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Singapore – Restrictive Covenants In Employment Contracts: The Impact Of Other Clauses Protecting An Employer’s Legitimate Interests.

3 June, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Labour & Employment

 

The legal principles in Singapore applicable to restrictive covenants in employment contracts are fairly well-settled. The seminal House of Lords decision in the case of Thorsten Nordenfelt v. The Maxim Nordenfelt Guns and Ammunition Company, Limited [1894] AC 535, has been followed by the Singapore courts– any clause in restraint of trade is, in itself, contrary to public policy and thus void. The exception to this general rule is where the restriction sought to be imposed is reasonable with reference to the interests of the parties concerned and the interests of the public.

 
The test of reasonableness however is predicated on the requirement that the employer seeking to enforce the restrictive covenant has a legitimate interest to protect. A court will only enforce a restrictive covenant which goes no further than reasonable to protect such legitimate interest of the employer.

 
While the list of what constitutes a legitimate interest” is not closed, various interests have been identified as typically meriting protection – for instance, trade secretsii, trade connectionsiii, confidential informationiv, goodwillv.

 
It is not uncommon in Singapore to find restrictive covenants along with other contractual provisions in employment contracts, such as confidentiality clauses, which seek to protect an employer’s confidential information and trade secrets. The Singapore Court of Appeal has held that where such confidentiality clauses exist in employment contracts, the restrictive covenants must protect other legitimate interests over and above those already covered by the confidentiality clauses, or be unenforceable.

 
In the case of Stratech Systems Ltd v. Nyam Chiu Shin (alias Yan Qiuxin) & Ors [2005] 2 SLR(R) 579, the plaintiff was subcontracted by a main contractor to supply both hardware and software for a project awarded by the Land Transport Authority. Following a dispute between the plaintiff and the main contractor, the plaintiff terminated its subcontract. The main contractor then approached some of the plaintiff’s employees who had worked on the project, with a view to employing them. The plaintiff commenced action against the main contractor and the employees. In respect of its claim against the employees, the plaintiff sought to enforce a non-competition clause in the employment contracts of the employees. The employment contracts also contained a confidentiality clause.

 
As the plaintiff was not able to show that the non-competition clause protected a legitimate interest over and above its confidential information (which was already protected by the confidentiality clause), the Court of Appeal made a finding that the main function of the non-competition clauses could only be to inhibit competition in business, and refused to enforce the same.

 
This approach was re-affirmed by a differently constituted Court of Appeal in the case of Man Financial (S) Pte Ltd v. Wong Bark Chuan David [2008] 1 SLR(R) 663, in which Andrew Phang JA, delivering the judgment of the court, stated that the proposition contained in the Stratech case was a general one, which would “apply equally in the context of other legitimate proprietary interests (for example, that of trade connection…) as well.”vi

 
The Court of Appeal has thus taken a fairly vigorous approach towards reading down non-competition clauses, such that enforcement will be refused if other clauses already exist in the contract that would adequately protect the employers’ legitimate interests. The most obvious and common clause is that protecting confidential information and/or trade secrets, but as the Court of Appeal has pointed out, the proposition is general and applies to any legitimate interest which can be protected by a restrictive covenant.

 
In both the Stratech and Man Financial cases, the Court of Appeal does not explain the rationale for its position. We would suggest though that this is consistent with the courts’ general approach towards restraint of trade clauses, as encapsulated in the Nordenfelt case – that restrictive covenants are in restraint of trade, rendering them contrary to public policy and thus prima facie void. The learned judge of appeal pointed out in the Man Financial case that the doctrine of restraint of trade “seeks to vindicate the legal right to freedom of trade while balancing, at the same time, the countervailing doctrine of freedom of contract.vii

 
It is therefore understandable that, in an employment context, where there is generally little equality in bargaining power between an employee and an employer, the court will be stricter in applying the doctrine of restraint of trade than in various other situations, such as, for instance, where there are restrictive covenants in agreements for the sale and purchase of a business. By refusing to enforce a non-competition clause which seeks simply to protect a legitimate business interest that is already covered by another enforceable provision in the employment contract, the Court of Appeal is simply applying the doctrine of restraint of trade with the rigour appropriate to employment contracts.

 
This position has, however, been questioned by the High Court in two recent decisions. The more vigorous challenge to the approach set out in Stratech was made by Woo Bih Li J in Centre for Creative Leadership (CCL) Pte Ltd v. Byrne Roger Peter & Ors [2013] 2 SLR 193, where the learned judge stated it seemed illogical that an employer who did not have the benefit of a confidentiality provision in his employee’s contract of employment had a better chance of establishing confidential information as a legitimate interest to protect under a non-competition clause than an employer who sought to protect his confidential information by the use of dual provisionsviii. However, the learned judge stated that, in the meantime, he was bound by the views of the Court of Appealix.

 

It is more interesting to note that Woo J had actually delivered the judgment of the court in the Stratech case. It appears that the learned judge had reconsidered the approach taken in Stratech after studying judgments made by the English Court of Appeal in the cases of The Littlewoods Organisation Ltd v. Harris [1978] 1 All ER 1026, Turner v. Commonwealth & British Minerals Ltd [2000] IRLR 114 and Thomas v Farr plc [2007] ICR 932 (which latter two cases followed the decision in Littlewoods).

 
In the more recent High Court decision of Lek Gwee Noi v. Humming Flower & Gifts Pte Ltd [2014] SGHC 64, Vinodh Coomaraswamy J expressed his agreement with Woo J’s views in the Centre for Creative Leadership case, and gave leave to appeal his decision to the Court of Appeal, for a definitive ruling on this issuex.

 

As at the date of this writing, it remains to be seen whether the Court of Appeal will re-affirm its position that restrictive covenants in employment contracts must be construed strictly in favour of employees, or whether the Singapore position will be changed in light of the High Court’s concerns.

 

End Notes:

 

See, for instance, Man Financial (S) Pte Ltd v. Wong Bark Chuan David [2008] 1 SLR(R) 663, CLAAS Medical Centre Pte Ltd v. Ng Boon Ching[2010] 2 SLR 386 and Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stuart [2012] 4 SLR 308.

 
ii Man Financial (S) Pte Ltd (formerly known as ED&F Man International (S) Pte Ltd) v. Wong Bark Chuan David [2008] 1 SLR(R) 663, at [81].

 
iii Ibid.

 
iv Heller Factoring (Singapore) Ltd v. Ng Tong Yang [1993] 1 SLR(R) 495, at [15(c)].

 
v Ibid.

 
vi Man Financial (S) Pte Ltd (formerly known as ED&F Man International (S) Pte Ltd) v. Wong Bark Chuan David [2008] 1 SLR(R) 663, at [92].

 
vii Ibid., at [45].

 
viii Centre for Creative Leadership (CCL) Pte Ltd v. Byrne Roger Peter & Ors [2013] 2 SLR 193, at [92].

 
ix Ibid., at [93].

 
x Lek Gwee Noi v. Humming Flowers & Gifts Pte Ltd [2014] SGHC 64, at [71].

 

ATMD Bird & Bird

 

For further information, please contact:

 

Swee Siang Boey, Partner, ATMD Bird & Bird

sweesiang.boey@twobirds.com

 

Kavitha Rajan, ATMD Bird & Bird

kavitha.rajan@twobirds.com

 

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