WHAT EXACTLY IS RESTRAINT OF TRADE?
Most employees, nowadays, are required to sign an employment contract, containing a restraint of trade clause, or to sign a separate restraint of trade agreement.
It is important to note that restraint of trade agreements are not regulated or governed by Labour Law. These agreements are regulated by the Law of Contracts.
As such, the definition of restraint of trade can not be found in any legislation. The term was however defined in the Petrofina Ltd v Martin case as:
“a contract in which one party (the employee) agrees with another party (the employer) to limit or restrict his future freedom to trade with another external party, who was not a party to the employee/employer contract.”
In order to better understand the term “restraint of trade” one must consider its purpose. The purpose of a restraint of trade agreement is aimed at preventing an employee who has obtained confidential information during his employment from using it to the detriment of the employer, as stated in the Reddy v Siemens Telecommunications (Pty) Ltd case.
WHEN WILL A RESTRAINT OF TRADE BE ENFORCEABLE?
The enforceability of and legalities relating to restraint of trade agreements are not distinct and differ from case to case. Certain principles and aspects that need to be considered when determining whether a restraint of trade is enforceable, have been defined in case law.
The Labour Appeal Court held in the Magna Alloys and Research (SA) Ltd v Ellis case that restraint of trade agreements are enforceable unless, and to the extent, that such agreements are contrary to public policy because they impose an unreasonable restriction on the former employee’s freedom to trade. Simply put, restraint of trade agreements are enforceable unless it is shown to be unreasonable.
In the case of Basson v Chilwan and Others, the court held that the following questions need to be answered when determining whether restraint of trade is reasonable:
“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, does such interest 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 rela-tionship between the parties that requires that the restraint be main-tained or rejected?”
The courts are tasked with making a judgement whether or not a restraint of trade is reasonable. This decision is very often based on public policy, by considering, on the one hand that it is in public interest for parties to comply with their contractual obligation and on the other hand considering people’s freedom to work, trade and engage in economic activity. A restraint of trade cannot place an unreasonable limitation on a person’s freedom to trade.
Further aspects that a court will also consider in determining whether a restraint of trade agreement is reasonable or not are: the duration and geographical scope. A restraint of trade will not be enforced if the area and length time is broader than necessary to protect the employer’s interest.
In this issue::
- What exactly is restraint of trade?
- When will a restraint of trade be enforceable?
- Restraint of trade from an employer viewpoint
RESTRAINT OF TRADE FROM AN EMPLOYER VIEWPOINT
Employers aim to protect themselves from employees taking up employment with a competitor and divulging confidential information and trade secrets by requiring employees to sign a restraint of trade agreement. The question now is, what should an employer do to ensure that the restraint of trade is reasonable and enforceable.
In the Supreme Court of Appeal case of Reddy v Siemens Telecommunications, the court held that a restraint of trade agreement will be against public policy and unenforceable if it attempts to do no more than restrain competition, as competition is seen as beneficial to the economy. The court further stated that for a restraint of trade agreement to be enforceable, the employer must have a proprietary interest or a protectable interest, such as confidential information, trade secrets, etc.
In deciding whether or not a restraint of trade is reasonable and enforceable, the question must be asked whether the employer has a protectable interest, and if so, is this interest threatened by the employee?
The court, when deciding whether or not the restraint of trade was enforceable, further held that the employee’s mere possession of confidential information (protectable interest) is not sufficient to enforce a restraint of trade and took additional factors into consideration such as: the fact that the employee carried on the same business as with his previous employer and the position the employee held.
In this particular case the court found that the restraint of trade was enforceable, as the employee was in possession of confidential information and would be employed in a similar position as with his previous employer.
Regarding the confidential information and trade secrets, the court held that it was not necessary to find that the employee would actually use it to the benefit of his new employment and to the detriment of his former employer, but it was sufficient to find that it is possible that he could use the confidential information and that there was a risk of disclosure to his new employer, the competitor of his old employer.
In the case of Digicore Fleet Management (Pty) Ltd v Steyn, the former employee resigned and took up a position with the employer’s competitor. The court found that the employee did not obtain any confidential information during her employment and as such the employer had no protectable interest to enforce the restraint of trade.
The court further held that all the restraint of trade aimed to achieve, was to prevent the employee from engaging in economic activity. As such, the restraint of trade was found to be unreasonable and unenforceable.
The main difference between the Reddy and Steyn cases are that, Reddy obtained confidential information during his employ that could be used to his former employer’s detriment and the confidential information was regarded as a protectable interest. Steyn, however, did not obtain any confidential information and her former employer had no protectable interest.