Restraint of Trade - Can we?

Restraint of Trade – Section 28 of the Contracts Act 1950

• Section 28 of the Contracts Act

  
  

  

  
  

  does not automatically invalidate all contractual clauses that limit future employment.

  
  

• Section 28: Agreement in Restraint of Trade VoidAny agreement that restricts an individual from engaging in a lawful profession, trade, or business is void to that extent.

  • Exception 1: A seller of the goodwill of a business may agree not to engage in a similar business within reasonable local limits, provided the buyer or successors continue the business.

  • Exception 2: Partners, upon or anticipating dissolution of a partnership, may agree not to engage in a similar business within reasonable local limits.

  • Exception 3: Partners may agree that during the partnership, no partner will engage in any business other than that of the partnership.

    
    

• Petrofina (Great Britain) v Martin [1966] 2 All ER 17 (Ch D)Lord Denning stated that any contract restricting a person’s free exercise of trade or business is invalid unless it is reasonable between the parties and not harmful to public interest.

  
  

• Distinction Between Contracts in Restraint of Trade and Restrictive of TradeAccording to Halsbury's Laws of Malaysia, not every agreement that limits trade is a restraint of trade. The key test is whether the agreement truly restricts trade or simply regulates it. Agreements restricting certain actions during employment, such as exclusive service contracts, are generally not considered in restraint of trade.

  
  

• Hua Kiow Steamship Co Ltd v Chop Guan HinThe court differentiated between contracts in restraint of trade and those merely restrictive of trade. Contracts that direct how business should be conducted, without preventing the business itself, are not automatically void.

  
  

• Vision Cast Sdn Bhd & Anor v Dynacast (Melaka) Sdn Bhd & Ors [2015] 1 MLJ 424The Court of Appeal ruled that restraining an individual from lawful trade, even for a short period, is unsustainable unless falling within the exceptions of Section 28.

  
  

• Nagadevan A/L Mahalingam v Millenium Medicare Services Sdn Bhd [2011] 3 CLJ 529The Court of Appeal held that clauses restricting an individual's ability to practice their profession or trade fall under Section 28, unless they meet any of the three exceptions.

  
  

• Protecting Confidential Information and Trade SecretsEmployers can protect their confidential information through non-disclosure clauses, which strike a balance between protecting company assets and allowing employees to pursue future employment.

  
  

• Duty of Good Faith and ConfidentialityFormer employees are bound by good faith obligations, which may include clauses preventing the disclosure of confidential information, rather than imposing excessive trade restrictions.

  
  

• Breach of Confidentiality and Conspiracy to InjureIn Sundai (M) Sdn Bhd v Masato Saito & Ors [2013] 9 MLJ 729, the High Court emphasized the importance of confidentiality obligations, with violations resulting in legal consequences for conspiratorial actions.

  
  

• Duration of Confidentiality ObligationsThe Federal Court’s decision in Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Anor [2016] 3 MLJ 417 highlighted that confidentiality obligations could be perpetual, although this does not necessarily violate Section 28.

  
  

• Conclusion

  Malaysian courts scrutinize clauses that impose restraint of trade under Section 28 of the Contracts Act 1950. Clauses that effectively restrict future trade are generally void unless falling under specific exceptions. Clear, well-drafted agreements can protect both employers and employees.

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