By Phil Davel
A restraint of trade clause is commonly found in employment contracts to enable an employer to protect its business from competition from ex-employees. In terms of a restraint of trade agreement, an employee is prevented from starting his or her own business in competition with his or her employer or working for competitors for a specified period in a specified geographical area after the termination of the employment contract. At the outset it is important to take note of two things: Restraint of trade arguments cannot be settled by hard and fast rules, and these agreements are not regulated by Labour Law, but by the Law of Contract.
RESTRAINT OF TRADE AGREEMENTS: WHAT AND WHY?
Courts have defined a restraint of trade agreement as a contract in which one party (the employee) agrees with another (the employer) to limit or restrict, for a specified period, his or her freedom to trade with another external party, in order to protect the employer’s goodwill and customer connections, or trade secrets, after the employment
relationship has ended.
In most cases the employee will be in the weaker bargaining position and will not really be able to negotiate the terms of the contract. The courts are aware of this problem and have had to formulate rules relating to its validity and reasonableness.
WHAT DOES IT MEAN?
Despite a lack of clarity at one stage as to how restraint of trade agreements should be treated, the court in Magna Alloys and Research (SA) (Pty) Ltd v Ellis, 1984 found that, in South African law, a restraint of trade agreement is valid and enforceable and will only be invalid and unenforceable if it is contrary to public policy on account of it unreasonably restricting a person’s right to trade or to work.
IS IT REASONABLE?
In determining the reasonableness of restraint of trade agreements, two competing policy considerations come into play. The first is that it is in the public interest that people should be held to their agreements. The second is that it is also in the public interest that people should be free to engage in economic activity. The Constitution also protects the right to choose a “trade, occupation or profession freely”.
Although this may seem confusing and contradictory, the common law rules relating to restraints of trade are not unconstitutional (this will be discussed in Part II). When a
court considers whether to enforce a restraint of trade agreement it must, after observing all the relevant agreements between the employee and employer, reflect on the provision in Section 22 of the Constitution (that every citizen has the right to freely choose his or her occupation) and exercise a value judgement on its assessment of the facts.
THE ONUS OF PROOF
As with any other agreement, when a party to a restraint of trade agreement attacks its validity, the onus is on him or her to establish that it is unreasonable. Thus, the employee bears the onus of proving that the clause is contrary to public policy.
A VALUE JUDGEMENT ENTAILS THE FOLLOWING:
• Does one party have an interest that deserves protection after termination of the agreement?
• If so, is that interest threatened by the other party?
• In that case, do these interests weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
• Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?
• Does the restraint go further than necessary to protect the interest?
• Part II will be published in the second issue of Solidarity Magazine. Phil Davel will discuss the reasonableness of restraint of trade with specific reference to Section 22 of the Constitution as well as the relevant grounds for opposing restraint
of trade agreements.
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Uitgawe 1 2011 – Restraint of trade agreements – part I
By Phil Davel
A restraint of trade clause is commonly found in employment contracts to enable an employer to protect its business from competition from ex-employees. In terms of a restraint of trade agreement, an employee is prevented from starting his or her own business in competition with his or her employer or working for competitors for a specified period in a specified geographical area after the termination of the employment contract. At the outset it is important to take note of two things: Restraint of trade arguments cannot be settled by hard and fast rules, and these agreements are not regulated by Labour Law, but by the Law of Contract.
RESTRAINT OF TRADE AGREEMENTS: WHAT AND WHY?
Courts have defined a restraint of trade agreement as a contract in which one party (the employee) agrees with another (the employer) to limit or restrict, for a specified period, his or her freedom to trade with another external party, in order to protect the employer’s goodwill and customer connections, or trade secrets, after the employment
relationship has ended.
In most cases the employee will be in the weaker bargaining position and will not really be able to negotiate the terms of the contract. The courts are aware of this problem and have had to formulate rules relating to its validity and reasonableness.
WHAT DOES IT MEAN?
Despite a lack of clarity at one stage as to how restraint of trade agreements should be treated, the court in Magna Alloys and Research (SA) (Pty) Ltd v Ellis, 1984 found that, in South African law, a restraint of trade agreement is valid and enforceable and will only be invalid and unenforceable if it is contrary to public policy on account of it unreasonably restricting a person’s right to trade or to work.
IS IT REASONABLE?
In determining the reasonableness of restraint of trade agreements, two competing policy considerations come into play. The first is that it is in the public interest that people should be held to their agreements. The second is that it is also in the public interest that people should be free to engage in economic activity. The Constitution also protects the right to choose a “trade, occupation or profession freely”.
Although this may seem confusing and contradictory, the common law rules relating to restraints of trade are not unconstitutional (this will be discussed in Part II). When a
court considers whether to enforce a restraint of trade agreement it must, after observing all the relevant agreements between the employee and employer, reflect on the provision in Section 22 of the Constitution (that every citizen has the right to freely choose his or her occupation) and exercise a value judgement on its assessment of the facts.
THE ONUS OF PROOF
As with any other agreement, when a party to a restraint of trade agreement attacks its validity, the onus is on him or her to establish that it is unreasonable. Thus, the employee bears the onus of proving that the clause is contrary to public policy.
A VALUE JUDGEMENT ENTAILS THE FOLLOWING:
• Does one party have an interest that deserves protection after termination of the agreement?
• If so, is that interest threatened by the other party?
• In that case, do these interests weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
• Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?
• Does the restraint go further than necessary to protect the interest?
• Part II will be published in the second issue of Solidarity Magazine. Phil Davel will discuss the reasonableness of restraint of trade with specific reference to Section 22 of the Constitution as well as the relevant grounds for opposing restraint
of trade agreements.