Is your Restraint of Trade agreement reasonable?

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A subject that is shrouded in confusion, however, present in most commercial agreements and employment contracts is the issue of a Restraint of Trade (“ROT”). ROT’s are used to provide the employer with reasonable and legitimate protection against exploitation of its proprietary interests, including but not limited to, the company’s goodwill, confidential information and client lists.

Corporate market intelligence would suggest and appreciate a company’s right, as a juristic person, to protect its intellectual property, trade secrets and methodologies and while ROT clauses are not strictly governed by labour law but the law of contract instead, the far-reaching effect of the ROT is often found in employment matters and disputes.

The leading case in respect of the enforcement and reasonableness of a ROT is Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A). The following principles were mooted and adopted in our law as follows:

  • A prima facie presumption exists in that every ROT signed and agreed upon by the employee is valid, reasonable and enforceable. The onus lies with the employee to show that the ROT, or parts thereof, are both unreasonable and against the boni mores of society;
  • In determining whether a ROT is against public policy, the courts will assess the facts and circumstances present at the time of the enforcement of the ROT and evaluate same against two main considerations. The considerations must make provision for the public interest and expectation that, in general, individuals should comply with their agreed upon contractual obligations. The countervailing principle in this juxtaposition is that of the consideration that all members of the public should be permitted as far as possible to freely engage in commerce or their chosen profession.
  • In assessing the validity and enforcement of the ROT, the court will consider the following factors in its determination (please note that this is not a closed list and the courts will consider all applicable and reasonable factors):
    • The duration of the restraint;
    • The applicable geographical area of the restraint;
    • The presence of a restraint payment;
    • Whether the employee still has the ability to earn a living;
    • The proprietary and/or commercial interest or capital asset which the employer seeks to protect.

Enforcement and dispute of ROT:

Upon being informed that the ex-employee is in breach of the ROT, an employer will generally commence proceedings by addressing correspondence to the ex-employee requesting that the ex-employee observe and comply with the ROT. Furthermore, the employer should demand an undertaking, recorded accordingly in writing, from the new employer and/or ex-employee stating that neither party shall employ or be employed in contravention of the ROT respectively.

Establishing whether a ROT is reasonable or not

If neither the employee nor the new employer agrees to give the aforementioned undertaking, the employer must approach the High Court or Labour Court to make application for an urgent interdict, interdicting the employee and new employer and enforcing the ROT provisions. Whilst the general provisions relating to the onus resting on the ex-employee to show that the ROT is unreasonable still applies but due to the nature of the urgent application, the ex-employer will need to establish that not only is the ROT reasonable and in line with public policy, but further that the ex-employer has a proprietary interest deserving of protection.

Should the court find in favour of the ex-employer, the new employer will be precluded, by law, from employing the ex-employee and all applicable provisions of the ROT shall subsist.

Ensure the ROT is justified

In practice employers will generally insert a ROT in their employment contracts with the view of enforcing the ROT should it become necessary. The employer, however, should do the appropriate due diligence insofar as approaching an attorney to conduct an evaluation and determine whether or not the employer has a commercial and/or proprietary interest which justifies the inclusion of a ROT. Similarly, employees should seek legal advice prior to agreeing to and concluding a ROT which contain terms and provisions unreasonably prejudicial to the employee.

References:

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. Errors and omissions excepted (E&OE)

Matthew Schoonraad
C & A Friedlander Inc.- Labour & Employment law.

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