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High Court Rules that Forfeiture-for-Competition Clauses are not Restraints of Trade.

25 November, 2011

 

Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2011] SGHC 241  

 
SUMMARY
 
In a landmark decision, the Singapore High Court has ruled in favour of an employer, holding that a clause in an employee incentive bonus plan which requires the employee to forgo deferred incentive payments if he resigns and joins a competitor (referred to as a “forfeiture-for-competition” clause) is not a restraint of trade. The employer need not show that such a clause is reasonable in order to enforce it.
 
Blossom Hing, Kimberley Leng, Justin Kwek and Mohan Gopalan acted for the successful employer in this case. 
 
BACKGROUND
 
In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2011] SGHC 241, the High Court was asked to decide whether a forfeiture-for-competition clause in a bonus plan was enforceable. The bonus plan was structured such that the employee would be paid half of his annual bonus upfront, while payment of the remaining half would be deferred.
 
The forfeiture-for-competition clause stated that the deferred portion of the bonus would be paid to the employee if he either (a) continued to be employed for another three years; or (b) resigned and did not join a competitor for a period of two years from his resignation. If the employee resigned and competed within two years of his resignation, he would forfeit the deferred bonus. 
 
The employee in this case resigned and set up a competing business. Two years later, he demanded payment of the deferred portion of his bonus. The employee contended that the forfeiture-for-competition clause was a restraint of trade which was unreasonable and therefore unenforceable. 
 
On behalf of the employer, it was argued that the forfeiture-for-competition clause was not a restraint of trade, and accordingly, reasonableness was not a criterion for its enforceability. As the employee had failed to comply with the terms of the clause, he was not entitled to be paid the deferred portion of his bonus.
  
COURT’S DECISION ON FORFEITUREFOR-COMPETITION CLAUSES
 
The court noted that the English and Australian courts have treated forfeiture-for-competition clauses as amounting in substance to a restraint of trade. These courts have refused to enforce forfeiture-for-competition clauses unless they have been shown to be reasonable.
 
It was further observed that there is a divergence of views among the different state courts of the United States, but the majority position in the United States is that forfeiture-for-competition clauses are not subject to the restraint of trade doctrine. None of these authorities are binding on the Singapore courts. 
 
The court held that forfeiture-for-competition clauses are not restraints of trade because: 
 
(a) They “do not prohibit an employee from competing with [the] employer.” Instead, they operate only as a “financial disincentive” for the employee to compete. If the employee elects to compete upon resignation, he does so with full knowledge of the financial disincentive. In such circumstances, he would have made a “calculated business decision” that he would nonetheless be financially better off working 
for a competitor. There is therefore “no restraint in form or substance to speak of”; 
 
(b) Employers also deserve some protection from “opportunistic employees”. To hold the forfeiture-for-competition clause as, in substance, a restraint of trade “would attach unjustifiable weight to the right of freedom of trade at the expense of the equally important countervailing right of freedom of contract.” Allowing an employee to walk away from a forfeiture-for-competition clause that he had agreed to would enable him to “have his cake and eat it too”; and 
 
(c) An employee may negotiate with his next employer for a remuneration package that would compensate him for any loss under a forfeiture-for-competition clause. If the new employer does so, then the employee would suffer no loss. If the new employer refuses to do so, then the employee should bear the full financial consequences of his informed decision. There is nothing inherently unfair with such an outcome. 
 
THE COURT’S COMMENTS ON PAYMENT-FOR-LOYALTY CLAUSES
 
In addition to the above reasons, the court was also persuaded by decisions validating “paymentfor-loyalty” clauses. Payment-for-loyalty clauses provide that an employee would forfeit a benefit upon resignation, regardless of whether the employee joins a competitor.
 
The court noted that the English and Australian courts have consistently upheld payment-forloyalty clauses without subjecting them to the restraint of trade doctrine. This is because the objective of such clauses appears to be to promote the employee’s loyalty and retention and not to deprive the employee of his right to work for a competitor. These clauses therefore need not be reasonable to be enforceable.  
 
In the court’s view, the distinction drawn in the English and Australian cases between paymentfor-loyalty clauses and forfeiture-for-competition clauses has no rational justification as: 
 
(a) in substance, both types of clauses provide a financial disincentive to an employee if he chooses to breach the conditions set out therein; and 
 
(b) payment-for-loyalty clauses have a more overreaching effect than forfeiture-forcompetition clauses as the employee would not be able to work for anyone else (whether a competitor or not) if he wanted to retain the benefit. It is naïve to believe that payment-for-loyalty clauses are not directed at preventing employees from joining competitors, since the principal purpose in promoting retention and loyalty is to ensure that employees do not join a competitor.
  
Both types of clauses therefore ought to be treated similarly, and on a proper analysis, the public policy considerations underpinning the restraint of trade doctrine do not apply to either type of clause. 
 
COMMENT
 
Employers now have certainty that Singapore-law governed forfeiture-for-competition clauses are not subject to the often unpredictable reasonableness test. The court also made favourable remarks concerning payment-for-loyalty clauses, which may be another option for employers to consider when structuring their employment contracts and remuneration packages. Nevertheless, to ensure enforceability in both scenarios, care must still be taken in drafting and incorporating forfeiture-for-competition or payment-for-loyalty clauses into employment contracts or bonus plans. 
 
 
For further information, please contact:
 
Blossom Hing, Drew & Napier
blossom.hing@drewnapier.com
 
 
 

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