Historically restraint of trade agreements were void and unenforceable unless the employer could prove that it was a reasonable agreement entered into between the parties. Fortunately for employers the position in our law has changed.
What are restraint of trade agreements?
An agreement that seeks to restrict a party’s right to carry on a trade, business or profession in such manner or with such persons as he/she sees fit, is restraint of trade.
Restraint of trade clauses are most commonly found in employment and partnership contracts, which usually take effect after termination of the contract, or in the sale of a business or practice.
Why are they controversial?
They are controversial because there is a clash of fundamental values: on the one hand there is freedom or sanctity of contract which relies on agreements being honoured, and on the other hand there is freedom of trade which is a constitutionally recognised right.
As with other contracts, restraint of trade agreements are presumed to be prima facie valid and enforceable. Whereas previously the onus was on the employer to prove that implementation of the restraint of trade was fair and in the public interest, the onus is now on the employee to show why enforcement in those circumstances would be against the public interest.
A restraint of trade will be classified as unreasonable and unenforceable if it is contrary to the public interest. The reasonableness of a restraint of trade clause or agreement is determined on two bases: the broad interests of the community, and the interests of the parties themselves (inter partes).
Reasonableness inter partes depends on a variety of factors:
• Does the employer have a protectable interest?
• The area and duration of restraint (possibility of partial enforcement)
• Concession by the employee in the contract that the restraint is reasonable, and inequality of bargaining power of parties (these factors carry little weight)
Examples of protectable interests include confidential information, trade secrets, customer connections and lists, and the goodwill of the business. However, it does not include interest in the elimination of competition, and the investment of time and capital in the training of an employee.
It is not sufficient simply to label confidential information as such. In order to be confidential the information must be commercially useful, in other words be capable of application in trade or industry, have economic value to the person seeking to protect it, and be known only to a restricted number of people.
With regards to trade connections, it will only be relevant when the employee has close working relations with the customers, to such an extent that there is a danger of him/her taking them with him/her when he/she leaves the business. Relevant factors here include the following:
• duties of the employee;
• his/her personality;
• frequency and duration of the contact with the customers;
• his/her influence over them;
• nature of his/her relationship with them (degree of attachment, extent of their reliance on him/her);
• level of competition between the rival businesses;
• type of product sold; and
• evidence that customers were lost when he/she left the business.
With reference to the above the following questions must be asked:
a) Does party A have an interest that deserves protection?
b) Is such interest being prejudiced by party B?
c) If so, how does A’s interest weigh up qualitatively and quantitatively against B’s interest in not being economically inactive and unproductive?
d) Is there a broader facet of public policy that requires the enforcement or rejection of the restraint?
If the restraint of trade agreement is reasonable inter partes, it may still be unenforceable if it is damaging to the public interest for a reason not familiar to the parties.
Sources:
Basson v Chilwan & Others [1993] 3 SA 742
Sunshine Records (Pty) Ltd v Flohing & Others 1990 (4) SA 782 (A)
Magna Alloys & Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A)
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.