Forfeiture-for-Competition Clauses in Employment Contracts

In employment contracts, there is commonly a clause which prohibits an employee from working for a competitor upon termination of his employment. It has long been established that such a clause, commonly known as a "noncompete clause" or a "restraint of trade clause", must be shown to be reasonable in order to be enforceable. This principle of law was founded on public policy considerations which seek to strike a balance between an individual's freedom to work for himself or herself and not (in principle) to deprive himself of his or her labour or skills, while balancing the freedom of contract.

Over the years, remuneration packages and terms of employment have evolved to include, amongst other things, financial incentives for employees who remain with the employers and conversely, financial disincentives for the employee should he resign or join a competitor.

In this article, we highlight the recent case of Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2011] SGHC 241, where the Singapore High Court addressed the issue of whether a clause in an employee incentive award plan which forfeits deferred incentive payments in the event the employee resigns and competes with his employer (referred to as a "forfeiture-forcompetition" clause) is in substance a restraint of trade clause.

The High Court ruled that forfeiture-for-competition clauses are not restraints of trade clause as they "do not prohibit the employee from competing with the employer." The forfeiture-for-competition clause merely sets out what the employee would have to forfeit should he choose to compete upon his resignation and as such, served to "operate as a financial disincentive for the employee to compete" after he leaves the employer. If the employee decides to compete upon leaving his employment with full knowledge of the financial disincentive, being the forfeiture of his deferred bonus, he would have made a calculated decision having evaluated the detriment of losing the deferred bonus against the gain in joining the competitor.

As the forfeiture-for-competition clause was not held to be a restraint of trade clause, the employer need not show that such a clause is reasonable in order to enforce it.

Brief facts

In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2011] SGHC 241, the plaintiff, Mr Mano Vikrant Singh (the "Plaintiff") had in addition to his employment contract with his employer Cargill TSF Asia Pte Ltd (the "Defendant"), also signed the following:-

a...