Insights into restraints of trade

It is a well-known commercial practice for employers to include restraint of trade provisions in their employment agreements despite prevailing uncertainty as to when and how (as well as to what extent) these restraint of trade provisions would be enforceable.

A restraint of trade is essentially an agreement in terms of which one party agrees to some form of limitation to their freedom to carry on their trade, profession or business. Restraint of trade provisions are most frequently encountered in employment contracts, where the employee undertakes not to compete with his or her employer during and/or after termination of his or her services to the employer. There are also other forms of agreements in which these provisions can be encountered, for example, in a sale of business, where the seller agrees with the purchaser not to carry on a similar business in competition with the purchaser within a reasonable proximity of the business premises and for a prescribed period of time. Partnership agreements may also include similar provisions in terms whereof each of the partners undertakes not to compete with the business of the partnership during and/or after leaving the partnership.

In terms of the well-known and oft-cited Appellate Division judgment in Magna Alloys and Research (SA) (PTY) Ltd v Ellis [1984] 2 All SA 583 (A),it was held that restraint of trade provisions are valid and lawful unless the party wishing to escape the provisions of the agreement in question can prove that they are contrary to public policy and therefore unenforceable.

The Magna Alloys precedent necessitates an enquiry as to when restraints of trade will be deemed contrary to public policy (which is by nature a vague concept). Fortunately in the later judgment in Basson v Chilwan and Others [1993] 2 All SA 373 (A) the court laid out several guidelines with which to determine whether or not a restraint of trade agreement is contrary to public policy, as follows:

  • Does the restraining party have an interest deserving of protection, during or after termination of the relevant contract (a “Protectable Interest”)?
  • If so, would that Protectable Interest be prejudiced by the restrained party’s freedom not being limited by the restraint?
  • If the above can be answered in the affirmative, then it furthermore needs to be decided whether the Protectable Interest of the restraining party (seeking to uphold the restraint agreement) qualitatively and quantitatively outweigh the interest of the restrained party to be economically active and productive?
  • Are there any other aspects to be considered to determine whether or not to uphold or reject the restraint?
  • Does the restraint go further than reasonably necessary to protect the interests of the restraining party seeking to enforce the restraint in question?

Generally speaking, according to the Basson judgment, if the answers to the first three questions above are in the affirmative, and the answer to the last question is in the negative, then the restraint of trade is reasonable and consequently not contrary to public policy, therefore making it enforceable against the restrained party. However, if the answers to the first three questions are in the negative and the answer to the last question is in the affirmative, then such restraint of trade would be contrary to public policy and therefore unenforceable. In some instances the court may find that a restraint of trade provision has gone further than is necessary to protect the interest of the restraining party but doesn’t go so far as to render it contrary to public policy. The court may then order that the restraint be partially enforced. By partially enforcing a restraint, the court would restrict its limitation to either a narrower proximity than the one that was initially included in the restraint of trade, or for a lesser period of time than the period that was initially agreed.

In order to determine whether a restraint would be reasonable, the concept of a Protectable Interest must be considered further, as either parties’ assertion or defence would primarily be dependent on whether there is any Protectable Interest that the restraining party could argue he is entitled to protect. A court would normally only entertain a restraint of trade dispute if it is satisfied that there is indeed a Protectable Interest. There’s no exhaustive list of what constitutes a Protectable Interest, although the judgment in Advtech Resourcing (Pty) Ltd t/a The Communicate Personnel Group v Kuhn and another [2007] 4 All SA 1368 (C), provides the following insights:

  • A Protectable Interest includes the restraining party’s ‘trade secrets’ (meaning any information that is capable of application in trade or industry provided that such information is only known to a certain number of people but not to the public and is of economic value). By way of example, technical processes, chemical formulae, computer software, price lists, credit records and business conversation, constitute trade secrets.
  • However, the mere fact that an employer had provided an employee with training and skill development does not mean that he or she owns the skill provided to an employee. This is illustrated by the following excerpt: “An employee who, in the main, uses his own expertise, knowledge, skill and experience [after leaving employment] cannot be restrained [from doing so]”.
  • Confidential information constitutes a protectable interest.
  • Customer goodwill or trade connections constitute a protectable interest.

Another question that needs to be considered is that of who bears the onus of poof in restraint cases. Most past judgments follow the approach that was laid down in Magna Alloys, in which it was held that the party alleging that the restraint is contrary to public policy, bears the onus of proving the unreasonableness of such restraint. In the new Constitutional dispensation, however, every person has a constitutionally enshrined right to choose and carry on his/her chosen trade, profession or business. With that background, some more recent commentaries have held that the restraint enforcer should bear the onus of proof. Some commentators remark that it does not matter who bears the onus of proof because the guidelines that were laid down in the Basson judgment are decisive.

In conclusion, restraint of trade provisions in agreements are lawful, valid and enforceable provided they are reasonable and not contrary to public policy, and the enquiry into public policy will often centre on a consideration of the Protectable Interest that a restraining party would wish to protect. Beyond this, although restraints of trade are very common in practice, it is notoriously difficult to predict whether a court would determine a particular restraint to be fair and reasonable in the circumstances. We recommend that any party to a restraint carefully consider its terms and limitations, and attempt to negotiate on these limitations if you foresee a time when this restraint may be detrimental to your ability to carry on your chosen trade or business.

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