You have spent days and months, even years contemplating the idea of starting your own business, whilst still employed. Exciting, right? You finally gather up the courage to resign from your employment, to pursue this new business adventure. Now, your new business adventure offers similar products/services to those of your former employer. When you took up employment with your former employer, the contract of employment contained a number of restraint of trade clauses. One of the clauses restricts you from doing a similar business to that of your former employer, for a certain period. Despite this fact, you continue with the business venture until you receive court papers from the former employer, interdicting you from proceeding with the same, alleging a breach of contract.
In this article, we briefly discuss restraint of trade provisions and some of the legal issues around this. Additionally, whether a restraint of trade can be used as a safeguard to prevent a former employee of a company from doing a similar business to that of a former employer.
What is a restraint of trade?
A restraint of trade is a clause within a contract of employment and other business agreements, to protect the interests of a restrainer. A restraint of trade protects interests such as trade secrets, confidential information, and goodwill. A trade secret is information about the business that is not known or available to the public. It is unique information that is capable of application in trade or industry, secret and confidential and has economic value to the proprietor e.g. price lists, customer lists, methodologies, recipes, designs, manuals, specifications n etc.
The object of a restraint of trade clause is to protect an employer’s economic interests after the employment contract has ended (NRG Office Solutions (Pty) Ltd v Alexander).
Is a restraint of trade enforceable?
Restraint of trade clauses are enforceable provided that they are reasonable. The onus of proving unreasonableness rests upon the person alleging it. Restraint of trade clauses generally prevent employees from competing with an employer’s competitors, with conditions i.e. working or doing business with its direct competitor after the termination of the contract of employment (with conditions attached). In essence, they are not designed to eliminate competition but to protect the interests of an employer.
Determination of reasonableness
The determination of reasonableness requires a balancing of the competing interests of both parties (South African Recycling Equipment v Leleux).
When considering reasonableness, public policy and constitutional considerations are taken into account. Public policy requires that restricted parties should be able to: compete freely and fairly in the marketplace, use their skills and advantage. Where the restraint of trade is aimed at curbing or preventing fair competition, it will be contrary to public policy and unreasonable (Sibex Engineering Services (Pty) Ltd v Van Wylie and Another). This supports the constitutional right to freedom of trade. Public policy also requires, in general, that parties should comply with contractual obligations that have been freely and voluntarily undertaken.
Further, the determination of reasonableness should take into account the 4 factors set out in Basson v Chilwan, to the effect that it should be established whether, inter alia, there is an interest deserving of protection and if the other contracting party threatens such interest. The duration of the restraint will also be considered.
Basson v Chilwan and Others (332/1991) [1993] ZASCA 61; 1993 (3) SA 742 (AD); [1993] 2 All SA 373 (A) (17 May 1993)
This case concerned a former employee who resigned to establish a business competing with former employer’s business.
A former employer (applicant) successfully enforced a restraint of trade where two former employees (respondents) established a business that was in direct competition with the applicant, offering similar products (Freepak BK v Duraan and Another). On one hand, the applicant sought to enforce the restraint of trade on the basis of protecting a legitimate interest (confidential information and trade secrets), particularly its client base or customer connections, while on the other hand, balancing the rights of the respondents to freedom of trade and engaging in economic activities had to be considered.
The decision of the court in this case took into consideration the fact that, the respondents had close contact with the applicant’s client base, more so because they have been the face of the applicant’s Kimberley branch and had exclusive dealings with the applicant’s customer connections. Therefore, the risk of harm to the applicant’s customer connection could not be discounted. It is clear that restraint of trade clauses or agreements is enforceable. However, each case will be dealt with based on its own merits. Restraint of trade is a necessary safeguard for employers to protect their confidential information, trade secrets and goodwill, provided that the same is not unreasonable and against public policy. Seeing that an employer may be vulnerable when employees leave with the knowledge of trade secrets and confidential information about its business, the language of the restraint of trade should be carefully worded and clear, to protect the interests of the employer. It is important to note that the purpose of such restraint of trade clause or agreement should not be to eliminate competition.
Please do not hesitate to contact us should you need help with reviewing restraint of trade clauses or agreement e: info@mhmattorneys.co.za c: 082 408 8884
Please note that the information contained in this article is for general information purposes only and does not constitute legal advice. Please contact an attorney for your own unique circumstances.
