Restrictive Covenants
and Trade Secrets
in Employment Law
An International Survey
Volume II
Americas, Asia, Middle East and Africa, Oceania
Editors-in-Chief
WENDI S. LAZAR
GARY R. SINISCALCO
Outten & Golden LLP
New York, New York
Orrick, Herrington & Sutcliffe LLP
San Francisco, California
Associate Editor
Timothy J. Darby
BNA
Arlington, Virginia
Regional Editors
Americas
Asia
OSCAR DE LA VEGA GÓMEZ
ROBERT S. PÉ
ERICA CHONG
Basham, Ringe y Correa, S.C.
Mexico City, Mexico
Orrick, Herrington & Sutcliffe
Hong Kong S.A.R.
United States and Canada
GARY R. SINISCALCO
Orrick, Herrington & Sutcliffe LLP
San Francisco, CA
DANNY ONG
TEO SHU QIU
ANDREA TARYN BAKER
Latin America
WENDI S. LAZAR
Rajah & Tann LLP
Singapore
Outten & Golden LLP
New York, New York
Oceania
Middle East and Africa
DANNY ONG
TEO SHU QIU
ANDREA TARYN BAKER
DAVID J. MILLSTONE
Squire, Sanders & Dempsey L.L.P.
Cleveland, Ohio
Rajah & Tann LLP
Singapore
Restrictive Covenants and Trade Secrets Issues in
Oceania and Selected Countries in Asia
Danny Ong
Teo Shu Qiu
Andrea Taryn Baker
Rajah & Tann LLP
Singapore
International Labor and Employment Law Committee
Section of Labor and Employment Law
American Bar Association
BNA Books, A Division of BNA, Arlington, Virginia
Z
Copyright © 2010
American Bar Association
Chicago, IL
Reprinted by permission.
Library of Congress Cataloging-in-Publication Data
Restrictive covenants and trade secrets in employment law : an international
survey / editors-in-chief, Wendi S. Lazar, Gary R. Siniscalco.
p. cm.
v. 1. Europe.
ISBN 978-1-57018-926-5 (vol. I) -- ISBN 978-1-57018-935-7 (vol. II)
1. Covenants not to compete. 2. Trade secrets--Law and Legislation. I.
Lazar, Wendi S. II. Siniscalco, Gary R.
K1769.R427 2006
20010046589
346.02--dc22
The materials contained herein represent the opinions of the authors and editors
and should not be construed to be those of the American Bar Association or
the Section of Intellectual Property Law. Nothing contained herein is to be
considered as the rendering of legal advice for specific cases, and readers are
responsible for obtaining such advice from their own legal counsel. These
materials and any forms and agreements herein are intended for educational and
informational purposes only.
Published by BNA Books
1801 S. Bell Street, Arlington, VA 22202
bnabooks.com
International Standard Book Numbers:
978-1-57018-926-5 (Vol. I)
978-1-57018-935-7 (Vol. II)
Printed in the United States of America
RESTRICTIVE COVENANTS AND TRADE
SECRETS ISSUES IN OCEANIA AND
SELECTED COUNTRIES IN ASIA*
I. Introduction .................................................................
II. The Common Law Countries: Similarities and
Differences ..................................................................
A. The Common Law ................................................
B. Employees’ Duties................................................
C. The Dispute Resolution Mechanism ....................
III. The Civil Law Countries .............................................
A. The Philippines .....................................................
1. The Civil Code ..............................................
2. Employees’ Duties ........................................
3. The Dispute Resolution Mechanism .............
B. Indonesia...............................................................
1. The Civil Code ..............................................
2. Employees’ Duties ........................................
3. The Dispute Resolution Mechanism .............
IV. Conclusion ..................................................................
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I. Introduction
This overview aims to highlight the key differences between
the laws concerning the enforceability of restrictive covenants in
employment contracts across selected countries in Oceania and
Asia, namely, Australia and New Zealand in the former region and
Singapore, Malaysia, the Philippines, and Indonesia in the latter.
*Danny Ong, Teo Shu Qiu, and Andrea Taryn Baker, Rajah & Tann LLP,
Singapore.
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Restrictive Covenants: Int’l Survey
I.
It is not unusual for employment contracts to contain restrictive covenants on employees such as noncompetition, nonsolicitation or confidentiality clauses in order to protect the interests
of the employer during and post employment. By their very nature, the enforceability of restrictive covenants post employment
is a very real concern for most employers and employees. Yet the
laws on enforceability of restrictive covenants are far from uniform across jurisdictions, and multinational employers may face
difficulties with enforcement where the employment contract is
governed by an unfamiliar law. The purpose of this overview is,
therefore, to provide an overall understanding of the laws on restrictive covenants in each of the selected countries.
The laws on the enforceability of restrictive covenants are
most similar among Singapore, Malaysia, Australia and New
Zealand. That is largely due to the fact that these countries have
common law systems premised on the judicial precedent which
has binding value in the country where the judicial decision was
made and persuasive value in all other common law countries.
The similarities between the laws in the common law countries is
explained by the fact that their legal systems are “porous” vis-àvis one another. Where differences exist between the common law
countries, they are largely due to legislation passed in one country
that has not been enacted in the others.
On the other hand, the laws on the enforceability of restrictive covenants in the Philippines and Indonesia are distinct from
the above common law countries as well as from each another.
Indonesia and the Philippines are civil law countries wherein the
black letter of the civil code and legislation govern all conduct. No
binding value is placed on judicial precedent in civil law countries.
Since the civil code and the statutes enacted in each country are
distinct, it is no wonder that the laws surrounding restrictive covenants in the Philippines and Indonesia bear little resemblance to
one another.
For simplicity, this overview refers to Singapore, Malaysia,
Australia and New Zealand collectively as the “Common Law
Countries” and to the Philippines and Indonesia collectively as the
“Civil Law Countries”. Although there are numerous other com-
II.A.
Restrictive Covenants Issues in Oceania
8-3
mon and civil law countries across the globe, use of the capitalised
terms shall refer exclusively to the countries that are discussed in
this overview.
II. The Common Law Countries:
Similarities and Differences
A. The Common Law
In the Common Law Countries, restrictive covenants in employment contracts are, in theory, prima facie unenforceable. Such
covenants represent restraint of trade, which is not encouraged as
a matter of public policy. Nonetheless, public policy also dictates
that there must be a balance between the freedom of trade and the
freedom of contract. It is this middle ground that forms the basis
of the common law on the enforceability of restrictive covenants.
The courts of the Common Law Countries will uphold such
covenants where they are reasonable to protect the legitimate interests of the employer and, vis-à-vis, the public interest. Reasonableness depends on a number of non-exhaustive factors, such as
duration of the restriction and nature of the employment. There
must also be a legitimate interest of the employer to protect before it can be considered reasonable to impose a corresponding
restraint on the conduct of an employee.
An exceptional framework exists in Malaysia where the
common law on enforceability of restrictive covenants is partially
modified by statute. Section 28 of the Malaysian Contracts Act
states that “every agreement by which anyone is restrained from
exercising a lawful profession, trade or business of any kind, is to
that extent void”. Subject to exceptions stipulated in that provision,
therefore, Malaysian law departs from the laws of the other Common Law Countries by governing the enforceability of noncompete clauses within a statutory regime. Apart from noncompete
clauses, the common law reasonableness test continues to apply in
Malaysia to other forms of restrictive covenants. None of the other
Common Law Countries have statutorily modified the common
law.
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Restrictive Covenants: Int’l Survey
II.B.
B. Employees’ Duties
Restrictive covenants are express contractual terms which, if
enforceable, bind an employee to comply with the restraint agreed
to in the employment contract. Over and above the terms that are
expressly written into an employment contract, the Common Law
Countries imply an overarching duty of loyalty into all employment contracts. The duty of loyalty arises out of the common law
and obliges employees to serve their employers honestly, in good
faith and with fidelity.
Australia is the only one out of the Common Law Countries
to impose a statutory duty on employees to supplement the common law duty of loyalty. Sections 182 and 183 of its Corporations
Act states that employees have a duty not to abuse their position
for personal gain or to cause detriment to the employer, or to misuse information obtained in the course of employment. Arguably,
conduct in breach of those statutory duties would also contravene
the general duty of loyalty. Therefore, the fact that the other Common Law Countries have not imposed similar statutory duties on
employees does not make their laws very different from Australian law in this respect.
All the Common Law Countries also impose fiduciary duties
on directors and certain senior employees to act in good faith for
the benefit of the employer. Fiduciary duties do not arise from the
employment contract but rather from the nature of the employment
and the role played by the employee.
C. The Dispute Resolution Mechanism
Apart from New Zealand, the Common Law Countries do
not have specific statutory authorities to which claims based on enforceability of restrictive covenants may be brought. Such claims
are commenced in the courts of the Common Law Countries and
subject to the usual litigation rules and procedures of that State.
Interestingly, however, New Zealand’s Employment Relations Act established an Authority with primary jurisdiction to
interpret the statutes and rules surrounding restrictive covenants,
save for claims arising out of tortious acts such as inducing an employee to breach a restrictive covenant, which are litigated in the
III.A.1.
Restrictive Covenants Issues in Oceania
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civil courts. An appeal process exists to challenge in the Employment Court the determinations of the Authority. Thus, the issue of
enforceability of restrictive covenants and the application of the
reasonableness test fall under the ambit of these two employment
institutions.
III. The Civil Law Countries
A. The Philippines
1. The Civil Code
The position in the Philippines on the enforceability of restrictive covenants appears to be the reverse from that of the Common Law Countries in that restrictive covenants are prima facie
enforceable unless they are unreasonable. The Civil Code, read
together with the Constitution, upholds the freedom of contract
and prohibits any law that impairs that freedom to be bound by
contractual obligations. There is no corresponding written code
upholding the freedom of trade. Therefore, the starting point in the
Philippines is that restrictive covenants are enforceable as contractual obligations that were freely entered into.
The courts have, nonetheless, held restrictive covenants to be
unenforceable where they are unreasonable. The factors considered when determining unreasonableness are similar to the ones
considered in the Common Law Countries when determining reasonableness, for example, the duration of the restriction and the
nature of the employment. To that extent, the reasonableness test
applies in the Philippines, albeit in the reverse. However, it should
be noted that the doctrine of judicial precedent does not apply
under civil law. It remains to be seen if the courts in the Philippines would continue to apply the reasonableness test in future
cases since they are not bound by earlier decisions.
Insofar as it is unclear whether the courts would consider the
reasonableness of restrictive covenants in determining whether to
uphold the freedom of contract, some uncertainty, therefore, lies
in the enforceability of restrictive covenants in the Philippines.
That being the case, it would be sensible for employers to craft re-
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Restrictive Covenants: Int’l Survey
III.A.1.
strictive covenants in a manner that is reasonable, in order to avoid
the risk that a covenant will be struck down by a court in the Philippines should the court decide to apply the reasonableness test.
2. Employees’ Duties
In the Philippines, there is also a duty of loyalty imposed on
employees derived from case law and written code. Article 19 of
the Civil Code obliges all persons to act justly, honestly and in
good faith in the exercise and performance of duties, while Article
21 provides that compensation must be made by any person who
“wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public police”. Specific to the
employment relationship, Article 282 of the Labour Code permits
employers to dismiss any employee who wilfully breaches the trust
reposed in him. The wording of Article 282 of the Labour Code
also implies that the law imposes fiduciary duties on employees.
As a result of the generality of that provision, the interesting difference between the Philippines and the Common Law countries
is that all employees owe fiduciary duties to their employers, not
only to directors or senior employees.
3. The Dispute Resolution Mechanism
The regional trial courts of the Philippines have jurisdiction
over matters involving the interpretation of the Civil Code, including the question of whether a restrictive covenant should be struck
down for unreasonableness. Relief that may be granted includes
declarations, injunctions, and damages for breach of contract.
B. Indonesia
1. The Civil Code
Restrictive covenants are generally enforceable in Indonesia
by virtue of the principle of freedom of contract embodied in the
Civil Code. The only curtailment placed on that freedom is found
in Article 31 of the Manpower Law and Article 38(2) of the Law
on Human Rights, which stipulate that a person has the right to
freely choose his or her employment. As long as those provisions
are not breached, restrictive covenants are valid under Indonesian
IV.
Restrictive Covenants Issues in Oceania
8-7
law. Unlike the Common Law Countries and the Philippines, there
is no application of the reasonableness test in Indonesia.
2. Employees’ Duties
No duty of loyalty is imposed on employees under Indonesian law. However, it is common for employers to expressly establish, by way of contract, such a duty and the consequences of
breaching that duty.
No fiduciary duties are imposed on employees either, with
the exception of directors of limited liability companies. The duty
owed by such directors is encapsulated in Article 92 of the Law on
Limited Liability Company.
Indonesian law therefore differs from the Common Law
Countries and the Philippines in that the employment contract is
self-contained with regards to employees’ duties; there is no implied term or overarching duty of good faith governing the employment relationship.
3. The Dispute Resolution Mechanism
An Industrial Relations Court exists in Indonesia to adjudicate matters involving industrial relations disputes concerning
rights, interests, termination of employment and labor unions. The
enforcement of restrictive covenants presumably falls within the
scope of the Industrial Relations Court.
With respect to Indonesia’s dispute resolution system, however, it is worth bearing in mind that much is unpredictable due to
the lack of binding precedent and practical challenges which may
be faced.
IV. Conclusion
Although the enforceability of restrictive covenants differs
between the Common Law Countries and the Civil Law Countries, with the exception of Indonesia, the reasonableness test runs
common to all. The employees’ duty of loyalty and fiduciary duties also apply in all the selected countries, again with the exception of Indonesia. In other words, the legal framework in Indonesia
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Restrictive Covenants: Int’l Survey
IV.
in relation to restrictive covenants and employees’ duties is the
most unique in comparison to the Common Law countries and the
Philippines. The establishment of an Industrial Relations Court
in Indonesia also stands out. Only New Zealand, with its bifurcated employment institutions (the Authority and the Employment
Court), is similar to Indonesia in this respect. All the other countries examined handle employment disputes in the civil courts,
through the usual procedures for civil disputes.
As multinational companies are often key employers in both
regions, it is important to ensure that the nature and scope of restrictive covenants and restraint of trade clauses by which the
employer seeks to regulate its relationship with its employees be
crafted having regard to the legal and practical peculiarities unique
to each country in which enforcement of such clauses is likely to
be sought, rather than adapting standard boiler-plate type clauses.
It would, perhaps, be the next step to attempt some uniformity among countries on the enforceability of restrictive covenants. An international initiative may lay the foundation for firm
guidelines to instill more certainty into the law by creating global
consensus on the law surrounding restrictive covenants. Of course,
this would mean that standards of employer protection that are far
lower than what exists in certain industrialized nations would become a new standard. Such an approach, however, would be aimed
at avoiding situations where employers and employees would be
subject to the unpredictability that differing national statutes and
conflicts of law rules can sometimes produce.