DEC 14, PART C QUESTION 1

The issue is whether Diamond can be held liable for breach of undertaking
under the restraint of trade.

An agreement in restraint of trade is an agreement where a person's liability to

carry on a profession,trade or business is restricted. This normally arises in two
situations, firstly, an employee who upon leaving his employment agrees not to
compete with his employer by setting up a similar business or joining a rival company
and second, a seller of business with goodwill agrees not to carry on a similar
business to compete with the purchaser of the business. The law on restraint of trade
in Malaysia is provided under Section 28 of the Contracts Act, which is different from
the common law position.

Under common law, all restraints are prima facie void subject to a test of
reasonableness. While, under Section 28 of the Contracts Act, all restraints are void
unless it falls within any of the three exceptions provided. The exceptions are;
Exception 1—One who sells the goodwill of a business may agree with the buyer to
refrain carrying on a similar business, within specified local limits, so long as the
buyer, or any person deriving title to the goodwill from him, carries on a like business
therein: Provided that such limits appear to the court reasonable, regard being had to
the nature of the business, Exception 2—Partners may, upon or in anticipation of a
dissolution of the partnership, agree that some or all of them will not carry on a
business similar to that of the partnership within such local limits as are referred to in
exception 1, and lastly Exception 3—Partners may agree that some one or all of
them will not carry on any business, other than that of the partnership, during the
continuance of the partnership.

For common law, in the case of Nordenfelt v Maxim Nordenfelt Gun and
Ammunition Co, the plaintiff agreed not to engage in manufacturing of guns,
ammunition or in any business competing with the defendant for 25 years. It was
held that the court considered the first condition (covenant) as reasonable, since the
defendant had sold the business for a huge amount and granted the injunction. But,
the second condition, which prevents the defendant from engaging in any other
competing business, was regarded unreasonable (as the restraint/condition would
not protect the proprietary interest of the plaintiff Company).
In the case of Fitch v Dewes, where the covenant in restraint of trade was for
the interest of the employer, the court found that although it was unlimited in time, it
was reasonable for the protection of the employer and was not against public
interest.

While an example of case under Section 28 of the Contracts Act would be the
case of Stamford College Group Sdn Bhd v Raja Abdullah Raja Othman. The
defendant entered into a contract of service with the plaintiff as a lecturer in Hotel
Management. It was a term of the contract saying that if the defendant's service was
terminated, he should not, within 2 yearsfrom the termination, become employed by a
company or an institutioon to become a lecturer, without the plaintiff's consent. The
defendant later terminated his contract with the plaintiff and became employed by
Syarikat PDC Sdn Bhd where he gave courses in Hotel Management. It was held that
the clause was void. This was because if the defendant was not allowed to become a
lecturer at elsewhere, his livelihood would be affected.

For this question, we would refer to the Section 28 of the Contracts Act. As the
general rule says that all restraints are void unless it falls within any of the three
exceptions. Looking at the term stated in the contract, "Diamond would not start the
same business for the next ten years in Malaysia", under the general rule, it shall be
considered as void, from the perspective under the Exception 1, and looking at the
term stated in the contract between Diamond and Ruby, the one who sells the
goodwill may agree with the buyer to refrain carrying on the same business.
Somehow, looking back at the nature of the business, and to the reasonableness of
the term provided, which refraining Ruby to start the same business for the next 10
years. The period of time shall be considered as too long for the business restraint,
and would affect Diamond's livelihood as she was once an event manager and
proved that the reason why she started the business in Kedah was because of her
forte.

Refering to the case of Stamford College Group Sdn Bhd v Raja Abdullah
Raja Othman, the term stated in the agreement was void because it would affect the
defendant's livelihood, as in this present question, for the term in the contract
between Ruby and Diamond, to that extent shall be considered void. Diamond's
livelihood can be affected as she was an event manager and that was her profession.
To some extent, that is one of her ways to make living. And if the term restrain her
from continuing doing the same business in Kedah, which is far from Shah Alam, is
unreasonable and shall be considered void.

To conclude, the term is considered void and Diamond shall not be liable for
breach of undertaking under restraint of trade.