Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] SGHC 64

The Singapore High Court in Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd considered whether non-competition and non-solicitation covenants in an employment contract were reasonable and enforceable and if not, whether the offending sections could be severed. The court found that much of the restrictive covenant was unenforceable and, after an in-depth consideration of the law of severance in Singapore, found it incapable of severance.

Background

The plaintiff was an employee in a business, Humming House (“HH”), which was owned partially by her two brothers. A competitor to HH (“Noel Gifts”) acquired it and incorporated the defendant as a wholly-owned subsidiary of Noel Gifts for the sole purpose of acquiring HH’s business and then carrying it on. Both HH and Noel Gifts were in the business of supplying flowers and gifts through catalogues and the Internet, with no physical premises.

The defendant entered into a sale and purchase agreement (the “SPA”) with HH and the shareholders of HH. The SPA contained non-solicitation and non-competition covenants binding the shareholders of HH. The plaintiff was not a shareholder of HH and was not a party to the SPA and was not bound by those covenants. It was a condition precedent of the SPA that HH’s shareholders sign employment contracts with the defendant. On the same day the SPA was signed, the defendant presented the plaintiff with an employment agreement (the “agreement”) for her signature. The agreement contained the non-competition and non-solicitation covenants (the “restrictivecovenants” and “Clause 13”) which were the subject matter of these proceedings. The plaintiff was unwilling to be bound by these restrictive covenants and resisted signing it for a period of six months. During this period, she continued to work without interruption as the sales manager of the acquired business, save that she now rendered her services to the defendant rather than to HH. The defendant accepted the plaintiff’s services even though she had not signed the agreement. She was eventually persuaded to sign it by her brother, one of the shareholders of HH.

The plaintiff resigned from her position in November 2011 and shortly thereafter informed the defendant that she intended to set up a business selling flowers and gifts. The defendant reminded the plaintiff of the restrictions in the agreement and threatened to sue should she proceed with her business plans. The plaintiff commenced proceedings to seek a declaration that Clause 13 of the agreement was void and unenforceable.

The District Judge applied the doctrine of severance to Clause 13, severing the geographical restraint which he held to be void, leaving a non-solicitation restraint as being valid and enforceable. Both parties were dissatisfied with this judgment and appealed to the High Court.

Clause 13

Clause 13 of the agreement contained prescriptions which the High Court summarised as follows:

  • The plaintiff shall not undertake or be employed in the same or similar business as the “relevant company”, or in any other business carried on by the relevant company in Singapore, Malaysia or any country in which the “relevant company” had offices on 31 December 2011 (the plaintiff’s last day of service with the defendant) (the “non-competition covenant”); and
  • For the same period and within the same geographical areas, the plaintiff shall not canvass or solicit orders from any person who was a customer of the relevant company while she was employed by the defendant and shall not endeavor to take away from the “relevant company” any of its customers (the “non-solicitation covenant”).

Nature of Clause 13

The court disagreed with the defendant’s submissions that the plaintiff’s restrictive covenant was part of the overall acquisition of HH. It was contended that the plaintiff, like the shareholders of HH, came to be employed by the defendant only as a result of the business. The court disagreed with this contention, noting inter alia that the plaintiff was not a shareholder of HH and the acquisition of HH was independent of the plaintiff’s continued employment. For this reason, the court held that the restrictive covenants at issue here were between employer and employee and not between vendor and purchaser.

The court agreed that the plaintiff had access to confidential information in the course of her employment and that this information was of commercial significance. The court overruled the lower court and held that protecting trade secrets or confidential information cannot be a sufficient legitimate interest to justify either the non-competition covenant or the non-solicitation covenant. After this ruling, the court confined its investigation as to whether the restrictive covenants were reasonable as protection of the defendant’s trade connections.

In order to establish that the employer’s trade connection is a sufficient legitimate interest, it must be shown that the employee has personal knowledge of, and influence over, the customers of the employer. The court was satisfied that there was such a legitimate interest in these circumstances as the plaintiff was the defendant’s sales manager.

“Relevant company”

The court considered the reasonableness of Clause 13 in terms of geographical restriction and the activity restriction.

The court noted that the reasonableness of the activity restriction and the geographical restriction depended on the definition of “relevant company” as used throughout Clause 13. The term was defined in Clause 13 as including the defendant and any related companies which the plaintiff performed duties in relation to and for the benefit of during the nine months prior to termination of employment. The court found that this included Noel Gifts and every one of its subsidiaries, which was too wide.

Non-competition covenant

The court found that the activity restriction in the non-competition covenant was rendered too wide by the definition of “relevant company”. The activity restriction was clearly intended to extend beyond the defendant’s core business in circumstances where there was only an incidental connection between the plaintiff and the related company.

The geographical restriction was also found to be unreasonably wide. The non-competition covenant extended to “Singapore, and Malaysia and any other countries the relevant company has offices at the date of such termination”. The court agreed with the plaintiff that this prohibition was rendered unreasonably wide with the inclusion of Malaysia as the plaintiff was only responsible for sales to Singapore customers. The court came to this conclusion because it was clear that the geographical restriction was aimed at protecting Noel Gifts’ interests. The plaintiff had no role in Noel Gifts or, indeed, in the Noel group.

For the above reasons, the court held that the non-competition covenant was void and unenforceable.

Non-solicitation covenant

The court found the activity restriction in the non-solicitation covenant was unreasonably wide due, again, to the use of the defined term “relevant company”. Its effect was to extend the non-solicitation covenant to prevent the plaintiff from soliciting orders from customers of other Noel group companies even if her connection with that company was purely incidental and even though the plaintiff may have had no trade connection with those customers. Again, the geographical scope was too wide here also for the same reasons enunciated in relation to the non-competition covenant.

The non-solicitation covenant restrained the plaintiff from soliciting business from the defendant’s present and future customers for two years. The restraint in relation to future customers was unreasonable as there was no trade connection. In relation to present customers, the court found the restriction lasting two years was unreasonable - the restraint ought not to last longer than reasonably necessary to allow the employer the breathing space it needs, free of active interference with its trade connection from the departing employee, to transfer that trade connection to its other employees.

Severance

The court noted that the doctrine of severance can be applied only if what results after severance makes grammatical sense though grammatical sense is not a sufficient condition for severance. The court reviewed the Court of Appeal decision in Man Financial (S) Pte Ltd v Wong Bark Chuan David[2008] 1 SLR(R) 663 and noted that the court will not rewrite a contract. A deletion which yields a grammatically sensible form of words can still yield a contractually senseless outcome and amount to rewriting a contract.

The court, in reviewing severance in Singapore, was of the opinion that it would create unnecessary fragmentation to recognise two varieties of severance in Singapore law, one applicable to employee covenants and one applicable to all other covenants.

The court found that the severance attempted by the lower court amounted to a rewriting of the contract particularly in relation to the deletion of the geographical restrictions.

Judgment

The court found aspects of the non-solicitation clause to be void and unenforceable, and for severance not to be possible. The court also held that the non-competition covenant was void and unenforceable in its entirety. The plaintiff’s appeal was therefore allowed.

Conclusion

This case serves as an important reminder of the dangers of drafting restraint of trade clauses using template or standard boilerplate clauses without giving due consideration to the employee’s scope of work and position in the firm. The unique circumstances of the employee would be relevant to the court’s determination of whether a restrictive covenant contained in an employee contract is reasonable and enforceable. Thus, as a matter of prudence, employers who wish to rely on restrictive covenants to protect their legitimate trade interests would do well to carefully tailor such covenants to suit the circumstances of each employee.