RESTRAINT OF TRADE CLAUSES: WHAT THEY MEAN AND WHEN THEY APPLY
What is a restraint of trade?
A restraint of trade is a clause ordinarily found in employment contracts that seeks to prohibit employees from establishing their organizations that will render the same services as the employer and from working for a competitor of the employer. The intention behind this clause is to ensure that employees do not use the employer’s confidential information and trade secrets at any other entity as this would place such an entity at an unfair advantage. The clause will state the length in which the employee may not join a competitor or establish their own organization which would be a competitor to the employer, however the time period will vary from each employment contract.
Enforceability of restraint of trade
Restraint of trade clauses are enforceable, and this can be seen in the case of Magna Alloys and Research (SA) Ltd v Ellis [1984] (4) SA 874 (A) where the court held that restraint of trade agreements are enforceable on the condition that they are not unreasonable towards the employee. Reasonableness is subjective to the courts, however, employers and employees may test what is unreasonable by weighing the right of the employee to render services and earn a living against the right of the employer to safeguard its confidential information that the employee had access to.
In addition, courts often also assess the position that the employees hold. Restraint of trade agreements entered into by employers and employees with high-ranking positions are more likely to be enforceable as compared to other employees. Employers are to be careful not to have all employees enter into restraint of trade agreements as the courts may not regard all the agreements as enforceable.
Is a restraint of trade agreement still enforceable if an employee was dismissed?
In the Reeves and Another Marfield Insurance Brokers CC and Another 1996 (3) SA 766 (A) the Labour Court of Appeal was required to assess whether a restraint of trade agreement pertaining to an employee whose contract had terminated by the employer is enforceable. The Labour Court held that a restraint of trade agreement usually comes into effect once the relationship between employee and employer has been terminated meaning that the reasons as to why the relationship was terminated is irrelevant to the enforceability of the agreement. Employers are to be cautioned that the enforceability of the agreement may be impacted if an employee’s contract is terminated in bad faith. An employee’s contract should not be terminated solely on the basis of depriving them of working for a set period of time as this would constitute bad faith on the employer’s side.
Recourse for breach of agreement?
Upon realization by an employer that a former employee has been employed by a competitor, or that the former employee has established an organization that will be providing the same services, the employer is entitled to approach a competent court for an urgent interdict enforcing the restraint.
The employer is also entitled to approach the courts claiming damages that they would have suffered due to the former employee working for the competitor or establishing an organization rendering the same services.
Conclusion
In conclusion, it is imperative that parties that have entered into a restraint of trade agreement are aware of what would be required of them in the event that they are ever before a court of law either to enforce the agreement or to avoid the agreement.
Employers are also reminded that absence of a well-drafted restraint of trade agreement for high-ranking employees, exposes them to having little to no legal recourse when the employees establish their own organizations or join a competitor of the employer.
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