Essay On Trade Restraint Freedom To Conduct Business In Malaysia PDF

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Restraint of trade is a common law doctrine which means that a or a future liberty to carry on a trade, business or profession in such manner and with such person(s) is restricted. In other words, it is an enforceability of contractual restrictions on freedom to conduct businesses. This legal theory...

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Restraint of trade is a common law doctrine which means that a person’s or a party’s future liberty to carry on a trade, business or profession in such manner and with such person(s) is restricted. In other words, it is an enforceability of contractual restrictions on freedom to conduct businesses. This legal theory can be observed in an old leading case of Mitchel v Reynolds [1711] 1 P Wms 181 1, where Lord Smith LC mentioned that: “it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.” In Malaysia, the general principles on restraint of trade have been clearly stipulated under S.28 of Contract Act 1950 (hereinafter referred to as “CA”), which provides that every agreement by which anyone is restrained from exercising a lawful profession trade or business of any kind is to that extent void. Derived from this statute, we can conclude that all the clauses or covenants in the contract in restraint of trade are void because S.28 of CA generally prohibits any restraint of trade. For an example, in practical, any covenant in restraint of trade against an employee after leaving his former employer is void under the above section. In the case of Wrigglesworth v Wilson Anthony [1964] MLJ 269 2, the defendant, an advocate and solicitor, entered into an agreement of service with the plaintiff’s legal firm. Clause 8 of the said agreement stipulated that the defendant would not for a period of two years after the termination of his engagement by the plaintiff practice as or carry on the business or profession of an advocate and solicitor within a radius of five miles from Kota Bharu Town without first obtaining the written consent of the plaintiff. Such written consent was not given by plaintiff. On 7 December 1963, the plaintiff agreed to discharge the defendant from the terms and obligations of the said agreement with effect from 31 December 1965. The plaintiff claimed an injunction to restrain the defendant from practising or carrying on the business or profession of an advocate and solicitor within a radius of five miles from kata Bharu, Kelantan, until 31 December 1965. The court then ruled the case by applying the S.28 of the Contracts (Malay States) Ordinance 1950, which provides that “every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extend void.” Accordingly, an agreement whereby an advocate and solicitor is retrained from practising his 1 Mitchel v Reynolds [1711] 1 P Wms 181 2 Wrigglesworth v Wilson Anthony [1964] MLJ 269

profession within five miles from Kota Bharu town for a period of two years after the termination of his service agreement with his employee is void. The distance and place in respect of the restraint are irrelevant. Hashim J stated that: “I do not think the English cases are applicable as the Contracts (Malay States) Ordinance 1950 is not based on the English law of contract. Section 28 is quite clear. Except in respect of the three exceptions, every agreement by which anyone is restrained from exercising a lawful profession is to that extent void.” 3 From this case, we can conclude that the contract where the employees covenanted not to complete with their former employers after leaving their employment do not come under any of the three exceptions to S.28 of CA, which means that any restriction in this circumstances is void. Whilst, in the case of Polygram Records Sdn Bhd v The Search [1994] 3 MLJ 127 4, Visu Sinnadurai J held that the clause prohibiting the Search group from making any recordings after the expiry of their contract with the plaintiffs was void from the very beginning being a covenant in restraint of trade. The court stated that once the Malaysian courts take the view that a particular covenant is a covenant in restraint of trade, the courts have no discretion but to declare it to be void under S.28 of CA, subject to the three exceptions provided by the said section. In this circumstances, any covenant in restraint of trade, whether it is an absolute or a partial restriction, which is a restriction limited to some particular place or time, is void. The issues that the restraint is for a limited period, or confined to a particular area or the test of reasonableness under English Law do not arise in cases affecting employers and employees. 5Therefore, as the general rule, a strict interpretation of S.28 of CA would render all covenants in restraint of trade void even if the covenant in question were reasonable.6 An interesting development came in the case of Schmidt Scientific Sdn Bhd v Ong Han Suan [1997] 5 MLJ 6327, where Kamalanathan Ratnam JC held that there is no restraint of trade when the employees are restrained from using, disclosing and/or divulging confidential information and/or trade secrets of their former employers to their detriment. In this case, the plaintiff dealt in very much specialised equipment and instruments imported from an overseas supplier to be sold to various hospitals, research centres, universities and industries throughout Malaysia. The first, second, third and fourth defendants were employees who resigned from the 3 Ibid 4 Polygram Records Sdn Bhd v The Search [1994] 3 MLJ 127 5 Superintendence Co of India (P) Ltd v. Krisbnan Murgai AIR 1980 SC 1717 6 Sinnadurai Law of Contract in Malaysia and Singapore: Cases and commentary (2nd Edn, 1987) pp.487 7 Schmidt Scientific Sdn Bhd v Ong Han Suan [1997] 5 MLJ 632

plaintiff at different times and subsequently incorporated a new company, which was the fifth defendant. The fifth defendant then approached the three customers of the plaintiff and gave them exact quotations of the same equipment and instruments with the exact specifications of the plaintiff but at a reduced price. The plaintiff alleged that as a result of the fifth defendant’s low quotation, the plaintiff had suffered loss by reason of a special discount that it has to give to two of its customers and that it Joss its sale to the third customer to the defendants. The plaintiff claimed against the defendants for an injunction to restrain the fifth defendant from using, divulging and/or disclosing any confidential information and/or trade secrets of the plaintiff, approaching any suppliers of the plaintiff with the view to induce them to appoint the fifth defendant as the agent/distributor of their products, soliciting any orders from the plaintiffs suppliers for whom the plaintiffs were the exclusive agents/distributor and soliciting orders or otherwise dealing with each and every customer of the plaintiff. The defendants submitted that the plaintiffs’ action amounted to a restraint of trade. Kamalanathan Ratnam JC held that it was not the plaintiff's case to restrain the defendant from entering into the same trade as the plaintiff. The plaintiff’s case was to restrain them from using, disclosing and/or divulging confidential information and/or trade secrets of the plaintiff to the detriment of the plaintiff. The allegation of restraint of trade clearly failed. From this case, we can conclude that the restriction on the ex-employees from wrongfully use or disclose the confidential information belonging to the ex-employer does not constitute a restraint of trade but is strictly prohibited. Clearly, the acts such as memorizing a formula or a list of the employer’s customer or taking away such list for his own uses is improper and would constitute an act in bad faith. The application of this law also clearly stipulated in the case of Svenson Hair Centre Sdn Bhd v. Irene Chin Zee Ling [2008] 7 MLJ 903, [2008] 8 CLJ 386 8

, where the court held that the law vigilantly protects the employers’ interest in such confidential

information from abuse by their ex-employees. It also allows the employer to stipulate in the contract forbidding the employee for the use of any confidential information or trade secrets and disclosing or divulging them to others. Such covenants are not restraint of trade. In fact, there are three exceptions to S.28 of CA, which have been mentioned in the judgment of the aforesaid cases, where the covenant in restraint of trade is valid and exist in certain contracts. The first type of contract that dealt by law and the restraints may exist is the 8 Svenson Hair Centre Sdn Bhd v. Irene Chin Zee Ling [2008] 7 MLJ 903, [2008] 8 CLJ 386

contracts between vendor and purchaser for the sale of the goodwill of a business. This principle is stipulated under Exception 1 in S.28 of CA , which provides that: “one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill (rom him, carries on a like business therein: Provided that such limits appear to the court reasonable, regard being had to the nature of the business.” In other words, this exception deals with restraint of trade in cases of sale of the goodwill of a business, where the vendor of the goodwill of a business enters into a covenant not to carry on a similar business in competition with the purchaser. This exception is applicable if it prohibits the vendor from carrying on a similar business, in competition with the business bought over by the buyer from the vendor; the area of restraint is within specified local limits; the buyer or his successors carries on the same business; and such limits are reasonable regard being had to the nature of the business. If the conditions said above have fulfilled, the covenant against the vendor will not be in restraint of trade. Nonetheless, it is important to note that this exception is expressly provides that the restraint must be “within specified local limits which are reasonable” which means that any restraint beyond local limits would be unreasonable and thus void. The second valid contract in restraint of trade is the contracts between partners prior to dissolution of the partnership and during the continuance of the partnership. In terms of the dissolution of the partnership, Exception 2 of S.28 of CA applied. This exception provides that: “partner may, upon or in anticipation of the dissolution of the partnership, to agree that some or all of them will not carry on a business similar to that of the partnership within such local limits as are referred to in Exception 1.” In the case of Wrigglesworth v Wilson Anthony [1964] MLJ 269 9, the plaintiff contended that Exception 2 applied to their contract because clause 9 of the contract intended to make the defendant a partner of the plaintiff's firm. Hashim J rejected the argument and held that Exception 2 did not apply in this case as at the time of the execution of the contract, the defendant was not a partner of the plaintiff's firm. Besides, during the continuance of the partnership, Exception 3 in S.28 of CA provides that: “partners may agree that some or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.” Such clauses are normally found in partnership agreements 9 Wrigglesworth v Wilson Anthony [1964] MLJ 269

to ensure that the partners devote their time and skills to promote the business of the partnership only. In commercial agreements, parties may include negative covenants that restrict their liberty in doing business or trade in a certain manner during the period of the contract. These covenants are not in restraint of trade. In Hua Khiow Steamship Co Ltd v Chop Guan Him [1930] 1 MC 175

10

, Thorne J in interpreting S.28 of CA took a liberal attitude that these

covenants are not in restraint of trade. A strict view of the section would have the effect of invalidating most commercial agreements. In this case, the plaintiffs contracted with the defendant and several other traders to charge them at a lower rate in consideration that they would ship all their goods and produces from Muar to any port to which the plaintiffs had a steamer running, by the steamers of the plaintiffs. The contract contains a covenant that if the defendant or any of the others transported their goods through another company, they would be disentitled to claim rebate, which otherwise they would have been entitled to. They would also become liable to the plaintiffs to pay three times the amount of the weight of the goods shipped by them in breach of the agreement. The defendant breached the agreement and the plaintiffs claimed for the recovery of the sums of money due. Thorne J took a liberal attitude in interpreting section 28 and held that these covenants are not in restraint of trade by stated that: “a strict view of the section would have the effect of invalidating most commercial agreements. To interpret this section sufficiently widely a to rule that this contract is in restraint of trade would involve holding that a restraint in every case arises when a trader has bargained in such manner as to hamper in some way his own freedom of contract and the court does not think that is the law.”11

10 Hua Khiow Steamship Co Ltd v Chop Guan Him [1930] 1 MC 175 11 Ibid at 179...