Contracts in Restraint of Trade in Malaysia

Restraint of Trade in Employment Contracts: Understanding What it is and How it Impacts Employers & Employees

1. Introduction

   On 29th of May 2021, Malaysia has reported a daily record of 9,020 new Covid-19 cases, its highest daily toll since the start of the pandemic. The drastic increase of Covid-19 cases in Malaysia and in fear of the collapsing health care system have led to the implementation of total nationwide lockdown from 1st of June 2021 onwards.
   Our Finance Minister, Tengku Datuk Seri Zafrul Tengku Abdul Aziz during the live broadcast said that the first MCO last year has contributed to a 5.3 per cent unemployment rate with 826,000 people losing their jobs. Worse still, only six jobs were regained for every 100 lost thus far. Undeniable, the implementation of the latest MCO is expected to be more detrimental to the economy especially the vulnerable groups.
   In order to survive and thrive during the pandemic, many companies find their own way to cut down their expenses and costs by resorting to retrenchment or lay off. Employees who are facing the axe will receive notification letter and the letter may incorporate a restraint of trade clause and it is common to find such clause in the employment contract or employee handbook.

2. What is restraint of trade clause and how does it work in Malaysia?

   A restraint of trade clause is generally inserted into an employment agreement by the employer to stop an ex-employee from competing or using confidential information, in order to protect their business interests and goodwill. There are different types of restraint of trade clauses, restraining the ex-employee from:-

   1. joining the competitor for a specific period of time and in a particular geographic area (also known as “non-competition clause”);
   2. disclosing confidential information to the competitor;
   3. poaching or enticing any other employees to work for the competitor; and
   4. approaching or assisting your old clients for a period of time and in a particular geographic area after your employment relationship has ended.

   The most common one is the first restriction which disallow the ex-employee from joining other companies of the same business nature permanently or for a specific period of time. The restriction would be tantamount to depriving a person of his/her livelihood especially during this Covid-19 pandemic which has brought unprecedented challenges both for people and society.

3. Is non-competition clause enforceable in Malaysia?

   The law governing the restraint of trade or non-competition clause can be found in Section 28 of the Contracts Act 1950 (“S.28 CA 1950”). By reading S.28 CA 1950, any agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void. Meaning to say, the agreement is invalid or unenforceable.
   However, there are three exceptions to S.28 CA 1950, namely: agreements involving sales of goodwill of a business; partners prior to dissolution; and continuance of the partnership. Agreements which fall under any of the exceptions will be upheld by the court.
   In the Court of Appeal case of Nagadevan Mahalingam v Millennium Medicare Services [2011] 3 CLJ 529, the panel of Court of Appeal Judges was asked to determine whether Clause 11(iii) of the Partnership Agreement falls under S.28 CA 1950 and the decision is summarized as follows:

   1. S.28 CA 1950 clearly provides that a contract in restraint of trade is void unless it falls under any of the exceptions thereto.
   2. Clause 11(iii) has the effect of restricting the liberty of the appellant to carry on the practice of medical practitioner in future either by himself or with other persons for such period and within such limit as specified therein.
   3. Since the clause sought to be enforced was a covenant in restraint of trade, the agreement is therefore void under S.28 CA 1950

4. Different approach in Malaysia and English court

   In deciding whether such clause is of restraint of trade, the English court will apply the concept of reasonableness and fairness. In Malaysia, the position is different and this can be found in the case of Polygram Records Sdn Bhd v. Hillary Ang & Ors (Collectively Known As “The Search”) & Anor [1994] 3 CLJ 806. It was held that once the Malaysia courts take the view that the particular clause is in restraint of trade, the courts have no discretion but to declare it to be void under S.28 CA 1950, subject to the three exceptions provided for by the said section.

5. Conclusion

   Although the general rule is that you are bound by what you have signed, do not be afraid if the employment contract contains the non-competition clause or even if the notification letter to lay-off contains such clause. The Malaysia court in dealing with the restraint of trade or non-competition clause will give due consideration to the provisions of S.28 CA 1950 and the provision is general in its terms and unequivocally declares all agreements in restraint of trade void, except in the cases specified in the exceptions.

This article is written by 

Wai Chong Khuan
Partners, Low & Partners

Derek Chin Tze Qi
Associate, Low & Partners