The Extent And The Applicability Of Non-Compete Clause In Employment Agreement

• Published date: 26 May 2023
• Subject Matter: Employment and HR, Contract of Employment
• Law Firm: Kevin Wu & Associates
• Author: Ms Nurin Husnina and Kevin Wu

Employment agreements are commonly drafted by the employers hinged on the provisions envisaged in the Employment Act 1950 and comprises of critical terms and conditions which contractually bind the employers and employees throughout the course of employment. Nevertheless, time and again the employers tend to overlook the provisions propounded in the Contracts Act 1950 which governs the contractual facet of the agreement, the aspects of statutory duties stipulated in the Companies Act 2016 as well as the fundamental liberties propounded in the Federal Constitution. As a consequence thereof, there exists a tendency for void and unenforceable clauses to be serendipitously incorporated into the employment agreements, inter alia, the draconian construction of non-compete clause which is also known as a restraint of trade which will be primarily dissected in this article.

Legal framework governing the restraint of trade

Section 28 of the Contracts Act 1950 clearly stipulates that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void unless if it falls under the exceptions thereto¹. The proviso of section 28 further lays down the exceptions of the aforementioned general rule as follows: -

1. Agreement not to carry on business of which goodwill is sold whereby 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 subject to the test of reasonableness of such limits and the nature of the business²;
2. Agreement between partners prior to dissolution whereby the 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; or³
3. Agreement during the continuance of the partnership whereby the partners may agree that someone or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership⁴.

It is therefore apparent that the law bars the restraint of trade to any person as it is in breach of the natural justice and it contravened the general principle of section 28 of the Contracts Act unless it can be proven that it falls under the ambit of one the above-mentioned exceptions. However, the test of...