Restraint of Trade Clause
In an increasingly competitive business landscape, one of the most common legal tools to protect a company’s trade secrets, confidential information, and customer relationships, is a restraint of trade clause.
To understand the characteristics of a restraint of trade, it can be equated to an antenuptial contract. Both remain dormant until the relationship ends, whereby an ante-nuptial contract (“ANC”) becomes relevant upon divorce or death, and a restraint of trade upon termination of employment.
Furthermore, just as a divorcing spouse may challenge the ANC as being unfair or against public policy, the former employee may also challenge the restriction of the restraint and argue the same. In both cases, the court can step in to balance the parties’ contractual freedom without overly restricting the other parties’ rights.
Given the current socio-economic challenges facing South Africa, the question would be to what extent can an employment contract lawfully restrict an employee from working for a similar business?
As a point of departure, it is worthy to note that the current position in South African law is that restraint of trade clauses are prima facie valid and enforceable (Magna Alloys).
This presumption of enforceability is premised on the Latin phrase “pacta sunt servanda” meaning that that parties are bound by agreements and expected to honour the terms thereof. However, there is a limitation on this principle as held in Magna Alloys, that a restraint of trade is only enforceable if not unreasonable or contrary to public policy.
Although one could argue that restricting an individual’s freedom to trade is contrary to public policy, it is in fact this very same principle that allowed the individual to attain the position they were in when they first agreed to the terms of the restraint. In this regard it is important to note that it is the restrained party seeking to challenge the clause that bears the onus to prove that it is against public policy. Consequently, a court will only intervene when an unreasonable restriction is imposed on an individual’s freedom to trade.
When looking at the enforceability of a restraint of trade clause, courts will ultimately have to weigh up the principles of a protectable interest and right to freedom of trade. The clause must be narrow enough to protect the former, but only to the extent required to protect the propriety interest of the business.
In the 2023 case of Sadan and Another vs Workforce Staffing (Pty) Ltd, former employees of Workforce Staffing challenged the reasonableness of a two-year nationwide restraint that prevented them from joining competitors. The Labour Appeal Court ruled that only a partial enforcement of the clause would be justifiable and emphasised that the period of restriction should be no longer than necessary to safeguard the legitimate business interest of the employer.
However, in another 2023 case of Beedle vs Slo-Jo Innovations Hub (Pty) Ltd, the reasonableness of a similar restraint of trade clause with two-years duration was considered. In this case, the Labour Appeal Court held that the geographical scope and duration of the restraint was justified due to the specific legitimate business interest of the employer.
Accordingly, as seen in the recent case law, a restraint of trade clause will remain enforceable if it does not go further than necessary to safeguard a protectable interest of an employer (Reddy v Siemens). The fundamental question to be asked is whether there were any less restrictive means available, to the enforcer of the clause, to effectively protect its proprietary interest (Section 36(1)(e) of the Constitution of the Republic of South Africa, 1996).
Practical tips on putting the “claws” into a restraint of trade
The following factors should be kept in mind when drafting the clause:
i. Clearly define the parameters;
ii. Duration for which the restraint operates;
iii. Geographical scope;
iv. Include specific activities or industry. -Precisely articulate the relevant protectable interest.
In conclusion, when drafting a restraint of trade clause, it is critical to strike a balance between protecting the business of the employer while safeguarding the constitutional rights of the employee.
In Beedle, when the enforceability of a restraint of trade clause was confirmed, the court was satisfied that “the respondent has offered a comprehensive explanation as to why two years is necessary to protect its interests.”
Ultimately, to ensure that a clause is enforceable, the employer must show that the restraint protects a legitimate interest, that interest is being threatened/prejudiced, the two conflicting interests are balanced appropriately, and the aspect of public policy were considered (Basson v Chilwan).
