Employment

Restrictive Covenants In Employment Contracts

Written by Team Farallon | May 28, 2019

Restrictive covenants” are common clauses found in an employment contract where the employee (also known as the “Covenantor”) agrees with the company (the “Covenantee”) to restrict some of the Covenantor’s rights upon the termination of the employment relationship. Restrictive Covenants could also be part of the agreed terms in a Termination Agreement.

All restrictive covenants are, prima facie, void unless it could be proven by the Covenantee that the restrictive covenants are necessary to protect the legitimate interests of the parties concerned and the public. This article will give a brief introduction to the types of Restrictive Covenants that could be present in an agreement between the employer and employee and also several important issues to consider when deciding if a restrictive covenant is necessary and valid. In the event of disputes between employer and employee, we strongly advise either party to seek advice from a trusted and reliable Employment Lawyer In Singapore.

Types of Restrictive Covenants

There are several forms of restrictive covenants which could be present in an agreement between an employer and employee, such as:

Non-Compete

This restrictive covenant seeks to prevent the Covenantor from joining a business rival soon after he terminates his employment with the Covenantee.

Non-Solicitation of Employees

This restrictive covenant seeks to prevent the Covenantor from soliciting the employees of the company that are working in the same teams as the Covenantor, or those whom he had direct influence with.

Non-Solicitation of Business and Suppliers

A non-solicitation of business restrictive covenant should prevent the Covenantor from soliciting existing customers, future customers whom the company is in negotiations with, and ex-customers who are no longer patronising the Company but remain in the habit of dealing with the company (i.e. returning customers). This covenant should only be limited to the business of the company that the Covenantor was previously engaged in.

Finally, the non-solicitation of suppliers restrictive covenant seeks to prevent the Covenantor from soliciting any of the company’s suppliers that could result in a possible supply disruption.

When will a restrictive covenant be valid?

For a restrictive covenant to be valid, the first issue is to determine the legitimate interest(s) that the Covenantee seeks to protect. The second issue would be to determine the scope of the restrictive covenant necessary to protect such interests.

Legitimate Interest

It is very important to craft the restrictive covenant carefully. To determine what the “legitimate interest” is, the courts will first refer to the contractual wording of the restrictive covenant. If the legitimate interest cannot be ascertained, the court will there look beyond the contractual wording and look at the extrinsic evidence to determine the parties’ intention.

Scope of the restrictive covenant

For the restrictive covenant to be valid, the scope of the restrictive covenant must reasonable. The courts will consider factors such as:

It is extremely important to define the “territory” where the restrictive covenant will apply. It is usually defined to mean any country or geographical area in which the Covenantee usually carries on business or proposes to carry on business.

Therefore, the Covenantee should be mindful that the ambit of the territory does not go beyond that of the territory where the Covenantee operates.

A restrictive covenant cannot last in perpetuity. Additionally, the absence of any time limit in the restrictive covenant would also render the restrictive covenant unreasonable. While there is no existing jurisprudence that indicates what is a reasonable period, 1-2 years may be held as a reasonable benchmark. However, what period would be considered to be reasonable differs from case to case.

For example, the courts have found that a covenanted period of 1 year to be too long for a Managing Director in charge of business strategy and operations, the same period was found to be valid when applied to the Managing Director for a brokerage firm. In Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd, a restrictive period of 2 years was also held to be unreasonable.

On top of the “territory” where the restrictive covenant will apply, the restrictive covenant should also be restricted to a particular demographic. The restrictive covenant cannot prevent all competition for clients within the territory and must be limited to the employee’s former clients/customers.

Additionally, the restrictive covenant cannot prevent the Covenantor from pursuing a career in an unrelated field with respect to the company’s business. The restrictive covenant should only be limited to the particular field of business that the Covenantor was involved in when he was at the company.

Other noteworthy points:

In the case of a junior employee, it is likely that the court will generally lean against the employer. In that regard, the company should consider whether it is practical or necessary to include restrictive covenants within a junior employee’s employment contract.

Finally, even if the restrictive covenant is determined to be valid, it may not be enforceable if an employer dismisses an employee without notice, because the company would have been regarded to have repudiated the contract of employment. Additionally, this rule cannot be circumvented by including a term in the employment contract stating that the restrictive covenant will remain enforceable even if the employee is wrongfully dismissed.