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Enforceability Of Restraint Of Trade Agreements

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Enforceability Of Restraint Of Trade Agreements

7th November 2018

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Restraint of Trade Agreements (hereinafter referred to as “Agreements”) are included in Employment Contracts to protect the interests, business acumen and trade secrets of Employers when Employees terminate their employment. Employees are thus restricted from working for their Employer’s competition upon termination of their employment.

Many Employees sign the Employment Contracts that includes these Restraint of Trade Clauses but act surprised when Employers want to enforce it when the Employee plans to join the Competitor’s work force.

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The question remains, are these Agreements still enforceable and/or should Employers turn a blind eye when their former Employees join the work force of their Competitors?

The necessity of Restraint of Trade Agreements

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Many Employees argue that due to the coming of the Fourth Industrial Revolution and access to technology, they don’t see why they should sign these types of Agreements. According to them, information is freely available online and there should be no need to protect “trade secrets” that are not so secret any way.

However, Employers would argue that these Agreements are still necessary seeing as that their trade secrets and business acumen set them apart from their Competitors especially in this age of rapid technological advancement and access to information. It will therefore give them the competitive edge when their trade secrets are protected by these Agreements.

If it agreed that these Agreements are necessary, does it automatically confirm that these Agreements must therefore also be enforceable?

When will these Agreements be enforceable?

There have been numerous cases decided by South African Courts over the years regarding the necessity and enforceability of these Agreements. 

Hoffman AJ stated in Prism Holdings Ltd and Another v Liversage and Others 2004 (2) SA 478 (W), that these Agreements are necessary and can be regarded as part of the goodwill of a business.  

In Mathewson’s Micro Finances BK v Lombard and Another [2004] 2 All SA 422 (NC), Olivier J ruled in favour of the Applicant seeking the enforcement of the Agreement and interdicting the first Respondent from continuing the running of a competing business on the basis that the Applicant “had a protectable interest in seeking to enforce the restraint as the first respondent had been privy to trade secrets during her employment and that the information so acquired could be used to the applicant’s detriment.”

It seems that these Agreements will not be enforced for the sake of enforcement, but that Employers must have protectable interests dictating the protection and thus enforcement thereof.

When will these Agreements be unenforceable?

The then Appellate Division had already established in 1984 in Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A)) the principles as to when these Agreements would be enforceable as opposed to being unenforceable based on the unreasonableness thereof. The Court decided that: “In general terms, a restraint will be unreasonable if it does not protect some proprietary interest of the party seeking to enforce a restraint. In other words, a restraint cannot operate only to eliminate competition. The party seeking to enforce a restraint need only invoke the restraint agreement and prove a breach of the agreement, nothing more. The party seeking to avoid the restraint bears the onus to establish, on a balance of probabilities, that the restraint agreement is unenforceable because it is unreasonable.”

The then Appellate Division did not clarify when the enforceability of these Agreements would become unreasonable.

In Basson v Chilwan and others 1993 SA 742 (A), the Court established the test to determine whether the Agreement must be enforced and if yes, would the enforcement thereof be unreasonable.

The test necessitates that the following four questions must be asked:

  1. Does one Party have an interest that deserves protection when the Employment Contract is terminated?
  2. Is the interest being prejudiced by the other Party?
  3. If the interest does create the situation that one Party is being prejudiced against the other Party, does it mean when the competing interests are weighed up against each other that the enforcement of the interest being sought to be protected, would render the other Party economically inactive and unable to seek alternative employment?
  4. Does public policy determine that the restraint be enforced, or does it determine that it must be rejected?

With the advent of the democracy and having a sovereign Constitution in South Africa, the position has changed somewhat. The Labour Appeal Court in deciding Ball v Bambalela Bolts (Pty) Ltd and Another (2013) 34 ILJ 2821 (LAC), indicated that “Prior to the decision in Magna Alloys and Research SA (Pty) Ltd v Ellis restraints of trade were only enforceable if they were proved to be reasonable. Since then they have been regarded as enforceable, unless they are proved to be unreasonable. The effect of the Magna Alloys’ decision was to place an onus on the party, sought to be restrained, to prove, on a balance of probabilities, that the restraint was unreasonable. However, because the right of a citizen to freely choose a trade, occupation, or profession, is protected in terms of section 22 of the Constitution and a restraint of trade constitutes a limitation of that right, the onus may well be on the party who seeks to enforce the restraint to prove that it is a reasonable, or justifiable limitation of that right of the party sought to be restrained”.

The investigation into the reasonableness of a restraint is now therefore a finding that involves the contemplation of 2 considerations namely, the public interest, which requires that Parties to a Contract must comply with their contractual obligations and thus be bound to the Contract that they had willingly entered into (i.e. pacta servanda sunt) and the principle, that a Citizen should be free to choose or practice a trade, occupation or profession of his/her choice.

An Agreement would therefore be deemed as unreasonable and unenforceable in the absence of an interest deserving protection thereof. An Agreement that is merely constructed to prevent competition would therefore be unreasonable and unenforceable.

Conclusion

These Agreements are therefore still enforceable should it protect an interest that deserves being protected, that is reasonable to do so and that it does not unreasonably infringe upon the rights of Citizens established in Section 22 of the Constitution. Parties should therefore be mindful when entering into these Agreements and the enforceability thereof when the employment relationship is terminated. Contact SchoemanLaw Inc today for expert advice on all Contractual and Employment-related matters.

Written by Helena Roodt, Attorney, SchoemanLaw

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