A restraint of trade clause in a contract is a promise/undertaking where one party agrees not to act in a manner or trade his profession or business in a particular place for a specified period of time.
Although it sounds logically to say that parties are bound by the contract they sign on where they have a freedom to contract. However, in Malaysia where all contract is subjected to Contract Act 1950.
Parties are not able to contract out the provisions in Contract Act 1950 unless they offered a better protection to the other parties or they fell under the exception.
This is to protect the people who have a weaker bargaining position while contracting with the other party who has a stronger bargaining power (i.e. Employer-employee, supplier-buyer and etc).
Restraint of trade clause happens to be one of the protections offered by the Contract Act, where the contract which contains a restraint of trade clause shall be void by virtue of s28 of the Contract Act 1950.
However, there are 3 instances where Restraint of Trade clauses is allowed whereby:-
- there is an agreement not to carry on business of which goodwill is sold;
- There is an agreement between partners prior to dissolution ;
- An agreement during the continuance of partnership.
However, the Court will scrutinize the clause and only void it when there is actually a restraint of trade clause (i.e. restraint the manner of trade clause is enforceable).
