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This article is relevant to Paper F4 (SGP)

Historically, restraint of trade clauses were void but the law has changed over time in that they will not be found void if they can be justified as being reasonable in the interests of the parties and of the public.

The law in Singapore concerning restraint of trade is governed by case law rather than legislation. Restraint of trade clauses are commonly found in different kinds of contracts – for example, employment contracts and sale of business contracts. The focus of this article is on restraint of trade clauses in employment contracts. The restraint of trade doctrine attempts to balance the freedom to trade with the freedom of contract and it is not easy balancing the two interests. In the employment context, the policy underlying the restraint of trade doctrine is the interest of the individual and the State in the free flow of expertise. Man Financial (S) Pte Ltd v Wong Bark Chuan David (1) made clear the underlying policy in the following passage:

'The first of the aforesaid aspects of public policy (viz, that relating to the doctrine of restraint of trade) is a clearly established one... The doctrine seeks to vindicate the legal right to freedom of trade while balancing, at the same time, the countervailing doctrine of freedom of contract. Indeed, in the leading House of Lords decision of Herbert Morris, Limited v Saxelby [1916] 1 AC 688, Lord Atkinson emphasised that every person should be at liberty to work for himself or herself, and ought not (in principle) to deprive either himself or herself, or the State, of his or her labour, skill and talents.'

This article aims to give an overview of current developments in relation to the doctrine of restraint of trade in employment contracts. The first part of the article considers when the doctrine of restraint of trade applies. The second section examines the criteria to determine if a restraint of trade clause will be upheld or struck down.


When does the doctrine of restraint of trade apply?

In analysing a clause to determine if the doctrine of restraint of trade applies, three sub-questions have to be answered:

  1. Is there a restraint?
  2. Is it a restraint of trade?
  3. Is it one of those restraints to which the doctrine of restraint of trade doctrine applies?


Diplock LJ had, in Petrofina (Great Britain) Ltd v Martin (2), explained what a restraint is in this manner:

'A contract in restraint of trade is 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 manner as he chooses.'

Lord Denning MR, in the same case, explained what a restraint is along the same lines:

'Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful: with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest.' (3)

Essentially then, the person restrained must be bound for the future and with respect to third parties.

As to the meaning of ‘trade’ in the second sub-question, it is to be noted that trade is to be understood broadly, such that it is not limited to a particular skilled occupation but applies to employment generally.

The last sub-question to be considered is to what restraints does the restraint of trade doctrine apply. In Chua Chian Ya v Music & Movements (S) Pte Ltd (4), the Singapore Court of Appeal drew a distinction between restraints imposed on an artiste's ability to make a living (ie by writing or performing music), and restraints on the sale by an artiste of their proprietary interest in their musical compositions. The court held that the doctrine of restraint of trade applied to the former restraint but not to the latter restraint. In that case, because the clause in question concerned the sale of the artiste’s intellectual property rights, the court ruled the clause was not a restraint of trade clause.

In another case Mano Vikrant Singh v Cargill TSF Asia Pte Ltd (5), the Singapore courts had the occasion to consider the issue of whether a clause in an employee incentive award plan (as distinct from the employment contract), which forfeited deferred incentive payments in the event that the employee competed with his employer, was in substance a restraint of trade. The High Court held that the forfeiture clause in question merely contractually defined when the employee would lose their entitlement to the deferred incentive payments but was not likely to cause the employee 'to refuse business which otherwise he would take' or 'would diminish his prospects of employment'. The Court of Appeal disagreed. It found that, given that the deferred incentive award was already vested in the employee and that the forfeiture provision operated to restrain the employee from leaving the employment of the company to join a competitor, by way of a threat to forfeit a not insubstantial financial reward that had already vested in the employee should he in fact leave the employment of the company to join a competitor, the clause was a restraint within the ambit of the doctrine of restraint of trade.

In the most recent case, Pilkadaris Terry and others v Asian Tour (Tournament Players Division) Pte Ltd (6), the Singapore High Court had to consider an interesting question as to whether the doctrine of restraint of trade applied to a regulation of a trade association called Asian Tour. The High Court ruled that the doctrine of restraint of trade applied. While it had been recognised to be against public policy to allow interference with individual liberty in trading and carrying on a business or an occupation, the doctrine was not limited to the same and had been engaged in other circumstances, such as the operations of trade associations. The Asian Tour was found to be such a trade association. In as much as the Asian Tour sought to govern the actions of its members in their professional lives and in relation as to how they earned a living, it was said to be operating in an area in which the doctrine of restraint of trade applied.


What is the criteria to be used to evaluate a restraint of trade clause?

If the restraint is one to which the doctrine of restraint of trade applies, then the court will move on to consider these two questions in order to determine whether to uphold or strike down a restraint of trade clause:

  1. Does the employer have a legitimate proprietary interest to protect?
  2. Is the clause reasonable both in the interests of the parties and of the public?


It is to be noted that it is only after the doctrine of restraint of trade is found to be applicable that the employer has to establish a legitimate proprietary interest that needs protection and the twin tensions of freedom of contract and freedom of trade has to be balanced.

In relation to the question as to whether the employer has a legitimate proprietary interest to protect, business connections and trade secrets are often said to be legitimate proprietary interests. The general rule is that the clause must do no more than restrain the employee from carrying on the business in respect of which the connection has been built up. For instance, if A has been employed by Company B to engage in the corn business, but Company B made A agree not to compete with Company B and its associate company, Company C, which is in the furniture business, the clause may be too wide with reference to the proprietary interest to be protected. Similarly, a clause may be too wide if it restrained the employee from carrying on ‘any business whatever’.

In Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart (7), the company provided dental treatment and the employee was its associate dentist. He resigned to set up his own practice and many of the company’s former patients, who had been treated by the employee, left to become patients at his new practice.

In considering whether the company had a legitimate proprietary interest to protect, the court observed that the company was seeking to protect its customer connections and, therefore, had to show that the employee had personal knowledge or an influence over its customers. The court also took into account other factors such as the extent of that knowledge and influence, as well as whether the company had an institutional hold over its customers that would mitigate the employee’s personal influence. The court concluded that the company had a legitimate proprietary interest to protect because the main contact for the patients would be the employee and that, as long as they were happy with his services, they would be inclined to follow him to a competing clinic.

In terms of whether the restraint was reasonable in reference to the interests of the parties and the public, the court would usually consider factors such as the length of the restraint and the geographical scope covered by the clause in question.

In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd (8), the Singapore High Court found the clause in question to be unreasonable and, hence, unenforceable for the following reasons. First, the clause was wider than necessary in terms of duration. The non-compete agreement restrained trade for only one year while the clause covered a period of two years. There was no compelling reason why the company's legitimate proprietary interest requires protection beyond the period for which it already received protection under the non-compete agreement. Second, the clause had no geographical limit, whereas the restriction under the non-compete agreement was limited to countries in which the company had an actual place of business. Finally, the clause covered employment by, and consulting with, any organisation that competed for employees, customers, clients, market share or financial/commodity resources and deals. It was not limited to the company’s business and, hence, was wider than necessary to safeguard the defendant's legitimate proprietary interest.

In Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart (9), the clause in question was also found to be too wide and, hence, unreasonable. The Singapore High Court noted that the restraint was not limited to the clinic at which the employee worked, but included all other clinics set up by the company. It would cover all of the company’s patients even if the employee had not been involved in their treatment. There was also no time-limit on the period of restriction. All these suggested that, over and above protecting the company’s customer base, the clause was intended to prevent the employee from ever competing with the company. This went further than what could be legitimately protected and the court held the clause to be void as being in restraint of trade.

It may be seen that much depends upon the precise factual matrix before the court. Indeed, the very concept of reasonableness itself, which is central to the doctrine of restraint of trade, necessarily entails a close analysis of the relevant facts.


Conclusion

When employers include a restraint of trade clause in an employment contract, they have to be clear about the type of interests they are seeking to protect and ensure that the clause is not wider than is necessary to protect those interests. The courts – in balancing the competing interests of the employer and employee – will examine closely that the specific facts and circumstances of the case, in order to come to a decision whether to uphold or strike down the clause.

Written by a member of the Paper F4 examining team

 

References

  1. [2008] 1 SLR(R) 663; [2008] 1 SLR 663
  2. [1966] Ch 146 at 180; [1966] 1 All ER 126 at 138
  3. [1966] Ch 146 at 169; [1966] 1 All ER 126 at 131
  4. [2009] SGCA 54
  5. [2012] 1 SLR 311; [2011] SGHC 241
  6. [2013] 2 SLR 385; [2012] SGHC 236
  7. [2011] SGHC 266
  8. [2012] 1 SLR 311; [2011] SGHC 241
  9. [2012] 1 SLR 847; [2011] SGHC 266

Last updated: 16 Jul 2013