Introduction

It is often presumed that employment relationships conclude once an employee chooses to leave the company. However, this is not always the case as employees may still be bound by post-employment clauses such as non-competition, non-solicitation, and confidentiality clauses.

That said, a common concern for many employees is whether such clauses are legally enforceable.

This article discusses the enforceability of the various post-employment clauses in Malaysia.

Non-Competition/Restraint of Trade Clauses

A clause which seeks to restrain a previous employee from working or starting a similar business for a specified time period is generally unenforceable as it will be held void under Section 28 of the Contracts Act 1950 (CA 1950).

Section 28 CA 1950 only provides for 3 exhaustive exceptions which a restraint of trade clause will be upheld:

1. Agreements involving sales of goodwill of a business;
2. Agreements between partners prior to dissolution; and
3. Agreements between partners during the continuance of the partnership.

In Nagadevan a/l Mahalingam v Millenium Medicare Services [2011] 4 MLJ 739, the clause which restricted the appellant medical practitioner from carrying on the practice of medical practitioner whether by himself or with others was held by the court to be a restraint of trade clause and therefore, void. Exception 2 being “of agreement between partners prior to dissolution” did not apply in this case as the appellant medical practitioner was not a partner at the time the agreement was made because the agreement had not been made in anticipation of the dissolution of the partnership.

Section 28 CA 1950, however, only applies to post-contract period and not during the currency of the contract. This principle was confirmed in Polygram Records Sdn Bhd v Hillary Ang & Ors (collectively known as “The Search”) & Anor [1994] 3 CLJ 806 where the court also held that the courts must treat restraint of trade clauses as void under Section 28 CA 1950 and have no discretion in the matter, except when it falls within the 3 exhaustive exceptions.

Court’s Ruling:

[5] The covenant whereby the defendants undertook to provide exclusive recording rights to the plaintiffs during the currency of their recording contract, is not a covenant in restraint of trade and is therefore not rendered void under s. 28 of the Contracts Act. Section 28 is only applicable in cases where a person is restrained from carrying on his trade or profession in the traditional sense of the doctrine, that is, in the post – contract period and not during the currency of the contract.

[6] The tenor of clause 6 (v) is clearly that of a covenant in restraint of trade in the traditional sense. Whilst the validity of such covenants are tested by the reasonableness test by the English Courts, the position in Malaysia is different. Once the Malaysian Courts take the view that a particular covenant is a covenant in restraint of trade, the Courts, have no discretion, but to declare it to be void under s. 28 of the Contracts Act, subject to the three exceptions provided for by the said section. As none of these exceptions are applicable to the instant case, and having held that clause 6(v) is a covenant in restraint of trade, clause 6 (v) is void and of no effect. As it is a void provision, it should further be deemed to be void ab initio, that is, from the time the second contract was entered into.

Non-Poaching/Non-Solicitation Clauses

The objective of these clauses is generally to prevent employees who have left or are leaving the Company from ‘stealing’ the Company’s current employees and/or clients.

Unlike restraint of trade clauses, there are no laws prohibiting the same, and therefore these clauses must be taken as enforceable and applicable. However, employers are advised to draft them very specifically as a vague or general prohibition may render such clauses a “non-compete” clause, and attract the application of Section 28 CA 1950.

These clauses are mainly applicable for the post-contract period since employees owe an implied duty of loyalty and fidelity to their employers during the currency of their employment contract.[1]

In Sundai Malaysia Sdn Bhd v Masato Saito & Ors [2013] 9 MLJ 729, the Defendants orchestrated mass poaching of the Plaintiff’s employees and in doing so, had caused disruption and instability to the Plaintiff. The Court held that the defendant’s actions amounted to a breach of their loyalty and fidelity towards the Plaintiff.

Confidentiality Clauses

Just like non-poaching/non-solicitation clauses, confidentiality clauses are also legally enforceable. In Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Anor [2016] 3 MLJ 417, the Federal Court in its obiter dicta recognized that confidentiality clauses can have perpetual effect:

 [19] Hence, in relation to leave question 1 we would at the outset say that the proposition of law in Svenson Hair Center Sdn Bhd v. Irene Chin Zee Ling [2008] 8 CLJ 386 should be considered in the context of the facts and circumstances of each case. Thus, in that case the protection of confidential information did not have any time limits because cl.7.02 of the employment agreement expressly stated that the ‘employee agrees that he shall not whether during or after the termination of this agreement without limit in point of time’. As such it depends very much on the term or terms of the agreed contractual obligation or obligations. For instance, in Maggbury Pty Ltd v. Hafele Australia Pty Ltd & Anor [2001] HCA 70 the High Court of Australia recognized a contractual term that made one party to observe the obligation of confidence ‘forever’.

[20] Further, in coming up with such proposition of law in Svenson Hair Centre v. Irene Chin (supra) the learned judge rationalised that a contrary view would mean an ex-employee could exploit confidential information with impunity. All that is needed to do is to wait until the expiry of the restriction period. Such an outcome could not have been intended by any of the contracting parties as it would defeat the very purpose of having a confidentiality provision in an employment agreement. We wholly agree with the rationale.

The significance of confidentiality clauses and their perpetual effect is essential to safeguard a company’s confidential information and its trade secrets.

As mentioned by the learned judge in Svenson Hair Centre v. Irene Chin [2008] 8 CLJ 386, confidentiality clauses would be redundant if they are effective only during the currency of the contract and not during the post-contract period.

By having perpetual confidentiality clauses, companies can maintain their competitive edge, reputation, and goodwill in the long-run.

That said, employers are reminded to distinguish confidentiality obligations, and the skills and knowledge gained by their employees during the course of their employment. In VSL Prestressing (Australia) Pty Ltd v. DJ Mulholland [1971] CLJU 145, the court held that employers cannot restrict their employees from using the skills and knowledge gained during the course of their employment:

In Sir W C Leng & Co. v. Andrews [1909] 1 Ch 763, Farwell LJ after quoting the passage from the judgment of Lord Macnaghten, which I have already quoted, said at p. 733:

The argument which has been addressed to us on behalf of the respondent does not bring the case within that doctrine. That doctrine does not mean that an employer can prevent his employee from using the skill and knowledge in his trade or profession which he has learnt in the course of his employment by means of directions or instructions from the employer. That information and that additional skill he is entitled to use for the benefit of himself and the benefit of the public who gain the advantage of his having had such admirable instruction. The case in which the Court interferes for the purpose of protection is where use is made, not of the skill which the man may have acquired, but of the secrets of the trade or profession which he had no right to reveal to anyone else – matters which depend to some extent on good faith.

Actions Employers Can Take and Remedies Available

First and foremost, an employee who has breached the post-employment clauses provided in their employment contract may be dismissed by their employer.

Thereafter, the Company may consider initiating a legal suit against their previous employee for the following causes of action:

1. Breach of employment contract (and other contractual documents signed)
2. Tort of Breach of Confidence
3. Unlawful Interference of Trade

Employers may be entitled to the following remedies:

1. Damages[2]
2. Injunctions (Including Springboard Injunction)[3]
3. Account of Profits[4]
4. Delivery Order and Deletion Order

Practical Advice to Employers

1. Draft clear contracts to include post-employment clauses
2. Have proper handover procedures to protect confidential information
3. Ensure all company properties are returned including laptops and other devices to safeguard confidential information and trade secrets
4. Activate technology flagging to detect any potential to preventthe  circulation of confidential information to outsiders
5. Ensure separation of duty in each department to prevent misuse of company data and unauthorized access to such information

Conclusion

Post-employment clauses play an important role in employment law.

Although an employer-employee relationship ends upon an employee’s resignation or termination, an employee’s duties to their previous employer do not end immediately.

When drafting post-employment clauses, employers must ensure that the clauses are clear, specific and not overly restrictive as it would otherwise be construed as a restraint of trade/non-competitive clause which will be struck down by courts under Section 28 CA 1950.

Employers are also reminded to balance the right of their employees and their own when drafting post-employment clauses as employees are entitled to apply the knowledge and skills gained during their employment, whether it be setting up their own business or working for another company in the same field.[5]

PS: If you are facing a situation or dispute involving the issues above, or would like us to review your existing contracts or agreements to tackle the issues above, please feel free to contact us. 

This article was written with the assistance of LLC’s pupil, Amelia Lo.

[1] Schmidt Scientific Sdn Bhd v. Ong Han Saun & Ors [1998] 1 CLJ 685

[2] In Worldwide Rota Dies Sdn Bhd v Ronald Ong Cheow Joon [2010] 8 MLJ 297, the Court ordered the Defendant to pay RM2,095,780 as damages and losses with interest at 8% per annum to the Plaintiff

[3] In Juris Technologies Sdn Bhd & Anor v Foo Tiang Sin & Ors [2020] MLJU 157, the Court exercised its discretion to grant a Springboard Injunction under Section 37(1)(a) CA 1950, Section 50 & Section 51 of the Specific Relief Act 1950

[4] MRA International Sdn Bhd v SPC Diatech, LLC [2021] MLJU 1052

[5] If an employee is found to be misappropriating the Company’s confidential information, the Court may grant a springboard injunction to restrict the said employee from working for the Company’s competitors for a stipulated period of time so as to prevent the Company’s confidential information from being misused to gain an unfair advantage as seen in Juris Technologies Sdn Bhd & Anor v Foo Tiang Sin & Ors [2020] MLJU 157