The Legal Theory Under Restraint of Trade

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The legal theory under restraint of trade of common law is that all agreements are prima facie void unless it is shown that the restraint is reasonable in the interests of the parties and of the public. It is a legally binding arrangement which restrict the manners by which one of the parties may work together, or earn a living, have at various circumstances been dealt with by the common law as being prima facie void , or prima facie valid.

In the case Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co, the appealing party, Thorsten Nordenfelt, was a Swedish gun maker with a significant, overall business. He sold the business to an organization, the respondents, and consented to enter a prohibitive pledge not to work for any rival business for a 25-year time frame in a boundless geological zone. Afterward, he worked for an opponent business. He at that point authorizes his rights at the court and contended that a worldwide geographical restriction was outlandish. The respondents contended that the restriction was just, for example, was important to protect themselves. Lord McNaughton stipulates a condition by which some person limits themselves from the activity of his trade was at first sight unlawful. It was a foremost of English law that all trade should be free. In any case, it would discourage trade on the off chance that somebody who has developed an important business couldn’t discard it further to his benefit. It was not debated that this proviso was sensible, as an immense entirety had been paid for the business. Nor was it harmful to general society. In this way, the proviso was maintained.

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However, the protection of public interest in cases of restraint of trade can be clearly seen in the case Thomas Cowan & Co Ltd v Orne. The defendant entered into a contract of service with the plaintiffs who were carrying on business as White Ant and General Pest Exterminators and Fumigators. He covenanted that, on leaving the plaintiffs` employment, he would not “carry on the business of White Ant Exterminator or Fumigator anywhere in the Island of Singapore either by himself or in partnership with others nor shall he take employment with any person, firm or corporation carrying on the business of White Ant Exterminators or Fumigators or any such similar business until the period of three years has expired”. After leaving the plaintiffs` employment, the defendant became a director in the Fumigation and Pest Control Co Ltd, a company carrying on business as White Ant and General Pest Exterminators and Fumigators. The plaintiffs brought this action to restrain the defendant from being in breach of the above covenant. The court held that although the covenant was reasonably necessary for the protection of the plaintiffs` business with regards to space and time as well as the nature of the defendant`s employment, it was against public policy since to prevent the defendant from operating as a fumigator in Singapore would give the plaintiffs a virtual monopoly of the business. Hence the covenant was void and could not be enforced. Moreover, the covenant, being a single covenant for the protection of the plaintiffs` whole business and not two covenants for the protection of the plaintiffs` two businesses, it could not be severed so as to allow its enforcement in part.

On the other hand, in Malaysia, for the most part, after a worker leaves the association, the representative may not be limited from accepting work with an adversary association, nor would he be able to be kept from setting up a business in rivalry with his previous boss. This is on the grounds that under s.28 of the Contracts Act 1950 forbids any agreement which refrains a man from practicing a lawful profession, business, and trade of any sort. The goal of s.28 of CA is to promote organized commerce and free development of work. There are three exemptions to the general rule of restriction under s.28 however none of which apply to a worker accepting employment with a rival association or setting up a business in competition with his former employer. The first exception is the sale of the goodwill of business. One who offers the goodwill of a business may agree with the purchaser to abstain carrying on a comparable business, within specified indicated local limits, as much as the purchaser, or any individual deriving title to the goodwill from 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 the case of Worldwide Rota Dies Sdn Bhd v Ronald Ong Chew Joon , the court had expressed the view that when applying the test of reasonableness, it must also consider the reasonableness of the restraint of trade in the context of the interest of the parties as well as the public.

The second exception is the dissolution of partnership. Partners may, upon or fully expecting a dissolution of the partnership, agree that a few or every one of them won’t bear on a business like that of the organization inside such local points of confinement as are referred to in exemption 1. In the case of Wrigglesworth v. Wilson Anthony , Hasim J held that, under S.28, English decisions relating to restraint of trade were not relevant as all covenants in restraints of trade were void under S.28: test of reasonableness could not be applied in such cases. The test of reasonableness is applicable in Malaysia because it lies between the contexts within the view of Exception 1 to S.28 CA. It is applicable to the sale of a goodwill of business enters covenant with the buyer not to carry on similar business. Thus, a person binds himself during the term of his agreement directly or indirectly not to take service with any other employer or be engaged by a third party has been held to be valid and not against S.28 of the CA.

In the case of Millennium Medicare Services v Nagadevan Mahalingam , the appellant (“MMS”) was running a business of healthcare centres (“the said business”) with the principal place of business at Bandar Baru Permas Jaya, Johor. The respondent (“Nagadevan”) was a registered medical practitioner. Nagadevan had agreed to join MMS as a partner vide an agreement dated 1.11.2006 (“the said agreement”). Under the said agreement, there was an express term restraining Nagadevan as a partner from practicing as a medical practitioner within the radius of 15km from any of MMS’s branches. The express term also stated that the restraint would be effective for three years from the date Nagadevan had ceased to be a partner of MMS. Subsequently, Nagadevan gave a three-month notice to resign and withdrew as a partner of MMS.

As of April 2007, Nagadevan practised as a medical practitioner at a clinic which was within the radius of 15km from one of the MMS’s branches. In consequence, MMS sought from the High Court, inter alia, for an injunction to restrain Nagadevan from practicing within 15km radius from MMS’s branches, and for damages. The High Court dismissed MMS’s application, hence the present appeal. The court was in a decision to dismiss MMS’s appeal with costs. Section 28 of the CA 1950 is general in its terms and unequivocally declares all agreements in restraint of trade void pro tanto (i.e. as far as it can go), except in the specified exceptions. However, the said agreement did not contain a specific clause which dealt with the dissolution of the partnership practice. The said agreement only governed the termination of the partnership agreement between MMS and Nagadevan but not the dissolution of the partnership. Furthermore, there was no evidence to show that the partnership agreement was made in anticipation of the dissolution of the partnership practice then or soon. As such, the trial judge was correct to hold that MMS had no authority to restraint Nagadevan from practising within 15km radius from MMS’s branches.

The third exception is restraint during the partnership. Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership. In the case of Hua Khiow Steamship Co Ltd v Chop Guan Hin , the court held that agreement was not void for being in restraint of trade within the meaning of S.28 of CA. The agreement only limits the manner in which trade shall be carried out in that it merely provides that the defendant should exercise the trade in a particular manner.

Moreover, in the situation where the ex-employee is using ex employer’s confidential information, it is not void to the extent. An ex-employee is allowed to compare with his or her ex-employer by canvasing or doing business with the latter’s former customers. Thus, the general principle allows competition between them. However, the ex-employee is permitted wrongfully use or disclose the confidential information belonging to the ex-employer. In the case of Schmidt Scientific Sdn Bhd v Ong Han Suan , the court held that the obligation of good faith or fidelity on a representative does not just require that the worker cease from abuse or divulgence of data while under employment, yet that there is additionally an inferred obligation that restricts the representative from utilizing any secret data acquired amid his employment, without the employers assent, after the employment contract ends.

Next, in the case of Sundai (M) Sdn Bhd v Masato Saito & Ors , the plaintiff’s reason for action against Saito was for breach of his obligations as a trustee of the plaintiff. Saito who was the director of the plaintiff was included in and had supported the improper acts of the ex-teachers in setting up another adversary school in Klang Valley to equal and rival the plaintiff to utilize private data without prior informed consent of the plaintiff. Saito, as a director of Sundai Malaysia has breached his obligations towards Sundai Malaysia by acting to the detriment of Sundai Malaysia with other conspiring parties with the aim as well as transcendent reason for causing harm to Sundai Malaysia. As the director of the plaintiff, Saito was bound by the provision of s 132(1E) of the Companies Act 1965 (‘Act’). By prudence of his position as a director of the plaintiff, Saito had an obligation to act to the best interest of the plaintiff.

In a circumstance where there was a conflict between his obligation to the company and his obligation to his nominator, Saito ought not subordinate his obligation to act to the best interest of the company to his obligation to his nominator. Director of the plaintiff, Saito was included in improper acts which kept running in conflict with his position as the director of the plaintiff and regardless of having the data that a rival company would have been set up by LEC KL, Saito had neglected to convey this to the consideration of the plaintiff. The role played by Saito who by virtue of his position as a director had breached his fiduciary duties to the plaintiff. As the director of the plaintiff Saito ought to have dealt with the interest of the plaintiff than his very own interest. In view of the prior, there was sufficient evidence in the witness of this court on the standard required by the law that Saito as the director had breached his obligations to his fiduciary and had permitted his own and private interest to conflict with his obligations as the director of the plaintiff.

In addition, when it can be found that there is threaten of the livelihood of a person, the agreement is void. For instance, in the case of Stamford College Group Sdn Bhd v Raja Abdullah Raja Othman , the issue in this case was whether the restrictive clause in the agreement cause threatened the livelihood of the person. The court held that if the defendant was not allowed to be a lecturer elsewhere, his livelihood would be affected. Therefore, the clause was to be held void.

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