Enforceability of Restraint of Trade Agreements

LABOUR INSIGHTS OCTOBER 2020

To Enforce or Not To Enforce: What Employers Need to Know About the Enforceability of Restraint of Trade Agreements  

Restraint of trade agreements limit the ability of employees to accept future employment where they could disclose information that could prejudice their current employer. In this article, we discuss how the law protects employers’ interests and how employers can ensure that they have an air-tight restraint of trade agreement.

How the Law is Geared to Protect Employers’ Interests

Many employers erroneously believe that it is useless to haggle about restraint of trade clauses because it would be too onerous to prove that they are valid and enforceable. Not so. In Magna Alloys and Research SA (Pty) Ltd v Ellis the court expressly ruled that the interests of employers must be protected.

As a result, employers are only required to prove the existence and the breach of their restraint of trade agreement. Hereafter, the employee will have to prove that the restraint of trade agreement is unreasonable. This is not easy to prove, and many employees opt instead to adhere to the terms of their restraint.

How to Ensure that you Have Air-Tight Restraint of Trade Agreements

In order to enforce restraint of trade agreements the courts will balance the interests of the parties to determine the reasonableness of its enforcement. In Basson v Chilwan and Other the Appellate Division, the court held that the reasonableness of a restraint is determined with reference to four considerations. These are discussed below.

Does the employer have an interest worthy of protection?

If the court finds that the employer does not have an interest deserving  of protection, the restraint will not be enforceable against the employee. The two protectable interests which the court recognises are trade connections and trade secrets.

Trade connections refer to the relationships that the employee may have with customers, potential customers, suppliers and others. This is also commonly referred to as goodwill. In Den Braven SA (Pty) Ltd v Pillay & Another the court advised that employers must be mindful that a protectable interest in the form of trade connections only arises when that connection will probably enable the former employee to induce the customer to follow him or her to new business. This was confirmed in Reddy v Siemans Telecommunications (Pty) Ltd.

The courts also recognise trade secrets as a protectable interest. Trade secrets include confidential matters which are useful for the carrying on of the business and which could be used by a competitor, if disclosed to him, to gain a relative competitive advantage. In Coolair Ventilator Co SA (Pty) Ltd v Liebenberg and Another the court stated that in order to qualify as a trade secret, the information must be useful to a competitor.

Is that interest being prejudiced?

Secondly, employers need to indicate how their interests will be prejudiced. The employer will only be able to prove that their trade connections will be prejudiced if there is evidence to suggest that the employee will be going to a competitor with his acquired personal knowledge and influence over customers which the employer exposed him to. It will also have to be clear that the employer’s competition will be able to take advantage of said knowledge and influence.

In New Justfun Group (Pty) Ltd v Turner and others on the other hand, the court stated that prejudice with regards to trade secrets will be proven if the employer can show that secret information exists, that the employee had access to it, and that the employee could transmit this information to their competitors if he/she wished to.

If so, how does that interest weigh up qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?

Thirdly the restraint agreement should not be too restrictive in protecting the interests of the employer at the expense of the employee. In order to limit the restriction and make it reasonable, the restraint should be limited to a specific geographical area, to a reasonable time frame and thirdly, to a specific industry (i.e. building industry). Excessively restrictive agreements have consistently been found to be unreasonable and therefore, unenforceable.

Does public policy demand that the restraint should either be enforced or disallowed?

Lastly, societal norms may deem the enforcement of the restraint of trade agreement to be unreasonable. Examples include that it would be fair to restrict employees of strategically important service providers from accepting alternative employment with competing parties when they had access to sensitive information which would jeopardize the safety of others i.e. by restricting a South African nuclear physicist from immediately working abroad.

Contact us for expert legal advice

Are you concerned that your restraint of trade clause is not enforceable? Do you need expert legal assistance to draft an enforceable restraint of trade clause which can be inserted or annexed to your employment contracts? Contact our expert Labour Specialists today to schedule a call to talk about your situation.