Imagine being in a relationship where your significant other tells you that in the event of a break-up, you are not allowed to date anyone else for a period of 12 months.

The request sounds absurd and irrational, yet many employees in Malaysia willingly sign employment contracts which have similar covenants. It has become quite common for employers to include a “non-compete” clause in their employment contracts (especially for high level employees) which purports to prohibit employees from joining competitors for a fixed period of time after their resignation from the company.

A typical non-compete clause looks something like this:

“For a period of 12 months after cessation of your employment with the Company for whatever reason, you shall not be directly or indirectly engaged or interested in (whether as employee, principal, agent, consultant or otherwise), or conduct any trade or business in Malaysia which is wholly or partly in competition with any business carried on by the Company at the date of cessation of your employment.”

Employers include such non-compete clauses in the belief that it will help them retain key employees, protect their confidential information and customers, and also prevent their competitors from capitalising on investments made in their employees. These may be valid concerns… but are non-compete clauses even enforceable in Malaysia?

The simple answer is NO.

Non-compete clauses in employment agreements are not enforceable in Malaysia due to Section 28 of the Contracts Act 1950. Section 28 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is void.

Malaysian Courts have interpreted Section 28 to mean that where the non-compete clause attempts to cover a period after the employment has ended, it will be void and unenforceable against the employee. It does not matter that the non-compete clause appears reasonable, or is only for a short period of time. This position was recently affirmed in 2014 in the Court of Appeal case of Visioncast Sdn Bhd & 1 Or v Dynacast (Melaka) Sdn Bhd & 2 Others [Update: an appeal to the Federal Court was dismissed in 2016].

Simply put – there’s nothing to stop a former employee from joining a competitor (provided of course they do not use their former employer’s confidential information). The rationale behind Section 28 and the courts’ decisions is that no one should be prevented from pursuing legitimate work or business.  Further, employees with specialised skill and knowledge in niche areas would naturally only be able to work within a small industry – preventing them from working with competitors would effectively limit their ability to make a living.

Take note however that Section 28 does not apply to: (a) agreements involving the sale of goodwill of a business; (b) agreement between between partners prior to dissolution or during continuance of the partnership; and (c) non-compete clauses applicable during the currency of the contract (eg: “exclusivity contracts”).

Non-compete clauses may still serve their purpose if an employee does not seek legal advice and voluntarily refrains from joining a competitor in the mistaken belief that the non-compete clause is enforceable. However, the expectation of employers should be managed accordingly – Malaysian employers who attempt to enforce a non-compete through civil action may find themselves having no greater rights than an obsessive and vindictive ex.

***

ABOUT THE AUTHOR. Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Edge, The Star, the American Chamber of Commerce updates, and Asialaw. Have a question? Contact us.

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