Which of the following is required for the covenant not to compete to be enforceable?

28 June 2018

Tan Kok Yong Steve v Itochu Singapore Pte Ltd [2018] SGHC 85

There is a common misconception that restrictive covenants in employment law (“Non-Competes”) are not enforceable. Under Singapore law, Non-Competes are prima facie unenforceable, unless the employer can prove that (i) they protect a legitimate interest of the employer, and (ii) the restrictions are reasonable in the interests of the parties and reasonable in the public interest. The burden is on the employer to show that the Non-Compete fulfils both criteria.

The courts have generally applied these criteria strictly against employers. Many Non-Competes in Singapore have been struck down, either because the activity scope was too broad (covering trading activities which the employee had no involvement with), the geographical scope was too wide (covering countries beyond Singapore where the employee had no actual or significant customer contact), or the time restriction was too long (covering a period beyond the time needed for the employer to rebuild its trade connections). The Non-Compete must be reasonable in all three aspects to be considered reasonable. If the Non-Compete was found to be too wide in any one aspect, it would be struck down as being invalid.

In Tan Kok Yong Steve v Itochu Singapore Pte Ltd, the Singapore High Court enforced a Non-Compete that extended to Vietnam and the Philippines, for a period of two years. This is the first reported decision in over a decade that a two-year Non-Compete has been enforced in Singapore.

Background

The Company is a multinational trading conglomerate headquartered in Japan, and operating around the world with over 200 affiliates. The employee (“Employee”) was in the Company’s cement trading business. The Non-Compete restricted the Employee from competing with the Company and/or its affiliates in the countries and in the products that the Employee was concerned with, two years after leaving the Company’s employment.

After leaving the Company, the Employee continued to trade in cement and specifically targeted the Company’s clients in Vietnam and the Philippines, whom the Employee had formerly dealt with while employed with the Company. The Company brought an action to enforce the Non-Compete against the Employee. The Employee then attempted to strike down the Non-Compete as being too wide and unreasonable.

Validity of Non-Compete

The Employee argued that the Non-Compete was too wide and unreasonable because:

• the Employee had no trade connections which the Company could legitimately protect, as his trades were subject to Company approval;
• the Non-Compete’s geographical restrictions were too wide, and potentially extended to all 200 affiliates of the Company worldwide; and
• the Non-Compete’s temporal restriction of two years was too long and impaired his livelihood in cement trading.

The Singapore High Court rejected all the Employee’s arguments on several grounds.

The court first found that the Company had a legitimate interest to protect. The Employee’s very job was to build rapport with the Company’s customers and establish trade connections on behalf of the Company. He had a “strong base of customers” over which he had “knowledge and influence”. The court rejected the Employee’s attempt to downplay his trade connections.

The court found the geographical restrictions reasonable. The court accepted the Company’s argument that the Company was not always required to prove sales in every part of the restricted countries, in order to uphold the geographical restrictions. Here, the Employee had traded in the principal trading cities in Vietnam and the Philippines, and a restriction in those countries was justified.

The court accepted the Company’s argument that on a proper reading of the Non-Compete (which was specific in its activity restriction to cement trading), the Non-Compete did not prevent the Employee from competing with all 200 of the Company’s affiliates, but only those which he had dealt with in Vietnam and the Philippines. Hence, the inclusion of the Company’s affiliates in the Non-Compete did not make it unreasonably wide.

Further, the temporal restriction was held to be reasonable. The cement trading business was a specialised industry. The court accepted the Company’s submission that the Employee himself had taken four years to build up his customer connections, and if the Employee were allowed to compete, it would be difficult for a newcomer of the Company to build up his own customer connections.

Having declared the Non-Compete enforceable, the court then considered whether an injunction was warranted. Pursuant to cross-examination at trial, it was noted that the Employee exhibited a “blatant disregard” for his contractual obligations with a clear intention to breach the Non-Compete. He had admitted under cross-examination that since he knew the Company’s business counterparts personally, he thought it was “fair game” for him to deal with them after leaving the Company. On the facts of the case, the Employee was appointed as exclusive agent of the Company’s business counterpart merely a day after leaving the Company. Having considered the evidence in totality, the court ordered the injunction sought by the Company.

Practical implications

This case recognises an openness and willingness of the court in Singapore to enforce Non-Competes.

When framed carefully in terms of its activity, geographical and temporal scope, a Non-Compete may be held to be enforceable. This is provided the employer can show sufficient evidence of breach by the employee. This case is a clear positive example of a Non-Compete being enforced in court notwithstanding the common misconception that restrictive covenants are generally unenforceable post-employment.

Allen & Gledhill Partner Tay Yong Seng acted for Itochu Singapore Pte Ltd (“Company”) in successfully enforcing the Non-Compete.

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