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Restraint of trade clauses - separating the chaff from the wheat

4th September 2009

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"On what conceivable basis can it be concluded that an employee should be compelled to sign an agreement so wide, so vast in its scope and application, and be compelled to be restrained from working on so vague a basis, namely that a court will take care of the width of the agreement and read it down so as to render it reasonable? That is surely incongruent with the principles of transparency and fairness which are inherent in our constitutional framework and part of the test of proportionality."

This was just one of the views expressed by Davis J in Advtech Resourcing (Pty) Limited v Kuhn and another1, his diatribe against the enforcement of restraint of trade agreements in the post-constitutional era.

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Kuhn was employed by the applicant ("Advtech"), a personnel recruitment agency, as a personnel contracting consultant in the area of IT recruitment. She left the employ of the applicant some four months later, taking up employment with the second respondent, a competitor of the applicant. The restraint of trade clause incorporated in her contract of employment with the applicant was, as is not uncommon, wide in its scope, seeking to restrain the applicant for a period of twelve months from effectively doing anything for anyone considered to be a competitor. Advtech did not seek a partial enforcement of the restraint.

Seven months later a similar matter came before Wallis AJ in the Durban and Coast Local Division. In Den Braven SA (Pty) Limited v Pillay and another2 the employer ("Den Braven") sought to restrain a salesman ("Pillay") who, prior to leaving for greener pastures, was accountable for 50% of Den Braven's sales in Kwazulu Natal. Den Braven, in sharp contrast to the approach of Advtech, sought only to enforce the restraint in the area of Kwazulu Natal and conceded that a more limited period than the two year duration of the agreement would be appropriate.

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This article seeks to examine the content of both judgments, with specific reference to the approach a court should adopt when faced with a restraint of trade which is too widely drawn.

Davis J, who ultimately found Advtech not to have a proprietary interest worth protecting (which finding rendered the large portion of his argument against enforcement to the realms of obiter), devotes much of his judgment to the impact of the Constitution on the freedom to contract. His view on overly broad restraint of trade clauses is perhaps best summed up in the quote contained in the opening paragraph of this article. Tackling the severability clause contained within the restraint of trade agreement with Kuhn (the employee), Davis J relied on the judgment of Smalberger AJ in Sasfin (Pty) Limited v Beukes3 who held "[in] any event it is, in my view, not open to parties to a contract to say to a Court 'take our agreement such as it is, excise from it all that is bad and retain what is good, and provide us with a contract which is legal and enforceable, even though it may not be what we originally had in mind'...Such an approach would offend the fundamental rule that the Court may not make a contract for the parties...[p]arties could simply insert whatever they wish, good or bad, into a contract and by resorting to the provisions of [a severability clause] leave it to the Court to separate the chaff from the wheat."

He concluded that "a restraint [such as the one in Kuhn's contract] cannot be salvaged by a form of jurisprudential forensic surgery involving the excision and reconstruction of the clause so as to justify the relief sought in the notice of motion.

Advocating for a restraint clause drafted so as to reflect a balance between contractual provisions and the right to be a productive worker, Davis J differentiates the issues before him from those placed before Marais J in BHT Water Treatment (Pty) Limited v Leslie and another4 where the applicant had sought relief which was geographically narrower than that which was provided for in the restraint clause. The case before Davis J required that, in his view, "every component of the clause would have to be simultaneously restricted in order to render it valid."

Wallis AJ took issue with much of Davis J's judgment but found himself in "profound disagreement" with the conclusions of Davis J as set out above, finding them to be both "contrary to established precedent" and "show[ing] a lack of appreciation for the commercial realities that underpin the drafting of restraint of trade agreements." The reasoning of Wallis AJ centred on the decision of Botha J in National Chemsearch SA (Pty) Limited v Borrowman and another5. Botha J rejected as "artificial, ill-defined and internally inconsistent (per Wallis AJ)" the traditional approach of English courts which refused to make an agreement for the parties that they themselves did not write, choosing instead to formulate the following "proper approach" to the enforcement of restraint of trade undertakings:

"[w]hen a restraint according to its terms agreed upon is found to be unreasonably wide in its scope of operation, the Court can, in a proper case, enforce the restraint partially, by issuing an order incorporating the addition of such limiting words to the restraint as agreed upon as are appropriate to restrict its scope of application to what is reasonable."

Wallis AJ, concluding that it is inappropriate to have to resort to general principles of severability in approaching a restraint of trade that is too widely drawn, but which is sought to be enforced only in respect of conduct that manifestly falls within its terms and in respect of which the enforcement would be fair and reasonable in accordance with the norms of public policy derived from the Constitution, found that the proper approach was for the court to ask itself:

"whether the conduct the applicant seeks to restrain by way of an interdict is conduct that falls within the terms of the restraint agreement and from which the former employee agreed to abstain. If the answer to that question is in the affirmative the court then moves onto the analysis of whether it should, in accordance with the principles of public policy, enforce the agreement to that extent by granting the relief to the applicant. It has no need in those circumstances to have regard to those portions of the agreement that are more extensive than the relief actually sought."

He then went on to caution against courts reflexively criticising those who draft restraint of trade agreements in very broad terms as it is "wholly undesirable and inconvenient to both the employer and the employee to have to engage in an ongoing and relatively continuous process or renegotiating the terms of the restraint undertaking in order to accommodate new elements that enter into their relationship."

It is again necessary to point out that the judgment of Davis J did not turn on the question of enforceability in the post-Constitutional era, nor did it turn on the obiter highlighted in this article. Davis J correctly points out that "[i]f the restraint does not protect the proprietary interest of the covenantee, that finding would put an end to the dispute." On the facts before him, without even pursuing the reasonableness of the restraint, Davis J could not find a proprietary interest worthy of protection.

Den Braven, on the other hand, seeking only a partial enforcement of its restraint, was able to show a significant trade connection with its customers, and that that trade connection was built up between Pillay and the customers over a period of eight years. The inference drawn from this was one which Pillay could not rebut. In fact, Pillay conceded his knowledge of the Den Braven client base and his understanding of their requirements. He also failed to place before the court information which might suggest that such relationships were superficial and transitory in nature (such that they could not be exploited). Wallis AJ went on to find that Den Braven had discharged the onus of showing that it had a commercial interest worthy of protection. Having established this, Pillay's only challenge lay, in effect, on his counsel's reliance on the decision of Davis J. This reliance held no water in the eyes of Wallis AJ.

Employers will find comfort in the judgment of Wallis AJ; one that provides ample justification for standard-term, widely couched restraint of trade clauses. They should, however, take heed at the fact that restraints will only, and should only, be enforced where it is clear that the employer has a proprietary interest worthy of protection, and the employer can demonstrate this.

Written by: Nick Robb, Partner and Brett Abraham, Associate at Webber Wentzel

 

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