Are non-compete clauses enforceable in Malaysia?

Almost every Malaysian employment contract carries a non-compete clause, and almost every one of them is void. This is not a close question, and it is not a matter of drafting quality.

What section 28 says

Section 28 of the Contracts Act 1950:

Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.

Three exceptions follow, and they are exhaustive. Exception 1 allows the seller of the goodwill of a business to agree not to carry on a similar business within specified local limits, so long as the buyer carries on a like business there, and provided the limits appear reasonable to the court. Exception 2 allows partners, on or in anticipation of dissolution, to agree not to carry on a similar business within such limits. Exception 3 allows partners to agree not to carry on any other business during the partnership.

There is no fourth exception for employees, and there is no general saving for reasonable restraints.

Why English drafting does not transfer

English law treats restraint of trade as presumptively unenforceable but saveable where it protects a legitimate business interest and goes no further than reasonably necessary. Practitioners then negotiate scope, duration and geography.

Malaysia does not run that analysis for post-termination employment restraints, because Parliament replaced the common-law position with a statutory rule. Trimming twelve months to six, or the whole country to the Klang Valley, does not change the outcome.

Note the internal evidence: Exception 1 is the only place where reasonableness appears, and it appears as a proviso to a specific exception. Its presence there confirms its absence everywhere else.

What the clause does and does not destroy

Section 28 voids the clause, not the contract. An employment contract containing a non-compete remains fully binding in every other respect, and the employer cannot use the invalid clause as a reason to withhold pay, benefits or a release.

Nor does an unenforceable clause become harmless. Threatening litigation on a void covenant, or telling a prospective employer that the person is restrained, is a commercial and reputational exposure of its own.

What actually protects the business

Move the protection from where the person may work to what the person may use.

Confidentiality and trade secrets. An obligation not to use or disclose the employer’s confidential information is not a restraint on exercising a trade — the former employee remains free to work anywhere, using their own skill and general knowledge. Define the information with specificity; a clause that sweeps in everything the employee learned starts to look like a restraint in disguise.

Intellectual property assignment. Present assignment of work product, with an obligation to execute further documents, secures the asset rather than restricting the person.

Notice periods and garden leave. During the notice period the contract subsists and the employee is still your employee, so keeping them off client work is a management decision inside a live relationship rather than a post-termination restraint. Keep paying full wages, and remember s.12(2) requires the notice length to be equal both ways.

Non-solicitation of customers and staff. These are drafted as protections of the employer’s connections rather than as bans on trading, and they are the most commonly attempted workaround. Treat them as exposed rather than safe: a clause that in practice prevents the former employee from working in their industry will be read for what it does, not what it is called.

Retention of the relationship itself. Client contracts held by the company rather than the individual, and shared account ownership, protect revenue better than any covenant.

Common mistakes

Assuming a short, narrow clause survives. Duration and geography are not the test in Malaysia, because there is no test.

Copying a Singapore or UK precedent. Both jurisdictions apply a reasonableness analysis that s.28 displaced here.

Paying for the restraint. Consideration does not validate a void agreement.

Relying on a director’s or shareholder’s covenant without checking which exception applies. A restraint given by a seller of goodwill on a share or business sale can fall inside Exception 1, subject to the reasonable-limits proviso — but that is a different instrument from the seller’s employment contract, and the two should not be conflated.

Leaving the clause in as a deterrent. In an unfair-dismissal file, an unenforceable restriction is evidence about how the employer treats its people.

What’s next

Strike the post-termination non-compete from your standard contract and reinvest the drafting effort in a specific confidentiality schedule, a clean IP assignment and a notice period long enough to hand over properly. Then check the rest of your template against what else is unenforceable in a Malaysian employment contract.