Singapore: Restrictive covenants & trade secrets

In a recent decision, the High Court in Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] SGHC 64 considered whether a restraint of trade clause was necessary, and therefore reasonable, in a contract which contained other clauses protecting trade secrets.

The court noted that it is a threshold condition for the validity of a restrictive covenant which operates once employment has been terminated, that it protects some legitimate interest of the employer. If this condition is satisfied, then the reasonableness of the restriction will be weighed against: (i) the interests of the parties; and (ii) the interests of the public.

In the instant case, the defendants argued that the protection of trade secrets and trade connections was a legitimate interest of the employer. However, the court referred to the decision of the Court of Appeal in Stratech Systems Ltd v Nyam Chiu Shin [2005] 2 SLR(R) 579 and the opinion of Woo J in Centre for Creative leadership (CCl) Pte Ltd v Bryne Roger Peter and others 2013 2 SLR 193. Both of these cases question whether the protection of trade secrets can amount to a legitimate interest, where a contract contains other express provisions for the protection of trade secrets.

In light of these decisions and the express provisions contained in the Plaintiff’s employment contract (which extended to the protection of trade secrets), the court held that, in the instant case, the protection of trade secrets could not amount to a legitimate interest. However, it noted that this was a question it would like the Court of Appeal to examine on appeal.

Action for employees

This case serves to illustrate the importance of being able to show that a restrictive covenant protects a legitimate interest of the employer. Where a contract contains such a provision for the protection of trade secrets, employers will do well to remember that they should be able to demonstrate that the restriction on the employee protects a legitimate interest other than that of trade secrets.

 Further, any restrictive covenant in an employment contract should be drafted such that it is reasonable with regard to: (i) the activity restricted; (ii) the area in which it is restricted; and (iii) the time for which it is restricted. Each of these limbs should ideally be drafted so that it will satisfy the test for severability.