Published 30 October 2018
As a business owner, one of your many concerns will be ensuring that your proprietary interests are protected. This is especially a concern where it comes to employees who have access to very important proprietary interests, including, among others, trade secrets / confidential information of the business, details of and relationships with customers and suppliers, and who can use such access and information to damage the goodwill of the business. For this reason, and to protect their business’ proprietary interests, many employers enter into restraint of trade agreements with their employees (or include such provisions in their employment agreements). In this blog we briefly examine how the law views restraints of trade and how to ensure that your restraint of trade is reasonable and enforceable.
A restraint of trade is an agreement that limits, usually for the duration of an employee’s employment with the specific employer, and for a set period thereafter, the business activities that such employee may be involved in. It may also be entered where a business is purchased, and the new owner wants to protect the proprietary interests of the business as against the previous owner. It is important to note that there is no automatic right to a restraint of trade and that a restraint will only exist where the parties agree to it – it is a contractual right.
The starting point in assessing any restraint of trade is that, while it results in a clash in the principles of sanctity of contract and the constitutional right to choose a trade, occupation and profession, the courts will presume it to be valid and enforceable. Any person alleging that a restraint is not enforceable must show that it is unreasonable and therefore contrary to the public interest, at the time that the restraint is sought to be enforced.
In determining whether a restraint is in fact unreasonable, the courts will look at reasonableness as between the parties, and reasonableness in terms of the broad interests of the community.
In terms of the conflicting interests of the parties, the court must balance the employer’s interest in protecting his proprietary information against the employee’s right to be economically active. In determining this, the court will firstly consider whether the interest sought to be protected is actually protectable and, if so, it will then consider the duration of the restraint, the geographical area within which the restraint will operate and whether the restrained party is still able to earn a living (among other things). There are no specific thresholds as regards each of the above factors, and each case is rather determined according to its own circumstances.
To ensure that your restraint is enforceable and that your proprietary interests are sufficiently protected, the following must be considered / included:
- the proprietary interest sought to be protected must be set out clearly and it must be made clear that such interests belong to the party in whose favour the restraint is granted;
- it must be clear that the purpose of the restraint is to protect a proprietary interest and not to, for example, restrict competition or spite an employee for leaving;
- the duration of the restraint must be specified and must be reasonable in the circumstances; and
- the geographical area within which the restraint will operate must be specified and must be reasonable, having regard to the operations of the business.
The above factors must always be considered in the context of the market, the position of the restrained party and his access to proprietary information. Further to this, the restraint must be carefully drafted, such that the intention of the restraint is very clear.
Where the above factors are considered and applied, the presumption that a restraint is valid and enforceable is likely to be upheld, and the business’ interests protected. It is therefore best to always seek appropriate legal advice before preparing or entering a restraint of trade agreement.