Case Note: High Court analyses reasonableness of non-solicitation of employees and non-compete clauses
By Isaac Heng and Ronald JJ Wong
Plaintiff: 3D Networks Singapore Pte Ltd
First Defendant: Voon South Shiong
Second Defendant: Sunway Digital Pte Ltd
Judge: Chan Seng Onn SJ
The judgment can be found here: https://www.elitigation.sg/gd/s/2022_SGHC_167
Facts
The first Defendant’s employment with the Plaintiff was governed by the letter offering him employment, a non-disclosure agreement, and a conduct guide. He was heavily involved in the hiring, promotion, and remuneration of sales employees, and had the power to approve their claims for reimbursement and leave applications.
During his employment, the first Defendant incorporated Juice Master Pte Ltd (“JMPL”). Towards the end of 2017, Mr Sng shared with the first Defendant that he was considering setting up the second Defendant. Expressing interest, the first Defendant sent Mr Sng a detailed business plan and subsequently resigned from the Plaintiff.
Prior to his departure, JMPL and the Plaintiff entered into a consulting agreement. Following his departure, JMPL entered into a business development services agreement with the second Defendant. The Plaintiff terminated the former agreement when it learned about the latter. The first Defendant’s departure on 15 April 2018 coincided with a steady stream of employees leaving the Plaintiff to join the second Defendant between March and August 2018.
Holdings and Analysis
Breach of Contract
The learned Judge found that the first Defendant was liable for breach of contract with respect to the Confidentiality Obligation, the Non-conflict Obligation and clause 7 of the conduct guide pertaining to record keeping, while the Non-solicitation Obligation and the Non-compete Obligation were deemed not valid or enforceable.
a. Non-solicitation Obligation and Non-compete Obligation Unenforceable
Both the Non-solicitation Obligation and the Non-compete Obligation – set out in the first Defendant’s Employment Letter and NDA [29] – are covenants in restraint of trade. It is well established that there cannot be a bare and blatant restriction of the freedom of trade; there must be a legitimate proprietary interest to be protected (Man Financial at [79]). In an employment context, although the two main legitimate proprietary interests which have been identified are trade secrets and trade connection, according to Man Financial at [81] and [121], an employer may also have a legitimate proprietary interest in maintaining a stable, trained workforce [31].
The learned judge accepted that both the Non-solicitation Obligation and the Non-compete Obligation protect legitimate proprietary interests. As stated in Man Financial at [121], the maintenance of a stable, trained workforce is a legitimate proprietary interest that the employer is entitled to protect via a non-solicitation clause [32]. As for the Non-compete Obligation, the first Defendant was in a position to divert business from the Plaintiff, and thus the Plaintiff had a legitimate proprietary interest in protecting its trade connection from interference by the first Defendant through the Non-compete Obligation ([33]-[34]).
However, even where a legitimate proprietary interest is shown, the court will ensure that the covenant in restraint of trade goes no further than what is necessary to protect the interest concerned (Man Financial at [79]). In this respect, the covenant must be reasonable in reference to the interests of the parties concerned and the interests of the public (Man Financial at [75]-[76]). As there was no indication that either obligation would threaten the interests of the public, the learned Judge, therefore, focused on the reasonableness of the obligations in relation to the interests of the parties ([31] and [36]).
In respect of the Non-solicitation Obligation, the sticking point is the prohibition on the first Defendant from soliciting “any employee”. As noted by the court in Man Financial at [110], if the non-solicitation clause concerned covers employees whose work entails very minimal or even no expertise and does not form an integral part of the employer’s operations, it would, barring extraordinary circumstances, be extremely difficult for the employer to justify the reasonableness of that particular clause [37].
Per Man Financial at [108], the notable questions to determine reasonableness include the categories of colleagues over whom the employee in question had influence and the ease with which the employer might replace departed employees [38]. The Plaintiff did not show that the first Defendant possessed influence over all non-sales employees to any significant degree, or that all of its employees were integral to its operations and difficult to replace. Therefore, the learned Judge found that the Non-solicitation Obligation was not reasonable between the parties and thus neither valid nor enforceable, as it went further than what was necessary to protect the Plaintiff’s interest in having a stable, trained workforce ([40]-[41]).
Turning to the Non-compete Obligation, the period of restraint of one year was reasonable as an estimate of how long it would take for the Plaintiff to rebuild its trade connection. However, the prohibition on any employment or engagement which “by the nature of the employment or engagement will be detrimental or may be perceived to be detrimental to the best interest of the Company” goes well beyond what is necessary to protect the Plaintiff’s interest in maintaining its trade connection. The breadth of “best interest of the Company” is qualified with words like “credibility, stature, profitability, or business” which are all still extremely broad, and ostensibly encompass matters which do not relate to the Plaintiff’s trade connection. The learned Judge, therefore, found that the Non-compete Obligation was not reasonable between the parties, and hence not valid or enforceable [42].
Where a restraint of trade clause is found to be unreasonable, the court will still consider whether the doctrine of severance could apply such that the reasonable part of the clause can be upheld (CLAAS Medical at [68]). The prerequisites for severance are (Humming Flowers at [155]): (i) the unenforceable provision must be capable of being removed without adding to or modifying the wording of what remains with the remainder continuing to make grammatical sense; (ii) the remaining contractual terms must continue to be supported by adequate consideration; and (iii) the severance must not change the fundamental character of the contract between the parties [44]. It is worth noting that the “notional severance” approach – whereby the court is entitled to not just delete words but also to alter or even insert words – has not been accepted into Singapore law (Smile Inc at [32]-[35] and Humming Flowers at [174]-[186]).
Presently, the doctrine of severability does not apply to either the Non-solicitation Obligation or the Non-compete Obligation, as both would still go well beyond what is necessary to protect the Plaintiff’s proprietary interests [45]. Thus, the unreasonable nature of these obligations renders them invalid and unenforceable [46].
b. Breach of Confidentiality Obligation
The learned Judge found that the first Defendant had breached the Confidentiality Obligation through the preparation and communication of the business plan to the second Defendant’s chief operating officer, as the plan disclosed the Plaintiff’s team, client base, and incomes and expenditures – items which all comfortably fall within the restrictions of the Confidentiality Obligation ([49]-[54]). The relevant portion of the Confidentiality Obligation states: “any information concerning the products, organization, business, finances, transactions or affairs of the Company”. In addition, the transmission of the Plaintiff’s internal manuals to the second Defendant’s chief operating officer was a clear breach of the Confidentiality Obligation [57].
Furthermore, the first Defendant routinely and constantly undertook services, diverted customers and opportunities, and provided information for the second Defendant’s benefit, thereby breaching his Confidentiality Obligation and Non-conflict Obligation ([102]-[103]).
c. Breach of Non-conflict Obligation
Regarding the Non-conflict Obligation, the learned Judge found that the first Defendant’s explicit contemplation of poaching the Plaintiff’s team plainly disclosed a conflict of interest and thus a breach [55]. Moreover, the first Defendant’s act of providing feedback on the second Defendant’s name cards was in service of a competitor and therefore a breach of the Non-conflict Obligation [57]. The first Defendant had also breached the Non-conflict Obligation by actively assisting the second Defendant’s solicitation of the Plaintiff’s employees [60]. Furthermore, the first Defendant’s acts of manipulating records to obtain higher payments from the Plaintiff, and approving reimbursement claims with no ostensible link to the Company’s business constituted breaches of the Non-conflict Obligation ([117] and [119]).
The learned Judge next found that the first Defendant’s work for JMPL while in the Plaintiff’s employ and his blatant misuse of the Plaintiff’s employees in benefiting JMPL constituted a breach of the first Defendant’s Non-conflict Obligation ([105] and [109]).
d. Breach of the Conduct Guide
Through his manipulation of records and payments to benefit himself and certain other employees [110], the first Defendant breached his obligation under clause 7 of the conduct guide to keep honest and accurate records [132].
2. Breach of Implied Duties of Good Faith and Fidelity
Acknowledging the well-established precedent that there is an implied term that the employee will serve his employer with good faith and fidelity (Man Financial at [193]), the learned Judge was satisfied that each breach of the first Defendant’s express contractual obligations also constituted a breach of the implied duties of good faith and fidelity ([135]-[136]).
3. No Breach of Fiduciary Duties
The test for whether a fiduciary relationship arises in the context of an employment relationship is whether the employee has been placed in a position where he must act solely in the interests of his employer (Clearlab SG at [273]). The learned Judge found that there was such a relationship between the first Defendant and the Plaintiff, as the first Defendant’s position of substantial seniority and his oversight of the day-to-day and sales operations meant that he was in a position to act in his own interests at the expense of the Plaintiff’s interests [139].
However, the mere existence of such a relationship is not enough to succeed in a claim for breach of fiduciary duty, as the first Defendant must have owed specific fiduciary duties arising out of particular circumstances, which he acted contrary to ([140]-[141]). The learned Judge noted that the Plaintiff did not plead the contents of the alleged fiduciary duties – an omission which proved fatal to its claim, as the first Defendant would be placed at a disadvantage in marshalling his evidence and arguments ([142]-[143]). Thus, the Plaintiff’s claim in breach of fiduciary duty was dismissed [144].
4. Fraudulent Misrepresentation
The elements of fraudulent misrepresentation are as follows (Ochroid Trading at [238]): (i) there must have been a representation of fact made; (ii) the representation must have been made with the intention that it be acted upon by the Plaintiff; (iii) the Plaintiff has acted upon the false statement; (iv) the Plaintiff has suffered damaged by doing so; and (v) the representation must have been made with knowledge that it was false either wilfully or in the absence of any genuine belief that it was true [146].
The learned Judge found that the first Defendant had made representations of fact regarding his employees’ sales performance and targets, with On-Target Earnings paid to them based on these representations which he knew to be untrue [147]. Furthermore, the first Defendant had approved an employee’s miscellaneous claims which plainly had nothing to do with the business of the Plaintiff. His implicit representation that those claims were in fact legitimate resulted in reimbursements to the employee [148]. Therefore, the Plaintiff’s claim in fraudulent misrepresentation was made out.
5. Breach of Confidence
The court’s approach to breach of confidence claims (most recently set out in I-Admin at [61]) is to consider whether the relevant information had the necessary quality of confidence about it and if it was imparted in circumstances importing an obligation of confidence. Upon satisfaction of these prerequisites, an action for breach of confidence is presumed, which may be displaced should the first Defendant prove that his conscience was unaffected [150].
Within the prepared business plan, the first Defendant communicated to the second Defendant voluminous details pertaining to the Plaintiff’s clients and financial information. The information clearly bore the necessary quality of confidence and was imparted in circumstances importing an obligation of confidence. Moreover, the first Defendant made no attempt whatsoever to suggest that his conscience was unaffected [151]. Hence, the learned Judge found that the first Defendant was liable for breach of confidence [152].
6. Inducement of Breach of Contract
For such a claim to succeed, the Plaintiff must show that (M+W Singapore at [88]): (i) the Defendants knew of the contract and intended for it to be breached; (ii) the Defendants induced the breach; and (iii) the contract was breached, and damage was suffered [158]. The learned Judge found that both Defendants are liable for inducing the Plaintiffs’ employees’ breach of their Confidentiality Obligations [197].
7. Unlawful Means Conspiracy
Unlawful means conspiracy occurs when two or more persons combine to commit an unlawful act with the intention of harming another’s economic interests. The Plaintiff must demonstrate that (Bluestone Corp at [254]): (i) there was a combination of two or more persons; (ii) the alleged conspirators intended to cause damage; (iii) their acts were unlawful; (iv) the acts were performed in furtherance of an agreement; and (v) the Plaintiff suffered loss as a result [188]. The learned Judge found that both Defendants are liable in unlawful means conspiracy for the Plaintiff’s contractual breaches and the inducements of breach of contract [197].
8. Lawful Means Conspiracy
Lawful means conspiracy is constituted by (Tuitiongenius at [114]): (i) a combination of two or more persons; (ii) a predominant purpose to cause damage; (iii) acts performed in furtherance of an agreement; and (iv) the Plaintiff suffering loss as a result [191]. The learned Judge found that both Defendants are liable in lawful means conspiracy for the Plaintiff’s contractual breaches, the inducements of breach of contract and the solicitation of most of the former employees [197].
Comment
Non-compete and non-solicitation clauses are often the most controversial and disputable terms of any contract of employment or service provider / independent contractor. There are important drafting lessons to be gleaned from this decision.
The non-solicitation of employees clause in this case was struck down because it prohibited the solicitation of “any employee” without differentiation as to expertise or extent of importance in the employer’s operations. This means that the court would probably only be satisfied if the clause in question stipulates specific categories of employees e.g. client-facing sales personnel, management executives, or specialised research & development personnel. Also, as has been espoused by the courts before, the level of influence the defendant employee had over the relevant other employees is another important consideration.
The one-year non-compete clause, in this case, was shown to be reasonable given that it was a reasonable estimate of the time the Plaintiff would take to rebuild its trade connection. In this regard, evidence to prove such a reasonable estimate would be crucial to satisfy the court. Such evidence and reasonable basis should be contemplated at the time of drafting the contract.
However, the clause was nonetheless struck down because the scope of prohibited activity was vague and wide. The scope was held to be unrelated to the Plaintiff’s trade connection. As such, it is important that the specific legitimate interest that is being protected is explicitly considered and that a rational nexus between the scope of the restriction and the legitimate interest is drawn.
Another interesting point to note is that the court held that the defendant employee was a fiduciary in relation to the employer, by virtue of his substantial seniority and oversight of the sales operations. Hence, in a situation where an employment contract may not stipulate robust contractual terms obligations, an employer can claim breach of fiduciary duties.
This case also underscores the need to have comprehensive, robust, and particularised express contractual obligations which govern employees’ conduct. In particular, the Confidentiality Obligation, Non-conflict Obligation and relevant terms in the Conduct Guide are helpful references for this purpose. Further, the fact that the Conduct Guide was signed by the first Defendant [6] likely prevented any argument that the terms therein were not incorporated in his employment contract or binding, an issue which we have seen arise in various employment disputes.