Restraint of Trade

“Liberty exists in proportion to wholesome restraint” – Daniel Webster

Article by Joshua Nattar (Senior Labour Advisor)

Introduction

Many employment contracts contain a restraint of trade clause, but employees often overlook this provision, unless the employer elects to enforce that specific clause.

This article discusses the legality of such, are they valid and enforceable?

Purpose of Restraint of Trade:

A restraint of trade agreement emanates from contractual law and is binding, as it applies to the principle of unlawful competition.

The most typical purpose of a restraint of trade clause is to prevent employees from competing with their previous employer for the business of such an employer. The primary intention of this provision therefore is to protect the employer’s proprietary interests, including trade secrets, confidential information and customer database from falling into the hands of the competitor.

A restraint of trade clause in an employment contract stipulates that in the event of termination of the employment, the employee may be restricted from performing certain work, within a specific geographical location, for a specific period of time.

In the Labour Court (LC) case of ABSA Insurance and Financial Advisors (Pty) Ltd v Jonker and Another, ABSA Insurance and Financial Advisors (Pty) Ltd v Jonker and Another (LC) (unreported case no C741/17 and C742/17, 17-11-2017), Steenkamp J confirmed that South African law recognises two forms of unlawful competition, being –

• unfair use of a competitor’s fruits and labour; and
• the misuse of confidential information in order to advance one’s business interests and activities at the expense of a competitor.

In the Supreme Court of Appeal (SCA) case of Reddy v Siemens Telecommunications (Pty) Ltd 2007 2 SA 486 (SCA), the court found in favour of the employer:

Reddy, resigned from Siemens to join Ericsson. The Siemens contract of employment, stipulated that he may not be employed by a competitor for a period of one year after termination of his employment and to not disclose trade secrets and confidential information belonging to Siemens. The court found that the restraint was aimed at preventing a person with knowledge of confidential technologies from utilising them to the detriment of the employer.

The court held that a restraint of trade agreement is enforceable unless it is shown to be unreasonable. The test for reasonableness, is two-fold:

1. The first is that of public interest, which requires that parties should comply with their contractual obligations.
2. The second is that all persons should, in the interests of society, be productive and be permitted to engage in trade and commerce or the professions, in order to earn a living.

In this case, the court found that the circumstances were such that the restraint was neither unreasonable nor contrary to public policy. The restraint did not prevent him from obtaining employment – it only restrained his choice of employer, for a limited duration.

Restraint of Trade and Section 197 of the Labour Relations Act: Transfer of a Business as a Going Concern

In the case of Slo Jo Innovation (Pty) Ltd v Beedle and Another (J 737/22) [2022] ZALCJHB 212, According to Beedle (employee), there was no restraint of trade in place between Slo Jo Innovation and herself, as a restraint of trade agreement does not by law pass from one employer to another, placing reliance on the 2017 High Court decision in Laser Junction where the court held that only contracts of employment and not restraints of trade are transferrable under section 197 of the LRA.

However, the LC in this matter deviated from the decision of the Laser Junction case, concluding that a restraint of trade agreement, concluded between an employer and employee is transferable under section 197 of the LRA.

Restraint of Trade and Settlement Agreements:

The LC in the matter of CP De Leeuw Johannesburg (Pty) Ltd v Wheelright and Others (J 229/22) [2022] ZALCJHB 107 (30 May 2022), considered whether a CCMA agreement in “full and final settlement of all and any claims which the parties may have against each other,” extinguished the employer’s rights in terms of the restraint of trade agreement.

The LC found that the CCMA settlement only included claims that existed at the time of conclusion thereof, and not to future claims that did not exist at the time of the settlement agreement.

Therefore, settlement agreements do not automatically terminate the restraint of trade agreements and will need to be specially provided for to extinguish them.

Conclusion

The reality is that restraint of trade clauses in employment contracts are recognised as being valid and enforceable. Therefore, we urge you to familiarize yourself with the provisions of our contracts.

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