Restraint of trade in Malaysia
In Malaysia, there are four types of contracts where the provisions of restraint of trade may exist. First, contracts between employer and employee in contracts of employment. It is regards to an employee who agrees not to compete with his employer by conducting a similar business or joining a rival company upon leaving his employment. Commonly, an employee is bound with a ‘conflict of interest’ clause, which means that the self-interest of the employee may not conflict with the employer under a contract of employment. Second, contracts between the seller and buyer for the sale of the goodwill of a business where a seller of a business who is with the goodwill agrees not to carry on a similar business to compete the with the purchaser of the business. Third, contracts between partners prior to dissolution of the partnership and the continuance of partnership. Fourth, contracts deal with other commercial matters.
The validity of agreement in restraint of trade can refer to Section 28 of Contract Act 1950, which it stated that “Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.” This clause is made with the intention to ensure free trade and free movement of labour. Based on the term “to extend the void”, it means that the contract is still remains valid and binding, only the clause on restraint of trade is unenforceable. Therefore, severance is allowed in this respect.
There are some exceptions under this section. First is saving of agreement not to carry on business of which goodwill is sold. “One who sells the goodwill of a business may agree with the buyer to refrain carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein: Provided that such limits appear to the court reasonable, regard being had to the nature of the business.”
It means that where a seller of the trade or the business agrees to restrain himself by not competing with the purchaser, within “specified local limits” and also within the duration of the purchaser that carries on that business. The term “specified local limits” means that an area that specified by the parties among the countries. The parties can make decision and choose the area to which the limits could apply among the countries.
However, the exception has a proviso to the limit which that they “appear to the court reasonable, regard being had to the nature of the business. The courts have to use a test of reasonableness based on whether, regard to the nature of the business and the limits which been imposed are reasonable as to the limit of the area to which only the restraint may be applied. Based on the term “so long as the buyer…carries on a like business” which ruled with the regard to the duration to which the restraint can be applied, it is clear to show that as long as the buyer is working the purchased business, the restrained of trade is enforceable on the part of the seller.
Second is of agreement between partners prior to dissolution. “Partners may, upon or in anticipation of a dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits as are referred to in exception 1”
The exception stated that in dissolution of the partnership, partners can be restrained themselves from carrying on a similar business. It simply means that all the former partners cannot do what they have been doing if such an agreement is upheld. It may not include working as an employee in a similar business although they may restraint each other from carrying on a business similar to that of the partnership.
Third is agreement during the continuance of partnership. “Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.”
This exception is very strictive in the partners when come to a partnership situation. In a partnership, it can restrain each other from carrying on any other business apart from that partnership. It will not be conducive to trade if such an agreement is enforced.
Based on the Section 28 of the Contract Act 1950, all agreements in restraint of trade are to that extend void, unless under the three exceptions. There is no any exception for the employment agreement to include restraint of trade, which known as non-compete clause. This clause is void and unenforceable under Section 28 of the Contract Act 1950. However, there is other alternatives for the employer to protect their confidential information from wrongfully used by employee, such as non-disclosure agreements and anti-poaching or anti-solicitation clauses, which imposes a duty of fidelity and good faith on an employee.
The doctrine of restraint of trade is based upon public policy. Everyone shall be free to use his abilities and earn his living in whatever legitimate ways he may from time to time think fit. A contract in restraint of trade hampers this freedom which in the policy of the law to protect. Public policy requires that every man shall be at liberty to deprive himself of the state of his labour, skill or talent, by any contracts that he enters into. The public have an interest in every person’s carrying on his trade freely and so has the individual.
In The Hua Khiow Steamship Co Ltd v Chop Guan Hin, the plaintiff and the defendant had had an agreement based on the restraint of trade between a seller and a buyer. The defendant agreed to ship all his goods through his vessels. Defendant would be disentitled to claim a rebate and he also be liable to pay three times the cost of freight shipped by them to the plaintiff in breach of agreement. The court held that the agreement was not void for being in restraint of trade within the meaning of section 28 of Contract act 1950. The agreement which only limits the manner in which trade shall be carried on in this following case.
In Stamford College Group Sdn Bhd v Raja Abdulalh Raja Othman, based on the restraint of trade between employer and employee, the High Court gave a wide interpretation according to the section 28 of Contract Act 1950. Based on this case, the defendant and the plaintiff had entered into a contract of service where the plaintiff as a lecturer in Hotel Management and Catering. The defendant should not become employed by any company and institution without the consent of the plaintiff as a lecturer or a teacher and also the defendant should not make use of any confidential information which he had obtained in the course of his service within a period of two years from such termination. The defendant then subsequently terminated his employment with the plaintiff and he became employed by Syarikat PDC Sdn Bhd which gave courses in, inter alia, Hotel Management. The defendant submitted that the said term was a clause in restrain of trade. The plaintiff then obtained against the defendant in the term void and applied to set aside the injunction. The High Court stated that the question was whether the restrictive clause threatened the livelihood of a person. So in this case, the court held that if the defendant was not allowed to be a lecturer elsewhere, his livelihood would be affected. Therefore, the clause was held void.
In Millennium Medicare Services v Nagadevan Mahalingam, based on the restraint of trade between partners prior to dissolution of the partnership and the continuance of partnership, the appellant was running a business of healthcare centres in both principal business and branches in Johor. The respondent, Nagadevan was a registered medical practitioner. On 1st of November in the year of 2006, he had agreed to join Millennium Medicare Services as a partner and come to a said agreement. There was a term under the said contract that restraint Nagadevan as a partner from practicing as a medical practitioner within the radius of 15km from any of the Millennium Medicare Services’s branches. The restraint would apply to Nagadevan if he as a medical practioner no matter be in the way by setting up any medical practice by himself or as a partner or as an employee. The express term stated that restraint would be effective for three years from such date which Nagadevan had ceased to be a partner of Millennium Medicare Services. Nagadevan then subsequently gave a three-month notice to resign and withdrew as a partner of Millennium Medicare Services. Nagadevan then practiced as a medical practitioner at a clinic and it was allocated within the radius of 15 km radius from on of the Millennium Medicare Services’s branches. The appellant against the respondent for an injunction to restraint and for damage. The issue raised here is whether the restraint of trade clause in partnership agreement contravened Section 28 of Contracts Act 1950.
The court held that, the Millennium Medicare Service had no authority to restraint Nagadevan from practicing within 15 km radius from the Millennium Medicare Services’s branches. The court dismissed Millennium Medicare Services application because there was no evidence to show that the partnership agreement was made in anticipation of the dissolution of the partnership practice then or in the near future.
In Svenson Hair Center Sdn Bhd v Irene Chin Zee Ling, based on the restraint of trade against use of confidential information by employee, the employer in this case applied for an injunction, inter alia to prevent its former employee from using certain confidential information relating to customer. The employee had, under her contract of service with the employer signed agreements that contains express and specific prohibitions regarding confidentially. The employee had worked with the employer for six years. Then, the employee was being first employed as a sales consultant, and having subsequently being promoted as ‘centre manager of the Petaling Jaya branch’. The court applying the English case of Faccenda Chicken Ltd v Fowler and held that there is generally no restriction to an ex-employee competing with his/her ex-employer by canvassing or doing business with the latter’s former customers. This is certainly in line with general principles which allows competition and is consonant with Section 28 of the contracts Act 1950.
Although the restraint of trade is not applicable in the employment contract, the employee is not permitted to disclosure the confidential information, which refer to any information about the company, such as its dealings, transactions and financial matters. An employer may claim for a springboard injunction for a breach of the duty relating to the disclosure of confidential information by the employee during the employment.