Singapore: Restrictive covenants in employment contracts

In the recent decision of Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] SGHC 64, the Singapore High Court raised some interesting questions as to what constitutes sufficient legitimate interest to support a non-competition covenant, examined the distinction between the treatment of employment covenants and sale of business covenants and reviewed the Singapore law position on the doctrine of severance.

The Background

The Plaintiff, Ms. Lek Gwee Noi worked in the business of selling gifts, flowers, wreaths and hampers for all of her working life. Her employer, a market leader in the industry, sold its business to the Defendant, a subsidiary of another market leader. The intention behind the acquisition was for the acquiring company to increase its market presence through the use of the goodwill and customer lists of the target company.

The Restrictive Covenant

The Defendant wanted the Plaintiff to move with the acquired business and employed her under a contract which contained the following restrictive covenant:

"Upon the termination of the Employee’s employment for any cause or by any means whatsoever the employee shall not for a period of 2 years next thereafter undertake or carry on either alone or in partnership nor be employed or interested directly or indirectly in any capacity whatever in the same or similar business as the relevant Company (as hereunder defined), or in any other business carried on by the relevant Company, in Singapore, and Malaysia and any other countries the relevant Company has offices at the date of such termination within the aforesaid areas and shall not during the like period and within the same areas either personally or by Employee’s agent or by letters, circulars or advertisements whether on Employee’s behalf or on behalf of any other person, firm or company canvass or solicit orders from or in any way interfere with any person, or company who shall at any time during the continuance of the Employee’s employment hereunder have been a customer or customers of the relevant Company & for any cause whatever the Employee shall not canvass, solicit or endeavour to take away from the relevant Company the business or any customers or clients who have been customers or clients of the relevant company.The relevant company shall refer to and include the Company and any or all of such subsidiary, associate or other related companies which the Employee shall have performed duties or carried out work in relation to and for the benefit of any or all of such above companies at any time during the period of nine (9) months prior to the date of termination of employment stated herein."

Validity and Enforceability of the Restrictive Covenants

The Plaintiff resigned from the Defendant and subsequently informed the Defendant of her intention to set up her own competing business. The Defendant objected and reminded her of the restrictive covenants, threatening to sue in case of breach. The present suit was, however, initiated by the Plaintiff, seeking a declaration that the restrictive covenants in her contract were void and unenforceable.

The District Court decision

The District Court held that the clause above consisted of two covenants: a geographical restraint and a non-solicitation covenant. It held the former to be void for unreasonableness and stated that it should be severed, but held the latter to be valid. Both parties were unhappy with this decision and appealed.

The High Court decision

The High Court ruled that the entirety of the clause was void for unreasonableness and that none of it could be saved through severance. In coming to this conclusion, the Court started by examining the restrictive covenants from two angles:

1. a non-competition covenant:

"For two years after 31 December 2011, the plaintiff shall not undertake or be employed in the same or similar business as the relevant company, or in any other business carried on by the relevant company in Singapore, Malaysia or any country in which the "relevant company" had offices on 31 December 2011"; and

2. a non-solicitation covenant:

"For the same period and within the same areas, the plaintiff: (i) shall not canvass or solicit orders from any person who was a customer of the relevant company while she was employed by it; and (ii) shall not endeavour to take away from the relevant company any of its customers"

A. Sale of Business Covenants vs Employment Covenants

Sale of business covenants are traditionally treated more casually than employment covenants (due to the unequal bargaining positions of an employer and an employee in employment contracts). The Defendant argued that the covenants in this case should be treated as the former. The Judge held that as the Plaintiff was not a party to the sale and purchase agreement or its negotiations and did not benefit from the sale in any way, the clause should be treated as an employment covenant rather than a sale of business covenant.

B. Protection of Trade Secrets as a Legitimate Interest

The Court noted that the protection of a legitimate interest of the employer is a threshold condition for a post-employment restrictive covenant to be found valid.

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. The Defendant argued that the protection of trade secrets and trade connections was a legitimate interest. However, the Court considered the decisions of the Singapore 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 which questioned whether the protection of trade secrets could amount to a legitimate interest when there are express provisions for the protection of trade secrets.

In light of these decisions and the presence of provisions which extended to the protection of trade secrets in the Plaintiff's employment contract, the Court held that the protection of trade secrets could not amount to a legitimate interest.

C. Reasonableness of the restriction

The Court did find that the presence of a trade connection constituted a legitimate interest for an employer to protect.

However in testing the reasonableness of both the non-solicitation and the non-competition covenants in protecting that interest, the Court found that the definition of "relevant company" used in the covenants was too wide. The Court also opined that the geographical scope of the restriction was unreasonably wide as it extended to areas (such as Malaysia) in which the Defendant did not even have a presence. With regard to the non-solicitation covenant, the Court found the time limit of 2 years to be unreasonably long.

D. Doctrine of Severance

The Court then examined whether the law of severance in Singapore could permit any portion of the clause to stand. Following Lord Sumption's opinion in Marshall v NM Financial Management Ltd [1995] 4 All ER 785, the Court laid down the three limbs of the traditionally accepted test for severance and added a fourth limb for severance in employment law cases.

The test to be satisfied in order to sever a clause in employment law cases is therefore as follows:

(a) the unenforceable provision must be capable of being removed without adding to or modifying the wording of what remains with the remainder continuing to make grammatical sense;

(b) the remaining contractual terms must continue to be supported by adequate consideration;

(c) the severance must not change the fundamental character of the contract between the parties; and

(d) (and in the case of severance in employment cases) the severance must be consistent with the public policy underlying the avoidance of the offending part.

It is interesting to note that the Court categorically rejected the inclusion of the Canadian law concept of notional severance in Singaporean law and went on to note that such a concept faced difficulty in becoming a part of Singaporean law.

Applying the above test on severance the Court found that it was not possible to save either covenant through severance and therefore allowed the Plaintiff's appeal and dismissed the Defendant's.

Practical Tips for Employers: Designing Restrictive Covenants

This case serves to illustrate the importance of a legitimate interest in supporting a restrictive covenant. Where a contract makes provision for the protection of trade secrets, employers will have to demonstrate a legitimate interest in restricting its employee, other than that of protecting such trade secrets.

Finally, any restrictive covenants to be inserted in employment contracts should be designed such that they are reasonable with regard to (i) the activity restricted, (ii) the area in which it is restricted, and (ii) the time for which it is restricted and each of these limbs should ideally be structured in a manner that will satisfy the test for severance.