What is a Restraint of Trade Clause?
Restraint of trade clauses are clauses that govern certain commercial relationships, especially employment relationships. These clauses generally range from non-competition throughout the duration of employment and may extend beyond the period of employment, for a predetermined duration. This kind of clause is often deployed in an employment contract in an effort to prevent key employees of a company, to compete with the company while employed and after immediately after employment.
Non-compete clauses are also generally enforced along with other clauses in an employment contract, such as confidentiality clauses and non-solicitation clauses. Confidentiality clauses are implemented to ensure trade secrets are not divulged to direct competitors. While Non-solicitation clauses prevent ex-employees from luring current employees away.
Are Restrain of Trade Clauses Enforceable in Singapore?
Over time a great deal of consideration has been given to such clauses and as such they have evolved on how they can be drafted and implemented. It is generally held that a restraint of trade is applicable while the employment relationship is still on-going, can be upheld. The difficulty with such clauses is around their enforceability for the period after an employee has been terminated.
The general position held on the enforceability of this type of clause once an employee has been terminated is that it is not enforceable unless an employer can show that there is a legitimate proprietary interest that needs protection.
Scope of Restraint Cases in Singapore
In Singapore the legal position around restraint of trade cases is not set out in legislation, but is rather determined on precedent through previous cases. As such while there are general principles that should be followed in a case of non-competition, a court will still determine each case on its own merits.
Restraint of trade and non-competition clauses are implemented with the purpose of imposing particular restrictions on an employee. In the case of post-employment, such clauses aim to restrain employees who are departing from competing with a company for a particular period of time once they leave.
Courts in Singapore are reluctant to uphold a straight non-compete if there is no reasonable, legitimate interest to protect. The test applied by the courts to determine if a restraint of trade clause is reasonable, consists of 3 steps:
- Is there a legitimate proprietary interest that needs to be protected?
- Is the restriction reasonable in reference to the interests of each party?
- Is the restriction reasonable in reference to public interest?
A Non-Solicitation Clause is a clause that prevents a former employee from soliciting either clients or other employees away from the previous employer. This kind of clause is generally accompanied by a non-compete or restraint of trade clause, when an employee is departing from an enterprise. The non-solicitation clause has been used effectively to prevent the poaching of clients or employees by ex-employees in certain circumstances.
Unenforceable Restraint of Trade Clauses
If a court deems that the scope of the clause is too wide, then it may strike out the unenforceable parts or strike down the entire clause.
If a court strikes out a part of the clause, it will apply the “blue pencil test” to remove the parts of the clause that they deem unreasonable. This can only be done if the remain language of the clause retains its original meaning and makes sense.
What Recourse Does an Employer Have?
If there is a breach of a restraint of trade clause by an employee or ex-employee, an employer has a right to claim for damages (compensation) or an employer can file for an injunction, to prevent any continued breach of the clause.
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