Restraints of trade – what you need to know

Ninety per cent of employee restraint clauses are ineffective, according to one lawyer. What does a well-drafted restrictive covenant actually look like?

Restraints of trade – what you need to know
Business-critical employees may be largely free to leave and compete against their employers, due to a failure to move beyond cookie cutter contracts.

Leading Singapore employment lawyer Susan de Silva, partner at ATMD Bird & Bird, said restraint of trade issues have been a ‘constant’ for many years, with a particular rise to prominence over the last three to four years.

“We are handling both advisory and contentious cases relating to employees leaving. The issues relate to non-competes, non-solicits (employees, customers and other business partners), and protection of confidential information.”

However, de Silva said in many cases, businesses in Singapore are still being caught out by failing to ensure their contracts are effectively drafted.

“The main pitfall is poorly drafted restrictive covenants – this is usually fatal when trying to enforce a restrictive covenant,” de Silva explains.

“The first thing HR needs to be aware of is it is an area that is very technical in the drafting, and the law has been evolving in the area of restrictive covenants.

“It is a very technical area because the starting point for public policy is actually encouraging competition, so to be enforceable the drafting of a non-compete has to be 100 per cent perfect. That bit is not sufficiently appreciated,” she said.

HR teams are often resorting to cookie cutter approaches that are unlikely to work if put to the test when an employee departure becomes contentious.

“I think there is a propensity to use cut and paste restrictive covenants because it is seen as a standard thing that you cobble into an employment agreement. But when the covenant is just using standard provisions, it normally won’t work.”

De Silva said the contracts that will work are the ones where an employer has taken the trouble to consider the impact that an individual person leaving will have on the business, and tailored the restrictive covenant to that person. 

“That tends to work very well, although I haven’t seen a bullet poof one as yet.”

De Silva said ATMD Bird & Bird is often engaged by companies looking to bring on new star employees who may be restrained by their existing contracts.

“We look at it, and in 90 per cent of cases we are able to say to them, ‘don’t worry about it’. So the worry is there are provisions like that out there, where lawyers on the other side will just say don’t worry about it. I would say that in drafting these provisions HR needn’t be perfect, but the minimum standard should be that it is sufficiently well constructed that the other lawyer can’t dismiss it.”

HR teams are also tripping up when terminating employees, by accidentally annulling restrictive covenants through poor termination procedures. 

“The principle is that, where the employer repudiates the employment agreement and it is breached fundamentally, that annuls the entire contract.”

De Silva gives the example of a senior employee on a fixed-term contract, where there is a breakdown in the relationship due to misconduct and the employee is terminated before the end of the contract without sufficient evidence.

“That situation presents a high risk that the employer has repudiated the entire contract. So not only has the employer let the person go before the end of the fixed-term, but they are free of all post-termination restrictions.”

There is no reason why a company should not choose to enforce a carefully drafted restrictive covenant, according to de Silva.

“In some cases, the employer must enforce a restrictive covenant against an outgoing employee in breach, to make a point to remaining employees that it will do so. However, employers do have to find a balance when deciding who to enforce against, as being overly aggressive may make the employer less attractive to new talent.”

However, great HR management and employee engagement during the term of employment is the best form of legal risk management. 

“Employees may leave for different reasons to join a competitor, but if they have been fairly treated by their employer, they are less likely to be willing to harm the interests of the former employer and more willing to honour their restrictive covenants when they leave,” de Silva said.

“Neither the former employer nor the leaving employee wants to burn bridges.  In addition, well thought-through and drafted provisions around termination can help add another protective layer to supplement restrictive covenants which are generally harder to enforce.”

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