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Restraint of Trade Clauses in Employment Contracts

When drafting an employment contract, employers often include a restraint of trade clause in order to restrict what an ex-employee may do post-employment. As defined in Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 and Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269A:

A restraint of trade clause refers to one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such a manner as he chooses.

Put simply, the clause seeks to prevent ex-employees from taking certain actions that may be detrimental to the company’s interest. This includes, but is not limited to, soliciting clients from the company (non-solicitation clauses) or using proprietary and confidential information from the company to compete against it (non-compete clauses).

The law governs restraint of trade clauses and their enforceability through the common law, which is made up of precedent judgments. In the Singapore Courts, the threshold for the enforcement of restraint of trade clauses is high, and requires the clause to be reasonably and precisely written in accordance with the requirements set out below, for it to be enforceable.

Restraint of Trade Clauses in Singapore

In Man Financial (S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2008] 1 SLR(R) 663 (“Man Financial”), the Courts determined a two-stage test to determine if a restraint of trade clause is enforceable:

Legitimate Interest

The restraint of trade clause must protect a legitimate interest of the employer. In particular, the precedence set by Man Financial requires a legitimate interest that is not already covered by another clause. Instead, the Courts consider the case-specific details when determining if there are legitimate interests, such as the geographical area of operations, the appointment of the ex-employee, the nature of the industry, etc.

In the recent case of Shopee Singapore Pte Ltd v Lim Teck Yong [2024] SGHC 29, the Plaintiff struggled to articulate what legitimate interest the restraint of trade clause protected. The Plaintiff failed to establish the company’s confidential information as a legitimate interest, as the restraint of trade clause did not protect any interests above and over the existing confidentiality clauses. The judge also ruled that the US/UK markets the Defendant was now working in were sufficiently different from the Brazilian market he was working in while employed by the Plaintiff, and hence there was no legitimate reason to enforce a non-compete clause. Ultimately, the Plaintiff was not granted their requested injunction.

Private and Public Interest

If legitimate interest can be established, the Courts would then consider if the clause is reasonable in the interests of the parties and reasonable in the public interest. The reasonableness of the clause is a question of fact.

Attempts to enforce restraint of trade clauses in Singapore often fail because they were too restrictive to be considered reasonable to the employee. In the aforementioned case of Shopee v Lim, the Plaintiff argued that the Defendant could not work in any markets that the Plaintiff also operated in. Considering that the plaintiff operated in Southeast Asia, US, UK and South American markets, this was considered to be too restrictive. Similarly, the judge considers the time which the employee may be bound by the clause. The reasonable duration of a restraint of trade clause varies depending on the specifics such as the level of appointment of the ex-employee. The Courts also consider if the clause is reasonable in the public interest.

Conclusion

Restraint of trade clauses in Singapore require a certain threshold to be met before being enforceable. The drafting of the employment contract should be specific as to what proprietary interest the company needs to protect, and must be crafted specific to the appointment level of the ex-employee.

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