In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd  SGCA 42, the Singapore Court of Appeal (CA) has held that a clause under which deferred incentive awards to an employee would be forfeited if he competed with the company (Forfeiture-for-competition clause) was a restraint of trade.
“Forfeiture-for-competition” vs “Payment-for-loyalty”
It was argued that the Forfeiture-for-competition clause was akin to Payment-for-loyalty clauses which have been held to be valid and enforceable – both provide for financial disincentives against competition but an employee is free to choose whether or not he wants to compete.
The CA held that such clauses can be distinguishable from each other by considering (i) what the benefit was given for, and (ii) why and in what circumstances the benefit could be withheld under the clause. The CA found that:
- the benefit in this case was a vested entitlement of the employee at the time he entered into the Forfeiture-for-competition clause. In Payment-for-loyalty clauses, the financial benefit is not vested at the time of entering into the clause, but in the future contingent upon continued employment.
- the Forfeiture-for-competition clause deprived the employee of a right which had already vested, if the employee competed. Under a Payment-for-loyalty clause, an employee is free to choose whether or not to continue in the employment of the employer in order to earn the loyalty payment.
- the relevant question is whether, how and what effect the Forfeiture-for-competition clause has on the actions of the employee and his ability to exercise his skill and contribute to the market post-employment. In this case, the Forfeiture-for-competition clause purported to govern the employee’s post-employment behaviour.
- the CA also stated that it does not automatically follow that Forfeiture-for-competition clauses should be void and unenforceable. If the employer can demonstrate it has a legitimate proprietary interest which requires protection, the clause might be valid if it satisfies the twin test of reasonableness i.e. it is reasonable both in the interests of the parties and of the public.
As always, care must be taken in drafting post-employment restrictive covenants which are reasonable for both employer and employee. Employers may yet be able to construct a clause for an incentive payment which vests only in the future on the happening of an event (for example, on the employee completing a competition-free period), again taking care to ensure that the restrictions on trade are reasonable.