Labour Law

RESTRAINT OF TRADE AGREEMENTS

By 24/10/2013 June 9th, 2021 No Comments

The concept of a restraint of trade has become quite a vexing issue in South African law. People will often ask: What exactly is a restraint of trade? Are all restraints enforceable? Can I be released from a restraint of trade? What happens if I breach a restraint of trade? And how do I know if a restraint of trade applies to me?

The legalities surrounding a restraint of trade are not concrete and differ from case to case. To clearly understand the concept of a restraint of trade one must properly understand the definition.

In the matter of Petrofina Ltd v Martin 1996, Diplock J defined a restraint of trade as being “a contract in which one party (the employee) agrees with another party (the employer) to limit or restrict his future freedom to trade with another external party, who was not a party to the employer/employee contract”. A contract of employment will usually contain a clause which places certain restrictions on an employee. These restrictions will be relative to the unique trade or occupation of the company and will aim to maintain and protect confidential business secrets.

When a court is faced with a dispute regarding whether or not a restraint of trade is valid and enforceable a number of issues will be considered, some of which are:

  1. Reasonableness.In restraint of trade disputes, reasonableness is measured by weighing up two competing considerations. The first is that people should be held to their agreements, the second is that people should be free to engage in economic activity. Both of these principles are based on public policy and find their stead in the law of contract as well as the South African Constitution. When a court considers whether or not to enforce a restraint of trade, it is required to exercise a value judgment. This will include an assessment of the facts (each case differs) together with both the common-law principles as well as constitutional values.
  2. Period of restraint.If the scope (area) or period (length of time) of a restraint of trade is broader than necessary it will not be enforced. The court will judge the reasonableness of a restraint of trade according to merit. A restraint for 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 onus of proof on the person seeking to have a restraint declared unenforceable decreases as the period of time or area over which the restraint operates increases.
  3. DuressSometimes an employee may allege that he was forced to sign a restraint of trade after he/she had signed an earlier contract of employment which did not contain a restraint. In such a case the employee who alleges that he was forced to sign a restraint in fear of jeopardising his employment bears the onus of proving it. However, employers may not compel employees to sign restraint agreements after they have entered service with the Company. Again this will differ from case to case.
  4. Interests of the individual v the Interests of the CompanyIn assessing the nature of a restraint to determine whether it is valid and enforceable or not, one must weigh up what the restraint of trade seeks to protect against what it seeks to prevent. A restraint of trade will be void and unenforceable if its sole purpose is to prevent competition.An employee is entitled to take his skill away with him even if he acquired it through Company training. He is also free to earn a living in his chosen occupation.  On the other hand the party seeking to enforce a restraint must have a protectable interest. 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 restricting freedom of trade. The court accepted that a person is entitled to engage in 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 a legally recognisable interest of the employer. The court held that it is not adequate if a restraint merely seeks to exclude or eliminate competition (Automotive Tooling Systems (Pty) Ltd v. Wilkens and Others)

    In essence a restraint of trade is valid and enforceable if it is not contra bonis mores (against public policy). A restraint of trade will not however be valid and enforceable if it places an unreasonable limitation on a person’s freedom to trade.

Warren Sundstrom

Ian Mc Laren

Ian Mc Laren

Ian McLaren BA LLB (WITS) General Educated St Johns College, Houghton. BA LLB University of the Witwatersrand 1984 Founded McLarens Attorneys September 1986. Right of Appearance High Court, October 1996.ExpertiseLitigation, Labour Law, Commercial Law, Family Law, Pension and Provident Funds, Customs and Excise, Wills, Deceased Estates, Trusts, Commercial Agreements, Reviewing and Drafting Government Legislation, Information Technology.Committees/ TrustsLaw Society of South Africa Information Technology Committee. Trustee Verney College Educational TrustOtherTransvaal Provincial colours for Practical Shooting. Third degree Black Belt JKS Karate. Photographer and motor cyclist Lectured for Continuing Legal Education on Information Technology issues.