Written by Richard Wee, Fatin Ismail and Tai Sher Lynn

Can my employer stop me from entering into a contract with a competitor company due to a contractual clause?

More often than not in contracts of employment, there is often a clause that pertains something along the lines of:

… The employee shall not engage in work with Company ABC, XYZ and EFG or any other competitors of the industry upon resignation subject to three years. 

It is not uncommon for employees to only notice these clauses after resignation, and realise that they are at a legal roadblock. 

Turning to s 28 of the Contracts Act, one might realise that any agreement for restraint of trade will be void. Section 28 provides as follows:

28. Agreement in restraint of trade void

Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.

Saving of agreement not to carry on business of which goodwill is sold

Exception 1 — 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.

of agreement between partners prior to dissolution

Exception 2 — 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.

or during continuance of partnership

Exception 3 — 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.

Furthermore, in a landmark decision by Lord Denning of UK, he provides 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 restrain of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest’. (Petrofina (Great Britain) v Martin [1966] 2 All ER 17 B (Ch D)

So, does this immediately render the clause void, and hence allowing the employee to partake or be employed at any company of their choice? 

In order to realise this, we look at the distinctions between contracts in restraint of trade and restrictive of trade.

It is provided by the Halsbury’s Laws of Malaysia on Contract (Volume 4) that:

Not every agreement which limits the manner in which a trade or profession is conducted is an agreement in restraint of trade. The threshold test is to determine whether the clause contained in the agreement is truly one in restraint of trade, and not one which is merely restrictive of trade. In this regard, the Malaysian position appears to be the same as that under the common law. Exclusive service agreements which provide that during the course of the employment, the employee may not practice his trade or profession with a third party, or an agreement which provides that the person will provide exclusive rights and services to the other party has been held to be not in restraint of trade. Therefore, a covenant, whereby a rock group undertook to provide exclusive recording rights to a recording company during the currency of their recording contract is not void.

In The Hua Kiow Steamship Co Ltd v Chop Guan Hin, the plaintiffs entered into an agreement with a number of traders who were carrying on business in Muar. The parties agreed in consideration of the covenant by the said traders that they would ship all goods and produce which they desired to transport from Muar to any port to which the plaintiffs had a steamer running; by the steamers of the plaintiffs, the plaintiffs were to convey goods at tariff rates of freight. The agreement further stipulated that in the event of any of the dealers who should ship by the plaintiffs’ vessels, transporting their goods by those of another line, the traders who so acted would be disentitled to claim the rebate otherwise allowable, and become liable to pay to the plaintiffs three times the amount of the dead freight shipped by them in breach of the agreement. In an action by the plaintiffs for the recovery of a sum of money claimed to be due to them by reason of the defendant’s breach of the agreement, the defendant argued that the contact was in restraint of trade and was therefore void under the then Contract Enactments s 27 (now the Contracts Act 1950 s 28). The main thrust of the defendant’s argument was that by this agreement, the plaintiff was able to fix exorbitant charges for the freight, and that the traders were compelled to accept the charges.

In this instance, the courts drew a distinction between a contract in restraint of trade and restrictive of trade. It is provided that where such a clause does not prevent one’s exercise in his business, but merely provides that he should exercise it in a particular manner, does not necessarily equate a restraint to trade. The courts are obliged to uphold the freedom of contract even where a party has bound themselves to trade in a particular manner. 

See also the cases of Kamarudin Merican Noordin v Kaka Singh Dhaliwal [2011] 7 MLJ 281 and Polygram Records Sdn Bhd v The Search [1994] 3 MLJ 127.

As such, s 28 does not immediately render all contractual clauses void in regards to limitation of future employment.

Published on 18 February 2024

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