Non-compete and non-solicitation provisions are commonly found in Singapore employment contracts, seeking to prevent ex-employees from competing directly with their old employer or otherwise enticing away staff, customers or suppliers.
Any such provision must be reasonable in scope in order to be enforceable – essentially, the provision must do no more than protect the employer's legitimate business interests. To do so, the restrictions should be limited in three key areas: duration, business activities and geographical area. If a non-compete provision is found to be too onerous or unreasonable, it risks being struck down by the Singapore Courts.
In Singapore, an employer will have a difficult task enforcing a non-compete clause that extends beyond 12 months after termination of an individual's employment agreement. Even in this case, we recommend year-long non-competes only for the most senior staff (for example, CEOs and COOs). A six to nine-month non-compete for senior to mid-level staff is more common, and it is unlikely that a non-compete clause which survives termination of the employment contract would be considered reasonable for any junior staff (although non-solicit provisions are viewed more favourably in this respect than non-competes).
Non-compete provisions should be limited to activities currently carried on by the company and, specifically, by the individual concerned. Employers should not seek to restrict activities that entail minimal expertise or are not integral to the operations of the company, as this is unlikely to be justifiable in the context of the business as a whole.
Importantly, non-compete provisions should be restricted as to territory – it is no use arguing that an individual should be prevented from competing with a company "anywhere in the world" or "in Asia Pacific", even if the employer has worldwide operations. Instead, the territory should be limited to countries in which the company currently operates; and where the employee has an existing business connection.
For example, a senior manager of a Singapore company may have close ties with customers in Singapore, Malaysia and Thailand, whom he regularly visits as part of his duties. In this case, including all three countries is more justifiable. In any event, the non-compete should specifically set out the countries covered, to demonstrate that the provision has been drafted to protect legitimate business interests, rather than being arbitrary or over-inclusive.
Approach of the Singapore Courts
The reasonableness of a restriction is determined by the Singapore Courts on a case-by-case basis. The Courts appear more willing to accept wider non-compete provisions in the context of contracting commercial counterparties with equal bargaining power (for example, joint venture parties or the sellers of a company, as opposed to an individual employee), the rationale being that the subject of the non-compete received something valuable in return (such as the purchase price of the company sold). To date, the Singapore Courts have not imposed an upper limit on the duration of non-compete provisions for commercial counterparties.
Where the Courts consider a non-compete clause reasonable save for one particular element, they may allow part of the clause to be deleted, whilst the rest of the clause remains in force. This is known as the "blue pencil test" in Singapore. However, the Courts have become increasingly reluctant to apply the blue pencil test and will not "re-write" an unreasonable clause simply to ensure it is reasonable. Instead, the entire clause will be struck out.
Drafting a non-compete clause
Employers should tread carefully and exercise restraint when drafting non-compete and non-solicitation clauses. It is advisable to tailor each non-compete clause according to the employee's level of seniority and responsibility within the organisation, as well as their specific role. Employers should give thought to which areas and activities need to be restricted to protect the legitimate business interests of the company.