Can Your Boss Legally Stop You from Working for a Competitor? Understanding Restraint of Trade in Malaysia

When signing an employment contract, you might encounter a clause that restricts you from working in a similar field or starting a similar business after leaving your job. These clauses, known as restraints of trade, are often found in non-compete agreements. They're designed to protect an employer's business interests by limiting an employee's ability to work for a competitor or start a competing business.

For instance, imagine a restaurant owner who requires their chef to sign a contract stating that they cannot cook for another restaurant for six months after leaving. But is this type of clause actually legal?

What Does the Law Say?

In Malaysia, restraint of trade or non-compete clauses are generally considered void. This is due to Section 28 of the Contracts Act 1950, which states

"Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void."

However, there are three specific exceptions where restraint of trade clauses can be deemed valid:

1. Sale of Goodwill: If someone sells the goodwill of their business, they can agree with the buyer not to start a similar business within certain geographic limits, as long as these limits are reasonable.

2. Dissolution of Partnership: Partners may agree that, upon dissolving a partnership, some or all of them will not start a similar business within the same geographic area.

3. During Partnership: Partners may agree not to engage in any business other than that of the partnership while it continues.

   
   

These exceptions are strictly interpreted, as seen in the case of Millenium Medicare Services Sdn Bhd v Nagadevan A/L Mahalingam. In this case, the court ruled that a clause preventing the defendant from practicing medicine within a 15 km radius of his former clinic was an illegal restraint of trade under Section 28. The court found that this clause did not fit within any of the Act’s exceptions, rendering it unenforceable.

Limits on Restraint of Trade Protection

While Section 28 offers protection against unfair restraint of trade, it doesn't give employees carte blanche to misuse confidential information from their former employers. For example, in Agensi Pekerjaan Talent2 International Sdn Bhd v. Kenneth Yong Fu Loong & Anor, the defendant used confidential information from their previous employer to solicit clients. The court ruled this was not a restraint of trade issue but a breach of contract.

Similarly, in Svenson Hair Center Sdn Bhd v. Irene Chin Zee Ling, the defendant left her job, started a competing business, and used confidential customer information from her former employer. The court issued an injunction against her, not because she was restrained from trade, but because she had breached her duty of confidentiality. The court noted:

"The law does not debar an ex-employee from making any use of or drawing on a fund of knowledge and experience or skills that he had acquired while working for the employer. That would be tantamount to depriving him of his livelihood."

Thus, while the restraint of trade clauses was invalid, the misuse of confidential information was not.

Conclusion

Employers often include restraint of trade clauses in employment contracts to protect their business interests. However, in Malaysia, these clauses are generally void unless they fall within one of the three exceptions under Section 28 of the Contracts Act 1950. Employees should carefully review any non-compete agreements and consider seeking legal advice to fully understand their rights and obligations. Ultimately, the enforceability of these clauses hinges on their reasonableness and the specific circumstances of each case.