skills and knowledge in his trade and profession learnt during the course of his employment, as such skills and knowledge are different from secret and confidential information. The High Court also found that the terms and conditions of employment gave rise to a restraint of trade, which is rendered void by Section 28 of the Contracts Act 1950.
Protecting Confidential Information and Trade Secrets
In the realm of employment contracts and business relationships, it is essential to strike a balance between protecting a company’s confidential information and respecting the rights of employees. While restraint of trade clauses have traditionally been used for this purpose, there is an alternative approach that allows employees to rely on clauses governing the non-disclosure of confidential information.
The Duty of Good Faith and Protecting Confidential Information
Former employees are generally expected to act in good faith, adhering to a standard that a reasonable person would deem appropriate. One such permissible restraint is a clause that bars a former employee from disclosing, divulging, or misusing their former employer’s confidential information, proprietary know-how, and trade secrets. This approach not only safeguards a company’s valuable assets but also ensures that the employee’s obligations extend only to protecting confidential information, rather than overly restricting their future career opportunities.
Breach of Confidentiality and Conspiracy to Injure
In the case of Sundai (M) Sdn Bhd v Masato Saito & Ors [2013] 9 MLJ 729, the High Court established the importance of upholding the duty of good faith. Masato Saito was found to have breached his fiduciary duty by misusing confidential information and data without prior consent. This breach was proven through evidence of a conspiratorial agreement followed by overt acts aimed at causing harm. This case underscores the significance of respecting confidentiality obligations without necessarily imposing excessive restrictions on employees’ future endeavours.
Duration of Confidentiality Obligations
While the Federal Court’s ruling in Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Anor [2016] 3 MLJ 417 indicated that confidentiality obligations could potentially have a perpetual effect, it left open the question of whether restrictions on divulging or breaching such obligations during or after employment fall under Section 28 of the Contracts Act 1950. To ensure legal clarity and enforceability, it is advisable to explicitly state the duration and scope of confidentiality obligations in employment contracts or separate non-disclosure agreements.
Conclusion
The Malaysian courts place significant emphasis on the strict provisions outlined in Section 28 of the Contracts Act 1950 when evaluating clauses that may impose a restraint of trade following the expiration or termination of an employment contract. While such clauses are commonly included, any agreement containing a clause that effectively results in a restraint of trade is generally considered void and unenforceable, unless it unequivocally falls within one of the three exceptions in Section 28 of the Contracts Act 1950.
Whether you are an employer seeking legal guidance on non-compete clauses and potential revisions to your employment contracts or an employee aiming to gain a better understanding of your post-employment rights, we invite you to reach out to us. Our team is well-equipped to provide you with expert advice tailored to your specific circumstances, ensuring that your legal interests are safeguarded in accordance with Malaysian law. A well-drafted employment contract effectively delineates the rights and obligations of all parties involved, with transparency and fairness.
By Tommy Wong and Jasmine Wee Xing Yi
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
