Introduction
Non-compete clauses are common in employment contracts, designed to protect a company’s business interests by restricting employees from engaging in competing activities after leaving the organisation. However, in Malaysia, the enforceability of such clauses is heavily regulated and subject to strict legal limitations.
This article explores the legal framework governing non-compete clauses in Malaysia, the challenges to their enforceability, and best practices for drafting clauses that protect business interests while adhering to legal standards.
Legal Framework Governing Non-Compete Clauses
In Malaysia, non-compete clauses are primarily governed by Section 28 of the Contracts Act 1950, which generally renders any agreement in restraint of trade void. The law emphasises that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void. This overarching principle significantly restricts the enforceability of non-compete clauses in employment contracts.
However, there are specific exceptions to this general rule:
1. Sale of Goodwill
A person who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits, provided these limits are reasonable and relevant to the nature of the business.
2. Partnership Dissolution
Partners may agree, upon or in anticipation of a dissolution, that some or all of them will not carry on a similar business within certain.
3. Ongoing Partnership
Partners may agree that during the continuance of the partnership, they will not carry on any business other than that of the partnership.
Beyond these exceptions, any covenant that restrains a person from engaging in a lawful profession, trade, or business after the end of the contract is generally void. Importantly, the reasonableness test applied under English law, which assesses the validity of restraint of trade clauses, does not apply in Malaysia.
Enforceability of Non-Compete Clauses
Given the stringent limitations set out in the Contracts Act 1950, enforcing non-compete clauses in Malaysia is challenging. Malaysian courts typically view these clauses with skepticism, especially when they restrict an individual's right to work and earn a livelihood.
However, there are circumstances where restrictions might still hold, particularly when they are designed to protect trade secrets, confidential information, or other legitimate business interests during the currency of the employment contract.
For instance, actions by an employer to prevent an ex-employee from using, disclosing, or divulging confidential information to a competitor are not considered restraints of trade and are therefore more likely to be upheld by the courts.
Best Practices for Drafting Enforceable Non-Compete Clauses
Given the legal challenges associated with enforcing non-compete clauses in Malaysia, employers should adopt best practices when drafting these clauses to ensure they are as effective and legally compliant as possible:
1. Focus on Confidentiality:
Instead of broadly prohibiting competition, employers should focus on confidentiality agreements that protect specific business interests like trade secrets and proprietary information. These are more likely to be enforceable than broad non-compete clauses.
2. Reasonable Scope and Duration:
If including a non-compete clause, it should be narrowly tailored. This means limiting the scope (geographical area, specific competitors) and duration (the time period post-employment) of the restriction. While broad restrictions are likely to be void, narrowly defined clauses that protect legitimate business interests may have a better chance of being upheld.
3. Incorporate Non-Solicitation Clauses:
Employers may include non-solicitation clauses that prevent ex-employees from poaching clients or key staff. These are generally more acceptable to courts than blanket non-compete clauses.
4. Ensure Voluntary Agreement:
It is crucial that the employee fully understands and voluntarily agrees to the non-compete clause. This can be demonstrated by providing clear explanations and ensuring that the clause is not buried in the fine print.
5. Consideration for the Clause:
Offering additional consideration (e.g., a bonus or special payment) in exchange for the employee agreeing to the non-compete clause can also strengthen its enforceability, although it does not guarantee it.
Conclusion
Non-compete clauses in Malaysian employment contracts face significant legal hurdles due to the restrictive provisions of the Contracts Act 1950. While the law generally renders such clauses void, there are certain strategies that employers can adopt to protect their business interests effectively.
By focusing on confidentiality, tailoring restrictions narrowly, and ensuring that clauses are clear and reasonable, employers can draft agreements that align with legal standards and still offer some level of protection for their business interests. If you have any questions regarding the article, please feel free to contact our managing partner, Eugene Yeong.
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