“I signed, because I needed the job…”

Donderdag, Maart 31st, 2011

Restraint of trade agreements

Compiled and written by Phil Davel

January 2011

Contents

1. Introduction

2. Definition and purpose

3. How the validity of restraint of trade agreements should be treated

4. Reasonableness: Two competing policies: The maxim pacta sunt servanda and section 22 of the Constitution

5. The onus of proof

6. Guidance on approaching the value judgment

7. Criteria the courts consider when determining the enforceability of a restraint of trade agreement

8. Restraint of trade and the Constitution

9. Remedies and procedural issues

10. Conclusion

 

The following is an example of a restraint of trade clause in a contract of service:

 

Restraint of trade

 

1.1   The EMPLOYEE agrees and undertakes that he shall not for a period of 12 months, and within a 100 km radius of the premises of the EMPLOYER, after the termination of his employment with the EMPLOYER, either jointly or alone or together with or as agent for any reason, company or association of any nature whatsoever directly or indirectly ‒

 

1.1.1      carry on the business or activity of the manufacture or distribution of hair and skin care cosmetic or related products;

1.1.2      be in any way interested in any such business or activity whether as principal, agent, shareholder or otherwise; or be associated or engaged in or in any way concern himself in such activity; or

1.1.3      finance or guarantee the obligations of any such business or activity.

1. Introduction

A restraint of trade clause is commonly included in an employment contract to enable an employer to protect his business from competition from ex-employees. In terms of a restraint of trade agreement, an employee is prevented from starting his own business in competition with his employer, or working for competitors for a specified period in a specified geographical area after termination of his employment contract.

 

At the outset it must be noted that restraint of trade arguments are not governed by hard and fast rules and are not regulated by labour law, but by the law of contract.

 

2.         Definition and purpose

 

In the matter of Petrofina (Great Britain) Ltd v. Martin, (1966) 1 Ch. 146, the court defined a restraint of trade as a contract in which one party (the employee) agrees with another (the employer) to limit or restrict his freedom in the future to trade with another external party who was not a party to the initial contract.

 

The Appellate Division (now the Supreme Court of Appeal) has described the objects and purpose of restraint of trade as follows:        

The legitimate object of a restraint is to protect the employer’s goodwill and customer connections (or trade secrets) and the restraint accordingly remains effective for a specified period (which must be reasonable) after the employment relationship has come to an end. The need for protection exists therefore independently of the manner in which the contract of employment is terminated and even if this occurs within consequence of a breach of contract by the employer. (Reeves and another v. Marfield Insurance Brokers CC and another 1996 (3) SA 766 (A))

In most cases the employee is in the weaker bargaining position and is not really able to negotiate the terms of the contract. The terms of the restraint clause may even be harsh and unfair and may restrict the employee from following her occupation even when she would not be competing with her former employer. The courts are aware of this problem and have formulated rules relating the validity and reasonableness of restraint of trade.

 

3.         How the validity of restraint of trade agreements should be treated

 

In common law, a contract is unenforceable if it is contrary to good morals (contra bonos mores) or against public policy. Despite there having been a lack of clarity at one stage as to how agreements in restraint of trade should be treated, the Appellate Division decided in Magna Alloys and Research (SA) (Pty) Ltd v. Ellis 1984 (4) SA 874 (A) that, in South African law, an restraint of trade agreement is prima facie valid and enforceable and will only be invalid and unenforceable if it is contrary to public policy on account of it unreasonably restricting a person’s right to trade or to work.

 

In arriving at the conclusion that restraint of trade agreements are prima facie valid, Magna Alloys rejected the English law approach, as reflected in the famous  judgment of Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 (HL), which had been applied in a number of South African cases, that agreements in restraint of trade are prima facie against public policy and are therefore presumed to be invalid and unenforceable.

 

The result of Magna Alloys was summarised by Didcott J in J Louw and Co (Pty) Ltd v. Richter and others 1987 (2) SA 237 (N) as follows:

 

Covenants in restraint of trade are valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably restricts the covenanter’s freedom to trade or to work. In so far as it has that effect, the covenant will not therefore be enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case. Such circumstances are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time enforcement is sought.

 

4.         Reasonableness: Two competing policies: The maxim pacta sunt servanda and section 22 of the Constitution

In determining the reasonableness or otherwise of agreements in restraint of trade, two competing considerations come into play. The first is that it is in the public interest that people should be held to their agreements. The second is that it is also in the public interest that people should be free to engage in economic activity. (See Sunshine Records (Pty) Ltd v. Flohing & others 1990 (4) SA 782 (A) at 794). The Constitution of the Republic of South Africa, Act 108 of 1996 protects the right to choose a “trade, occupation or profession freely”. It has been held, however, that the common-law rules relating to restraint of trade are not unconstitutional (discussed below). When a court considers whether to enforce a restraint of trade, it is required to exercise a value judgment on its assessment of the facts seen in the light of both common-law principles as well as constitutional values, the first essentially embodied in the maxim pacta sunt servanda (“agreements must be kept”), the second essentially reflected in the provision in section 22 of the Constitution that every citizen has the right to freely choose his occupation.

 

5.         The onus of proof

 

In Magna Alloys the following was determined when it is alleged that an agreement in restraint of trade is unreasonable: As with any other agreement, when a party to an agreement in restraint of trade attacks its validity, he bears the onus of establishing that it is unreasonable. Thus, in this case, the employee bears the onus of proving that the clause is contrary to public policy. Once the employer has established that (a) the restraint of trade existed and (b) it has been breached, the employee has to prove that the restraint of trade is unreasonable. The court will then consider the circumstances that prevail when the enforcement of the clause is sought and not when the contract of employment was concluded. If the court is unable to make up its mind on the point, the restraint will be enforced.

 

6.         Guidance on approaching the value judgment

Guidance on how to approach the value judgment in question can be found in the judgments of the Appellate Division in Basson v. Chilwan and others 1993 (3) SA 742 (A) and of the Supreme Court of Appeal in Reddy v. Siemens Telecommunications (Pty) Ltd 2007 (2) SA 486 (SCA). In the latter case, Malan AJA held:

 

In applying these two principal considerations, the particular interests must be examined. A restraint would be unenforceable if it prevents a party after termination of his or her employment from partaking in trade or commerce without a corresponding interest of the other party deserving of protection. Such a restraint is not in the public interest.
Townsend Productions (Pty) Ltd v Leech and Others 2001 (4) SA 33 (C) ([2001] 2 All SA 255) at 50J – 51B (SA); CTP Ltd and Others v Argus Holdings Ltd and Another 1995 (4) SA 774 (A) at 784A – C.

Moreover, a restraint which is reasonable as between the parties may for some other reason be contrary to the public interest. In Basson v Chilwan and Others,
1993 (3) SA 742 (A) at 767G – H.

Nienaber JA identified four questions that should be asked when considering the reasonableness of a restraint:

 

(a) Does the one party have an interest that deserves protection after termination of the agreement?

(b) If so, is that interest threatened by the other party?

(c) In that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?

(d) Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected? Where the interest of the party sought to be restrained weighs more than the interest to be protected, the restraint is unreasonable and consequently unenforceable. The enquiry which is undertaken at the time of enforcement covers a wide field and includes the nature, extent and duration of the restraint and factors peculiar to the parties and their respective bargaining powers and interests. Secondly, he stated that in order to properly reflect s 36 of the Constitution in cases involving restraints of trade, a fifth question had to be asked, namely

(e) ‘whether the restraint goes further than necessary to protect the interest’.

 

The court will not be limited to finding that the entire restraint of trade clause is enforceable or unenforceable. It may decide that part of the clause is enforceable or unenforceable and cut out the unreasonable parts of the clause and enforce the rest, without redesigning the restraint and developing an entirely different contract. In Den Braven SA (Pty) Ltd v. Pillay & another 2008 (6) SA 229 (D), after engaging in comprehensive legal research and considering  a number of earlier judgments, the High Court came to the conclusion that the principles of severability applicable in other contractual situations should also apply to restraint of trade clauses.

 

7.         Criteria the courts consider when determining the enforceability of a restraint of trade agreement

A restraint will conflict with public policy if its effect is unreasonable. In determining the validity and enforceability of restraint of trade agreements, a court considers a number of factors, a few of which are mentioned here:

 

i)          Proprietary and protectable interest

An employer who relies on a restraint of trade agreement in order to protect trade secrets and confidential information must show that the information or methods are unique and peculiar to his business and that such information is not public property or in the public domain (for example, through the internet). In this regard the Court in Hirt & Carter (Pty) Ltd v. Mansfield & Another 2008 (3) SA 512 (D) pointed out that the information which a former employer wishes to protect “must be objectively useful to a competitor in order to be confidential as between ex-employee and an ex-employer”. (See Rectron (Pty) Ltd v. Govender [2006] 2 All SA 301 (D) for a legal formulation of “confidential information”).

 

The essence and purpose of any restraint of trade agreement is to prevent the use of confidential information by a former employee to the detriment of the employer. In Reddy v. Siemens Telecommunications (Pty) Ltd the court held that it was not necessary to find that Reddy did or would actually use trade secrets and confidential information in his new employment – but that is was sufficient if he could do so.

 

However the court in Arrow Altech Distribution (Pty) Ltd v. Byrne and Others (96612007) [2007] ZAKZHC 33; [2008] 1 All SA 356 (D) agreed that there may be information that is so trivial or so easily accessible from public sources that it cannot be regarded as confidential:

 

I am of the view that the legal protection afforded to this type of confidential information is limited to a certain extent. It seems clear that the law, whilst prohibiting an employee from taking his employer’s customer list, or deliberately committing its contents to memory, nevertheless recognises that, on termination of an employee’s employment, some knowledge of his former employer’s customers will inevitably remain in the employee’s memory. This leaves the employee free to use and disclose such recollected knowledge, in his own interests, or in the interests of anyone else, including a new employer who competes with the old one.

 

Another such interest which may legitimately be protected by a restraint of trade is an employer’s trade connections. The position is summarised by Van Rensburg J in Branco and another t/a Mr Cool v. Gale 1996 (1) SA 163 (E):

 

As I see the position, when an employee has access to the customers of a business and is in a position to build up a particular relationship with customers, with the result that when he leaves his employer’s service he could easily influence customers to follow him and trade with him at the expense of his erstwhile employer, there is no reason why, in principle, a restraint should not be enforced to protect the employer’s trade connections.

 

In David Crouch Marketing CC v. Mark (J2499/08) [2009] ZALC 63, the Labour Court found that there had to be such a strong customer relationship and “attachment” that customers would “easily be induced” to follow the employee to the former employer’s rival, before enforcing the restraint. The court held the following:

 

Customer goodwill and trade connections may likewise be regarded as a protectable interest in circumstances where the former employee has built up a relationship with a customer to the extent that the customer will easily be induced to forsake the business of the former employer and follow the employee to his/her new business or employment. If the authorities referred to by the Court in Hirt (supra) is perused, it appears that the employer will have to show that there is a strong attachment between the customer and the former employee to such an extent “that when the employee quits and joins a rival he automatically carries the customer with him in his pocket”.

Before arriving at such a conclusion the court will consider several factors including ‒

  • the frequency and duration of interactions with the clients;
  • the employee’s personality;
  • where the contact takes place; and
  • the knowledge that the employee gained with regard to the clients’ needs and requirements.

Such a strong relationship was found to be the case in Bergh NO and Another v. Van der Vyver and Another (EL 526/2010)  [2010]  ZAECGHC 73 where the court ruled as follows: “[Therapists] develop relationships with their clients which are easily transported in the event that the therapist should, for whatever reason, take up employment elsewhere.” In this case, the first and second respondents, both beauty therapists, were interdicted from carrying on business in breach of their restraint agreement after the court found that the restraint was not unreasonable and contrary to public policy.

 

Other protectable interests can include goodwill, client lists (Bergh NO and Another v. Van der Vyver and Another), trade agreements and technological information.

 

ii)         Scope, area and duration of restraint

If the scope of a restraint of trade clause is broader than necessary, it will not be enforced. In the above case of Den Braven SA (Pty) Ltd, the court held that the two-year period of restraint was too long and that compliance with the geographical area provisions would enable the employee to work in Angola, Tanzania or the DRC only (these countries being the closest to home outside the area of restraint). The court also found that the terms, that is, the definition of a “customer”, were very wide. The restraint was consequently limited to a period of eight months and to KwaZulu-Natal only.

 

The court will judge the reasonableness of a restraint of trade according to merit. A period of three years was found to be reasonable in Dickinson Holdings Group (Pty) Ltd and Others v. Du Plessis and Another (7351/06) [2006] ZAKZHC 10 due to the nature of the employer’s activities.

 

In general, the weight of the onus on the person seeking to have a restraint declared unenforceable decreases as the stringency of the restraint increases with regard to the period of time or area over which the restraint operates.

 

iii)        Vagueness and the “one size fits all” approach

If a restraint of trade clause is found to be too vague, it will not be enforced. The courts will not enforce a blanket restraint that makes it impossible for an employee to work in any related industry. The more specific a restraint of trade is, the more likely the breach can be proved and the more likely the restraint will be enforced.

 

Also “standard form” or “one size fits all” restraint clauses may easily tip the scales in favour of the employee. Spilg J in Interpark (South Africa) Ltd v. Joubert and Another (09/29946) [2010] ZAGPJHC 39 concluded:

 

I am alive to the considerations favouring extensive severing of overbroad restraints mentioned in Den Braven. Nonetheless courts should be slow to indirectly sanction clear cases of over-reaching by reason of unequal bargaining strengths and where draftsmen demonstrate scant regard for rational provisions. The one size fits all approach may also expose the restraint as fundamentally flawed because no rational basis exists for the period, area or scope of the restraint being the same for both a key executive and for an administrative staff member.

 

iv)        Prevention of competition

When considering the criterion of public policy and in assessing the nature of a restraint to determine reasonableness, one needs to weigh up what the restraint of trade clause seeks to protect against what is seeks to prevent.

 

A restraint of trade will not be enforceable if its sole purpose is to prevent mere competition. Such a clause will be void. The party seeking to enforce the restraint must have a protectable interest. A person is entitled to take his skill away with him, even if he acquired it through his employer’s training, and he is free to earn a living in his chosen occupation. In Basson v. Chilwan and Others it was ruled that the mere elimination of competition was not an interest deserving of protection by way of a restriction of freedom of trade. The court accepted that a person is entitled to engage in useful economic activity and in so doing will contribute to the welfare of society by the exercise of these skills.

 

More recently the Supreme Court of Appeal confirmed the principle that a restraint will be considered to be contrary to public policy and therefore unenforceable if it does not protect some legally recognisable interest of the employer, but merely seeks to exclude or eliminate competition (Automotive Tooling Systems (Pty) Ltd v. Wilkens and Others 2007 (2) SA 271 (SCA)).

 

In Humphreys v. Lazar Transport Holdings Ltd & Another 1994 (4) SA 388 (C), the court found that a restraint aimed at protecting a person’s investment by eliminating competition was unreasonable and contrary to public policy.

 

v)         Golden handcuffs

Golden handcuffs is a system of financial incentives designed to keep an employee from leaving a company. A payment that accompanies a restraint contract is regarded as compensation for the employee withdrawing from the industry.

 

The court in Interpark (South Africa) Ltd v. Joubert and Another added considerable weight to these incentives when it said:

 

The mere elimination of competition as such is not a protectable interest, even if the restraint was required in order to protect an investment of capital or expenditure (whether in time or money) incurred in training the employee. There may be other satisfactory remedies that are more proportionate to the harm or potential harm suffered (e.g. the repayment of agreed training costs such as those incurred by airline pilots). Conversely there are cases of genuine money compensation directly paid by the employer to sterilise the employee from competing after the relationship is terminated, as is evident when key-personnel resign or retire …. Conversely, there are cases where the proprietary interest sought to be protected resulted in a negotiated restraint, where the employee was paid a considerable sum to sterilize his economic activities, which would make it difficult for a court not to hold him to his bargain.

 

By referring to a restraint agreement tied to a realistic golden handcuff as a “negotiated restraint…which would make it difficult for a court not to hold him to his bargain”, it seems as if the court, in such cases, would carefully consider the merits before condoning an employee’s breach of his promise and negotiated terms. In these cases, when a restraint is negotiated, public policy would most likely dictate that a contract entered into ‘with one’s eyes open’ be enforced.

 

vi)        The reasons for the termination of the service contract

The manner in which a contract of employment was terminated does not invalidate a restraint of trade per se, and is only one of many factors to be taken into account when considering the reasonableness of a restraint clause. Therefore, in the event of an unfair dismissal, a breach of contract by an employer or forced retrenchment, the employer may still enjoy protection if the court finds that, provided the circumstances and merits of the case, it would be reasonable and in line with public policy to enforce the restraint.

 

The Appellate Division in Reeves and Another v. Marfield Insurance Brokers CC and Another, Scott JA found as follows:

 

The legitimate object of a restraint is to protect the employer’s goodwill and customer connections (or trade secrets) and the restraint accordingly remains effective for a specified period (which must be reasonable) after the employment relationship has come to an end. The need for the protection exists therefore independently of the manner in which the contract of employment is terminated and even if this occurs in consequence of a breach by the employer…. It is difficult to imagine that in such circumstances it would be against good morals to recognise the restraint and that the employer should have to forfeit the protection which the parties have agreed he should have regardless of how the employment relationship is ended. Even where the breach on the part of the employer is less innocent, it must be remembered that the employee is always free to pursue his contractual or statutory remedies against the employer…. [The] loss to an employer in consequence of holding the restraint to be invalid may be considerable.

 

After examining various cases, including Info D B Computers v. Newby and Another 1996(1) SA 105 (W) (where the employer was prohibited from enforcing a restraint after unlawfully terminating an employment contract), the court came to the conclusion that there is no reason why the circumstances under which the contract of employment came to an end should not be included in considering the multitude of factors to be taken into account in the inquiry into the reasonableness of the restraint.

 

Where the wrongful termination by an employer is fraudulent, e.g. the employee is hired and fired with the sole object of imposing a restraint upon him, or otherwise amounts to a wrongdoing on the part of the employer which is wilful, i.e. it involves bad faith on his part, a court would on that ground alone decline to enforce the restraint…. But it does not follow that in the absence of fraud or wilful wrongdoing the circumstances in which an employee ceases to be employed are necessarily an irrelevant consideration when it comes to the question whether or not the restraint should be enforced.

 

However much would depend on the facts: “In appropriate circumstances, however, such conduct, e.g. the repudiation of the contract by the employer and the nature thereof, may well serve to tip the scales in favour of the conclusion that it would be contrary to the public interest to enforce the restraint.” (p 776)

 

Even though the termination of Reeves’s employment contract had been unlawful, the court found that the restraint of trade still applied to him.

 

With specific regard to forced retrenchments, section 189 of the Labour Relations Act 66 of 1995, as amended, makes provision for a consensus-seeking process on measures to, among others things, “mitigate the adverse effects of the dismissals”.

 

Subsections (5) and (6) state:

 

(5)        The employer must allow the other consulting party an opportunity during consultation to make representations about any matter dealt with in subsections (2), (3) and (4), as well as any other matter relating to the proposed dismissals.

 

(6)        (a)   The employer must consider and respond to the representations made by the other consulting party and, if the employer does not agree with them, the employer must state the reasons for disagreeing.

 

(b)   If any representation is made in writing, the employer must respond in writing.

 

These measures can include consultation on prior restraint of trade agreements in an attempt to alleviate their limiting effects on retrenched employees.

 

vii)       Duress

Sometimes an employee alleges that he was forced to sign a restraint of trade after he had signed an earlier contract of employment that did not contain a restraint of trade clause. In a such a case, the principals of the Law of Contract dictates that the employee who alleges that he was forced to sign a restraint for fear of jeopardising his employment, bears the onus of proving it. However, the Industrial Court in Marshall v. Vistech Communications (1994) 15 (ILJ) 1365 (IC) ruled that employers may not compel employees to sign restraint agreements after they have entered service.

8.         Restraint of trade and the Constitution

In the matter of Fidelity Guards Holdings (Pty) Ltd t/a Fidelity Guards v. Pearmain 2001 (2) SA 853 (SE) the high court commented on the constitutionality of covenants on restraint of trade. Section 22 of the Constitution Act 108 of 1996 entrenches the right to freedom of trade, occupation and profession. It provides as follows: “Every citizen has the right to choose their trade, occupation or profession freely. The practice of a trade, occupation or profession may be regulated by law.”

 

The limitation clause in section 36(1) of the Constitution provides as follows: “The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors”.

 

The court concluded that in so far as a restraint of trade is a limitation of the rights entrenched by section 22, the development of our common law is such that the requirements of a binding restraint of trade are compliant with the requirements laid down in section 36(1). Since common law restraint clauses are only enforceable if they are reasonable and not in conflict with public policy, the requirements of section 36(1) are met.

 

However, in terms of the Constitution, the onus will be on the party wishing to enforce the restraint of trade agreement to show that it complies with the provisions of the Constitution.

 

After determining the reasonableness of a restraint of trade agreement and balancing its provisions with the requirements set out in section 22, AJA Malan concluded in Reddy v. Siemens Telecommunications (Pty) Ltd, that a court must make a value judgment with two principal policy considerations in mind: The first is that the public interest requires that parties should comply with their contractual obligations and the second is that, in the interests of society, all persons should be productive and be permitted to engage in trade and commerce.

 

Both considerations reflect not only common-law but also constitutional values. Contractual autonomy is part of freedom informing the constitutional value of dignity, and it is by entering into contracts that an individual takes part in economic life. In this sense freedom to contract is an integral part of the fundamental right referred to in s 22. (par. 15)

9.         Remedies and procedural issues

There are a number of legal remedies available to an employer who knows or suspects that a restraint of trade clause has been breached. The most effective and widely used remedy is to insist on compliance with the contract and to enforce the restraint clause by applying for an interdict to prohibit the employee from acting in breach of the restraint.

 

In the founding affidavit the applicant who wishes to enforce the restraint should set out the circumstances under which the restraint clause was entered into (i.e. a contract of employment), the terms and provisions of the restraint, as well as any evidence that the restraint has been breached. The applicant should also set out the proprietary interest he alleges needs protection so that it can be meaningfully dealt with in the answering affidavit (see Interpark (South Africa) Ltd v. Joubert and Another at 59). The applicant need not set out grounds to prove that the restraint is reasonable.

 

In his answering affidavit, the respondent will seek to discharge the onus of proof in setting out facts to bring the court to the conclusion that the restraint is unreasonable.

 

The applicant may then, in a replying affidavit, set out rebuttable evidence in response to the respondent’s answering affidavit.

 

Before a final interdict will be granted, the applicant must show a clear right, harm or injury actually committed or reasonably apprehended, and the absence of similar protection by another ordinary remedy. (See Plascon-Evans Paints Ltd v. Van Riebeeck Paints (Pty) Ltd [1984] ZASCA 51; 1984 (3) SA 623 (A) for the approach to the determination of the facts in motion proceedings when a final interdict is sought.)

 

If the party seeking to enforce the restraint of trade agreement suffers damages, a claim for damages may arise. However, it could be problematic and difficult to prove actual financial loss or prejudice resulting from the breach of a restraint.

 

Furthermore, the competing company can under the same set of facts be interdicted if it committed the delict of competing unlawfully. (See South Africa BV (Incorporated in the Netherlands) t/a Institute for International Research v. Tarita and Others 2004 (4) SA 156 (W)).

 

 

10.      Conclusion

If you are a bound to a restraint of trade agreement, you need to be fully aware of the terms of the restraint and understand exactly what it prevents you from doing. If a situation arises where you consider undertaking an activity which may be in breach of the restraint of trade clause, you should give careful consideration to the consequences.

 

A party to a restraint of trade clause can rely on the following grounds in opposing the enforceability of the clause:

 

i)          The employer does not have a protectable interest. The principle enquiry in a restraint of trade argument is whether or not the party seeking to enforce the restraint has a protectable interest and, if so, whether that interest outweighs considerations regarding public interest. In Digicore Fleet Management (Pty) Ltd v. Steyn and Another (722/2007) [2008] ZASCA 105 the Supreme Court of Appeal found it only necessary to look at this requirement, declaring: “Suffice it to say that Steyn, in order to escape her contractual undertaking, must show that Digicore has no proprietary interest that is threatened by her working for a competitor of Digicore.” (at 7) The employer must therefore secure a protectable proprietary interest such as confidential information, trade secrets, trade connections and intellectual property.

 

ii)         The restraint is too vague or unreasonably wide in nature, geographical area or

time period.

iii)        The restraint is unenforceable in that it unreasonably prohibits the employee his or her constitutional rights, i.e. the right to earn a living. If the sole purpose of a restraint of trade clause is to prevent healthy and fair competition, the restraint will be rejected as contrary to public policy.

 

For employers it is important to bear in mind that South African common law recognises that various wrongful acts may attract an action for damages on the grounds of unlawful competition such as passing off one’s product to be that of a rival, misrepresentation as to a rival’s performance, or use of a competitor’s trade secrets. These wrongful acts exist independently of whether or not a restraint of trade agreement has been signed.

 

As complicated as things may seem, the core of an agreement in restraint of trade is clear: A restraint of trade agreement serves to protect an employer’s protectable proprietary interests.

 

Thus, in the absence of a restraint of trade agreement an employer may find it difficult to protect his business and intellectual capital from fierce competition in tough economic times. In Strike Productions (Pty) Ltd v. Bon View Trading 131 (Pty) Ltd and Others (10/21704) [2011]  ZAGPJHC 1 the applicant had failed to secure a restraint of trade agreement in a new contract of employment with the third respondent and was therefore unable to compete for his services in the industry. The court found against the applicant, stating:

 

Jacobs was not contractually bound by a restraint of trade agreement during the period of his employment with the applicant. Had their fiduciary relationship been governed by a restraint, the obligation to respect the confidentiality of any information imparted or received in confidence in regard to the applicant’s business secrets in respect of its alleged “IDOLS intellectual property’, would have been in all probability subject to such terms in the restraint… As there is no restraint of trade agreement between Jacobs and the applicant, the latter does not enjoy any contractual power to restrain Jacobs from using his skills in the free economy. It must follow therefore, that a new employer is free to poach an employee, in the absence of a restraint, as long as the employee is free to leave. Jacobs is therefore free to choose whom he should work for, without hindrance.

 

Employees, on the other hand, often sign a restraint of trade agreement at the start of their employment without giving proper thought to the consequences and the effect it may have on their career advancement and future employment. The rationale behind signing a restrains is usually “I signed because I needed the job.”  As noble and convincing as it may seem, the adverse effects of signing an agreement without proper guidance may well, in future, turn out to be a nightmare ‒ and a costly one.

 

Employers and employees alike should first obtain a professional opinion, preferably from an attorney who specialises in the Law of Contract, before drafting or signing an agreement in restraint of trade.

References

1.         ‘The restraint of trade argument rolls on…’ and ‘Restraint of trade’, by Derek Jackson for The South African Labour Guide.

2.         ‘Restraint of trade remains a hot issue’, Cape Business News, 5 February 2008.

3.         Constitutional effects, ‘Restraint of trade’, by Mervyn Dendy, De Rebus, July 2009.

4.         ‘Restraint of trade’, Essential Labour Law, Fourth edition, 2005, p46 by AC Basson, MA Christianson, C Garbers, PAK Le Roux, C Mischke and EML Strydom.

5.         ‘Restraint of trade agreements, are they still valid?’, by Luke Brodziak for Labour Protect.

6.         ‘Restraint of trade: When will these be reasonable?’, by Carl Mischke for IRNetwork.

7.         ‘Restraint of trade – The merits of enforceability’, by Andrew Overall for ee-Publishers.

8.         ‘When will a restraint of trade agreement be enforceable?’, by Ross Alcock, enSight, Employment Law, November 2006.

9.         ‘Contracts in restraint of trade – A brief overview’, by Larry Kallmeyer, Legal Magazine, 29 January 2001.

10.      ‘Dié beperking op werkers onredelik’ by Luther Backer, Rapport, 2007.

11.      ‘Restraint of trade agreements and jurisdiction’ The Annual Survey of South African Law, by T Humby and Dr C Theophilopolus, 2006.

12.      ‘Golden handcuffs: Make them stronger!’, by LawDotNews, 4 August 2010.

 

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