17 August, 2018
Employers, human capital practitioners and legal practitioners often grapple with the enforceability of restraint of trade provisions such as non-compete or non-solicitation clauses. In the recent case of Tan Kok Yong Steve v Itochu Singapore Pte Ltd [2018] SGHC 85, the Singapore High Court upheld the enforceability of a two-year non-compete clause in an employee's employment contract.
Background
Itochu Singapore Pte Ltd (Itochu) employed the Plaintiff (Mr Tan) from October 2012 to June 2016. During this time, Mr Tan was responsible for deals in Vietnam, the Philippines and Bangladesh under the supervision of his section manager.
Mr Tan's employment agreement included a non-compete clause restricting him from being employed, engaged, interested in or involved with any company or business that suppl[ied] certain goods or services that competed with Itochu and its affiliates for a period of two years after termination of his employment with Itochu.
The non-compete clause applied to the types of goods and services which Mr Tan was "concerned with" during the 12 months prior to the termination of his employment, and extended to any area (geographical or otherwise) constituting the market for Itochu and its affiliates for those goods and services. In this case, the types of goods and services which Mr Tan was "concerned with" were cement products such as cement, clinker and other related cementitious products.
Subsequently, the parties' relationship broke down and parties terminated the employment relationship. One day later, Mr Tan commenced employment with one of Itochu's competitors. Subsequently, Mr Tan acted as an "agent" to arrange meetings between two of Itochu's business contacts, and also proceeded to incorporate his own company and attempted to establish connections with companies in countries which Itochu did business.
Itochu applied for an injunction to restrain Mr Tan from working for its competitors. In response, Mr Tan argued that the non-compete clause was an invalid and unenforceable restraint of trade.
Holding
The court found that the non-complete clause was valid and enforceable as: (1) Itochu had a legitimate proprietary interest in protecting its trade connections; and (2) the activity, geographical and temporal scopes of the non-complete clause were reasonable on the facts of the case.
As Mr Tan had accepted that he would have breached the terms of his employment agreement if the non-complete clause was valid, the remaining issue to the determined by the court was the appropriate remedy to be ordered.
Based on the facts, the court granted the injunction sought by Itochu as it found that Mr Tan had demonstrated a "proclivity" to breach his obligations under the non-complete clause.
Further, the court also found that Mr Tan had "demonstrated a blatant disregard for the restrictions that have been placed on him" and ordered him to pay nominal damages of $1,000 to Itochu.
Analysis
In arriving at its decision, the High Court considered the seminal Court of Appeal decision in Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR(R) 663 which sets out the applicable tests in determining the enforceability of provisions in restraint of trade.
Legitimate proprietary interest
The High Court accepted Itochu's submissions that the non-compete clause was necessary to protect its "client and trade connections".
Pertinently, Mr Tan was placed as a "person-in-charge" of Itochu's cement products business in Vietnam, Bangladesh and the Philippines. Further, it was Mr Tan's responsibility to "build rapport" with these customers and to establish trade connections on behalf of Itochu. The evidence before the court showed that Mr Tan had significant standing with and influence over customers. For example, he had purchased expensive gifts for the customers and sent them free samples on Itochu's account.
Activity scope
The court found that the activities covered by the non-compete clause were reasonable as between the parties as they did not impose a blanket ban on all forms of commodity trading and sought only to prevent Mr Tan from engaging in the same areas of business that he was involved in while employed by Itochu, i.e., cement products. The court was of the view that the non-complete clause did not deprive Mr Tan of his livelihood as he had prior experience trading wood products and was in fact self-employed as a coal trader at the time of the trial.
Further, the court noted the scope of the activities restricted does not damage the public interest as suppliers and consumers of the cement products would have available alternatives. Further, Mr Tan was not prohibited from engaging in the cement products trade in Singapore. In the circumstances, the activity scope of the non-compete clause was held to be reasonable in the interests of the public.
Geographical scope
As regards the geographical scope, the court observed that the non-complete clause only applied to countries (Vietnam and the Philippines) in which Mr Tan had "actual and significant" customer contacts. In that regard, the court highlighted Mr Tan's influence with customers in these countries as he was able to arrange meetings between suppliers in Vietnam and buyers in the Philippines.
On that basis, the court found that the geographical scope of the non-compete clause was reasonable as between the parties. The court also found that the non-complete clause was reasonable in the interests of the public as it would not impact competition in each of those markets.
The court also noted that it may not be reasonable for a prohibition to extend to an entire country which has many major cities in which commerce and trade are done on a large scale (e.g., China and America) if the employer only traded with specific customers in specific cities. In that situation, the reasonableness of the geographical coverage of a provision in restraint of trade will depend on the facts of each case.
Temporal scope
On the facts of the case, the court held that a non-compete period of two years was reasonable. Pertinently, Itochu highlighted that it took Mr Tan four years to build up his customer relationships. The court accepted that it would be difficult for a newcomer to the market to build up his own customer contacts without interference from Mr Tan. The court also had regard to the fact that Itochu's business in the trading of cement products was a highly specialised industry. In the circumstances, the non-compete period of two years was held to be reasonable.
Comment
It is well-settled that the validity and enforceability of a provision in restraint of trade will turn on the specific facts of each case. In that respect, although previous decided cases may be instructive, they will not necessarily be determinative of any future disputes regarding the enforceability of a provision in restraint of trade between an employer and employee. Rather, it is clear that the approach adopted by the courts in relation to the question of the reasonableness of the restraints is carefully calibrated according to the established facts applicable to the particular parties.
When drafting provisions in restraint of trade in their employees' employment contract, employers should carefully consider whether or not the restraints go further than is necessary for the protection of the business' legitimate proprietary interests. If they do, they are liable to struck down by the courts. If necessary, employers should seek legal advice in the drafting of such provisions.
If you would like to have more information, please contact the following individuals. (The authors are grateful for the assistance of Chua Zhan Teng in the preparation of this legal update).
For further information, please contact:
George Cooper, Partner, Ashurst
george.cooper@ashurst.com
