What is a restraint of trade?
A restraint of trade is a contractual arrangement whereby one party seeks to protect their proprietary interests by restraining another party from competing in and or being involved in a business with the same or similar business interests. The restraint provisions can have various terms as to the length, conduct in concern and territory within which the restraint is to apply. Restraint of trade agreements are commonly concluded between an employer and employee where the employer wishes to protect its intellectual property and confidential information.
Disputes in respect of restraints of trade will be governed in terms of principles of contract law and in particular case law in the field of restraints of trade.
What is an example of a restraint of trade?
The necessity to conclude a restraint of trade to protect proprietary interests may arise in various contexts.
For example a salesperson or key executive who has access to proprietary information of an employer.
Further a purchaser of a business may wish to restrain the seller of that business from opening a similar business within a specific territory and for a specific period which would compete with that business.
A Franchisor may require that a Franchisee does not involve itself directly or indirectly in any competing business after termination of the franchise agreement within a specific territory in which other franchisees of that franchise are operating.
How does a restraint of trade work and what does it address?
To enforce a restraint of trade in South African courts a person is required to prove the conclusion of the restraint of trade contract and the breach of that contract.
The remedies that the enforcing party may wish to recover would be an interdict seeking to have the person in breach of the contract restrained from types of conduct which are aimed at protecting the proprietary interests of the enforcer and or a claim for damages and or legal costs.
The restraint will often define and or seek to address:
- the proprietary information or categories thereof sought to be protected although this subject matter may be addressed in a broad manner to cover unforeseeable circumstances arising in the future and cater for business development and growth;
- the territory within which the restraint is to apply;
- the duration;
- the nature of work or activities which are not permitted;
- consideration payable in respect of the restraint, if applicable in which case there may be tax implications;
- a declaration by the person signing the restraint that he or she agrees that the restraint is concluded voluntarily and is reasonable regarding the scope and content and necessary to protect the proprietary interests of the party wishing to enforce same.
Restraints of trade in South Africa & South African Case Law
There is substantial case law in South Africa addressing restraints of trade however some leading case law in this regard include:
Den Braven SA (Pty) Limited v Pillay
“the approach of the Constitutional Court is that contractual obligations are enforceable unless they are contrary to public policy, which is to be discerned from the values embodied in the Constitution and in particular in the Bill of Rights.”
Digicore Fleet Management v Steyn
The onus is on the employee to prove that an employer has no proprietary interest it is seeking to enforce.
“…in order to escape her contractual undertaking, must show that Digicore has no proprietary interest that is threatened by her working for a competitor of Digicore.”
In Basson v Chilwan it was held, inter alia:
- It would be unreasonable to enforce a restraint on an individuals’ freedom to do business if the party seeking to enforce same has no protectable proprietary interest which it is seeking to enforce.
- This proprietary interest and the infringement of same must be weighed up against the freedom of the other party to be economically active.
In Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 4 SA it was held: - contracts in restraint of trade are on the face of it enforceable.
- ‘where the restriction places an unreasonable restraint on an individual’s freedom to do business, in all likelihood it is contrary to the public interest and is therefore not enforceable’.
- the person alleging the unfairness of a restraint has the onus of proving same.
- the courts should have reference to the circumstances prevailing at the time at which the restraint is sought to be imposed.
- the courts can hold a restraint to be partially or fully enforceable.
Sunshine Records (Pty) Ltd v Frohling
“If the appellant had wished to rely on less than the complete contract it was, in my view, obliged to raise this pertinently as an issue to be dealt with in evidence and argument.”
National Chemsearch (SA)(Pty) Ltd v Borrowman
A court may enforce a restraint whether in part or in full.
Restraints of trade during COVID-19
The effects of the pandemic have been felt worldwide leaving no stone unturned and the law addressing restraints of trade have been no exception with South African courts considering the enforceability of restraints in light thereof.
In the case of Oomph Out of Home Media (Pty) Ltd v Brien it was held that to enforce a restraint of trade during the pandemic would be against public policy:
“For him to be forced out of a carrier of choice to start working in a different field at a time when many businesses are closing down, retrenchments and lay-offs being common place and individuals doing everything possible to survive and cope with the health and economic devastating effects of the covid 19 pandemic, is plainly unreasonable and contrary to public policy and constitutional values. For these reasons given in this judgment I find that the restraint of trade agreement cannot be enforced.”
However in the cases Prima Interactive (Pty) Ltd v Lemon and others and Bulldog Abrasives Southern Africa (Pty) Ltd v Davie and Another the Labour Court of South Africa disagreed with this view and held that the approach in Oomph Out of Home Media (Pty) Ltd v Brien and Another was incorrect in that “…Coronavirus is no respecter of persons, and that employers and employees are equally vulnerable in the face of the pandemic.”
How to defend a restraint of trade in South Africa or be absolved from a restraint of trade?
A party wishing to defend a claim for the enforcement of a restraint of trade would have to prove that at the time the enforcing party wishes to seek to uphold the restraint:
- that the restraint is aimed solely at preventing fair competition;
- the enforcement of the restraint is not reasonably necessary to protect the enforcing parties’ proprietary interests.
Further a party wishing to be absolved from the restraint of trade agreement would have to prove that the enforcement of the contract would be against public policy.
Restraint of Trade and Garden Leave Clauses
Garden leave clauses are provisions in employment contracts to protect proprietary interests of the employer by affording a contractual discretion of the employer to relieve the employee of his or her duties during the period of notice, with pay, provided that the employee is still in the employ of the employee and could still be called upon to perform his or her employment duties. The contractual provisions of the garden leave clause may differ and will address the terms of the employment during the notice period.
In the case of Vodacom (Pty) Ltd v Motsa and Another the Labour Court of South Africa held that the employer had not waived its rights contained in a garden leave clause as contended by the employee and further the notice period of the garden leave clause in relation to the notice period of the restraint of trade were considered in determining the reasonableness of the enforcement of the restraint of trade.
“But ultimately, the question that remains to be answered is whether any period of enforced commercial inactivity, whether by way of a garden leave clause or a more conventional restraint or both, is unreasonable having regard to the proprietary interests that the employer seeks to protect.”
The court decided there was no reason that the employee not be bound to the notice period enforceable via the garden leave clause.
Further the court addressed that the purpose of the garden leave clause was to prevent the employee from having access to the proprietary information of the employer for the six month garden leave clause:
“the fact of the matter is that for the period of garden leave Motsa will not have access to any of Vodacom’s trade secrets, whether in the form of confidential information or otherwise, and any trade connections which may have some value to MTN. Indeed, that is what the wording”
By way of the employee’s substantial knowledge of the proprietary information of the employer and its commercial dealings, the Labour Court found that the employer was entitled to the protection sought by the restraint of trade.
Article by Lisa Boogaard
Boogaard Attorneys
11/11/2021
Bibliography
Harms, Amler’s Precedents and Pleadings (7th Edition, 2009, Lexis Nexis)
https://www.saica.co.za/integritax/2007/1528_Restraint_of_trade_payments.htm
Case Law
Basson v Chilwan and Others (332/1991) [1993] ZASCA 61; 1993 (3) SA 742 (AD); [1993] 2 All SA 373 (A)
Bulldog Abrasives Southern Africa (Pty) Ltd v Davie and Another (J123/21) [2021] ZALCJHB 58
Den Braven SA (Pty) Limited v Pillay [2008] 3 All SA 518 (D), 2008 (6) SA 229 (D)
Digicore Fleet Management (Pty) Ltd v Steyn and Another (722/2007) [2008] ZASCA 105; [2009] 1 All SA 442 (SCA)
Magna Alloys & Research (S.A.) (Pty) Ltd. v Ellis (109/84) [1984] ZASCA 116; [1984] 2 All SA 583 (A) ; 1984 (4) SA 874 (A)
National Chemsearch (SA)(Pty) Ltd v Borrowman 1979 (3)(SA)
Oomph Out of Home Media (Pty) Ltd v Brien and Another [2021] JOL 49492 (GJ)
Sunshine Records (Pty) Ltd. v Frohling and Others (383/84/av) [1986] ZASCA 153; [1990] 1 All SA 8 (A)
Vodacom (Pty) Ltd v Motsa and Another (J 74/16) [2016] ZALCJHB 53; 2016 (3) SA 116 (LC); [2016] 5 BLLR 523 (LC); (2016) 37 ILJ 1241 (LC)