Understanding the Realm of the Restraint of Trade Clause

Trade restraint clauses are standard agreements that control a variety of commercial relationships. It is widely used in employment contracts to prevent key employees from competing with the company both during and after their employment. Non-compete and non-solicitation agreements are common examples of trade restraint clauses.

Non-Compete Clause

A non-compete clause is a legally binding agreement in which an employee undertakes not to work for a competitor company or start a business in a related sector, profession, or trade for a set amount of time after leaving their current position.

Such an agreement can prevent employees from exploiting valuable and sensitive information such as trade secrets, client lists, marketing plans, intellectual technology, and other confidential information if they decide to work for the competitor or establish their own firm.

Non-Solicitation Clause

Former employees are prohibited from soliciting clients or other employees from their prior employer under non-solicitation provisions. These clauses are applied to senior management personnel and employees who deal with sensitive and secret information in their jobs.

Can a Restraint of Clause be legally enforced in Singapore?

Case law, established by the outcome of previous cases rather than legislation, governs the law in Singapore addressing trade restraint. Restraint of trade aims to balance the freedom to trade and the right to protect business interests but the clause cannot be enforced unless the employer can establish that the following factors are met:

1. The restriction defends the employer’s genuine proprietary interests. Clauses that seek to prevent competition rather than protect the employer’s legitimate proprietary interests are not valid.
2. The limitations are appropriate in the parties’ and public interests.

To determine reasonableness, a court will assess whether the restriction agreements were acceptable between the employer and employee, then separately consider whether they were reasonable in the public interest. The employer bears the burden of proving that the restraint of trade clause meets these requirements.

Restrictions that apply to all employees, regardless of position, work responsibilities, or level of access to confidential information, are deemed unreasonable. Unfairly broad or unlimited coverage of industry, geography, or time will likewise be nonbinding. If the clause’s scope is too broad, the courts will either strike down the clause’s invalid portions or the entire clause.

Even though the restraint of trade may initially appear to be unenforceable, a well-crafted clause can be enforced. In general, a fair clause is a legally binding one. If a valid restraint of trade agreement is violated, the employer can seek damages from the former employee or get an injunction to prevent additional violations.

Defining a Fair Restraint of Trade Clause

Every member of the community has the right to engage in any trade or business they desire and whatever manner they see fit as long as it is not illegal. Any contract that restricts the ability for an individual to engage in trade or impacts arrangements they can make with others is not valid unless the rule of reason applies, and it does not harm negatively affect the public.

It is essential to highlight that the term trade should be interpreted widely, as it does not refer to a specific skilled occupation but rather to all work. The employer must prove a valid proprietary interest needs to be protected, and ensure the clause is not broader than necessary to safeguard those interests. In weighing the competing interests of the employer and employee, the courts will carefully analyze the facts and circumstances of the case before deciding whether to sustain the clause or not.

Managing Employment Contracts

KRIS HR Document Management System (DMS) is a valuable tool for HR teams to personalize contracts based on local templates. From a secure, central repository, you can easily organize all employee documents, establish folders for internal resources, and exchange confidential data. Having one location as the home to all your complex paper processes and policies, you can automate and digitize HR contracts that support electronic signatures and document tracking.

Disclaimer: This article is for general information purposes only and not intended as legal advice.