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Thai Law Insights

Competition Law for CEOs: The Salary Man's Dream and the Legal Ball & Chain

Chatchawarl Sornsurarsdr/Atthawut Rungrojkitiyos

chatchawarls@csbc-law.com
charles@csbc-law.com

The dream of a salary man is that one day not in the too distant future, he will have, a business, a kingdom to call his own so to speak or, for those not so ambitious, at least a boss that pays better than the last. Either way, that salary man may soon find that his hope and aspiration may come to naught as he discovers too late that he is bound by a contract prohibiting him from achieving his dream. More often than not, the salary man would have agreed not to compete with his employer or engage in business similar to his employer during the term of his employment or immediately after his resignation or dismissal. If the salary man did not agree to such provision when he took up employment, he may still be bound by a non-competition clause with his employer after the termination of his employment, for a reasonable period. This means that our salary man’s future has just been severely limited because he cannot engage in any business that is in competition with his employer, or become an employee of any business that engages in similar business of his previous employer.  

Usually, an employer will require an employee to covenant not to compete or engage in business similar to the employer as a prerequisite to the commencement of an employment contract. This is a roundabout way of imposing restrictions on our salary man because if he does not agree to the covenant,  he will most likely remain unemployed. Employers may also go as far as forcing the salary man to sign an agreement that the salary man will not divulge any trade secrets.  This is called a Non – Disclosure agreement.

From the employer’s perspective, by employing the salary man, he is providing the salary man with an opportunity to absorb and gain valuable experience in that field. This is especially true of multinational corporations that focus on the development of human resources and the caliber of its employees. The employer may provide the salary man with an opportunity to attend seminars or further his studies, nationally or internationally. The employer would regard such matters as an investment and this is especially true if the employer gave the employee access to the company’s information regarding finance, technology or other company knowledge that is considered a trade secret. This relationship is therefore one of an equivalent trade, because the more the employee’s knowledge and skills in this field develop, the more beneficial he or she is for the employer.  And, the more the employee develops to the satisfaction of the employer, the more his or her salary should increase.

Therefore, the mechanism the employer may use  to guarantee that for a certain period after the employment contract has ended, the employee does not compete with the employer in a similar business is an acceptable one, provided that such covenant does not infringe more than necessary on the right and liberty of the salary man in practicing his trade. Such restrictions must be within the scope of public decency and good morals as dictated by applicable laws.

The reason why the Courts of Thailand use public decency and good morals as the standard by which such mechanism is tested is because it promotes fairness to both the employee and employer.  This is true for all cases on non-competition as no other test exist in Thailand’s laws and regulations.

In addition to the public decency and good morals test and the doctrine of freedoms stated in the Constitution, the Courts of Thailand, when considering a claim of unjust restrictions on competition, may cite the Unfair Contract Terms Act of 1997, specifically the provision in Section 5 that stipulates related material factors as follows:

“The terms restricting the right or freedom in professing an occupation or execution of a juristic act related to the business, trading or professional operation which are not void, but being the terms that cause the person whose right or freedom has been restricted to bear more burden than that could have been anticipated under normal circumstances, shall only be enforceable to the extent that they are fair and reasonable according to such circumstances.

In determining whether the terms under paragraph one cause the person, whose right or freedom has been restricted to bear more burden than that could have been anticipated, consideration shall be taken to the scope of the area and the period of restriction of right or freedom, including whose ability and opportunity to profess occupation or to execute a juristic act in other form or with other person, as well as all legitimate advantages and disadvantages of the contracting parties”.

Consequently, the Unfair Contract Terms Act of 1997 plays a pivotal role in establishing if a covenant is too severe and unfairly restricts the right or freedom in professing an occupation or execution of a juristic act related to the business, trading or professional operation. The Act was intended to promote fairness. 

Furthermore, if the employee is in a managerial or executive position i.e. CEO, the employee may be appointed as a ‘director’ of the company. The said employee would then be legally bound by Section 1168 of the Thai Civil and Commercial Code (“TCCC”) to covenant not to execute a juristic act related to business, trading or professional operation that can be construed as similar or the same as the employer, for the employee or others’ benefit. If the employee directly violates the provision of Section 1168 of TCCC without the prior consent of the shareholders and such violation causes injury to the company, the company or shareholders (if the company itself does not pursue the violator) can claim damages from the director in violation of Section 1168 if actual injury to the company can be proven.

The issue of restricting an employee from operating in competition with the employer is an age-old question that been thoroughly discussed in many Thai Supreme Court Judgments because such disputes usually arise when an employer and an employee have conflicting points of view regarding non-competition. The employer is always of the opinion that the employee should remain in employment for as long as the company benefits and should be bound by certain promises after the period of employment.  However, when an employee resigns or is dismissed, the employer may try his best to make certain that the employee will not operate any business or become an employee of a business in competition with the employer. On the flipside, the employee, having accumulated enough experience in gainful employment, may feel that his or her remuneration, once adequate, is no longer satisfactory, and inadequate in consideration of the years of experience gained and expertise developed.   When this feeling develops, an employee may wish to operate his or her own business or seek gainful employment with a competitor. It is therefore almost inevitable that any competitive act by the former employee would have a direct impact on the business of the employer and, that any dispute arising from the restrictive covenant between employer and employee would inevitably end up before the Thai Courts awaiting adjudication, like many of its predecessors.