Restraint of trade: What does it mean?
10 Dec 2018
The majority of employment contracts contain a restraint of trade clause. Many people merely consider it a standard clause but it can have serious implications for future employment.
The implications can be seen in the recent dispute between Pepkor (formerly Steinhoff Africa Retail) and Tekkie Town footwear. According to the Fin24 article: “Pepkor says it succeeded in demonstrating to the court that it has a protectable interest in terms of restraint of trade provisions that apply to the founders of Mr Tekkie.”
What is a restraint of trade clause?
A restraint of trade clause limits the ability of an employee to accept future employment which could be to the detriment of their current employer – usually because it is a competitor and the employee has access to confidential information.
When is restraint of trade unenforceable?
There are instances in which restraint of trade agreements are unenforceable. This is usually where it is proven that the contract was not understood by the employee or the application of the restraint of trade agreement is too broad.
The court stated in Reddy v Siemens [2006] SCA 164 that “the substantive law as laid down in Magna Alloys is that a restraint is enforceable unless it is shown to be unreasonable, which necessarily casts an onus on the person who seeks to escape it.” In determining the reasonableness the court considers public interest, which expects parties to comply with their contractual obligations, balanced against the interests of society allowing people to trade freely and be employed in the profession of their choice.
In that particular case, Reddy v Siemens, the court found that the restraint of trade agreement only prevented the employee from taking up employment at a competitor of Siemens – it did not prevent the employee from being employed, it merely limited the specific employer. The court also found that the employee had access to confidential information of the employer (Siemens) and whilst it is sufficient that he has the ability to disclose this confidential information, it is not required that he actually disclose this information. Accordingly the restraint of trade agreement was found to be valid and enforceable.
Determining the reasonableness of the restraint of trade clause
The courts also refer to the test as set out in Basson v Chilwan [1993] ZASCA 61, which asks four questions to determine the reasonableness of the restraint of trade agreement:
- Does the one party have an interest that deserves protection at the termination of the employment?
- If so, is that interest threatened/prejudiced by the other party?
- 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 relationship between the parties, which requires that the restraint be maintained or rejected?
Protectable interest vs. the right to be economically active
Thus, where the interest of the party sought to be restrained outweighs the interest to be protected, the restraint is “unreasonable and consequently unenforceable” (Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another [2016] ZALCJHB 250). Accordingly, an employer must have a protectable interest and the threat of that interest being prejudiced must outweigh the employee’s right to be economically active.
What is protectable interest?
The protectable interest is usually the confidential information to which an employee is privilege and which can be divulged to competitors. The court set out in Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another the definition of confidential information:
“it must (a) be capable of application in trade or industry, must be useful; not be public knowledge or property; (b) it must be known only to a restricted number of people or a closed circle and (c) be of economic value to the person seeking to protect it.”
How is a restraint of trade agreement enforced?
The means by which to enforce a restraint of trade agreement is an interdict. If a final interdict is sought, three things need to be established: “there must be a clear right, secondly an injury actually committed or reasonably apprehended, and lastly, the absence of any other satisfactory remedy” (Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another).
Where an employee has access to confidential information and the ability to divulge that information, the first two requirements are met. Whether an alternative remedy is available considers the reasonableness of the restraint of trade agreement and the weighing up of the competing interests.
When is a restraint of trade unreasonable?
Courts have found restraint of trade agreements to be unreasonable in instances where they are too vague or too broad in their application. In Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another the court stated that “the restraint will be unreasonable if the duration and scope of area sought to be enforced falls outside of the agreement itself, and/or the restraint is broader than necessary.”
Advice for employers and employees
Accordingly, employers should ensure to draft restraint of trade agreements narrowly and only to the extent necessary to protect their protectable interests.
Similarly, employees should ensure they understand the extent and content of the restraint of trade agreement they enter into, as the onus is on the employee to prove its unreasonableness and thus its unenforceability.
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