Non-Compete Clauses in Malaysia: Are They Enforceable?

Restrictive trade covenants are frequently found in employment contracts and are typically designed to apply during the post-employment period. These covenants often include non-competition clauses that prohibit employees from engaging in similar businesses and non-solicitation clauses that restrict them from approaching the ex-employer’s customers or employees.

This article explores the enforceability of non-compete clauses in Malaysia and provides insights into the legal framework governing such clauses.

General Rule

In Malaysia, non-compete clauses are generally unenforceable as they are considered a restraint of trade under Section 28 of the Contracts Act 1950.

Section 28 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.” This approach differs from the common law position in jurisdictions like England, where courts assess the reasonableness of such clauses. In Malaysia, once a clause is determined to be a post-employment restraint of trade, it is automatically void unless it falls within specific statutory exceptions.

It is important to distinguish between two scenarios:

1. An employee using their personal skills and knowledge to compete with their former employer, which is permitted by law.[1]
2. An employee stealing trade secrets or confidential information, which is prohibited and actionable under the law.[2]

Exceptions to the General Rule

Section 28 recognizes three exceptions to the general prohibition on restraint of trade:

1. Agreements related to the sale of goodwill.
2. Agreements between partners prior to the dissolution of a partnership.
3. Agreements between partners during the continuation of a partnership.

The Malaysian courts have consistently interpreted these exceptions as a clear indication of the legislature's intention to make Section 28 exhaustive.[3] This means that any clause restricting an employee’s ability to compete with their ex-employer is void unless it falls within one of these exceptions.

As employment agreements typically do not involve these exceptions, restrictive covenants in such agreements are deemed void after termination.

Why Are Non-Compete Clauses Still Included in Employment Agreements?

Given their general unenforceability, one may wonder why employers continue to include non-compete clauses in employment contracts. The answer lies in the psychological impact of such clauses.

While non-compete clauses may be void, there is no prohibition against including them in contracts. Many employees, unaware of their rights under Section 28, may assume that these clauses are legally binding and, as a result, refrain from joining competing businesses. This creates a deterrent effect, fulfilling the employer’s intent even though the clause is legally unenforceable.

Conclusion

In Malaysia, non-compete clauses are, as a general rule, unenforceable post-employment due to the restraint of trade principle under Section 28 of the Contracts Act 1950. Employers should carefully consider the inclusion of such clauses, while employees are encouraged to seek legal advice to understand their rights fully.