Jurisdiction - Singapore
Reports and Analysis
Singapore – Enforceability Of Restraint Of Trade Clauses: An Update.

22 April, 2014

 

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

 

When is a restraint of trade clause enforceable? The High Court has issued a timely reminder in the case of Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd1 (Lek Gwee Noi) that the enforceability of restraint of trade clauses in employee contracts remains a fact-specific inquiry into the reasonableness of the clause, given the unique circumstances of each employee. It is not an exercise of simply using sample and past boilerplate clauses which may appear reasonable in a different circumstance. 


About The Case 


In Lek Gwee Noi, the defendant company Humming Flowers & Gifts Pte Ltd (Humming), a subsidiary of the SGX-listed company Noel Gifts International Limited (Noel Gifts), sought to enforce a fairly common restraint of trade clause in its ex-sales manager Lek Gwee Noi’s (LGN) contract:

 

“Upon the termination of the Employee’s employment … the employee shall not for a period of 2 years … undertake … nor be employed … in the same or similar business as the relevant Company … or in any other business carried on by the relevant Company, in Singapore, and Malaysia and any other countries the relevant Company has offices at the date of such termination … and shall not during the like period and within the same areas … canvass or solicit orders from … interfere with any person … who shall … during … the Employee’s employment … have been a customer … of the relevant Company & … the Employee shall not … endeavour to take away from the relevant Company … any customers … who have been customers … of the relevant company.”2

 

The clause further defined ‘relevant company’ as “the Company and any related companies which the Employee shall have performed duties in relation to and for the benefit of during the nine months prior to the date of termination of employment.3

 

On its face, the clause was probably devised by the Noel Gifts group of companies to be applied across the board in all its employees’ contracts. The definitive terms employed such as the temporal restriction of two years and the geographical restriction of Singapore, Malaysia and any country the ‘relevant company’ has offices in at date of termination would also militate against a finding that the clause was vague or too broad.

 

The High Court found that this clause essentially comprised two restrictions on the employee4


1. A covenant not to compete with the ‘relevant company’ for a period of two years in Singapore, Malaysia or any country in which the ‘relevant company’ had offices on the date of termination (the non-competition covenant); and 


2. A covenant for the same period and within the same areas not to solicit orders from any person who was a customer of the ‘relevant company’ while the employee was employed, and not to take away from the ‘relevant company’ any of its customers (the non-solicitation covenant). 


The High Court held that the clause was unenforceable against LGN. Applying the test for enforceability of restraint of trade clauses5Coomaraswamy J found that while Humming had a legitimate interest in protecting its trade connections against LGN (who had strong rapport with the customers of Humming by virtue of longstanding business relationships), the covenants were unreasonable between Humming and LGN for the following reasons6:
Non-Competition Covenant 


1. The definition of ‘relevant company’ would include any company in the Noel Gifts group of companies which LGN had carried out some incidental work for to benefit it. This definition would mean that the non-competition covenant could prevent LGN from engaging in activities outside the scope of her employment simply because Humming’s related companies engaged in those activities. This blanket ban went significantly further than necessary to preserve Humming’s trade connection with the customers under LGN’s influence. 


2. Humming had no business interests in Malaysia and the inclusion of Malaysia was aimed at protecting Noel Gifts’ (who LGN had never worked for) interests rather than Humming’s. The result of including Malaysia in the geographical restriction made the covenant unreasonably wide. 


Non-Solicitation Covenant 


3. The use of ‘relevant company’ had the effect of extending the non-solicitation covenant to prevent LGN from soliciting orders from customers of other Noel Gifts group companies even if LGN had no trade connection with those customers. This was an unreasonably wide covenant.

 

4. The covenant also prohibited LGN from taking away the business of any customer of Humming, including those who became customers after LGN had left. This was also unreasonably wide. 


5. The period of two years was also unreasonably long. The temporal restriction was meant to allow Humming reasonable time to transfer LGN’s trade connections to its other employees, and it could not give any good reasons why it needed two years to do so.


A Timely Reminder 


This case serves as a warning to in-house counsel and practising lawyers hired to draft employment contracts against using template restraint of trade clauses without giving due consideration to the employee’s scope of work and position in the firm. As shown above, a restraint of trade clause that appeared to be enforceable at first blush and which may well have been enforceable against a top management level officer, was found to be void against a lower-level employee whose duties were confined to a subsidiary. Prudent employers who wish to use restraint of trade clauses to protect their legitimate trade interests would do well to tailor such clauses for each employee to ensure that the clauses will not be found unenforceable for unreasonableness, leaving the employer without a remedy.

 

End Notes:

 

[2014] SGHC 64
The clause as shorn of excess words by the High Court at [23].
Ibid.
Note 1, supra, at [31].
As laid down in the Court of Appeal case of Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR(R) 663 at [70]. The test for enforceability consists of 2 parts – firstly, the clause must protect a legitimate interest of the employer; secondly, it must be reasonable as between the parties and reasonable in the public interest.
Note 1, supra, at [88] – [117].

 

Stamford Law

 

For further information, please contact:

 

Min-tze Lean, Director, Stamford Law

[email protected] 


Daniel Chia, Director, Stamford Law
[email protected]

 

Homegrown Labour & Employment Law Firms in Singapore

 

International (with Local Law Capabilities) Labour & Employment Law Firms in Singapore

 

Comments are closed.