Restraints of Trade

What is a contract in restraint of trade?

  • No legislation or regulation gives an employer a right to this type of protection, and any restraint must be in writing.
  • A restraint is a clause in an employment contract that provides that when an employee resigns, or his contract ends, he may not perform work at a new employer that competes with his/her former employer, for a prescribed period and in a specific geographical area.
  • The rationale is to safeguard the previous employer’s protectable proprietary interests, such as client and customer connections, trade secrets and confidential information.  
  • The proprietary interests that a restraint agreement can protect are of two kinds. The first consists of the relationships with customers, potential customers, suppliers, and others (trade connections). The second consists of all confidential matter that is useful for the carrying on the business that a competitor may use to gain a competitive advantage (trade secrets).

To what extent can an employer restrain a former employee?

  • If an employee has no special skills or access to client and customer connections, trade secrets or confidential information, it would be unfair and unconstitutional to prevent an employee from taking up work elsewhere to earn a living. An employee generally has the right to choose a trade, occupation, or profession.
  • Suppose an employee only possesses the skills of the job that the restraint prevents him from performing. In that case, the consideration of the employee’s ability to continue to earn a living may pose a problem for the enforceability of the restraint.
  • Ultimately, the courts perform a balancing act between the right of the employee to choose his trade and not to compete unfairly with the former employer at his new workplace. The court must balance conflicting interests between the employer and employee considering the public interest.
  • The courts point out that “It is in the public interest that agreements entered into freely should be honoured and that everyone should, as far as possible, be able to operate freely in the commercial and professional world.”
  • It will generally be contrary to the public interest to enforce an unreasonable restriction on a person’s freedom to trade. However, where the proprietary interest of the company which needs protection outweighs the employee’s interest in continuing his trade, such restraint will be reasonable and enforceable.
  • In Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A), the court laid down the general principle that, on the face of it, restraint undertakings are not unconstitutional. Every restraint agreement signed by an employee is assumed to be lawful and enforceable. The onus lies on the employee if he/she wishes to be released from the restraint to show that the condition is unreasonable and contrary to public policy.
  • In determining whether a restraint is enforceable, a court will consider, among other things, the following factors:
  • the length of time for which the restraint operates;
  • the geographical area to which the restraint applies;
  • Did the employer pay the employee a restraint payment;
  • can the employee still can earn a living;
  • the proprietary interest or capital asset that the employer seeks to protect.
  • Each matter will need to be determined on its facts on a case-by-case basis.   The general principle remains that restraint will only be enforceable if:
  • the employer that is seeking to enforce the restraint has a legitimate proprietary interest worthy of protecting,
  • the restraint is reasonable in as far as the geographical area and duration of the restraint are concerned, and the restraint is evident in its meaning and application.

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