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Breach of Employment Contracts: Restraints of Trade and The BACKGROUND CASE UPDATE 23 May 2019 HT is a security technology company, which provides “offensive security technology” to law enforcement and intelligence agencies. Its BREACH OF software is designed to access data on target devices, including hacking mobile phones or EMPLOYMENT computers, to monitor “terrorist and/or criminal” communications. CONTRACTS: One such software was the “Remote Control RESTRAINTS OF System” (“RCS”), which allowed secret access to data on target devices, without the user’s knowledge. The version at the material time was TRADE AND THE named “Galileo”. IMPORTANCE OF Woon was a former employee of HT, and had been employed as a security specialist. In January PROVING 2015, he resigned from HT and joined another company (“ReaQta”) which developed and sold DAMAGES defensive software that allowed users to detect HT SRL v Wee Shuo Woon [2019] SGHC 96 and prevent intrusive threats. This defensive software was named “ReaQta-Core”. SUMMARY HT commenced proceedings against Woon, and The Plaintiff (“HT”) sued a former employee alleged that he had breached his employment (“Woon”) for breach of his employment contract, contract by engaging in ReaQta’s business while and breach of an implied duty of good faith and still employed by HT. It further alleged that Woon fidelity. HT alleged that while Woon was still breached a non-compete clause which prohibited employed by HT, he breached Clauses 10(a) and him from being employed by a competitor within 12 10(b) of his employment contract and his implied months after termination of his employment. duty of good faith and fidelity by engaging in the business of a competitor without HT’s consent. Woon denied breach, denied that ReaQta was a HT further alleged that after Woon’s resignation, competitor of HT, and argued that the non- he also breached non-compete and non- compete clause was void as an unreasonable solicitation clauses of his employment contract restraint of trade. He also counterclaimed for (Clauses 12(b) and 13(b)) by working for a unpaid salary. competitor during the period of restraint. BREACH OF CONTRACT AND DUTY OF HT successfully proved that Woon breached his GOOD FAITH AND FIDELITY employment contract and his duty of good faith and fidelity during his employment with HT (“pre- The Court held that Woon had participated in termination breaches”). However, the non- ReaQta’s business while employed by HT, in compete clause was found to be an unreasonable breach of his employment contract. He was and unenforceable restraint of trade and the Court involved in a presentation for a prospective client, held that there was no breach of the non- advised on features that potential clients may be solicitation clause. interested in, and also had an official ReaQta email account. Despite successfully proving that Woon was liable for breach of contract as a result of the pre- On the employee’s implied duty of good faith and termination breaches, HT failed to prove that it had fidelity, the Court noted that this includes a duty suffered loss from this breach, and was therefore not to engage in employment that would inflict awarded only nominal damages of S$1,000. harm on the employer’s business. This was important because HT’s offensive The non-compete clause was therefore void as an security products and ReaQta’s defensive security illegal restraint of trade, and unenforceable. products were not strictly substitutes in the same market. Galileo facilitated secret access to a target The claim on the non-solicitation clause was also device, whereas ReaQta-Core was meant to dismissed. HT’s claim was based on Woon’s detect intrusions by such offensive software. employment with ReaQta, which was not a former Potential customers could be interested in customer of HT, and which therefore did not fall purchasing both products, since they performed within the scope of the non-solicitation clause. different functions. DAMAGES However, by taking part in ReaQta’s business while employed by HT, Woon was working on a HT claimed substantial damages against Woon, product which would harm his employer (because including among other things, loss of profits and ReaQta-Core could potentially neutralise Galileo), the cost of re-engineering its RCS software. HT and this amounted to a breach of Woon’s duty of also claimed general damages for loss of business good faith and fidelity. reputation. RESTRAINT OF TRADE The claim for loss of business reputation was dismissed because loss of reputation is a non- The Court held that the non-compete clause did pecuniary loss for which contractual damages are not protect a legitimate proprietary interest and not recoverable. The Court noted that HT was only was therefore void as an illegal restraint on trade. seeking general damages for loss of reputation, as opposed to special damages for specific pecuniary The Court applied the Court of Appeal’s test in loss caused by the loss of reputation, and was Man Financial (S) Pte Ltd v Wong Bark Chuan therefore not entitled to such damages. David [2008] 1 SLR(R) 663 that where confidential information or trade secrets are already protected The Court further noted for completeness that HT by a different clause in the employment contract, had not proved that the alleged loss of reputation the employer must show that the restraint of trade was caused by Woon, as opposed to a hacking clause is meant to protect a legitimate proprietary attack HT had suffered shortly after Woon’s interest over and above the protection of resignation. confidential information or trade secrets. On loss of profits, HT argued that Woon’s The Court further held that the terms of the breaches had caused it to make zero new sales in restraint of trade were unreasonably wide: the Asia-Pacific Region. The Court held that HT failed to prove this loss. HT had failed to adduce (a) the scope of the restraint attempted to prohibit evidence to show or explain how Woon’s actions Woon from working with any other business in had specifically led to a fall in sales, and it was the cybersecurity or intelligence industry, even insufficient for HT to merely assert loss by if these companies dealt solely in defensive inference from Woon’s involvement with ReaQta. security technology. This was especially because ReaQta itself was marketing ReaQta-Core and there were other (b) the clause attempted to prohibit not only sources in the market for information about employment with competitors, but also ReaQta-Core and its capabilities. engaging in business with competitors. These went beyond activities which would reasonably HT’s claim for the cost of re-engineering the RCS affect HT’s customer connection. software was also dismissed. There was a lack of evidence that ReaQta-Core had necessitated a (c) there was no geographical limitation on the complete re-writing of the RCS software, and a restraint of trade, even though Woon operated lack of evidence as to why ReaQta-Core was so in the Asia-Pacific region. different from other generic anti-virus software that it required a fundamental overhaul of RCS. (d) the restraint of 12 months was unreasonable, given the lack of geographic constraint. 2 Further, HT had been separately hacked and the nevertheless be careful that the ambit and scope Galileo source code released, shortly after Woon of any restraint is limited to what is reasonable in had resigned. There was insufficient evidence that the interests of the parties and of the public. it was Woon’s involvement with a competing Although it may be tempting to prohibit a former business that necessitated re-engineering the RCS employee from competing anywhere in the world, software, as opposed to the hack and leak of the for a lengthy period of time, this runs the risk that Galileo source code. the clause would be unenforceable. COMMENTS Employers should carefully review their employment contracts because a one size fits all Restraint of trade approach may not be suitable. Even where a company operates a global business, it may be A prudent employer will want to protect its inappropriate for all employees in different regions business from unfair competition if key employees of the world to be subjected to a geographically resign. However, employers must bear in mind that unlimited restraint, where the individual employee non-compete and non-solicitation clauses are only worked in a specific region. Similarly, the covenants in restraint of trade and such clauses duration of any restraint needs to be carefully are prima facie void and unenforceable, unless the tailored. employer can show that there is a legitimate proprietary interest to protect, and that the restraint The importance of proving loss and is reasonable in the interests of the parties and in damages the interest of the public (see eg CLAAS Medical Centre Pte Ltd v Ng Boon Ching [2010] 2 SLR Damages are a sometimes neglected aspect of 386). civil litigation. Parties tend to focus on issues of liability and the emotive aspects of wrongdoing, Further, the mere protection of confidential and view proof of damage as the second hurdle to information does not suffice as a legitimate cross when the time comes. proprietary interest, where there are other contractual provisions protecting such confidential This is a risky approach, because a claim will fail information. In such circumstances, the employer (in the practical sense) regardless of whether at must point to legitimate proprietary interests over the first hurdle of liability or second hurdle of and above the protection of confidential proving damage. information (see eg Stratech Systems Ltd v Nyam Chiu Shin [2005] 2 SLR(R) 579). Where an employee leaves a company for a competitor and the company’s profits fall, it may be On this issue, the High Court has previously tempting to blame that employee and assume pointed out the disparity in how an employer who unfair competition or poaching of clients.
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