In brief
In June 2026, the Committee for the Review and Reform of Contract Law ("Reform Committee") published its Final Report on the Review and Reform of Contract Law in Malaysia ("Report"), proposing wide-ranging reforms to the Malaysian contract law framework. Among the most notable recommendations is a proposed amendment to section 28 of the Contracts Act 1950 ("MCA"), which would replace the current blanket prohibition on restraints of trade with a reasonableness-based framework similar to that adopted in many other common law jurisdictions.
Proposed changes
Current position
Under Malaysian law, any agreement by which a person is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void pursuant to section 28 of the MCA. This operates as a blanket prohibition on all restraint of trade provisions, subject only to the following three exceptions:
- Sale of goodwill of a business
- Dissolution of partnerships
- Continuance of partnerships
In practice, any provision in a shareholders' agreement that seeks to restrict a joint venture partner from carrying on a competing business following the termination of the joint venture would generally be void and unenforceable under section 28 of the MCA unless it falls within one of the statutory exceptions, which do not typically apply to joint venture arrangements. The position in relation to post-completion non-compete covenants in share sale and purchase agreements is less clear.
There is no settled case law in Malaysia that definitively determines whether such covenants are void under section 28 or whether they may be saved on the basis that they are ancillary to a sale of goodwill (i.e., the goodwill of the underlying business being an asset that passes indirectly upon a transfer of shares).
In contrast to the position in many other common law jurisdictions, Malaysian courts do not apply the doctrine of reasonableness to restraint of trade provisions. A restraint will not be upheld merely because it is reasonable in scope, duration, or geographical reach. Instead the determinative question is whether the provision in question falls within one of the three statutory exceptions under section 28 of the MCA.
Proposed amendments
In an effort to align Malaysian contract law more closely with other common law jurisdictions, the Report recommends replacing the existing blanket prohibition with a reasonableness-based test, under which an agreement restraining a person from exercising a lawful profession, trade or business would be void unless the restraint is:
- Reasonable with respect to its duration, geographical area and the scope of the activities restricted
- Necessary to protect the legitimate interests of the parties
The amended MCA would also set out the following illustrative categories of restraint (non-exhaustive) in which a restraint of trade would be enforceable provided the overarching reasonableness test is satisfied:
- Sale of Goodwill: Where a person sells the goodwill of a business and agrees to refrain from carrying on a similar business within specified geographical limits, provided the conditions of the restraint are reasonable
- Dissolution of Partnership: Where partners agree that upon or in anticipation of dissolution of the partnership, any one or more of them will not carry on a business similar to that of the partnership within specified geographical limits, provided the conditions of the restraint are reasonable
- Business, Trade or Commercial Agreements: Where parties to a commercial, trade, or business agreement include restraints that are reasonable and proportionate for the protection of proprietary interests or to facilitate fair competition
- Employment Contracts: Where a non-compete clause applies during the period of employment and is reasonably necessary to protect the employer's legitimate interests, provided it does not unreasonably restrict the employee's right to work or practise a profession
- Confidentiality and Trade Secrets: Where an agreement prohibits the disclosure of confidential information or trade secrets, such a clause shall not be deemed a restraint of trade, provided it is reasonable and limited to the protection of proprietary or sensitive information
In determining the reasonableness of a restraint, the courts shall take into account all relevant circumstances, including the nature of the profession, trade or business, the interests of the parties, and the public interest.
The Report observes that the existing absolute prohibition on restraints of trade, which were originally intended to protect individuals from undue restrictions on their ability to earn a livelihood, no longer adequately reflect modern commercial realities, where such restrictions are required to protect legitimate business interest (including goodwill, trade secrets, proprietary interests and business investments).
Impact
If enacted, the proposed amendments would represent a significant shift in Malaysia's restraint of trade regime. Although the reforms are generally expected to enhance the protection of legitimate commercial interests and better align Malaysian law with international practice, certain aspects of the proposed framework remain unclear and may require further legislative or judicial clarification:
- Enhanced protection for acquirers of shares
In the context of share acquisitions, the proposed amendments would afford buyers greater protection in respect of the value of the businesses they acquire. Buyers often pay a significant premium for the target's goodwill, customer relationships, know-how, workforce and market position. Under the current regime, a seller may, following completion, re-enter the market and compete with the acquired business despite having received consideration as part of the sale of such business.
The proposed amendments would enable buyers to enforce reasonable post-completion restraint of trade provisions, thereby safeguarding the commercial value of the acquired business and reducing the risk of the seller diminishing the value of the goodwill and business for which the buyer has paid for.
- Facilitating long-term strategic partnerships
The proposed amendments would benefit joint venture partners who have contributed substantial capital, technology, expertise, intellectual property and business opportunities to a venture. Under the current regime, restrictions preventing a joint venture partner from competing with the business of the venture following its exit or the termination of the joint venture are generally unenforceable.
By permitting the enforcement of reasonable restraint of trade provisions, joint venture partners would be able to better protect the value of their investments and the goodwill, proprietary know-how and business opportunities developed through the venture. This would provide businesses with greater certainty that investments made in the venture are adequately protected, thereby encouraging greater investment, collaboration, knowledge-sharing and the formation of long-term strategic partnerships.
- Uncertainty around post-employment restraints
While the Report expressly recognises that non-compete obligations during the course of employment are enforceable, it does not address the treatment of such obligations once the employment relationship has ceased. This may suggest an intention to preserve the longstanding policy of safeguarding an individual's ability to earn a livelihood, notwithstanding the broader liberalisation of restraints in commercial arrangements.
This lack of clarity may give rise to particular issues in certain M&A transactions, especially where transactions involve earn-out arrangements, founder retention arrangements or other key-person protections. In many acquisitions, selling shareholders remain actively involved in the target business following completion, whether as employees, directors or consultants, and are often subject to post-termination non-compete obligations designed to protect the value of the acquired business. It remains unclear whether such restraints would be analysed as employment-related restrictions, which may continue to be subject to a more restrictive approach, or whether they could instead fall within the broader category of "Business, Trade or Commercial Agreements" and therefore be assessed under the proposed reasonableness test.
Until further guidance is provided, either through the final form of the legislation or subsequent judicial interpretation, the extent to which post-termination non-compete obligations associated with M&A transactions will be enforceable remains uncertain. This uncertainty may be of particular significance to buyers who rely on such restrictions as a key mechanism to protect the goodwill, customer relationships and proprietary know-how acquired as part of the transaction.
Conclusion and next steps
The proposed amendment to section 28 of the MCA would represent one of the most significant reforms to Malaysia's restraint of trade regime in decades. By moving away from the current blanket prohibition regime towards a more flexible, reasonableness-based approach, the proposed changes bring Malaysia more closely into line with Singapore and other leading common law jurisdictions. That said, certain areas remain unaddressed, and it remains to be seen how the Malaysian courts will apply the reasonableness test if the proposed amendments are enacted.
While the proposal remains subject to legislative implementation, businesses and investors should begin reviewing existing restrictive covenant provisions and consider how future agreements may be drafted to satisfy the proposed reasonableness test.
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Loo Mynn Keng, Senior Associate, and Nico Ho, Associate, have contributed to this legal update.
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