ENFORCEABILITY OF RESTRAINT OF TRADE CLAUSES
Restraint of trade clauses are often found in employment contracts and they can be contentious. This week’s blog covers Shopee Singapore Private Limited v Lim Teck Yong [2024] SGHC 29, a High Court (the “Court”) case on the enforceability of such restraint of trade clauses in a contract between Shopee Singapore Pte Ltd and one of its former employees.
Facts. The Claimant is Shopee Singapore Pte Ltd (“Shopee”). As many readers would know, Shopee’s primary business is running an e-commerce platform, including in Southeast Asia, Taiwan and Brazil.
The Defendant, Lim Teck Yong (“Lim”), is a former employee of Shopee from 2015 to 2023. Lim was a senior employee of Shopee, taking on roles such as Head of Regional Operations, and he was the Executive Director, Head of Operations for Shopee Brazil from January 2021 to 31 August 2023.
Lim then left Shopee to join ByteDance Pte Ltd in September 2023 as the “Leader for TikTok Shop Governance and Experience, Middle Platform”.
This case was brought by Shopee to:
Restrain Lim from accepting employment with ByteDance and to restrain Lim from soliciting Shopee’s clients and employees; and
Alternative, to obtain a “springboard injunction” to stop Lim from accepting employment with any of Shopee’s competitors.
Issue. The heart of Shopee’s case was that Lim had breached, or was about to breach, several clauses found in Lim’s agreements with Shopee, such as the non-solicitation, non-competition and confidentiality clauses contained in a Restrictive Covenants Agreement (“RCA”) and an Employee Confidentiality Agreement (“ECA”).
This blog post will focus on the discussion relating to the enforceability of these clauses in the context of the interim injunction application.
The legal tests. The Court set out the applicable legal tests at [17] – [22].
But in short, to obtain an interim injunction in respect of a restraint of trade clause, the applicant must show:
“a serious question to be tried that the restraint of trade clause is valid and enforceable, namely that it protects a legitimate proprietary interest and that it is reasonable in the interests of the parties and the public”;
“a serious question to be tried that a restraint of trade clause has been breached”; and
“if there are serious questions to be tried, that the balance of convenience lies in favour of granting the interim injunction”.
We also highlight two general points that were set out by the Court:
In law, restraint of trade clauses are prima facie void and unenforceable unless they serve to protect a legitimate interest of the employer (see [18(a)]; and
If the interest is to protect confidential information / trade secrets, then the employer would have to demonstrate that the “restraint of trade clause in question covers a legitimate proprietary interest over and above the protection of confidential information or trade secrets” (see [20]).
These two points are important to bear in mind when reading the case, as they inform the broad policy concerns that are at play.
RCA and ECA. We first turn to the RCA and ECA.
In summary, the RCA provided, among others, that for a period of 12 months after Lim’s employment with Shopee was terminated ([8]):
Lim was not to “seek or accept employment with or engagement by or otherwise perform services for or engage in business as or be in any way interested in or connected with a Competitor” within the “Restricted Territories” (the “Non-Competition Restriction”);
Lim was not to “seek, solicit, or endeavour to entice away from Shopee all or part of the account of any business of any Client” (“Client Non-Solicitation Restriction”);
Lim was not to “solicit or procure the services of or endeavour to entice away from Shopee or employment or assist in or procure the employment by another of any officer, employee or consultant of Shopee where that person is someone with whom he/she has had material dealings or contact during the twelve (12) months immediately preceding the Termination Date (and whether or not such person would commit any breach of his/her contract of employment or engagement by reason of leaving the service of Shopee)” (“Employee Non-Solicitation Restriction”)
The “Restricted Territories” was then in turn defined as follows:
“"Restricted Territories" means Singapore and such other countries within which Shopee or any Group Company thereof operates at the Termination Date and in relation to such country, during the twelve (12) months immediately preceding the Termination Date, the Employee:
(a) undertook duties for Shopee or any Group Company thereof with respect to the business of Shopee or any Group Company;
(b) had a degree of management responsibility for the business of Shopee or any Group Company or a material part thereof; and/or
(c) was privy to Confidential Information regarding the business of Shopee or any Group Company.”
As for the ECA, it contained a confidentiality clause obliging Lim not to disclose or use Shopee’s proprietary information (see [10]). See excerpt below:
“The Employee undertakes to at all times, both during his/her employment by Shopee and after his/her termination, (a) hold in the strictest confidence and will not disclose any Proprietary Information except to other Shopee Group employees, agents and representatives who need to know, or to third parties who are bound by written confidentiality agreements to the extent necessary to carry out his/her responsibilities as an employee of Shopee and in a manner consistent with any such third party confidentiality agreements; (b) use Proprietary Information only for the exclusive benefit of Shopee Group as may be necessary in the ordinary course of performing his/her duties as an employee of Shopee; and (c) will cooperate with Shopee and use his/her best efforts to prevent the unauthorised disclosure, use or reproduction of any Proprietary Information.”
Non-Competition Restriction. So, was the Non-Competition Restriction enforceable?
In short, no.
The Court found at [33] – [71] that Shopee failed to show that there was a serious case that the Non-Competition Restriction was enforceable.
Among others:
For the period of 12 months before Lim’s termination, Lim’s role was Executive Director, Head of Operations for Shopee Brazil. Yet Shopee was seeking an interim injunction n relation to Brazil, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam, without proving that Lim was undertaking duties or having a degree of managerial responsibility outside Brazil ([51] – [56]).
And insofar as Shopee was seeking to protect “Confidential Information” ([57]), this was already protected by the ECA Clause ([60] – [61]).
And if Shopee was trying to protect trade connections and to maintain a stable and trained workforce, then (a) those were not the interests which Shopee had asserted it was trying to protect through the Non-Competition Restriction ([63]) and (b) this would be covered by the Client Non-Solicitation Restriction and Employee Non-Solicitation Restriction ([64] – [68]).
The Non-Solicitation Restrictions. As for the Client Non-Solicitation Restriction and Employee Non-Solicitation Restriction, the Court held that Shopee “has not, on its bare assertions alone, shown a serious case to be tried that the Non-Solicitation Restrictions have been or are about to be breached by Lim” (at [75]).
The Court found that Shopee had no “specific evidence” that Lim breached these restrictions ([73]).
As for Shopee’s submission that there was a “risk of breach” hinging on Lim’s refusals to provide certain undertakings ([73]), this, too, was rejected by the Court.
This is because the Court found that by signing the RCA, Lim had already provided his undertakings ([74]). Not only did the undertakings requested by Shopee not add anything legally, but it was not apparent why Lim should provide them ([74]). Lim had also stated on affidavit that he has not breached and will not breach his obligations in this respect (at [75]).
But it is important to note that it is not in dispute that, unlike the Non-Competition Restriction, Shopee had a legitimate interest in respect of these Non-Solicitation Restrictions ([72]). Shopee had only failed to convince the Court that Lim was about to breach these restrictions ([72]).
Conclusion. Restraint of trade clauses are often included in employment contracts.
However, as set out earlier, it is important to bear in mind that the starting position in law is that such clauses are invalid.
The courts will only enforce such clauses if they (a) protect a legitimate interest, and (b) it is reasonable in the interests of the parties and reasonable in the public interest.
If the restraint of trade clause in question is too broadly worded, it may be struck down.
As illustrated by this case, if the restraint of trade clause is being used to protect confidential information (e.g., trade secrets), or to protect special trade connections, or to maintain a stable workforce, it is important to ask if these interests are protected by another clause.
If so, then the restraint of trade clause may be invalid as these interests sought to be protected are already protected by another contractual clause.
So, do not just mix-and-match boilerplate clauses on restraint of trade, protection of confidential information, and non-solicitation without considering their interaction.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.