A restraint of trade agreement is generally contained in a contract of employment.
The purpose of such a restraint of trade clause is to protect businesses from unfair competition by former employees or partners and safeguard company secrets and its client base. A typical restraint of trade clause may require a senior manager or sales executive with access to sensitive business information, such as client lists or trade secrets, to agree not to work for a competitor within six months of leaving the company within a specified geographic area.
Restraints of trade agreements are sometimes likened to an antenuptial contract in that it has no practical impact until the relationship terminates. The agreement must then be implemented post-breakup, which can lead to disputes.
The legal position in South Africa:
Under South African law, restraint of trade agreements are enforceable provided they meet specific criteria. The legal foundation for these agreements lies in the international law principle of pacta sunt servanda (“agreements must be kept or honoured”).
Everyone has the freedom to contract and enter into binding agreements. However, this freedom is balanced by the constitutional right to freedom of trade, occupation and profession as is enshrined in Section 22 of the South African Constitution.
In the landmark case, Magna Alloys and Research (SA) (Pty) Ltd vs Ellis (1984,) the Appellate Division established that a restraint of trade is enforceable unless it is unreasonable and thus contrary to public policy. The principle of reasonableness still governs the enforcement of restraints of trade agreements in South Africa today.
When is a restraint of trade enforceable?
The question of enforceability and reasonableness of restraints of trade have been shaped by some of the following case law:
1. Basson vs Chilwan and others (1993) SA742(A)
The court outlined the following key considerations when evaluating the reasonableness of a restraint:
- Is there an interest deserving protection after termination of the agreement?
- Is that interest threatened or being prejudiced by the other party?
- If so, does the interest weigh qualitatively and quantitively against the interest of the other party not to be economically inactive and productive?
- Does the restraint harm public interest?
2. In the matter Reddy against Siemens Telecommunications (Pty) Ltd (2006) ZASCA135
The Supreme Court of Appeal imposed a further consideration by asking whether the restraint goes further than necessary to protect a protectable interest. This is weighed against Section 36(1)(e) of the constitution which requires the restraint to be reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom.
Can a restraint of trade be challenged?
Employees who feel unfairly restricted by a restraint of trade can challenge it in court. The duration and geographical limitations set in a restraint will be scrutinised to determine its reasonableness. The employer will have the initial burden of proof to show that the restraint of trade is reasonable. Courts are required to make a value judgement and will be mindful of the distilled policy considerations: –
- That public interest requires that parties should comply with their contractual obligations as expressed by the maxim – pacta sunt servanda.
- That all persons should, in the interest of society, be productive and committed to engage in trade and commerce of their professions.
If the employer succeeds in showing that the restraint is reasonable, the employee must then prove that enforcing the restraint would be against public policy.
In the matter of Sadan and another vs Workforce Staffing (Pty) Ltd (2023) 34SALLR352 (LAC), the employer in this instance, provided staffing solutions, human resources, staff placement and related services throughout South Africa. The restraint of trade was interpreted by the court to effectively prohibit the employees from taking up employment with the respondent’s competitor anywhere in South Africa for a period of two years after they were last employed by the respondents.
The court agreed that the territorial restriction was fair and should pass muster but that the two-year operation of the restraint of trade agreement was unduly excessive. It found that the employer could not provide convincing and compelling reasons enough to justify the two-year period of the restraint and consequently ordered a partial enforcement of the restraint for a shorter period. The restraint was therefore allowed to be in effect geographically over the whole of South Africa but for a period of only one year from the employees’ last days of their employment.
In contrast to the Sadan case, in the case of Beedle vs Slo-Jo Innovations Hub (Pty) Ltd (2023) ZALAC17, the Labour Appeal Court upheld a two-year operation of a restraint in the whole of South Africa.
The court accepted the evidence led by the employer which established that the two-year period in which the restraint operated, was justifiable as it sought legitimately to protect the company’s proprietary interests.
Practical tips for employers and employees
For employers:
- Clearly define the scope, duration, and geographical area of the restraint.
- Ensure that the restrain is necessary to protect legitimate business interests. Consider your business interest carefully and make sure that you can legitimately defend it.
- Avoid overly broad or excessive restrictions that could render the agreement unenforceable.
For employees:
- Carefully review restraint of trade clauses before signing an employment contract.
- Remember that the relationship does not always last forever.
- Negotiate fair terms that do not unduly restrict future employment opportunities.
- Seek legal advice if you believe a restraint is unreasonable or unfair.
In South Africa, restraints of trade agreements strike a delicate balance between protecting business and safeguarding employees’ constitutional rights. While these agreements are generally enforceable, they must be reasonable and justifiable. Employers and employees alike should approach such agreements with caution, ensuring they serve legitimate purposes without imposing unfair restrictions.
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