Restraint of trade provisions are a common sight in employment agreements and many individuals encounter a restraint of trade provision for the first time when they sign an employment agreement. Most individuals merely consider a restraint of trade provision to be a standard term of their employment agreement and fail to realise that it can have serious implications on their future employment. What follows is a brief consideration of the “ins” and “outs” of restraint of trade provisions.
What is a restraint of trade provision?
Restraint of trade provisions are generally characterised by the limitation of a person’s freedom to carry on an occupation, trade or business. These provisions are most commonly encountered in the following types of contracts:
- contracts of employment whereby the employee undertakes not to compete with the employer for a certain period and within a certain area after the employee has left the employer’s service;
- sales of the goodwill of a business whereby the seller agrees with the purchaser not to carry on a business in direct competition with the purchaser; and
- partnership agreements whereby each partner undertakes not to compete with the partnership after leaving it.
When is a restraint of trade provision enforceable?
The use of restraint of trade provisions have been the subject of discussion as many have considered their use unenforceable. The enforcement of a restraint provision brings the contractual values of sanctity of contract (i.e. contracts freely entered into must be honoured and if necessary enforced) and freedom of trade into play. Initially, South African courts gave preference to freedom of trade and consequently regarded all restraint of trade provisions as being against public policy and therefore void. However, in Magna Alloys and Research (SA) (Pty) Ltd v Ellis (109/84)  ZASCA 116, the Appellate Division overturned this approach in favour of sanctity of contract. The court held that in determining the reasonableness of a restraint of trade provision the court must consider the opposing principal policy considerations of public interest, which expects parties to comply with their contractual obligations, and the interests of society, allowing persons to be productive and be permitted to engage in trade and commerce.
In Reddy v Siemens Telecommunications (Pty) Ltd 2007 2 SA 48 (SCA) the court stated that “the substantive law as laid down in Magna Alloys is that a restraint is enforceable unless it is shown to be unreasonable, which necessarily casts an onus on the person who seeks to escape it”. Restraint of trade provisions are therefore now valid and enforceable as the applicant in a restraint enforcement application only needs to prove the agreement contains a restraint of trade provision as well as the employee’s breach thereof, as was the case in TIBMS (Pty) Ltd t/a Halo Underground Lighting Systems v Knight and Another (JA29/2017)  ZALAC 62. If the applicant does so, then the onus shifts to the respondent to prove why the binding agreement should not be enforced. This involves showing that to enforce the agreement would be unreasonable, and therefore against public policy.
The test for reasonableness
In Basson v Chilwan 1993 (3) SA 742 (A), the court proceeded to formulate a test to determine whether an restraint of trade provision is reasonable. This test has proved authoritative and the court posed the following four questions:
- firstly, is there an interest of one party (e.g. goodwill and confidential information) worthy of protection?
- if so, then secondly, is that interest threatened by the conduct of the other party?
- if that is further so, then thirdly, does such interest weigh up qualitatively and quantitatively against the interest of the other party to be economically active and productive?
- fourthly, is there another aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint should either be maintained or rejected?
The restraint will only be enforced if all the answers to the questions posed are in the affirmative.
The reasonableness of a restraint of trade provision clearly depends on the facts of every case. This was evident in the case of PB Hairdressing Organisation (Pty) Ltd t/a Carlton Hair International v Vinciguerra and Another (J2948/16)  ZALCJHB 8. The restrained employee was only 21 years old and had been employed at Carlton Hair as a junior stylist. He averred that he only accrued between 20 to 30 regular clients in the 6 months that he spent working at Carlton Hair, where a more senior stylist would have 12 to 20 regular clients a day. In this instance, the court held that the restraint of trade which restrained him until 18 November 2017 from within a radius of 10 kilometers from the front door of the salon, was against public policy and unreasonable because the employee was a junior employee, qualified for only 6 months and who was only 21 years old.
This case demonstrated once again that restraint of trade provisions will only be enforceable if the employer seeking to enforce the restraint has a legitimate proprietary interest worthy of protection and the restraint is reasonable.
VDMA’s team of experts are available to assist you and your business with any restraint of trade and employment law requirements you may have.
Published 11 January 2021