Agreements in Restraint of Trade

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Agreements in Restraint of Trade

Restraint of trade clauses are primarily found in employment contracts. The clause restricts the ability of an employee to accept future employment, for a prescribed period and in a specific geographical area, to protect an employers’ proprietary interest such as company trade secrets, customer connections and confidential information.

In Magna Alloys and Research (SA) (Pty) Ltd v Ellis, the Appellate Division rejected the traditional English law approach to contracts in restraint of trade, inter alia, that such contracts are prima facie void or unenforceable. The court adopted the general principle that, on the face of it, restraint undertakings are not unconstitutional and every restraint agreement signed by an employee is assumed to be lawful and enforceable, and the onus rests on the employee, to show that the restraint is unreasonable and contrary to public policy.

In determining whether a restraint is against public policy, a court will consider the (i) the facts of the case and (ii) the circumstances at the time that the employer is attempting to enforce the agreement against the employee and weigh up two main considerations.

Later on in Basson v Chilwan & Others, the Appellate Division found that in relation to the restraint the following questions require investigation, namely the party who seeks to restrain has a protectable interest and whether it is being prejudiced by the party sought to be restrained. Further, if there is such an interest to determine how that interest weighs up qualitatively and quantitatively against the interest of the other party to be economically active and productive.

It will generally be contrary to public interest to enforce an unreasonable restriction on a person’s freedom to trade. However, where the proprietary interest of the company which needs protection outweighs the employee’s interest in continuing his trade, such a restraint will be reasonable and enforceable.

In determining whether a restraint is enforceable and reasonable, a court will consider, inter alia, the following factors: (1) the length of time for which the restraint operates; (2) the geographical area to which the restraint applies; (3) whether a restraint payment was paid to the employee; (4) whether the employee still has the ability to earn a living; and (5) the proprietary interest or capital asset that the employer seeks to protect.

In Carlton Hair International v Vinciguerra and Another, the restrained individual was a 21-year-old and had been employed at Carlton Hair as a junior stylist. He averred that he only accrued between 20 to 30 regular clients in the 6 months that he spent working at Carlton Hair, where a more senior stylist would have 12 to 20 regular clients a day. In this instance, the court held that the restraint of trade which restrained him for a period of 1 (one) year, either directly or indirectly, within a radius of ten kilometres (as the crow flies) from the front door of the salon, was against public policy and unreasonable because the employee was a junior employee, qualified for only 6 months and who was only 21 years old.

It is well established that the proprietary interests that can be protected by a restraint agreement are of two kinds. The first consists of the relationships with customers, potential customers, suppliers and others (trade connections). The second consists of all confidential matter which is useful for the carrying on of the business and which could, therefore, be used by a competitor to gain a competitive advantage (trade secrets). In Aranda Textile Mills v Hurn & Another, the court emphasised that the proprietary interests sought to be protected must be properly described as belonging to the employer.

Each matter will need to be determined on its own facts on a case by case basis. The general principle remains that a restraint will only be enforceable if the employer is seeking to enforce the restraint has a legitimate proprietary interest worthy of protecting, the restraint is reasonable in as far as the geographical area and duration of the restraint are concerned, and the restraint is clear in its meaning and application.