The difference between the legal theory and application of law of Restraint of Trade under Malaysia and England jurisdiction.
Restriction of trade is a contract that agrees on someone to restrict himself from carrying on his trade, business and profession. While such agreements are prima facie void in England (the agreements are void until it was proven), the agreements are void in Malaysia pro tanto. Both English and Malaysian courts are in the opinion to have a fair competition between parties and are opposing someone cannot utilize his skill effectively. In England, there are many cases regarding restraint of trade which is legitimate if it is vital and just to protect interest of one parties.
To identify whether the restraint of trade is reasonable, the English court will apply “reasonableness test” in the contract. Here, reasonable means that the restraint is to protect parties’ legitimate interests. If the contract is to only prevent parties from joining a legitimate competition, the restraint will fail on the ground that it prevents healthy competition between parties; Meanwhile, restraint of trade is void pro tanto as stated in Session 28 of Contract Act unless it falls under the exceptions. In Nagadevan Mahalingam v. Millennium Medicare Services1 , the learned judges affirmed that reasonableness test as practiced in England is not applicable in Malaysia as it is against Session 28 of Contract Act as in Polygram Records Sdn Bhd ; Ors v Phua Tai Eng2. In Wriggleworth v. Wilson Anthony3, the learned judge held that exceptions in Session 28 precluded the necessity of reasonableness test as claimed by plaintiff in determining the presence of the element of restraint of trade. Thus, it is undeniable that the concept of reasonableness and fairness as applied in England will not be applied in Malaysia. Session 28 of Contract Act also rigidly invalidated all and every form of restraint, whether it is a partial or general restraint. The exceptions are also narrowly limited.
The reason that Session 28 of Contract Act has a different stand compared to England counterpart is to protect the trade from restraint as trades are underdeveloped in 1950. The Contract Act has also a similar and interesting fact when we compared Indian Contract Act. Session 28 of Contract Act is the same with Session 27 of Indian Contract Act which when amended, allowing reasonable restraint to be carrying on in trade.
There are some procedures in reasonableness test need to be followed. Firstly, the court will determine the existence of contractual relationship between parties. Next, the court will determine the presence of limitation on one party to carry out one’s trade business or profession. If there is such clause, the agreement will be prima facie void unless other reasonable elements are present. The reasonable elements should have two criteria. One of the criteria is to protect the party’s legitimate interest. The other criterion is to protect the public interest. In some cases, the public interest should at least not to be harmed as the public has the benefit to be given the privilege to choose freely and without obstruction.
For the clause to be reasonable, it should have covered only a reasonable geographical area to protect the legitimate interest of the party who drew the contract as in Fitch v Dewes4. While smaller area is reasonable, it would be more unfair for the party who drew the contract and can sometimes harm the interest of that party. In Fellowes v Fisher5, Lord Denning held that the clerk is not popular and restraining him to practice conveyancing in Wathomstow area of London is unreasonable.
Next, the restraint should be smaller for the range of activities to protect legitimate interest. Sometimes, the geographical extent is inversely proportional to the local population for the restraint to be reasonable or else the restraint clause is void. Hence, when a restraint is drafted, it should not cover too wide such that it is impossible for the person to try for every possibility. In Mont (JA)(UK) Ltd v Mill6, the 43-years-old paper tissue industry1’s managing director was prevented from joining another paper tissue industry in one year after his resignation. The court held that it is unjust to prevent him from joining the industry for such a prolonged period as this is only what he knew.
The duration of the restraint should be reasonable. When the restraint covered a longer period, it may render unfair advantage to the party who drew the contract. In some cases, it may lead to monopoly in the market and induce unfair competition and deprive the choice of the public. In Fitch, supra, the court held that restraining a conveyancing clerk to practice for an unlimited duration is reasonable as the restriction is applied in a rural area.
In the employment contract, the court may consider the rank of the employee and his importance to the business. Such restraint will be reasonable deemed by the court as in Herbert Morris Ltd v Saxelby7 as the employee played a very important role in his former’s employers business without being a senior staff.
Meanwhile, restraint of trade is also reasonable when it involves vendor restraints as long as it prevents the public from losing their benefit where one party is prevented from trading by the other. The court is more likely to upheld vendor restraints compared to employee restraints as the bargaining strength of the parties is equal. In employment contract, employee restraint is easier to be dismissed as employee is inferior when it comes to bargaining with the employer. The reasonableness should include legitimate interests of the parties and not merely preventing legitimate competition. In British Reinforced Concrete Co v Schelff 8, a business specialized in steel reinforcement production for road was sold. The contract of sale contained a restraint clause from preventing the vendors to engage in a similar business. The vendors later entered another business as a manager. The court held that it was too wide to protect legitimate interests and therefore void ab initio. The court may uphold longer duration and wider geographical extent in vendor restraints compared to employment restraint as businessmen has the same bargaining power compared to employees’ restraint. In Nordenfelt v Maxim Nordenfelt Co9, the plaintiff, a manufacturer of guns and ammunition, has sold his business to defendant. The contract limits the plaintiff not to makes guns and ammunition in any part of the world for the next 25 years, and not to compete with the defendant in any way. The House of Lord held that limitation not to produce guns and ammunition for a period of 25 years is reasonable but the phrase “not to compete with the defendant in any way” is not pragmatic.
In restraint between merchants or manufacturers, English court will apply the rules and declare the agreements valid when both parties gain benefits from the agreement. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd 10, the appellant, a motor fuel supplier, agreed to only sell motor fuel to the respondents as well as opening the garages for reasonable hours and not to offer any discount scheme. The agreement imposed a restriction of 4 years and 5 months in one garage and a 21-years solus agreement that bar redemption for 21 years. The court held that a longer period of 21 years was invalid as it brings disadvantage to the appellant. Another example where restraint is valid and mandatory as the parties are members of an association and are required to bind to the association’s rule. In English Hop Growers v Dering11, the defendant agreed to deliver his entire hop crop to the association for his coming sale as it is one way to eliminate competition among hop growers. Any loss and profit are shared equally among members of the association. The court held that this agreement is used to protect all the member’s benefit. On the other hand, restraint in the agreement between artists and performers and their various agent are usually deemed as unenforceable by law as both parties has unequal bargaining strength and position. In Schroeder Music Publishing Co Ltd v Macaulay12, the defendant entered into an agreement with music publisher stating that royalties will only payable when the compositions by publishers were commercially produced and no general payment for composition. The agreement also stated that the original five years agreement could be altered for the duration subjected to publishers’ discretion. The court held that the regulation of trade is unlawful as the publishers are taking advantages of the young composer’s inexperience in musical industry.
One of the famous case regarding restraint of trade in Malaysia includes Wriggleworths, supra, as it was a landmark case of restraint of trade in employment contract. In that case, the plaintiff, an employer of a law firm which is the only law firm existed at that time, imposed restrictive clause stating that the plaintiff cannot practice as an advocate and a solicitor within a 5 miles radius from Kota Bharu within two years from the defendant’s resignation. The learned judge held that the restrictive clause imposed by the plaintiff on defendant is void pro tanto claiming
the defendant, a practicing advocate and solicitor in Peninsula of Malaya, being barred from practicing his lawful profession and business in any part of Peninsula of Malaya, has clearly violated Section 28 of Contract Act.
In Ganesh Raja Nagaiah & Ors V. Nr Rubber Industries Sdn Bhd13, the defendant used to be a plaintiff’s employee. The High Court grant an injunction for the plaintiff to surrender their information regarding the personal information of the sale as the defendant has used it. The defendants later appealed. The Court of Appeal later reversed the decision and held that general information which can be obtained by usual employees of the respondent’s company as well as any information which can be obtained by the public could not be viewed as a violating the doctrine of confidential.
In DCM Personal Care Sdn Bhd V. Khoo Kok Leong & Anor14 , the plaintiff brought against the first defendant for the breach of contract of employment and breach of good faith and fidelity and the second defendant for violating the usage of confidential information as deemed by the plaintiff. The court held that the second defendant who has the plaintiff’s trade secret information which was found in the first defendant’s such as claim sheets and staff reimbursement form is a violation of Section 28 of Contract Act.
In Kamarudin Merican Noordin v Kaka Singh Dhaliwal15, the plaintiff, a race horse trainer licensed by Malayan Racing Association (MRA) and the President of the Association of West Malaysian Race Horse Trainers (AWMRT), sued the defendant, the public officer of MRA, for declaration a rule under the contract in which the MRA has agreed to abide by any rules imposed by AWMRT such that the rule is ultra vires, and should be null and void and unenforceable under Contract law. Under the contract of MRA, one of the rules stated that a fresh applicant needs not to have 20 horses to apply as a licensed horse trainer, but the other rules stated a licensed trainer needed to have at least 20 horses in his stable. The court held that the later rule is a contract restrictive to trade but not restraint of trade as the plaintiff, a racing horse trainer, is an individual trainer where the MRA does not impede the plaintiff to practice as a horse trainer geographically.
In Svenson Hair Center Sdn Bhd v Irene Chin Zee Ling16, the plaintiff, an employer of the defendant, signed a specific prohibition agreement on confidentiality, non-solicitation, and non-competition with the defendant. The plaintiff later sued the defendant when the defendant set up the same business with plaintiff and accused the defendant for utilizing the plaintiff’s confidential information. The plaintiff also applied an injunction to stop the defendant from contacting with the plaintiff’s customer and the defendant argued that her livelihood has been affected by limitation on customer access imposed on her. Here, the court held that plaintiff’s customers are not the business experience and skill of the plaintiff.
Although in most cases of employment contract seemed more favour to the employee, the judgment will favour the employee if there is a strong prima facie shown that the livelihood of the employer is severely impacted, and the employee used the trade secret of the employer. In Worldwide Rota Dies Sdn Bhd v Ronald Ong Cheow Joon17, the defendant has approached all the employer’s employee to tender resignation to the plaintiff and invited them to join the defendant’s company. The defendant also has revealed the plaintiff’s trade secret to the plaintiff’s competitor while he is still an employee of the plaintiff. The plaintiff then sued and claim an injunction and damages for the forecasted profit. The court held that the plaintiff act has violated restraint of trade under section 28 of Contract Act.
To ensure that the lost would be welly served, an equitable remedy is available to any party being injured severely in the trade. Injunction, which is a judicial order that restrain someone from beginning or continuing the any action of threatening or invading one’s legal right, or compelling ones to carry out specific act, is one of the equitable remedies ordered by court. Injunction can be either prohibitory or mandatory, where the former is to refrain someone from doing something rights while the later is for the party to do something positive. Usually, in most of the cases regarding restraint of trade, the prohibitory injunction is given by court as mandatory injunction is difficult to enforce. The type of relief offered by injunctions can be either final or interlocutory, where the former is a remedy grant as final remedy while the later is an injunction granted during the trial of the issue to retain its status quo.
In Fitch, supra, the clerk was restrained from taking up the same employment within seven miles radius on the small rural town . The learned judge accepted that it was no further than protecting a legitimate interest of the employer. The duration of the restraint and the area covered by it were also satisfied the rest of reasonableness.
In Fellowes, supra, the clerk was restraint from taking up similar job in Walthamstow of London. Lord Denning held that the geographical restraint is too wide that the clerk is not famous in the densely populated area. The restraint is mainly preventing the clerk from taking up work.
In Kerr v Morris18, the doctor was prevented from practicing within a certain area under a partnership agreement. The learned judge held that it was contrary to public interest.
In Worldwide Rota Dies, supra, a permanent injunction applied by the plaintiff was rejected as the forecasted lost is hard to estimate unless it constituted to the real future injury risk.
In Svenson Hair Centre, supra, competition with ex-employer is allowed under section 28 of Contract Act and that the plaintiff’s interim injunction did not limit her to practice as a hair specialist.
Interim injunctions, an infringement rights granted under strong prima facie, were an inadequate remedy that was granted based on a balance convenience favoured granting the remedy. The rules on granting interim injunctions are now identified as Lord Diplock’s test in American Cyanamid Co v Ethicon Ltd19 (1975) 8 Sydney LR 207 as stated below:
The court is satisfied that the claim is neither frivolous nor vexatious
The court is satisfied that there is a serious issue to be tried
The balance of convenience test favours awarding the remedy
As a last resort only the court may consider the relative strength of each party’s case
The test will be valid once the criteria are fulfilled.
From the cases mentioned above, both England and Malaysia granted injunctions in a similar sense although the approaches for both jurisdiction are different.
There are some differences between English and Malaysian jurisdiction regarding restraint of trade. English judges used reasonableness test to verify whether there is any element that constitute restraint of trade while Malaysian judges conclude restraint of trade unless the situation falls under 3 exceptions under Section 28 of Contract Act. Likewise, English judges used Lord Diplock’s test to consider the interim injunction while Malaysian judges consider on case by case basis.
On the contrary, the consideration for restraint of trade is the same for English and Malaysian jurisdiction, including the geographical area covered, duration of restraint, the position of employee as well as bargaining power between parties.