The Legal Effects of Restraint of Trade Clause in Employment Contracts

This article seeks to render another affirmative view on the legal effect of restraint of trade clause, as we often found such clause exists in virtually every professional employment contract.

A medical doctor practicing cosmetic surgery procedures approached us for advice on the validity and enforceability of a particular clause that existed in her employment contract as follows:-

“ … … five (5) years from the date of the termination of this Agreement, you shall not, directly or indirectly, without the prior written consent of the Company (individually, in partnership with, joint venture with, as an employee, or otherwise) engage in any business or enterprise (whether as owner, agent, partner, officer, director, employee, consultant, investor, or otherwise), that directly or indirectly competes with the Company’s business.”

Our off-the-cuff feedback is to negate the validity and enforceability of such clause on the grounds that:-

1. Such clause is, in essence, a restraint of trade clause, also known as “non-compete” clause. It was purportedly used by her employer for the purpose of restraining her from practicing as a cosmetic surgeon for a fixed period of time after the termination of her employment contract, in competition with her employer.
2. It is the principle of law that, any provision, in the employment contract or a contract for service (the latter being a contract to engage independent contractors who are self-employed, for their work), in relation to a restraint of trade beyond the tenure of employment or contract is invalid in view of its direct contradiction with Section 28 of the Contracts Act 1950 which states as follows:-

“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

It is only logical that the law exists as such because to restrain a person from working after the termination of employment or resignation, be it with competitors or on her own, would effectively deprive her from livelihood, especially if she works in a niche or small industry that requires highly specialized skills and knowledges in practice.

Also, the law recognizes that the employer’s business should necessarily be subject to the competition of all person who choose to engage in a similar trade.

Therefore, any legal action taken by the employer claiming an injunction to restrain the cosmetic surgeon from practice must fail on the ground that the restraint of trade clause sought to be enforced by the employer is illegal and void.

Having said that, the cosmetic surgeon who was still under employment at that point in time must, however, be aware that:-

1. If at all, she agreed in the employment contract to be restrained from carrying out her profession during the subsistence of the contract, it is not a covenant in restraint of trade technically, and thus not rendered void under section 28 of the Contracts Act.

The High Court in Polygram Records Sdn Bhd v. Hillary Ang & Ors (Collectively Known As “The Search”) & Anor [1994] held that section 28 only applicable in cases where a person is restrained from carrying on his/her trade or profession in the traditional sense of the doctrine, that is, in the post – contract period and not during the currency of the contract.

2. On another note, while her right to practise her skills and expertise after termination of contract or resignation is guaranteed, the law also confers reasonable protection to her employer’s legitimate business interest at the same time in terms of any trade secrets or confidential information which she may come across during her tenure of employment. Such obligation is either express or implied, that is she is bound not to disclose or exploit such information even if the employment contract is silent on this. So strict is the prohibition that it was held that the protection of confidential information did not have any time limits in the Federal Court case of Dynacast (Melaka) Sdn Bhd v. Visioncast Sdn Bhd [2016].

About the author:

This article was written by Chia Swee Yik, Partner of this Firm (assisted by legal intern, Chau Shin Yong), who has provided advice on employment law.

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