High Court · Decided 8 April 2014

Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd

[2014] SGHC 64Case no. Originating Summons No. 110 of 2012 (Registrar's Appeal (State Courts) No. 2 of 2013 and 5 of 2013)

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Companies Act 1967

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Vinodh Coomaraswamy J:
Introduction
[1] For virtually all of her working life, the plaintiff has worked in the flowers, gifts, hampers and wreaths business. In 2008, the defendant acquired the business in which she was employed. After the acquisition, the plaintiff continued to serve as the sales manager of this business without interruption, but now with the defendant as her employer. Her employment agreement contains express post-termination non-competition and non-solicitation covenants.
[2] In November 2011, the plaintiff resigned from the defendant’s employment. In December 2011, the plaintiff’s notice period ended and her employment with the defendant came to an end. Shortly afterwards, she informed it that she intended to set up her own business selling flowers and gifts. The defendant reminded the plaintiff of her non-competition covenant and threatened to sue her if she breached it. In the end, it was the plaintiff who sued the defendant in the Subordinate Courts (as the State Courts were then known), seeking a pre-emptive declaration that the restrictive covenant in her employment agreement is void and unenforceable.
[3] The District Judge held that the restrictive covenant was void in part and enforceable in part. Both parties appealed to the High Court. The appeals came before me. After considering the parties’ submissions and the evidence, I allowed the plaintiff’s appeal and dismissed the defendant’s appeal, thereby holding that the restrictive covenant was entirely void and unenforceable. The defendant has now appealed to the Court of Appeal. I thereoore set out my reasons for arriving at my decision.
Background
[4] The plaintiff started working in the business in 1991 when Humming House Tradition (“HHT”) employed her as a clerk. The plaintiff was never a partner of HHT: she was merely an employee. HHT was a partnership owned by Mr Lek Sek Kwee (“LSK”), Mr Lek Kwee Chueng (“LKC”) and Mdm Yuen Wei Wun (“Mdm Yuen”). LSK and LKC are the plaintiff’s older brothers.
[5] By 1998, the plaintiff had risen to the position of sales manager in HHT. In 2000, HHT’s owners transferred its business to a corporate entity which they also owned: Humming House Flowers and Gifts Pte Ltd (“Humming House”). After the transfer, the plaintiff continued her employment as sales manager of the same business, but as an employee of Humming House rather than of HHT. The plaintiff has never been a shareholder of Humming House. Although it has a similar name, Humming House is not the defendant.
Noel Gifts International Limited
[6] Noel Gifts International Limited (“Noel Gifts”) is a company in the same business as HHT and Humming House. Noel Gifts was founded in 1976. It started as a sole proprietorship, later becoming a corporate entity and yet later becoming a public listed company. By 2005, Noel Gifts and Humming House were number one and number two respectively in their common business. Although they were competitors, their strengths lay in different segments of the market. Noel Gifts was (and still is) a market leader amongst Singapore’s English-speaking community whereas Humming House was a market leader amongst Singapore’s Chinese-speaking community. Humming House was also successful in targeting specific markets (such as the small-to-medium enterprise market) and in the Chinese New Year hamper business.
Noel Gifts’ acquisition of Humming House’s business
[7] Sometime in 2005, the managing director of Noel Gifts, Mr Alfred Wong (“Wong”), approached LSK to discuss a potential acquisition of Humming House. For Noel Gifts, the commercial rationale was twofold. First, the acquisition would complement Noel Gifts’ business and give it a presence in new segments of the market. Second, and most importantly to Noel Gifts, the acquisition would allow it to buy out a competitor. Humming House declined to be acquired.
[8] Two years later, it was LSK’s turn to approach Wong. He wanted to know if Noel Gifts was still interested in acquiring Humming House. Humming House was then suffering from serious financial and cash flow difficulties as a result of overexpansion. The shareholders of Humming House had given personal guarantees for its debts and were afraid of being held personally liable if Humming House defaulted.
The defendant takes over Humming House’s business
[9] Noel Gifts and the shareholders of Humming House eventually agreed on the terms of the acquisition. It was to be structured as an acquisition of Humming House’s business rather than an acquisition of shares in Humming House. Thus, on 28 December 2007, Noel Gifts incorporated the defendant as a wholly-owned subsidiary of Noel Gifts for the sole purpose of acquiring Humming House’s business and then carrying it on.
[10] On 7 January 2008, (1) the defendant, (2) Humming House and (3) the shareholders of Humming House entered into a sale and purchase agreement (“the SPA”). Pursuant to the SPA, Humming House sold its business to the defendant for $1,823,000. The SPA contains non-solicitation and non-competition covenants binding the shareholders of Humming House. The plaintiff, not being a shareholder of Humming House, is not a party to the SPA and is therefore not bound by these covenants.
[11] Because Noel Gifts was not acquiring Humming House itself, it required the shareholders of Humming House to move with Humming House’s business to become employees of the defendant as part of the acquisition. It was therefore a condition precedent under the SPA that Humming House’s shareholders sign employment contracts with the defendant. Again, because the plaintiff was not a shareholder of Humming House, the transfer of her employment to the defendant was not a condition precedent under the SPA.
The plaintiff is offered employment
[12] Despite this, the defendant clearly did want the plaintiff to move with the business and become its employee. To this end, on the same day the SPA was signed, the defendant handed the plaintiff a draft employment agreement for her to sign. The agreement contained the non-competition and non-solicitation covenants which are the subject-matter of these proceedings. The plaintiff was unwilling to be bound by these restrictive covenants and resisted signing it. Despite this, the plaintiff continued to work without interruption as the sales manager of the acquired business, save that she now rendered her services to the defendant rather than to Humming House. The defendant accepted the plaintiff’s services even though she had not signed the agreement. She eventually signed the agreement over six months later, on 25 July 2008. LSK persuaded her to do so. Although her signed employment contract was not a legal requirement of the acquisition, LSK needed her to sign it because of the commercial deal he had struck with Noel Gifts.
[13] It is this employment agreement which lies at the heart of this matter.
Terms of the employment agreement
[14] Clause 13 of the plaintiff’s employment agreement is the restrictive covenant on which this entire case turns and which the plaintiff asks me to declare void and unenforceable.
[15] Clause 13 provides as follows:
The plaintiff resigns from the defendant
[16] On 1 November 2011, the plaintiff tendered her resignation from the defendant. The plaintiff’s last day in the defendant’s employment was 31 December 2011. LSK and LKC resigned from the defendant on the same day.
[17] On 3 January 2012, the plaintiff informed the defendant in writing that she intended to set up a business selling flowers and gifts. She invited the defendant to let her know if it had any objections to her doing so by 13 January 2012. It did. On 13 January 2012, the defendant reminded the plaintiff of her obligations under her employment agreement, objected to her plan and threatened to sue her if she breached her restrictive covenant.
The plaintiff commences these proceedings
Procedural history
[18] The plaintiff did not wait to be sued. On 22 March 2012, she commenced these proceedings seeking as the principal relief a declaration that clause 13 of her employment agreement is “void and unenforceable”. On 17 May 2012, the defendant applied to convert these proceedings into an action commenced by writ on the basis that there were likely to be substantial disputes of fact between the parties. On 8 June 2012, the District Judge allowed the defendant’s application.
[19] The plaintiff appealed to the High Court against that decision. I heard that appeal and allowed it, but only after — and only because — counsel for the plaintiff told me that he would proceed in the originating summons on the basis that, to the extent that the defendant disputed any of the relevant facts, he would argue that clause 13 was void and unenforceable even if the defendant’s account of those disputed facts were true. The narrative at [4]–[17] above and my analysis below takes this position into account.
Decision of the court below
[20] On 6 December 2012, the District Judge determined the plaintiff’s principal application. He held:
(a) The defendant has a legitimate interest in protecting its customer lists, strategic information and other sensitive business information.
(b) Clause 13 consists of two separate and distinct restraints: (i) a geographical restraint; and (ii) a non-solicitation restraint.
(c) The geographical restraint is unreasonably wide and therefore void and unenforceable because it operates to bar the plaintiff from employment even in a country in which the plaintiff has never had dealings.
(d) The non-solicitation restraint, however, is reasonable because it is restricted to the customers of the defendant and the customers of those other companies for which the plaintiff may have worked.
(e) There was no public interest sufficient to hold the non-solicitation restraint void.
[21] The District Judge then applied the doctrine of severance and held that the void geographical restraint could be severed from the non-solicitation restraint, leaving the non-solicitation restraint valid and enforceable. I now set out clause 13 in the form in which the District Judge held that it was enforceable, with the original underlining omitted and with clause 13’s three proscriptions in bold underline:
[22] Both parties were dissatisfied with the decision of the District Judge and appealed to the High Court.
Clause 13: two restrictions rather than three
[23] I begin by restating clause 13 shorn of all excess words, with its three proscriptions in bold underline and without the original underlining that appears in it:
[24] Clause 13 is both a legal construct and a grammatical construct. As a grammatical construct, it comprises three clauses connected by the conjunction “and” (double underlined above) and built around the negated modal auxiliary verb “shall” (in bold underline above). The grammatical subject of the first limb and of the third limb is “the Employee”. The first and third limbs are therefore independent grammatical clauses. The second limb does not have a grammatical subject and therefore draws its subject (“the Employee”) from the first grammatical clause. It is, to that extent, dependent on the first grammatical clause.
[25] Transposed to the facts of this case and paraphrased, each grammatical limb of clause 13 prevents the plaintiff from doing the following things:
(a) First limb: for two years after 31 December 2011, the plaintiff shall not undertake or be employed in the same or similar business as the relevant company, or in any other business carried on by the relevant company in Singapore, Malaysia or any country in which the “relevant company” had offices on 31 December 2011.
(b) Second limb: for the same period and within the same areas, the plaintiff shall not canvass or solicit orders from any person who was a customer of the relevant company while she was employed by the defendant.
(c) Third limb: the plaintiff shall not endeavour to take away from the relevant company any of its customers.
[26] I have not in this summary dealt with the concept of the “relevant company.” Clause 13 defines that as encompassing (a) the defendant and (b) any subsidiary, associate or other related company of the defendant for which the plaintiff performed duties or carried out work within nine months prior to the date of termination of her employment. I will look at the significance of this definition in more detail at [88] to [98] below.
[27] Construing the three grammatical clauses of clause 13 as three legal limbs creates an immediate problem. The third limb, unlike the first two limbs, incorporates no temporal limit and no geographic limit either expressly (like the first limb) or by reference (like the second limb). That construction would make the third limb so limitless as to be unreasonable and void beyond question. I do not, however, construe clause 13 in this way for three reasons.
[28] First, this was not the construction of clause 13 that the parties advanced before me. Both parties proceeded on the basis that clause 13 falls into two legal limbs: a non-competition covenant (comprising the first grammatical clause) and a non-solicitation covenant (comprising the second and third grammatical clauses).
[29] Second, it appears to me likely that the words incorporating the temporal and geographic limits into the second limb by reference (ie “during the like period and within the same areas”) are capable as a matter of grammar of extending to the third limb also. This is reinforced by the fact that the subject-matter of the third limb (taking away customers) is an aspect of the second limb (soliciting orders from customers) rather than a distinct restriction by itself (for example, a prohibition on soliciting employees as opposed to soliciting customers).
[30] Third, I find it unlikely that a draftsman conscious of the need in law to impose temporal and geographical limits on the first two limbs so as to make them at least arguably enforceable would then have intended to create a third limb with no such limits and with the inevitable and immediate consequence of its being void. I therefore take the view that this construction is not that intended by the parties even though it is perhaps the most natural meaning of the words as a matter of grammar.
[31] I therefore proceed on the basis that clause 13 comprises only two legal limbs imposing only two post-termination restrictions on the plaintiff. Transposed to the facts of this case, the two limbs provide as follows:
(a) First limb: for two years after 31 December 2011, the plaintiff shall not undertake or be employed in the same or similar business as the relevant company, or in any other business carried on by the relevant company in Singapore, Malaysia or any country in which the “relevant company” had offices on 31 December 2011. I shall refer to the first limb as the non-competition covenant.
(b) Second limb: for the same period and within the same areas, the plaintiff: (i) shall not canvass or solicit orders from any person who was a customer of the relevant company while she was employed by it; and (ii) shall not endeavour to take away from the relevant company any of its customers. I shall refer to the second limb as the non-solicitation covenant.
[32] I now move on to consider the law on restrictive covenants in order to identify the questions which I must determine in order to dispose of the plaintiff’s application.
General approach to restrictive covenants
Legitimate interest and reasonableness
[33] Whenever an employer and an employee agree on a restrictive covenant — a covenant intended to restrict the employee’s conduct after his employment comes to an end — two competing policies are engaged. The first is the policy of upholding contractual bargains which parties of full age and of sound mind freely enter into. The second is the policy of protecting a person’s fundamental liberty to earn a living, and to do so where and how he chooses: Herbert Morris, Limited v Saxelby [1916] 1 AC 688 at 699 and 701 per Lord Atkinson, approved in Man Financial (S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2008] 1 SLR(R) 663 (“Man Financial”) at [45].
[34] The common law strikes the balance between these two policy imperatives by holding a restrictive covenant to be void unless certain conditions are satisfied. The threshold condition is that the restrictive covenant protects a legitimate interest of the employer. If it does, the restrictive covenant will be enforceable if in addition: (i) it is reasonable in the interests of the parties; and (ii) it is reasonable in the public interest: Thorsten Nordenfelt (Pauper) v The Maxim Nordenfelt Guns and Ammunition Company, Limited [1894] 1 AC 535 (“Nordenfelt”) at 565 per Lord Macnaghten; approved in Man Financial at [70] and Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart [2012] 4 SLR 308 (“Smile Inc (CA)”) at [19]. The maxim that a court will enforce a restrictive covenant only if it goes no further than necessary to protect a legitimate interest of the employer is not the legal test for enforceability but is the result of applying the legal test summarised above: Smile Inc (CA) at [19].
Employee covenants and sale of business covenants
[35] Restrictive covenants do not appear only in employment contracts. They also appear frequently in contracts for the sale of a business. This case is an example. Not only did the plaintiff’s employment agreement contain a restrictive covenant, so too did the SPA under which the owners of Humming House’s business sold it to Noel Gifts and the defendant.
[36] The law takes a stricter approach to restrictive covenants found in employment contracts than to those found in contracts for the sale of a business: Man Financial at [48]. Heydon in The Restraint of Trade Doctrine (Butterworths, 2nd Ed, 1999) at pp 68–70 identifies five reasons for this stricter approach:
(a) First, employees tend to lack bargaining power as against employers.
(b) Second, an employee’s ability to sell his labour may be his only asset whereas a vendor will have capital in hand from the sale of his business and is better able to sustain himself.
(c) Third, a business will often be valueless to a purchaser without the vendor’s covenant not to compete. In contrast, an employee provides value through his services during the course of his employment whether or not he later competes against his employer.
(d) Fourth, once an employee accepts a restrictive covenant, the employer’s bargaining position during the employment is much increased because the employee’s ability to withdraw his services and seek work elsewhere is inhibited.
(e) Fifth, it is in the public interest for employees to be free to move towards jobs in which they can most effectively use their skills. Restricting that freedom distorts the labour market and diminishes its ability to move employees to where they will do the most good.
Each of these reasons is apparent in the reasoning of the Court of Appeal in Smile Inc (CA) at [20].
[37] The category into which a restrictive covenant falls determines: (1) the array of legitimate interests of the covenantee which the covenant can protect; and (2) the public policy underlying the avoidance, which in turn shapes the standard applied to evaluate whether the covenant is reasonable. For that reason, the categorisation of a restrictive covenant is often dealt with as a threshold question. That is a convenient approach as a matter of exposition. In many cases it will be easy to categorise a restrictive covenant as either being between employer and employee or as being between vendor and purchaser. In those obvious cases, there is nothing wrong with categorising the clause at the outset of the analysis as an easily-ascertained indicator of the approach to adopt in construing the covenant. But it would in my view be incorrect to elevate categorisation as a matter of law or logic into a threshold question for determining whether a restrictive covenant is enforceable. The true threshold question is not the character in which the covenantee and the covenantor have contracted. The true threshold question always is whether the restrictive covenant is aimed at protecting a legitimate interest of the covenantee as against the covenantor. The question of categorisation determines the array of legitimate interests which a restrictive covenant may protect. The question of categorisation is, therefore, logically subsidiary to that threshold question and not logically prior to it.
[38] Millett J (as he then was) made this very point in Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60 (at 64):
[39] The fundamental and threshold question, therefore, is always whether the covenantee has a legitimate interest to protect as against the covenantor. Even if a covenant is found in a contract of employment, it is the nature of that interest and how it arises which calibrates the court’s approach to enforcing that covenant. This case offers a neat illustration. The shareholders of Humming House caused it as vendor to enter into an agreement for the sale of its business with Noel Gifts and the defendant as purchaser. As an interlocking part of the same overall transaction, these shareholders at the same time entered into personal employment contracts with the defendant (see [11] above). Those employment contracts also contain restrictive covenants. If this case turned on whether those restrictive covenants were enforceable, I would have no hesitation in holding that the proprietary interest which the defendant acquired in the assets and business of Humming House in the overall transaction, including in its goodwill, is a legitimate interest for the defendant to protect through restrictive covenants imposed on these employees. That would be the case: (1) even though these covenants are found in employment contracts (and are therefore between employer and employee) and not in the SPA and (2) even though it was Humming House, and not these shareholder/employees, who was the vendor of the business and who received the purchase consideration.
Questions for determination
[40] With those preliminary points of law in mind, I now set out the questions of law which I have to determine in order to dispose of the plaintiff’s application:
(a) Whether clause 13 should be interpreted as a restrictive covenant between employee and employer or as a restrictive covenant between vendor and purchaser.
(b) Whether the non-competition covenant is directed at protecting a legitimate interest of the defendant and satisfies the twin tests of reasonableness set out above at [34].
(c) Whether the non-solicitation covenant is directed at protecting a legitimate interest of the defendant and satisfies these twin tests of reasonableness.
(d) If the whole or a part of the non-competition covenant or of the non-solicitation covenant is void, whether the remainder can be saved by applying the doctrine of severance, either to sever words within a covenant or to sever one covenant from the other.
The plaintiff’s restrictive covenants
[41] Counsel for the defendant, Mr Lok Vi Ming SC, argued that I should approach the restrictive covenants in the plaintiff’s employment agreement as vendor covenants, in the same way as I would have approached the restrictive covenants in the employment agreements of the vendor shareholders of Humming House. He submitted that the transfer of Humming House’s business to the defendant and the plaintiff’s employment by the defendant were inextricably linked and had to be construed as part of a single transaction. The plaintiff, like the shareholders of Humming House, came to be employed by the defendant only as a result of its acquisition of the business. The entire commercial purpose of these employment contracts was to ensure a “seamless transition” of the business to its new owner.
[42] Counsel for the plaintiff, Mr Tan Tee Jim SC, invited me to approach clause 13 as an employee covenant rather than as a vendor covenant. He stressed that:
(a) the plaintiff was neither a party to the SPA nor even indirectly a vendor of Humming House’s business;
(b) the plaintiff was not involved in the negotiations which led to the SPA; and
(c) there was no evidence that the plaintiff derived any benefit from the sale of the business by receiving part of the purchase price or any other preferential treatment.
[43] I accept Mr Tan’s submissions and approach clause 13 as a covenant between employer and employee for the following four reasons.
The plaintiff was not a shareholder in Humming House
[44] First, the plaintiff was not a shareholder in Humming House. She had no say in the sale of its business or in the terms on which it was sold. Therefore, the plaintiff was entirely unconnected to Humming House’s transfer of the proprietary interest in its business to the defendant. She was merely an employee of Humming House who chose to continue her employment with the defendant.
Acquisition independent of the plaintiff’s continued employment
[45] Second, contrary to Mr Lok’s submissions, the defendant’s purchase of Humming House’s business was not dependent on the plaintiff accepting the restrictive covenants in her employment agreement. The SPA did not make it an express — or even an implied — condition precedent to the acquisition that the plaintiff should sign a new employment agreement with the defendant. Equally, the SPA did not require Humming House or its shareholders to procure the plaintiff’s entry into a new employment agreement with the defendant. In other words, under the terms of the SPA, the acquisition of the business was to take place even if the plaintiff did not sign a new employment agreement with the defendant. That is exactly what happened. The SPA was executed on 7 January 2008. On that date, the plaintiff had not signed a new employment agreement. The sale of the business was nevertheless implemented. This shows that rather than imposing restrictive covenants on the plaintiff directly or indirectly through the acquisition process, the defendant sought to extract these restrictive covenants from the plaintiff voluntarily, by handing her a draft employment agreement on the same day for her to consider and sign. In the event, she did not sign that agreement until July 2008. As a result, the plaintiff provided her services to the defendant until July 2008 with no employment contract. During this period, the defendant was at risk that the plaintiff could withdraw her services at any time upon reasonable notice and, more importantly, could do so with no post-termination restriction on her employment or other activities. I find it unlikely that the defendant would have allowed that state of affairs to arise and to continue for six months if the plaintiff’s employment was indeed part and parcel of the overall acquisition.
[46] The shareholders of Humming House were treated very differently. It was an express condition precedent under the SPA that they each sign a new employment agreement with the defendant (see [11] above). It is also telling that the restrictive covenants found in the employment contracts of Humming House’s shareholders were prepared separately and contained different provisions from those in the plaintiff’s employment agreement. This supports the view that the plaintiff’s restrictive covenants arose only from her position as an employee and not because she was in a position analogous to a vendor.
Asymmetry of financial rewards
[47] Third, there was clear asymmetry between the financial rewards which Humming House’s shareholders derived from the sale and those which the plaintiff did. The purchase consideration for the acquisition accrued directly to Humming House and therefore indirectly to its shareholders. As I have mentioned, the plaintiff was never one of those shareholders. In addition, it was a term of the SPA that the shareholders’ new employment contracts provide that they were entitled collectively to 30% of the profits of the defendant. As a result of these provisions, LSK received between $78,000 and $131,000 from 2008 to 2011 by way of shared profits. LKC received between $39,000 and $73,000 for the same period and on the same basis. The SPA also gave the Humming House shareholders options to purchase shares in the defendant, subject to certain conditions and targets being met. The plaintiff received no such share of profits or options.
[48] Indeed, the plaintiff received nothing from the sale of the business other than the ability to continue as an employee, earn a salary, and be eligible for an annual employee’s bonus. Under her employment agreement, the plaintiff’s basic monthly salary was $3,110. By November 2011, it had risen to $3,770. She also received a bonus of “at least 1½ months” salary each year (save for 2011 when she received a two-month bonus). The scale of her financial rewards as compared to the vendors was so different as to be different in kind and to signify a purely employer/employee relationship with the defendant.
Indirect benefit not referable to acquisition
[49] Fourth, I am not satisfied that the plaintiff derived even an indirect or incidental benefit referable to Humming House’s sale of its business. Mr Lok argued that she derived a real, albeit indirect, benefit from the sale of the business in the following way. The plaintiff permitted a property which she owned in her sole name to be used as security for loans which LSK had taken. Mr Lok contended that the plaintiff was at risk of losing her property at the time of the acquisition because it was likely that LSK would have defaulted on the loans if the business had not been sold. After the acquisition, that mortgage was fully discharged. On that basis, Mr Lok argued that the plaintiff derived a benefit from the sale of Humming House’s business just as much as its shareholders and should be treated as a person in the position of a vendor rather than as a mere employee.
[50] On the evidence before me, there is nothing to establish on the balance of probabilities that LSK incurred the debt secured on the plaintiff’s property in connection with Humming House’s business or that LSK’s share of the purchase money is connected to the discharge of the mortgage over the plaintiff’s property. Further, even if I were satisfied on these points, the connection between the sale of the business and the discharge of the mortgage over the plaintiff’s property was incidental at best. It indicates no more to me than an intention by LSK to use his share of the sale proceeds to benefit the plaintiff as his sister or as an employee of Humming House, but not as a vendor or quasi-vendor of Humming House’s business.
The plaintiff has no connection to the goodwill acquired
[51] The real reason that Mr Lok argues that the plaintiff’s restrictive covenants should be approached as vendor covenants is because he seeks to argue that it serves to protect the goodwill which the defendant acquired from Humming House from impairment by the plaintiff. According to him, failing to give the defendant that protection would undermine the main commercial driver behind the acquisition of the business which was the defendant’s desire to acquire Humming House’s customer base and therefore its goodwill.
[52] “Goodwill” is both a legal term of art and an accounting term of art. As a legal term of art, it has been said that it is “the attractive force which brings in custom” and, further, that “goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates”: per Lord Macnaghten in The Commissioners of Inland Revenue v Muller & Co's Margarine, Limited [1901] 1 AC 217 at 223–224; approved in Staywell Hospitality Group Pty Ltd v Starwood Hotels & Resorts Worldwide, Inc and another and another appeal [2014] 1 SLR 911 at [131]. As an accounting term of art, it has a somewhat wider meaning.
[53] Goodwill in the legal sense is a species of property and is undoubtedly a legitimate interest which a restrictive covenant may protect. There is no doubt in my mind that the defendant is entitled to use restrictive covenants to secure reasonable protection of the goodwill it acquired from Humming House in the acquisition. That protection, however, is available only as against Humming House and its shareholders, being the parties from whom the goodwill was, directly or ultimately, acquired. It is not only in the parties’ private interest that such bargains be upheld. There is also a strong public policy in favour of preventing a vendor of a business from derogating from a bargain it has entered into. As Lord Watson observed in Nordenfelt at 552:
[54] This public policy rationale, however, has no application to the plaintiff, because (a) the sole relationship between the plaintiff and the defendant was as employee and employer; (b) her sole pre-existing relationship with the business during the time it was owned by Humming House (and before that, by HHT) was also an employee/employer relationship; and (c) the plaintiff came to be employed by the defendant through her voluntary act and not as an obligation under the SPA or in some other way as part of the acquisition.
[55] Mr Lok stressed that the defendant paid valuable consideration under the SPA amounting to $1,823,000 to purchase the business. Of this, $607,000 was consideration for Humming House’s “Customer lists”. I accept that that is payment for goodwill both in the wider accounting sense and in the narrower legal sense. However, for the reasons given above, the defendant as a purchaser is not entitled to protect its undeniable proprietary interest in the goodwill of the entire business as against the plaintiff who was neither a vendor nor a quasi-vendor of it.
Restrictive covenants are between employee and employer
[56] All of the foregoing factors indicate to me that, in reality, the defendant’s acquisition of Humming House’s business was connected to the plaintiff solely in her capacity as an employee. In the absence of any other connection, the plaintiff’s restrictive covenants must be approached as covenants between employer and employee and not as covenants between vendor and purchaser. I now turn to analyse the plaintiff’s restrictive covenants on the basis that they are between employer and employee.
Legitimate interest
Legitimate proprietary interest or legitimate interest?
[57] It is sometimes said that a covenantee must be able to identify a legitimate proprietary interest to justify a restrictive covenant. This does not mean that the covenantee’s legitimate interest must arise from or be related to a right of property: see Cactus Imaging Pty Limited v Glenn Peters [2006] NSWSC 717 (“Cactus Imaging”), cited with approval in Man Financial at [118]. It is true that a restrictive covenant may often be justified as protecting a right of property, particularly a vendor covenant. But a restrictive covenant may equally be justified as protecting a legitimate interest which falls short of being a right of property. That is typical in the employer/employee cases. Thus, for example, the goodwill of a business is property which can be bought and sold together with the business. It is clearly a legitimate proprietary interest capable of being protected by a restrictive covenant as between vendor and purchaser. The goodwill of a business is, at least in part, the cumulative effect of the trade connection which the business has through each of its employees. But the trade connection which a business has through an individual employee is not property in the same way that goodwill is. Nevertheless, an employer is entitled to protect that individual trade connection as against that individual employee by a restrictive covenant. So too, a trade secret is information which is confidential and treated as confidential because of its commercial value to competitors. But information is not property: Oxford v Moss (1979) 68 Cr App Rep 183; Force India Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616 (Ch) at [376]. That is so even if the information is a trade secret or is confidential information akin to a trade secret. But information of this nature is nevertheless a legitimate interest capable of being protected by a restrictive covenant.
Typical legitimate interests
[58] The first question therefore is whether the defendant, as employer and not as purchaser, has a legitimate interest which clause 13 is directed at protecting. The list of legitimate interests which can support a restrictive covenant as between employer and employee is not closed: Man Financial at [94]. Having said that, there are commonly three legitimate interests which an employer seeks to protect through a restrictive covenant: (a) its interest in protecting trade secrets or confidential information akin to trade secrets; (b) its interest in protecting trade connection (primarily clients or customers but presumably including trade connection with suppliers); and (c) its interest in maintaining a stable, trained workforce: Man Financial at [81] and [121].
[59] Mr Lok submits that the non-competition covenant in clause 13 serves to protect both the defendant’s trade secrets and trade connection. This arises, he says, because she had access to the defendant’s trade secrets during her employment. He submits further that both the non-competition covenant and the non-solicitation covenant serve to protect the defendant’s trade connection. This arises, he says, because the plaintiff has personal knowledge of and influence over the customer base which the defendant acquired from Humming House.
[60] Mr Tan submits as follows:
(a) In relation to trade secrets, that:
(i) the defendant had no trade secrets to protect; alternatively
(ii) if it did, that trade secrets could not be a legitimate interest for clause 13 to protect because they were sufficiently protected by other provisions in the employment agreement.
(b) In relation to trade connection, that:
(i) the plaintiff did not have any or sufficient influence over the defendant’s customers; alternatively
(ii) even if the plaintiff had such influence, the defendant had no legitimate interest in her trade connection because these were customers which she had cultivated during her time at Humming House and who had followed her from Humming House to the defendant.
[61] Before I consider counsel’s submissions, it is useful to describe the defendant’s business and the plaintiff’s employment in it.
The defendant’s business and the plaintiff’s employment in it
[62] The defendant’s business is selling gifts, flowers, wreaths and hampers. It is a sophisticated operation. The defendant has no physical retail premises. Instead, it markets its goods and services by distributing physical catalogues by mail, through telemarketing and through a website. Catalogues are mailed to specific and targeted lists of customers. The starting point for these lists is the customer lists which it purchased from Humming House. These lists are updated constantly as a result of tracking customers’ spending patterns. Most of the defendant’s business is done during the festive season when its loyal customers purchase the defendant’s products, presumably in large quantities and consistently from year to year. The defendant also maintains sales accounts for loyal and repeat customers. In fact, part of the defendant’s post-acquisition strategy was to ensure that Humming House’s customers continued to be served by the same contact person (eg the plaintiff) to provide those customers a “seamless transition from Humming House to the defendant”.
Trade secrets or equally confidential information
[64] The Court of Appeal in Man Financial approved a multifactorial approach in considering whether or not information has the necessary quality to constitute a legitimate interest capable of being protected by a restrictive covenant (at [83]). The following factors are relevant:
Effect of an express confidentiality clause
[66] Mr Tan, however, submits that the protection of confidential information is not a sufficient legitimate interest to justify a non-competition covenant in Singapore law. For this submission, he relies on the Court of Appeal’s decision in Stratech Systems Ltd v Nyam Chiu Shin (alias Yan Qiuxin) and others [2005] 2 SLR(R) 579 (“Stratech”). In that case, the Court of Appeal held as part of its ratio that where trade secrets or confidential information are protected by other express provisions in an employment agreement, the employer must be able to point to a legitimate interest “over and above” the protection of trade secrets or confidential information in order to justify a restrictive covenant: at [48]–[49]. This proposition was recently reaffirmed in Man Financial (at [92]). It was binding on the District Judge and is binding on me.
[67] The plaintiff’s employment agreement includes wide protection for the defendant’s trade secrets and confidential information post-termination. Clause 3 of the agreement binds her to maintain confidentiality during her employment and for two years after that employment ends. During those two years, it proscribes not only disclosure of the defendant’s trade secrets and confidential information, it also proscribes use and attempted use of that information to the defendant’s detriment. It reads as follows:
[68] Clause 4 of the agreement obliges her to return to the defendant upon the end of her employment any notes or memoranda relating to the business of the defendant. It reads as follows:
[69] These clauses give the defendant comprehensive protection against the disclosure and use of both trade secrets and of confidential information akin to a trade secret (and indeed even of confidential information which is not akin to a trade secret). Stratech binds me to hold, therefore, that protecting trade secrets or confidential information cannot be a sufficient legitimate interest to justify either the non-competition covenant or the non-solicitation covenant. Stratech also binds me to hold that the District Judge erred in law in his finding that it was a sufficient legitimate interest (see [20(a)] above).
[70] This principle is not without difficulty. Woo Bih Li J recently considered it in Centre for Creative Leadership (CCL) Pte Ltd v Byrne Roger Peter and others [2013] 2 SLR 193 (“CCL”). He reviewed three English cases which recognise that a restrictive covenant can be justified as protecting trade secrets or confidential information even if there are other express clauses in the same contract which do so: The Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026, Turner v Commonwealth & British Minerals Ltd [2000] IRLR 114 and Thomas v Farr plc [2007] ICR 932. Woo J observed that the reasoning in these cases is premised on the fact that confidentiality obligations are difficult to police and therefore in some cases the best practical protection may be a restrictive covenant in addition to a contractual obligation to preserve confidentiality. Woo J went on to say (at [92]):
[71] Woo J therefore suggested that there may be something in this issue for the Court of Appeal to revisit. I have sympathy for the concerns expressed by Woo J. It is, in part, to allow the Court of Appeal to consider this issue that I granted the defendant leave to appeal to the Court of Appeal.
[72] As the protection of trade secrets cannot be a legitimate interest on which to found either the non-competition covenant or the non-solicitation covenant in clause 13, I now turn to consider whether the protection of trade connection can.
Trade connection
[73] In order to establish that the employer’s trade connection is a sufficient legitimate interest, it must be shown that the employee has personal knowledge of, and influence over, the customers of the employer: Man Financial at [93].
[74] At first instance in Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart [2012] 1 SLR 847 (“Smile Inc (HC)”), Woo J (at [75]–[77]) elaborated on the factors that the court considers in applying this principle. I summarise the relevant factors as follows:
(a) the extent of the former employee’s knowledge of, and influence over, the customers insofar as it indicates the actual or likely future influence of the former employee over the customers’ decision as to where to direct their business. Merely knowing the customers is in itself immaterial unless the former employee can (and is likely to) leverage on that knowledge in some way to gain some degree of influence over them;
(b) the extent of “institutional hold” and “customer inconvenience”. “Institutional hold” refers to the extent that the employer’s business thrives on loyalty to the employer and to its brand and reputation rather than on personal relationships with its employees. “Customer inconvenience” refers to the willingness of an employer’s customer to inconvenience himself by moving his custom away from the employer and following a departing employee;
(c) the frequency of the former employee’s contact with the customers;
(d) the place where the former employee makes such contact;
(e) the seniority of the former employee; and
(f) the nature of the former employee's relationship with the customers.
[75] On the facts of this case, I am satisfied that the defendant has a legitimate interest in protecting its trade connection as against the plaintiff. The plaintiff was the defendant’s sales manager, and therefore a senior sales figure in the defendant. She admits that she has established personal relationships and rapport with the defendant’s customers, although she does so as part of an argument that she should be free to use these relationships and rapport for her own benefit now that she is no longer employed by the defendant. The defendant’s business, like Humming House’s, is in large part built on its ability to establish rapport with its customers and to attract repeat custom. I am therefore satisfied that the extent of the plaintiff’s knowledge of, and her influence over, the customers of the defendant means that the defendant has a legitimate interest in protecting its trade connection against interference by the plaintiff post-termination. This legitimate interest suffices to support both the non-competition and the non-solicitation covenants, subject of course to the twin tests of reasonableness.
Pre-existing trade connection
[76] Mr Tan’s alternative submission at this point is that an employer has no legitimate interest in the trade connection of an employee which predates her employment by the employer. For this proposition he relies on the decision of the English Court of Appeal in M & S Drapers (a firm) v Reynolds [1957] 1 WLR 9 (“M & S Drapers”).
[77] In M & S Drapers, the plaintiff employed the defendant to sell curtains and to collect payment by instalments for the curtains that he sold. Employee and employer did not enter into an employment agreement. The employee had a pre-existing connection with customers of his previous employers and brought these customers to his new employer. Two years after the employment commenced, the parties entered into a written employment agreement which provided that, for a period of five years following its determination, the employee would not solicit the business of anyone who was the employer’s customer during the three years immediately preceding the determination of the agreement. The employee left the employer a few months later and sold goods to persons who fell within the restricted scope. The employer sought to restrain the employee from committing further breaches of the agreement.
[78] The Court of Appeal held unanimously that the restrictive covenant was void. The ratio of Hodson LJ’s and Morris LJ’s judgment was that a five-year restraint was unreasonably long having regard to the position of the employee. Denning LJ gave a short judgment, which appears to accept this ratio by concurring with Hodson LJ and Morris LJ. Obiter, however, Denning LJ expressed the view that any restrictive covenant is unreasonable and void if it prevents an employee from soliciting the business of persons with whom he had already formed a trade connection before his current employment. Thus, he said (at 18):
[79] On this point, Morris LJ preferred to say, obiter, that whether it was reasonable to restrict an employee from soliciting business from customers whom he brought to the employer depended very much on the particular facts of a particular case. Thus, he said (at 17–18):
[80] I respectfully prefer Morris LJ’s approach to Denning LJ’s. The reasonableness of any restrictive covenant is very much a factual inquiry. On the facts of M & S Drapers, the views of Denning LJ and Morris LJ are understandable: the employee had brought with him to the employer a set of customers with whom he had a long-standing and personal relationship established during his employment with a number of previous employees. His new employer did not bargain for these customers, it did not foster or finance his trade connection with them, nor did it lay claim to these customers by seeking at the outset of the employment to restrict his ability to deal with them post-termination.
[81] The present case is quite different. It is true that the plaintiff dealt with this particular set of customers for many years while she was working for Humming House and before that with HHT. But the trade connection which she established with these customers there was fostered by Humming House and HHT. It formed part of HHT’s goodwill and then part of Humming House’s goodwill. Humming House then transferred that goodwill — of which its trade connection through the plaintiff formed a part — to the defendant. The defendant bargained for and purchased that trade connection as part of its acquisition. Looked at that way, the trade connection with Humming House’s customers never “belonged” to the plaintiff even in the loosest sense. That trade connection was Humming House’s and went straight from Humming House to the defendant through the acquisition.
[82] I should also add that the sole purpose for which the defendant came into existence was to acquire Humming House’s goodwill and the trade connection it comprises. Unlike the employer in M & S Drapers, the defendant had no customers at all before the plaintiff began to work for it as its sales manager. To hold that the defendant’s trade connection with the customers that the plaintiff had dealt with when she worked for Humming House went with the plaintiff when she resigned would be, effectively, to hold that virtually the defendant’s entire customer base was not capable of being protected. That, I think, goes too far.
[83] In the circumstances, clause 13 is not unreasonable or void either: (i) on the basis that the plaintiff’s trade connection was her own (and cannot therefore be a legitimate interest of the defendant to be protected by clause 13); or (ii) on the grounds that, insofar as clause 13 seeks to prevent the plaintiff from soliciting custom from customers with whom she had a relationship pre-existing her employment by the defendant, it is unreasonably wide.
[84] I conclude by noting that Mr Tan’s alternative submission goes to whether an employer has a legitimate interest in the employee’s own trade connection whereas the English Court of Appeal in M & S Drapers analysed the issue as one of reasonableness as between the parties. Both approaches, of course, lead to the same substantive result. But I prefer the approach taken in M & S Drapers. The extent to which a particular restrictive covenant interferes with an employee’s right to solicit business from customers with whom he has an independent trade connection, separate from his employment and separate from his employers, is a factor which goes more naturally to the reasonableness of the clause as between the parties rather than to the threshold question of whether there is a legitimate interest capable of being protected at all.
Reasonableness: the non-competition covenant
[85] The parties contest the reasonableness of the non-competition covenant on three fronts: (1) the geographical restriction, (2) the activity restriction and (3) the temporal restriction.
[86] For ease of reference, I set out again clause 13 shorn of all unnecessary words, with the three proscriptions in bold underline with the grammatical segmentation in double underline. I have left out the original underlining.
[87] The time at which the reasonableness of a restrictive covenant is tested is the time at which it is entered into: Man Financial at [72]. Thus, a restrictive covenant must be construed bearing in mind the circumstances which the parties reasonably contemplated at the time they entered into the contract. This principle has both a positive and a negative consequence. The positive consequence is that if a restrictive covenant is reasonable as between the parties bearing in mind those circumstances, it will not become void simply because it could also be construed to cover unlikely situations outside their reasonable contemplation: National Aerated Water Co Pte Ltd v Monarch Co, Inc [2000] 1 SLR(R) 74 (“Kickapoo Joy Juice”) at [37]. The negative consequence, however, is that if a restrictive covenant is unreasonably wide as between the parties bearing in mind those circumstances, it will not be saved simply because the covenantee proposes to breach an aspect of the restrictive covenant which is, in fact, reasonable as between the parties. Thus, in Kickapoo Joy Juice, the Court of Appeal held that a restrictive covenant which prohibited the covenantor from using any of the syllables in the phrase “Kickapoo Joy Juice” was unreasonably wide because the restriction encompassed both the words “Joy” and “Juice”, which are ordinary words of the English language. It did not matter that the covenantor’s actual breach of the restrictive covenant did not use either of those words, but lay in its use of the first syllable of the distinctive word “Kickapoo”: at [34]–[38].
Relevant company
[88] The activity restriction and the geographical restriction both depend on the definition of “relevant company”. I therefore start by analysing that component.
[89] Clause 13 defines the term “relevant company” as including the defendant and “any … related companies which [the plaintiff] shall have performed duties … in relation to and for the benefit of … during the … nine … months prior to the date of termination of employment …”.
[90] The first point I note is that the term used in clause 13 and in the definition is not “a relevant company” but “the relevant company”. In fact, clause 13 refers consistently and solely to “the relevant company” and it does so six times. The use of the definite article could be taken to indicate that clause 13 contemplates only one relevant company and a specific relevant company: the defendant. But that would be inconsistent with the clear intention in the definition that the term should encompass a cumulation of relevant companies and therefore more than one company. I therefore say no more about this point.
[91] The core concept of the definition of “relevant company” is that of a “related company”. Noel Gifts and every one of its subsidiaries is therefore a “related company” of the defendant within the meaning of clause 13 (see s 6 of the Companies Act (Cap 50, 2006 Ed)). This very fact is an immediate indication that the definition of “relevant company” may be far too wide. The plaintiff played no role in Noel Gifts or in the Noel group of companies. There is no evidence that she had access to confidential information of Noel Gifts or of the Noel group. There is no evidence that Noel Gifts or the Noel group had any trade connection with customers through the plaintiff. Indeed, what evidence there is points completely in the opposite direction: the plaintiff’s role was confined to the defendant and to its customers alone.
[92] Under the definition in clause 13, not every “related company” is a “relevant company”. For a related company to become a relevant company, clause 13 requires that the plaintiff “performed duties or carried out work in relation to and for the benefit of” the relevant company in the nine months before her employment ceases. That definition appears to me to be far too wide. It does not require the plaintiff and the related company to be so closely connected as to give rise to a legitimate interest of the related company which ought to be protected in order for that related company to become a “relevant company”. For example, the clause does not require the plaintiff to be employed by the related company. It suffices that she has “carried out work for it”. That causes an immediate problem. If the plaintiff were (say) to be seconded to a company in the Noel group while still employed by the defendant, that subsidiary would immediately become a “relevant company” within the meaning of clause 13. Even worse, if the plaintiff were not seconded to another group company but, in the course of performing her duties to the defendant as its employee, carried out some incidental work in relation to and for the benefit of that other group company, that company would become a “relevant company”.
[93] It is true that if a restrictive covenant is reasonable as between the parties in light of the circumstances they reasonably contemplate at the time they enter into the contract, it will not become void simply because it could also be construed to cover unlikely situations outside their reasonable contemplation (see [87] above). It is also true that the plaintiff had a history of working in the same business throughout: first for HHT, then Humming House and then for the defendant. The fact remains, though, that clause 1(e) of the plaintiff’s employment agreement expressly gave the defendant the right to require the plaintiff to perform services for other companies in the Noel group. Likewise the confidentiality obligation in clause 3 of the agreement covered not only the confidential information of the defendant but also confidential information of the Noel group that the plaintiff might learn in the course of her employment. Further, both of these clauses use the precise phrase which appears in the definition of “relevant company” in clause 13: “subsidiary, associate and/or other related companies” of the defendant. The scenarios I have outlined at [92] above are therefore not fanciful but arise from rights which the defendant expressly reserved to itself under the employment agreement.
[94] I therefore turn to consider the activity restriction and the geographical restriction.
Activity restriction
[95] The only legitimate interest which can support the non-competition covenant is the defendant’s interest in its trade connection through the plaintiff (see [69] and [75] above). There is no basis for saying that activities prohibited by the non-competition covenant are reasonably necessary in order to protect the defendant’s legitimate interest in that trade connection.
[96] The non-competition covenant prevents the plaintiff from competing “in the same or similar business as the relevant Company, or in any other business carried on by the relevant Company.” Mr Tan argues that the definition of “relevant company” makes the activity restriction unreasonably wide because it means that the non-competition covenant could prevent the plaintiff from engaging in activities which have nothing to do with her employment simply because the defendant’s related companies engage in those activities.
[97] I agree with Mr Tan. For the reasons I have set out above, the definition of “relevant company” does not require a past employment relationship between the plaintiff and a “related company” for that company to become a “relevant company.” The definition also does not require the plaintiff to provide services directly to the “related company” as long as the work is carried out in relation to and for its benefit. The non-competition covenant would prevent the plaintiff from competing with any of these companies. That goes far beyond what is reasonably necessary to protect the defendant’s trade connection.
[98] Leaving that aside, the activity restriction means that if the plaintiff were employed by Noel Gifts even in a transitory manner, say by being seconded for a week to their sales team to overcome a temporary manpower shortage, she would thereby be precluded from competing with any business conducted by Noel Gifts whether in the flowers, gifts, hampers and wreaths business or outside that business (eg Noel Gifts’ franchising operations). This would be the result even if the plaintiff had no knowledge or influence over customers in these other segments of Noel Gifts’ operations.
[99] The activity restriction is clearly intended to extend beyond the defendant’s core business in circumstances where there is only an incidental connection between the plaintiff and the related company. A blanket ban preventing the plaintiff from competing with any business carried on by those companies is far too wide to preserve the defendant’s trade connection with a finite set of customers of whom the plaintiff has knowledge and over whom she has influence. I therefore hold that the activity restriction goes significantly further than is reasonably necessary to protect the defendant’s trade connection. Indeed, even if trade secrets and confidential information were to suffice as a legitimate interest, I would hold that the clause goes further than reasonably necessary to protect that interest too. The non-competition covenant is therefore unreasonable as between the parties.
Geographical restriction
[100] The non-competition covenant extends to “Singapore, and Malaysia and any other countries the relevant Company has offices at the date of such termination”.
[101] Mr Tan contends that this prohibition is unreasonably wide because it includes Malaysia and the plaintiff was responsible only for sales to customers in Singapore. Further, he submits, the geographical restriction prevents the plaintiff from competing in Malaysia even though at the date the parties entered into the employment agreement, the defendant had no business presence in Malaysia. Only Noel Gifts did.
[102] In response, Mr Lok argues that it is reasonable that a senior employee of the defendant should be restrained from competing not just against the defendant in Singapore but also against Noel Gifts and its related companies in Malaysia. He also contends that it was reasonable to include Malaysia at the time the employment agreement was signed because the defendant did have plans to expand its business into Malaysia by riding on the infrastructure and network of Noel Gifts.
[103] It appears to me that the geographical component of the non-competition covenant was aimed more at protecting Noel Gifts’ interests than the defendant’s. I accept that the court should take into account the realities of modern business and must not be too inhibited by considerations of corporate personality when construing a restrictive covenant. An example of this approach is Beckett Investment Management Group Ltd & ors v Glynn Hall & ors [2007] EWCA Civ 613 at [23] (“Beckett”) affirming Stenhouse Australia Ltd v Marshall William Davidson Phillips [1974] 1 AC 391 at 404D–E. In Beckett, two key employees were subject to a covenant restraining them from soliciting the employer’s customers post-termination. In fact, the employer was a holding company which did not trade and had no clients. The clients and the trade connection were actually held by a subsidiary, which was the entity to which the employees had provided their services. An injunction was refused at first instance because the court construed the covenant narrowly and held that it was void because the employer had no client connection of its own to protect and therefore no legitimate interest of its own to support the covenant. The English Court of Appeal granted the injunction, construing the restrictive covenant as extending to the clients of the operating subsidiary.
[104] That was no doubt a legitimate approach and result on the facts of Beckett. In this case, however, the plaintiff was employed by a subsidiary. The holding company brought the subsidiary into existence specifically to carry on the limited business of servicing the subsidiary’s own set of (acquired) customers. The plaintiff was specifically hired by the subsidiary to manage only the sales of that limited business. She had no role in Noel Gifts or in the Noel group. The defendant had no business presence or ongoing business in Malaysia: it had only plans to expand into Malaysia. In the circumstances, I hold that including Malaysia in the geographical restriction was intended to protect Noel Gifts’ interests rather than the defendant’s interests. To that extent, it is unreasonable as between the parties.
[105] The result of including Malaysia in the geographical restriction is to make the non-competition covenant unreasonably wide as between the parties in order to protect the defendant’s legitimate interest in protecting its trade connection. The non-competition covenant is therefore void as between the parties on this ground also.
[106] In light of my conclusion on the activity restriction and the geographical restriction, it is not necessary for me to consider the reasonableness of the temporal scope of the covenant as between the parties or to consider whether the restrictive covenant is reasonable in the public interest.
Reasonableness: the non-solicitation covenant
[107] The non-solicitation covenant restrains the plaintiff for two years in Singapore and Malaysia from: (i) canvassing or soliciting orders from any person who was a customer of a relevant company; and (ii) endeavouring to take away from a relevant company the business of any of its customers. As was the case with the non-competition covenant, the authority of Stratech means that the only legitimate interest which can support the non-solicitation covenant is the defendant’s interest in trade connection.
[108] The plaintiff contested the reasonableness of the non-solicitation covenant on the same three fronts: (1) the activity restriction; (2) the geographical restriction; and (3) the temporal scope.
The activity restriction
[109] I find that the activity restriction in the non-solicitation covenant is unreasonably wide as between the parties. The problem again is the scope of the definition of “relevant company.” Its effect is to extend the non-solicitation covenant to prevent the plaintiff from soliciting orders from customers of other Noel group companies even if her connection with that company was purely incidental and even though the plaintiff may have no trade connection with those customers.
[110] Further, limb (ii) of the non-solicitation covenant (see [107] above) as applied to the defendant prohibited the plaintiff from taking away from the defendant the business of any customer of the defendant. This limb therefore covered even those who became customers of the defendant after the plaintiff’s employment there had ended. The plaintiff could have no conceivable trade connection with those customers for the defendant to protect through the non-solicitation clause. I come back to this at [197] below.
The geographical restriction
[111] I note in passing that there is an ambiguity about the meaning of the words “same areas” in the phrase “within the same areas” in the opening words of the non-solicitation covenant. It could refer to the same areas of business as in the non-competition clause (ie the same or similar business as the relevant company or any other business carried on by the relevant company). Or it could refer to the same geographical areas as provided in the non-competition clause (ie Singapore, Malaysia and any other countries in which the relevant company has offices at the date of such termination). The phrase “within the aforesaid areas” raises the same ambiguity and is of no assistance. That prepositional phrase can be deleted without altering the meaning of clause 13 at all, and is therefore completely superfluous. Internal consistency suggests that the parties intended the phrase “within the same areas” to signify a geographical area.

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Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd

Laws this judgment relies on

Grounds of decision

Introduction

Background

Noel Gifts International Limited

Noel Gifts’ acquisition of Humming House’s business

The defendant takes over Humming House’s business

The plaintiff is offered employment

Terms of the employment agreement

The plaintiff resigns from the defendant

The plaintiff commences these proceedings

Procedural history

Decision of the court below

Clause 13: two restrictions rather than three

General approach to restrictive covenants

Legitimate interest and reasonableness

Employee covenants and sale of business covenants

Questions for determination

The plaintiff’s restrictive covenants

The plaintiff was not a shareholder in Humming House

Acquisition independent of the plaintiff’s continued employment

Asymmetry of financial rewards

Indirect benefit not referable to acquisition

The plaintiff has no connection to the goodwill acquired

Restrictive covenants are between employee and employer

Legitimate interest

Legitimate proprietary interest or legitimate interest?

Typical legitimate interests

The defendant’s business and the plaintiff’s employment in it

Trade secrets or equally confidential information

Effect of an express confidentiality clause

Trade connection

Pre-existing trade connection

Reasonableness: the non-competition covenant

Relevant company

Activity restriction

Geographical restriction

Reasonableness: the non-solicitation covenant

The activity restriction

The geographical restriction