Treatment of non-compete/non-solicitation covenants in the eyes of the Courts in Singapore and India

Published October 10, 2023

In an era where globalisation and industrialisation are at a peak, and companies are in unrelenting competition with each other to grow and acquire market share, contracts/agreements containing restrictive clauses are being executed at every turn. When a company wants to ensure its ‘secret sauces’ aren’t being shared with its rivals, a non-compete clause comes in handy.

What is a ‘non-compete’ clause? It is a clause in an employment agreement whereby the employee undertakes that during or for a certain period of time after his/her employment, the employee will not engage in activities that may be seen to be in competition with the employer’s business. Non-compete clauses prevent a person from working in the same industry as a rival of the employer for a certain period of time, which some may say is a restriction on an individual’s right to work.

A ‘non-solicitation’ clause on the other hand is often drafted into an employment agreement as a means of preventing the employee from using or soliciting the employer’s clients, customers, vendors or other employees for a period of time post cessation of employment.

This article sets out how courts in Singapore and India view these restrictive covenants.

Singapore

What do the Courts in Singapore consider to be “reasonable” for a non-compete? Since these clauses restrict trade and profession, which in turn affects a person’s livelihood, these clauses tend to be controversial in nature. The High Court of Singapore has stated that reasonableness depends on the factual matrix of cases. In most cases, the High Court has rendered the non-compete clauses invalid and unenforceable not because of the time period of the restriction imposed, but because of the scope of those clauses. In the case of HT SRL v Wee Shuo Woon^[1], the High Court of Singapore found that the non-compete clause was unreasonably wide due to its commercial, geographical and durational scope, and was therefore void as an illegal restraint of trade^[2]. The defendant worked only in Asia but the scope of the restrictive covenant was not limited to just that particular region. Hence, the Court found that the duration of 12 months was also excessive due to the lack of geographical constraint^[3]. In another case namely, 3D Networks Singapore Pte Ltd v Voon South Shiong & Another^[4], the High Court looked at the reasonableness of the non-solicitation restriction. The question that arose here was whether the employee in question had influence over an entire group of colleagues. The plaintiffs argued that the defendant did have a degree of influence over all the plaintiff’s employees^[5]. The Court. however, found that the plaintiffs did not provide enough evidence to show that the defendant had possessed a degree of influence on all the employees of the plaintiff, when they only actually had influence over a particular category of employees. The non-solicitation obligation was hence found to be unreasonable and was rendered invalid and unenforceable^[6]. Both the abovementioned cases have cited the case Mans Financial Pte Ltd v Wong Bark Chuan David^[7] in which the Court came up with a three-fold test that has to be satisfied for reasonableness. They are: (i) Is there a legitimate proprietary interest to be protected? (ii) Is the restrictive covenant reasonable in reference to the interest of the parties? (iii) Is the restrictive covenant reasonable in reference to the interests of the public?

Although the three-fold test is still valid, it has evolved. The Singapore Courts’ analysis has extended to examining other questions in order to flesh out the standards to be applied – such as, geographical limitation and duration of the covenant. Hence, to answer what the Courts in Singapore view as being reasonable depends on a number of factors. The non-compete and non-solicitation clauses need to be very specific in their commercial, geographical and durational scope, and should be justifiable.

India

Indian Courts have taken different views while dealing with non-compete clauses and non-solicitation clauses.. In the case of Niranjan Shankar Golikari v. The Century Spinning & Manufacturing Co. Ltd^[8], the Supreme Court of India took a liberal view. It stated that the “considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract, than those in cases where it is to operate during the period of contract of employment.” The Court held that the restrictive covenant would be a restraint of trade if it were “unconscionable or excessively harsh or unreasonable”. In this case, the employee was privy to special process invented/adopted by the plaintiff, due to which the Court held the restrictive covenant was reasonable and was necessary for the protection of the company’s interests. On the contrary, in the case of Tapas Kanti Mandal v. Cosmos Film ltd^[9], the Bombay High Court held that post service restrictive covenants are not enforceable per se. The Court in this case did not apply reasonableness as an exception and took a strict approach.

The Courts in India have approached non-solicit clauses in a manner that is consistent with their approach to non-compete clauses – non-solicit clauses have been upheld only in a limited manner. They Courts have approached these clauses based on facts and circumstances of each case. In the case of Wipro Ltd. v. Beckman Coulter International SA^[10], the Delhi High Court, examined the validity of a non-solicitation clause. The High Court stated employees cannot be restrained directly or indirectly from seeking employment of a competitor, and a clause to any such effect would amount to a restraint of trade as per section 27 of the Indian Contract Act. Therefore, the courts are unlikely to enforce a clause restricting employees from joining a competitor when acting in their own volition.

When including restrictive clauses such as these into cross border commercial contracts, one must not only bear in mind the standards applicable under the governing law of the contract, but also the law of the applicable jurisdiction where the clause is likely to be enforced.. It is evident from the above that the standards are somewhat different across the jurisdictions surveyed.

If one were to try and draw a common thread across jurisdictions, it is that in determining the validity of such clauses, Courts consider the employee’s position, access to trade secrets, influence over other employees, nature of the industry, and proprietary information of the employer.^[11]The duration of such clauses would also play a part inasmuch as any restriction post the duration of the contract and would be viewed under a stricter lens to adjudge its reasonability.

[1] HT SRL v Wee Shuo Woon [2019] SGHC 96

[2] Paragraph 84, HT SRL v Wee Shuo Woon [2019] SGHC 96

[3] Paragraph 83, HT SRL v Wee Shuo Woon [2019] SGHC 96

[4] 3D Networks Singapore Pte Ltd v Voon South Shiong & Another [2022] SGHC 167

[5] Paragraph 39, 3D Networks Singapore Pte Ltd v Voon South Shiong & Another [2022] SGHC 167

[6] Paragraph 41, 3D Networks Singapore Pte Ltd v Voon South Shiong & Another [2022] SGHC 167

[7] Mans Financial Pte Ltd v Wong Bark Chuan David, [2008] 1 SLR(R) 663 [https://v1.lawgazette.com.sg/2012-02/331.htm]

[8] Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd. (17.01.1967 – SC) (MANU/SC/0364/1967)

[9] Tapas Kanti Mandal vs. Cosmo Films Ltd. (16.08.2018 – BOMHC) (MANU/MH/2443/2018)

[10] Wipro Ltd. v. Beckman Coulter International S.A., 2006 SCC OnLine Del 743

[11] https://irblaw.com.sg/learning-centre/non-compete-clauses/

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