Although employers and employees may negotiate and agree to almost any express term in employment contracts, an employer's ability to enforce a covenant in restraint of trade against an ex-employee is not quite so straightforward. Govindarajalu Asokan provides us with an insight into how covenants in restraint of trade operate.
The Contract of Employment
While the relationship of employer and employee may well exist without a contract of employment (Chang Fah Lin v United Engineers (M) Sdn Bhd & Ors [1978] 2 MLJ 259), the relationship is normally constituted by a contract of employment, which may be oral or in writing and express or implied (section 2, Employment Act (Cap 94)). Subject to the rules of common law, equity and applicable statutory provisions, the contract of employment regulates the rights, liabilities, duties and obligations of the contracting parties thereto, and the inception, elements and end of the relationship of employer and employee.
Express terms
Broadly speaking, the parties are at liberty to agree to any express term they wish, unless such a term is unlawful (such as being against public policy). Due to this element of illegality, it is desirable for both the employer and employee to have a working knowledge of express terms, particularly covenants in restraint of trade in attempting to achieve a water-tight, or almost water-tight, contract of employment.
Implied terms
Fidelity or good faith (Tang Siew Choy v Certact Pte Ltd [1993] 3 SLR 44)
on the part of an employee is, in any event, a term implied by law. The employee
must, therefore, avoid all conflict of interest situations. Thus, an employee,
particularly during his period of employment, must not use trade secrets or
confidential information for his own benefit to the detriment of his employer.
Covenants in Restraint of Trade
A contract in restraint of trade can be defined as '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' (Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 at page 180 and Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at page 317).
Careful drafting
Invariably, the employer, as the covenantee, will wish to enforce the covenant in restraint of trade against the employee, as the covenantor. This often arises once the employee has left his previous employment. In particular, unbeknown to the employee who has resigned, he would have thoughtlessly agreed/covenanted, in his contract of employment, not to subsequently engage in business activities on his own or to enter into an employment contract with his previous employer's competitor.
The ex-employer will naturally institute proceedings in court for a variety of remedies to stop the ex-employee from competing with the employer's business, whether through a new employer or on his own business account. A well-drafted contract of employment might ensure that a covenant in restraint of trade is reasonable to both parties (employer and employee), as well as in the matter of public interest. In Buckman Laboratories (Asia) Pte Ltd v Lee Wei Hoong [1999] 3 SLR 333, the court was confronted with a purportedly well-drafted further covenant in restraint of trade. Unfortunately for the employer, this was what Judith Prakash J had to say about the clause (at pages 342 and 343):
The plaintiffs appear to have recognised that the restrictive covenants in clauses 12.1 and 12.2 were too wide and could not be well-received by a court. They therefore inserted clause 12.6 in an effort to save some minimum portions of these clauses in the event a court considered parts of them to be invalid. … An employee with a contract containing such clauses would have no way of knowing the extent of his obligations under them and would be put in an invidious position regarding his future employment if he ever sought to leave the plaintiffs' employ. [Emphasis added.]
Therefore, it follows that, in practice, it is difficult to have a water-tight, or almost water-tight, covenant in restraint of trade in favour of the employer. However, a covenant in restraint of trade that meets with the requirements of the fundamental rules applicable to it might well do the job (refer below for a discussion on the efficacies of these rules).
Enforceability
The reasonableness of the covenant in restraint of trade is scrutinised by the courts when considering whether to enforce such a covenant. The courts have approached this issue of reasonableness largely as a question of fact. As the House of Lords pointed out in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd (supra), 'The doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason' (page 331).
The Fundamental Rules
There are five rules. They were crystallised from a leading House of Lords decision, Nordenfelt v Maxim [1894] AC 535, the facts of which did not deal with an employment contract. In that case, Nordenfelt, who was in the business of making and inventing guns and ammunition, sold his business to Maxim for almost £300,000. The contract of sale contained a covenant that Nordenfelt would not, for a quarter of a century, 'engage … either directly or indirectly in the trade or business of a manufacture of guns, gun mountings or carriages, gun powder explosives or ammunition, or in any business competing or liable to compete in any way with that for the time being carried on by the company ' (at page 538). [Emphasis added.] The contract, however, permitted Nordenfelt to deal in explosives other than gunpowder, in torpedoes or submarine boats and in metal castings or forgings. After some years, Nordenfelt entered into a business with a competitor dealing in guns and ammunition. Maxim sought to stop him from doing this.
The court severed the restraint of trade covenant. It held that the italicised words above were unreasonable and, therefore, unenforceable because they extended protection to the company for its future business activities and were not confined to the company's business as it was at the time of its sale. The remainder of the covenant in restraint of trade, the court held, was reasonable between the parties, although it covered a wide area, firstly, because Nordenfelt received a large sum of money, secondly, because Nordenfelt reserved for himself his inventive and manufacturing skills and finally, because it was not contrary to public policy since Maxim was an English company who would be making guns and ammunition for foreign territories!
Prima facie against public policy
All covenants in restraint of trade are prima facie void, unless they are also reasonable in the interest of the public (Asia Polyurethane Mfg Pte Ltd v Woon Sow Liong [1990] 2 MLJ 463; [1990] SLR 407). Hence, if the contract of employment is so crafted to extend protection to an (ex-)employer over and above such rights of his, it will be unenforceable to that extent as a matter of public policy. Again, as a matter of public policy, the courts will only protect the proprietary interests of an employer, including trade secrets and confidential information.
Chan Sek Keong J (as he then was) in Asia Polyurethane v Woon Sow Liong (supra) said that the employer in that case had no interest, like trade secrets or confidential information relating to customers, which required protection. It was, therefore, contrary to public policy to restrain competition by the employee in that case. The employers deposed in an affidavit that '… a competent chemist may be able to analyse the chemical composition and the percentages of the chemicals therein …'. This admission drove His Honour to conclude as he did. So, public policy favours the protection of trade secrets, confidential information and the like. If the restraint of trade covenant encompasses such matters, the courts will, as a matter of public policy, afford protection to the employer, provided that there is sufficient evidence to establish them.
As early as about 1924, Shaw CJ in Framroz v NR Mistry [1933] SSLR 543 held that a mineral water manufacturer had no trade secrets to protect. The manager's contract of employment contained a covenant in restraint of trade, but it was held that the manager had acquired no special knowledge other than what he would have acquired in any properly conducted business of the same character.
In VSL Prestressing (Australia) Pty Ltd v DJ Mulholland [1971] 2 MLJ 89; [1969-1971] SLR 527, Choor Singh J similarly held that the case in question was not one where the defendant ex-employee could 'by personal influence or his acquaintance with individual customers divert business from the plaintiffs to himself' (pages 92 and 533) and the knowledge acquired in the course of employment by the defendant 'cannot … be regarded as knowledge of a trade secret which the defendant must be restrained from using.'
In Medivac International Management Pte Ltd v John Walter Moore [1988] 1 MLJ 5; [1987] SLR 415, trade secrets featured again. The employee was the company's general manager. He resigned without giving the requisite three months' notice required under the contract of employment and agreed to work as the managing director of a new company. His ex-employers argued that certain information acquired during his employment amounted to trade secrets. Chan Sek Keong J (as he then was) concluded on the facts that the specified items did not amount to confidential information in the nature of trade secrets as they contained information which any employee was bound to acquire in the course of employment.
In Thomas Cowan v Orme [1961] MLJ 41, 'monopoly' was stated as offending against public policy. In that case, FA Chua J held (at page 43):
… if the [ex-employee] is not allowed to operate the plaintiffs would have a virtual monopoly in Singapore … It is of course against public policy to allow any particular trade to be monopolised. [Emphasis added.]
Where special circumstances exist
Whether special circumstances exist to justify a restraint is a question of law for the court to decide upon since, as stated above, the court will not enforce an agreement which is contrary to public policy (Whyatt v Kregliner and Fernan [1933] 1 KB 793 and North Western Salt Co Ltd v Electrolytic Alkali Co Ltd [1914] AC 461).
It is notable that special circumstances arise where confidential information relating to customers or trade secrets exist, requiring protection of the employer's interest in these matters. Thus, in Heller Factoring (Singapore) Ltd v Ng Tong Yang [1998] 3 SLR 299, GP Selvam JC (as he then was) decided in favour of the ex-employers. The senior credit and marketing executive of the employers resigned and joined a competitor. GP Selvam JC held (at page 306) that, so long as it was reasonable,
a clause intended to protect an employer against use by the former employee of confidential information but also against the ex-employee drawing away the employer's customers will be upheld. A covenant may lawfully prohibit the employee from accepting a position with one of the employer's competitors so as to be likely to destroy the employer's trade connections by misuse of his acquaintance with the employers' customers or clients will be upheld. [Emphasis added.]
Restraint is justified if reasonable
By and large, a restraint will be justified if it is reasonable not only in the interest of the contracting parties, but also in the interest of the public. What is reasonable, particularly as a matter of interest of the contracting parties, will be discussed below.
Burden of proof
At this stage, it should be noted that it is for the person, usually the employer as covenantee, to prove that the covenant is reasonable between the contracting parties (Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, Herbert Morris Ltd v Saxelby [1916] AC 688 and Attwood v Lamont [1920] 3 KB 571). The burden of proving that it is, nevertheless, against the interests of the public lies upon the covenantor, normally the employee (Herbert Morris Ltd v Saxelby (supra) and Attorney-General of Commonwealth of Australia v Adelaide Steamship Co Ltd [1913] AC 781).
Construction of covenant in restraint of trade
Covenants in restraint of trade are normally construed with reference to the need to protect the employer against competition by the employee and taking into consideration the factual circumstances prevailing at the time when the employment contract was entered into (Clarke v Newland [1991] 1 AER 397).
Reasonableness vis-à-vis the Parties
Confidential information
Lai Kew Chai J in the Court of Appeal in Tang Siew Choy v Certact Pte Ltd (supra), quoted the significant English decision of Faccenda Chicken Ltd v Fowler [1987] Ch 177 in addressing the duty of confidentiality:
The duty of confidentiality …
- While the employee remains in the employment of the employer the obligations are included in the implied term which imposes a duty of good faith or fidelity on the employee …
- The implied term which imposes an obligation on the employee as to his conduct after the determination of the employment is more restricted in its scope than that which imposes a general duty of good faith …
- In order to determine whether any particular item of information falls within the implied term so as to prevent its use or disclosure by an employee after his employment has ceased, it is necessary to consider all the circumstances of the case. We are satisfied that the following matters are among those to which attention must be paid. (a) The nature of the employment. Thus employment in a capacity where confidential material is habitually handled may impose a high obligation of confidentiality … (b) The nature of the information itself. In our judgment the information will only be protected if it can properly be classed as a trade secret or as material which … is in all circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nominee. … [Emphasis added.]
Lai Kew Chai J, relying on several leading English cases, held as follows on the issue of identifying the confidential information. In the aforesaid Court of Appeal decision (at pages 52 to 53):
Identifying the confidential information
…
There were three passages which were relevant for the determination of whether the subject material had that quality of confidentiality required to merit the protection of the law. The first was that in Faccenda Chicken2 starting from the paragraph numbered (5) in the passage quoted above. Then there was the following description by Megarry VC in Thomas Marshall (Exports) Ltd v Guinle7 (at p 209):It is far from easy to state in general terms what is confidential information or a trade secret. … Plainly something which is public property and public knowledge is not confidential: see Saltman Engineering Co Ltd v Campbell Engineeering Co Ltd [1963] 3 All ER 413 per Lord Greene MR. On the other hand, it has been said:
'Something that has been constructed solely from materials in the public domain may possess the necessary quality of confidentiality: for something new and confidential may have been brought into being by the application of the skill and ingenuity of the human brain. Novelty depends on the thing itself, and not upon the quality of its constituent parts.'
See Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 47, a case that was not cited, but in part draws on the Saltman case, which was. Costs and prices which are not generally known may well constitute trade secrets or confidential information: see Herbert Morris Ltd v Saxelby [1916] 1 AC 688 referring to prices.
If one turns from the authorities and looks at the matter as a question of principle, I think (and I say this very tentatively, because the principle has not been argued out) that four elements may be discerned which may be of some assistance in identifying confidential information or trade secrets which the court will protect … in an industrial or trade setting. First, I think that the information must be information the release of which the owner believes would be injurious to him or of advantage to his rivals or others. Second, I think the owner must believe that the information is confidential or secret, ie that it is not already in the public domain. It may be that some or all of his rivals already have the information: but as long as the owner believes it to be confidential I think he is entitled to try and protect it. Third, I think that the owner's belief under the two previous heads must be reasonable. Fourth, I think that the information must be judged in the light of the usage and practices of the particular industry or trade concerned. It may be that information which does not satisfy all these requirements may be entitled to protection as confidential information or trade secrets: but I think that any information which does satisfy them must be of a type which is entitled to protection.Finally, there was Staughton LJ's statement in Lansing Linde Ltd v Kerr3 (at p 425):
… Mr Poulton suggested that a trade secret is information which, if disclosed to a competitor would be liable to cause real (or significant) harm to the owner of the secret. I would add first, that it must be information used in a trade or business, and secondly, that the owner must limit dissemination of it or at least not encourage or permit widespread publication. [Emphasis added.]
Thus, to be reasonable, the covenant in restraint of trade should only protect the legitimate interests of the employer as covenantee; he is only entitled to protect confidential information or trade secrets. The employer cannot, however, restrain an employee from using the skill and knowledge which he acquired in the course of his employment (GP Selvam JC, Heller Factoring (Singapore) Ltd v Ng Tong Yang (supra)).
GP Selvam JC's decision is consistent with that of Kan Ting Chiu J in Universal Westech (S) Pte Ltd v Ng Thiam Kiat [1997] 2 SLR 139, where the latter held (at page 148) that '[t]he policy of selling equipment cheaply and making profits from the sale of the related consumables is not novel or exceptional.' The judge further observed (at page 148):
Former employees who start their own businesses cannot be prevented from applying the policy to their businesses because their previous employers use the same approach. Employees who acquire knowledge of the products that they deal with do not have to abandon the knowledge when they resign. They are entitled to make the best use of their experience and knowledge in their subsequent employment or ventures, even if they involve their former employers' confidential information - so long as they do not steal and use their trade secrets or information of such high confidentiality as to amount to a trade secret. [Emphasis added.]
Kan Ting Chiu J's ruling was upheld by the Court of Appeal ([1997] 3 SLR 419).
Scope of the protection
Extent
A covenant in restraint of trade cannot be reasonable, unless it is confined to protecting the legitimate interests of the employer as covenantee. Accordingly, a covenant that stipulates that an ex-employee is 'not to carry on any business whatsoever' is unenforceable (Baker v Hedgecock (1889) 39 Ch D 520). It has also been held that a baker cannot restrain his employee, who was engaged to sell bread, from starting a restaurant business, even though the baker himself presently runs one or may do so in the future (Bromley v Smith [1909] 2 KB 235). In one English case, the court interpreted the covenant restraining the employee from selling 'milk or dairy produce' not to include his employment with a grocer who sold butter and cheese (Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526)!
Area
The general rule is that the area of restraint should be co-extensive with the protection of the legitimate interests of the employer as covenantee. To quote Judith Prakash J in Buckman Laboratories (Asia) Pte Ltd vs Lea Wei Hoong (supra):
… there is another difficulty which the plaintiffs will face in establishing that the restraint imposed is reasonable. The geographical area covered by the clause is extensive. In effect, it prevents the defendant from working for any competitor in most of Asia … A more reasonable clause would have limited the restriction to countries in which the defendant had actual and significant customer contact. [Emphasis added.]
Employee's status
The employer will obviously be given a larger degree of protection if the (ex-)employee held a senior position like managing director. In the case of a junior (ex-)employee, it is likely that the court will lean against the employer (Buckman Laboratories (Asia) Pte Ltd v Lee Wei Hoong).
Time - length/date
Each case must be decided on its own facts. The general proposition, however, is that the period of the restraint, to be reasonable, should not exceed a period that is necessary for the protection of the legitimate interests of the employer as covenantee. One factor that weighs heavily against the employer as covenantee is the position held by the (ex-)employee. In the English case of M & S Drapers v Reynolds [1957] 1 WLR 9, a period of five years imposed upon a collector-salesman was held to be too long!
When must the reasonableness of the covenant in restraint of trade be determined, at the time of the contract of employment or thereafter? The law on this point is not quite clear. Lord Denning MR in Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 (a non-employment case) held that, even if it was reasonable on inception, it becomes unenforceable should it be subsequently found to operate oppressively. The other two Lord Justices did not support this view, nor do most authorities (Chitty on Contracts, Vol 1 (1999 Ed) at paragraph 17-086).
Balancing the factors
It may be seen that the balancing exercise carried out by the courts is conducted within the framework of 'reasonableness', whether as a matter of interest between the parties or as a matter of public policy or interest. Often, the justice of the case requires the doctrine of restraint of trade to be applied to factual situations with a broad and flexible rule of reason.
Reasonableness vis-à-vis the Interest of the Public
The doctrine of public policy has already been dealt with. The question is whether the reasonableness of a covenant in restraint of trade must be dealt with only as a matter of public interest. Lord Pearce in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd (supra) thought so and said (at page 324):
… There is one broad question: is it in the interests of the community that this restraint should, as between the parties, be held to be reasonable and enforceable?
The two-stage approach adopted by our local courts, particularly in Thomas Cowan v Orme (supra), is instructive. FA Chua J first considered the covenant in restraint of trade in that case as being reasonable as a matter of interests between the parties. Thereafter, he decided that, notwithstanding such reasonableness, the covenant in restraint of trade in that case was nevertheless unreasonable in the interest of the public.
A similar approach seems to have been adopted by Lee Seiu Kin J in Nature's Farm & Ors v Poa Kheng Bee & Ors (unreported), where His Honour stated (at paragraphs 11 and 16):
According to Chitty on Contracts (27th Ed) paragraph 16-066, all covenants in restraint of trade 'are prima facie unenforceable at common law and are enforceable only if they are reasonable with reference to the interests of the parties concerned and of the public'. It is clear that the provisions in question are covenants in restraint of trade. The plaintiffs do not dispute the proposition in Chitty and agree that the onus is on them to show that the covenants in question are reasonable …
Again, as stated above, Lai Kew Chai J, in delivering the decision of the Court of Appeal in Tang Siew Choy & Others v Certact Pte Ltd (supra), seems to have adopted the two-fold test approach applied by FA Chua J in Thomas Cowan v Orme (supra), when he stated that the protection afforded to an employee must be balanced by the public policy in favour of competition. The same approach was adopted by Chan Sek Keong JC (as he then was) in Asia Polyurethane v Woon Sow Liong (supra).
Accordingly, the two-step approach should continue to be applied in Singapore, as it is not only valuable to the contracting parties, but also desirable in the interests of the public, as the community should not be denied the fruits of competition.
Employer's Conduct
Even if the restraint of trade covenant is reasonable both as a matter of interest between the parties and as a matter of interest of the public, it may yet be unenforceable on account of the conduct of the employer. Thus, where the employer has dismissed the employee without notice, thereby repudiating the contract of employment, it was been held that the employer cannot enforce the covenant in restraint of trade against the employee (General Bill Posting Company v Atkinson [1980] AC 118, Measures Brothers Ltd v Measures [1910] 2 Ch D 358 and Briggs v Oates [1990] IRCR 472). A term in the contract of employment stating that the covenant in restraint of trade will be enforceable even if the employee is wrongfully dismissed is invalid (Rock Refrigeration Ltd v Jones [1996] IRCR 675). An employer, by his conduct, may be held to have no desire to place any restraint on his ex-employee, although the contract of employment expressly contains a covenant in restraint of trade (Wrigglesworth v Wilson Anthony [1967] MLJ 269).
Conclusion
A covenant in restraint of trade, whether express or implied, cannot be enforced unless it is reasonable as a matter of both private and public interests. However, even if the restraint of trade covenant is reasonable both as a matter of interest between the parties and as a matter of interest of the public, it may yet not be enforceable on account of the misconduct of the employer.
The courts will only protect confidential information or trade secrets. An employee is free to use the skill and knowledge which he acquired in the course of his employment. There is, of course, difficulty in drawing the line between the employers' confidential information/trade secrets on one hand and the employee's skill and knowledge on the other.
The Singapore courts should continue to adopt the two-stage approach in determining the reasonableness of such covenants. Whilst parties should be at liberty to introduce reasonable covenants in restraint of trade, the interests of the public should also be satisfied. The public should be entitled to the results of competition.
Govindarajalu Asokan
Rodyk & Davidson