Non-solicitation clauses: the best insurance against team lifts

Employees are key to a company's success, and a stable, competent workforce is one of the hallmarks of a successful business. The departure of a senior employee to a direct competitor is not only destabilising, it can also be extremely damaging if the senior employee attempts to take other employees along as a part of a "team move". For this reason, non-solicitation clauses are frequently included in employment contracts to guard against any opportunistic poaching of employees by a rival company.

The case of Prudential Assurance Company (Pte) Ltd v Peter Tan Shou Yi and another [2021] SGHC 109 reads as a cautionary tale. Tan was formerly Prudential's top agency leader and rainmaker. His group of insurance agents, known as the Peter Tan Organisation (PTO), comprised some 500 agents and was by far Prudential's biggest and most successful group of insurance agents. Unbeknownst to Prudential, Tan had been in talks with Aviva, one of Prudential's direct competitors, about his and his organisation's potential move to join Aviva.

In May and June 2016, Tan held numerous covert meetings with the PTO agents and sought to cloak the meetings in secrecy by having the attendees sign non-disclosure agreements (NDAs). Tan not only solicited them to join him at Aviva, but also encouraged them to solicit other agents to do the same. Some meetings also took place under the guise of sham "team retreats" to Bangkok and Guangzhou (sponsored by Aviva). Following those meetings, 195 agents gave notice to terminate their engagement with Prudential over the short span of three days. Others did the same in the following days and months. By the end, 244 Prudential agents (most of whom belonged to PTO) left Prudential to follow Tan to Aviva.  

Following a trial of the matter, Prudential was successful in its claim that Tan had breached his contractual obligation to serve Prudential with "good faith and undivided interest", as he had solicited Prudential's agents to join a competitor during the tenure of his Agency Agreement. However, it was ultimately unsuccessful in respect of the Prudential agents who left to join Aviva after Tan's Agency Agreement had been terminated. This was because the non-solicitation clause, which Prudential had sought to rely upon, had not been validly incorporated as a term of Tan's Agency Agreement.

The failure to properly incorporate the non-solicitation clause

The non-solicitation clause was set out in an "agency instruction" issued by Prudential unilaterally after Tan's Agency Agreement had been executed. The court found that while the Agency Agreement permitted Prudential to vary its "rules, regulations and instructions" from time to time, and to do so unilaterally, imposing the non-solicitation clause went beyond such right as it amounted to a variation of the terms of the Agency Agreement. Such a variation of its terms would only be valid if done in writing and mutually agreed by the parties - as was required by the Agency Agreement itself.

The scope of the non-solicitation clause was found to be reasonable despite its breadth

Even though the non-solicitation clause was found to be non-binding, the court went on to consider whether its terms - particularly the scope of its restriction, which applied to all "employees, officers and agents", regardless of seniority or Tan's influence over them - were reasonable. While this was ultimately a fact-specific analysis, the court had no difficulty answering this question in the affirmative.

Firstly, Prudential had an interest in maintaining a stable, trained workforce (i.e. its agents), and it was not unreasonable for the non-solicitation clause to prohibit the solicitation of all agents regardless of seniority or Tan's influence over them. Secondly, every agent, regardless of seniority, was capable of soliciting other agents to leave Prudential.

Thirdly, while the restriction on the solicitation of Prudential's officers and employees went further than necessary to protect Prudential's interest in maintaining its agency force, the non-solicitation clause could still be saved by applying the doctrine of severance and deleting the words "officers" and "employees".

The effect of an NDA in furtherance of an unlawful purpose

A separate issue in the suit was whether Prudential was liable to Tan for having induced various agents to breach the terms of the NDAs they had signed. This counterclaim by Tan was dismissed on the basis that the NDAs were void and unenforceable, having been entered into for an unlawful purpose. This unlawful purpose was the concealment of Tan's various acts of solicitation which were in breach of the contractual obligations he owed Prudential.

Key takeaways

While this casewas decided in the context of an agency / independent contractor relationship, there are various points stemming from it which also apply with equal force within an employment context, and which employers in Singapore should note:

• The duty of good faith and fidelity, which is implied into all employment contracts as a matter of law, can include a specific obligation not to solicit other employees to join a competitor. However, the obligation would not apply after the cessation of employment. For this reason, employers should not treat this implied duty as a substitute for a well-drafted non-solicitation clause. Such a clause should either be incorporated as a term of the employment contract or capable of forming a freestanding and legally binding agreement.

• Tan's Agency Agreement required that any variation to be made in writing and signed by both parties, thereby precluding Prudential from attempting to introduce the non-solicitation clause unilaterally via an "agency instruction". This is a good reminder for employers that any variation of the terms of an employment contract should be carried out carefully, in accordance with any formal requirements for such variation imposed under the contract.

• While it is common for employers to include contractual terms purporting to grant them the right to vary the terms of the contract unilaterally, such a clause should be relied upon only with circumspection. In this case, while the parties had agreed that Prudential could unilaterally vary certain rules, regulations and instructions, this right was found not to extend to the variation of the contract itself. Even where an employer reserves the right to amend terms of the contract, the use of such right to vary fundamental terms or impose onerous obligations on the employee is likely to be challenged by the employee.

• The enforceability of non-solicitation clauses, like other restrictive covenants, is decided on a case-by-case basis. Even non-solicitation clauses which impose a wide prohibition on the solicitation of all employees regardless of seniority may be found to be enforceable under the right circumstances.

• In appropriate cases, a court may save an otherwise unenforceable restrictive covenant by applying the doctrine of severance and deleting certain words to reduce its scope, but a high threshold will need to be crossed before a court would do so. Employers should not expect such intervention as a matter of course; the prudent approach would be to ensure, at the drafting stage, that restrictive covenants are no wider than is necessary.

• NDAs are a common feature of employee separations, particularly acrimonious ones. Employers should be aware that such NDAs may not be enforceable if they are entered into to conceal illegal activity or for some other unlawful purpose. This consideration would likely also be relevant to confidentiality provisions in separation agreements.