Restraint of Trade Clauses in Employment Contracts in Malaysia

It does not take a genius to be aware that the economy is not in its best state right now. Thus, it is only natural that such a situation would clearly affect the employment status and jobs of many. Some of these scenarios may include employees becoming dissatisfied with their current employment or even start questioning as to whether it is simply time to move on and spread their wings elsewhere. 

With such feeling in mind, employees would then reread their employment contract to check on things such as their expected notice period, their expected responsibilities upon termination as well as their entitlements. Now being equipped with the necessary knowledge, the employees are now all ready and geared to go but there seems to be one obstacle preventing them from doing so – a little clause in their employment contract which states something like:

This form of clauses would usually be referred to as a ‘restraint of trade’ or a ‘non-compete’ clause.

Naturally, employees reading this type of clause would then ask themselves questions like:

Being worried, an employee would then go on to first check and read through the Employment Act, 1955 – the main statute stipulating an employee’s rights.

Upon going through all 103 sections of the Act, things seem to start looking bleak for the employee as none of the provisions therein have addressed whether an employer is entitled to place such an unreasonable clause in the employment contract.

Is there all there is to the law then? Are employees truly bound to such an unreasonable clause?

Do not fear for your search for your employment rights do not simply stop there. It is pertinent to note that an ‘employment contract’ is a form of contract on its own. Meaning, the provisions under the Contracts Act, 1950 would also be applicable towards it. 

Why? Because when one looks through the provisions of the Contracts Act, 1950, you would come across a very interesting provision in section 28 which states as follows:

This statutory provision basically provides that a ‘restraint of trade’ clause cannot be enforced within the Malaysian jurisdiction. The Court of Appeal decision of Nagadevan a/l Mahalingam v Millenium Medicare Services [2011] 4 MLJ 739 clearly explained that applicability of section 28 Contracts Act, 1950 in detail which is summarized as follows:

1. That where the clause in the contract has caused a person to restrict the liberty of another in the future to carry on their trade with other parties who are not parties to the contract for a period of time would clearly fall within the meaning of section 28 Contracts Act, 1950.

2. Where such clause sought to be enforced is a covenant in restraint of trade, it would be found void under section 28 Contracts Act, 1950. This is true unless the clause restraining the trade of a person would falls under any of the following exceptions stipulated within the provision itself:

• Exception 1 – When one sells the goodwill of a business, the seller can agree with the buyer that the later is to refrain from carrying on a similar business, within specified local limits, so long as the buyer or any person deriving the title to the goodwill from the seller, carries on a like business therein.
• Exception 2 – Partners may, upon or in anticipation of a dissolution of a partnership, may agree with one another (either some or all of the partners) will not carry on a similar business to that of which was carried out in the partnership within such local limits.
• Exception 3 – Partners may agree with one another (either some or all of the partners) will not carry on any business other than that of the partnership during when the partnership is still in effect.

However, the High Court decision of Polygram Records Sdn Bhd v Hillary Ang & Ors (collectively known as “The Search”) & Anor [1994] clearly held that section 28 Contracts Act, 1950 is only applicable to cases where a person has been restrained from carrying on their trade or profession in the post-contract period and NOT during when their employment contract is still in force.

In other words, where an employee is still under employment – in where their employment has not been terminated then, then the ‘restraint of trade’ clause would still be enforceable if there are any stipulated therein. As such, the employee would still be prohibited to have any direct or indirect interest in any rival company prior to their termination of their employment contract. This is common sense as it is natural that an employee has a duty of care towards their employers to ensure that they act in good faith and for the benefits of their current employer.

With that in mind, what about clauses restraining you from disclosing or divulging confidential information or trade secrets of the company upon the termination of your employment contract then? 

For example, clauses stating as follows:

-OR-

Would these ‘restraint of trade’ clauses fall within the definition of section 28 Contracts Act, 1950 as well? It is noted that this form of clauses would be enforceable even if it were not expressly provided in the employment contract (Federal Court decision in Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Anor [2016] 3 MLJ 417).

The reason for these clauses is to ensure that ex-employees would not become dangerous competitors towards their ex-employers using the knowledge and experience gained during their employment under their ex-employers. However, such clauses must be reasonably drafted for it to be properly enforced. 

In summary of the above, it is indefinitely clear that one would be able to join their current company’s rival companies upon the termination of their contract. However, if they fall within any of the exceptions provided as per section 28 Contracts Act, 1950, they would still be bound by such restrictive clauses. Upon termination, however, an employee must continue to be mindful that they would still be bound to certain obligations pertaining to the confidentiality and trade secrets of their previous company.