Forfeiture-for-Competition clause in an employment contract: Can you use them?

Employers need to think carefully before using forfeiture-for-competition clauses in incentive schemes, a law firm says.

A report compiled by Colin Ng & Partners LLP partner See Tow Soo Ling and associate Hu Huimin examined the enforceability of such clauses by drawing on the 2012 case - Mano Vikrant Singh v Cargill TSF Asia Pte Ltd - which went on to the Court of Appeal.

In this case Singh signed a contract agreeing not to compete with Cargill TSF one year after the termination of his employment. The Non-Compete Agreement was found to be a reasonable restraint by both the High Court and the Court of Appeal.

However, through the company’s incentives programme, he also signed terms and conditions containing a forfeiture provision, stating any deferred incentives would be forfeited if the employee continues a career in the same industry - but not with Cargill - within two years of resigning.

Singh applied to the High Court for a declaration that the forfeiture provision was void for being a restraint of trade clause, meaning he was entitled to the deferred incentives – but this was not upheld.

The Court of Appeal overturned the Singapore High Court’s decision and held that the restraint of trade doctrine applies to a forfeiture provision which forfeits an employee’s benefits when the employee is found to be competing against the employer.

The Court of Appeal drew a distinction between Forfeiture-for-Competition clauses and Payment-for-Loyalty clauses. It said that Forfeiture-for-Competition clauses provide for situations where the employee’s benefits have already vested in the employee as a legal entitlement, whereas with Payment-for-Loyalty clauses, the benefits have not vested in the employee.

The decision has a number of implications on companies and employers, the Colin Ng & Partners LLP report said.

“In structuring employees’ compensation and reward plans, employers should note the differences between a Payment-for-Loyalty clause and a Forfeiture-for-Competition clause.

“Employers should also note that the timing of the vesting of such benefits makes a difference in the Court’s determination of whether the clause is a Payment-for-Loyalty clause or a Forfeiture-for-Competition clause.”

Employers should communicate the rationale and the timing of the employees’ entitlement to the financial rewards clearly to their employees, it said.

“This is especially important since the enforceability of a Forfeiture-for-Competition clause is subject to greater challenge as compared to a Payment-for-Loyalty clause.

“For employers who wish to include a Forfeiture-for-Competition provision in employment contracts, they should ensure that the forfeiture provision protects a legitimate interest and is reasonable in all aspects including time, geographical limit and the ambit of restricted activities, so that the clause will not be void for violating the restraint of trade doctrine.”