Ramen chain Takagi Ramen was ordered to pay S$20,000 in liquidated damages to bubble tea catering company FrothTea.

The ramen chain was found to have breached a non-compete clause by continuing to sell bubble tea at its outlets after the two companies ended their collaboration in March 2022.

The non-compete clause stated that Takagi Ramen was not to sell any bubble tea items in-house without paying FrothTea royalties. Takagi Ramen was to be bound by the clause for one year after the agreement was terminated.

The partnership agreement was terminated on Mar. 21, 2022, and Takagi Ramen was then bound by the non-compete clause from Mar. 22, 2022, to Mar. 21, 2023.

According to their Facebook, Takagi Ramen was selling bubble tea items within the one year period.

This was done despite reminders, and without paying FrothTea the five per cent royalty fee.

Thus, FrothTea sought payment of S$20,000, which the parties agreed would be the "fixed penalty" payable for breaches of the non-compete clause.

In response, Takagi Ramen argued that the non-compete clause is "legally unsustainable" as it "imposes an unreasonable restriction" on the restaurant's operation.

It also argued that the different nature of the two businesses meant that they "cannot be considered competitors".

Takagi Ramen also filed a counterclaim for S$59,945.61 for alleged breaches of the partnership agreement by FrothTea.

Takagi Ramen x Frothtea collaboration

In 2020, Takagi Ramen partnered with FrothTea to introduce bubble tea to Takagi Ramen's permanent menu.

According to a court judgement dated Jun. 30, 2023, the partnership agreement detailed responsibilities FrothTea was to carry out, including conducting monthly "audit checks" on the quality of bubble tea products, conducting corrective training if needed, and proposing at least one new menu item every month, among others.

In exchange, Takagi Ramen would "manage all necessary manpower and logistical needs for the ongoing operations of the bubble tea menu" and pay FrothTea royalties of five per cent of bubble tea sales.

The partnership continued for about two years, from June 2020 to March 2022.

Partnership deteriorated

Takagi Ramen claimed that the relationship between the two deteriorated due to FrothTea's "persistent failure, refusal and/or neglect" to carry out its duties outlined in the partnership agreement.

According to Takagi Ramen, FrothTea "failed to carry out monthly checks" at all Takagi Ramen outlets and "no corrective training was performed save for four months when conducted audits led to the discovery of issues".

FrothTea allegedly proposed just four new menu items, instead of one per month as outlined in the partnership agreement.

No suggestions were made to Takagi Ramen's bubble tea marketing pushes and campaigns despite FrotheTea being "the subject matter expert on the bubble tea industry".

The judgment noted that Takagi Ramen continued to pay full royalties, despite these breaches.

FrothTea denied breaching any terms of the partnership agreement, as audits were done every month at each Takagi Ramen outlet. The obligation to propose at least one new menu item a month was understood by FrothTea and Takagi Ramen's co-founder Ai Takagi to be a "flexible arrangement".

Furthermore, the judgment highlighted that these breaches were only raised in retrospect — when Takagi Ramen gave notice to terminate the contract, it had said the reason for termination was that the parties could not agree on a new contract.

Non-compete clause

During their partnership, the parties agreed not to compete with each other.

Takagi Ramen agreed not to partner with any other brand to offer bubble tea items, and they agreed not to sell any bubble tea items in-house without paying FrothTea royalties.

When the partnership terminated, the two were bound by the non-complete clause for one year after the termination date, which was on Mar. 21, 2022.

Takagi Ramen was then bound by the non-compete clause from Mar. 22, 2022, to Mar. 21, 2023.

The agreement said a breach of the non-complete clause would incur "a fixed penalty of S$20,000".

According to the judgment, the ramen chain's co-founder Takagi told FrothTea's co-founder that the penalty fee was "small money to pay" in exchange for "bigger pastures", when discussing the terms of the non-compete clause.

"The penalty clause makes it free to break and go for bigger things if the non-compete becomes too restricting," she said.

Judgement

Magistrate Lewis Tan found that the non-complete cause was not a restraint of trade provision and was reasonable, and therefore, enforceable.

In addition, Tan found no breaches of the partnership agreement, and that FrothTea conducted themselves and performed their duties under the partnership by the flexible arrangement that FrothTea and Takagi Ramen agreed to.

Thus, Tan ordered Takagi Ramen to pay FrothTea S$20,000 as liquidated damages, and dismissed Takagi Ramen's counterclaim.

Top photos via Facebook/Takagi Ramen & Facebook/FrothTea