The COVID-19 pandemic has caused enduring effects across the world, in ways that will be remembered for generations to come. The economies of many countries have suffered a huge knock, causing many businesses to review their modes of operation. Some businesses, however, had to close shop as their services or products were rendered superfluous. This left many workers without jobs, leaving them to bank their survival on state social assistance programmes. Some workers were lucky enough to only have their wages and working hours reduced for the company to remain in business while strategizing for a new normal.
As prospects of securing other employment become realistically bleak, most people have resorted to opening trades of their own in line with their skills and professions. Inevitably, some employers still in operation find themselves in competition with former employees. As a result, restraints of trade dominate the limelight when two competing interests are vying against each other. Whilst workers who lost jobs desperately sought new streams of income in their fields of qualification and trade, employers were faced with a new reality of more trade competition at a time of enormous challenges.
This article defines, addresses the purpose, and scrutinises the validity and enforceability of restraint of trade clauses in employment contracts.
A restraint of trade provision in an employment contract is one that prevents an employee from engaging in trade activities which are in direct competition with the business interests of the employer, for a certain period of time and within a specified geographical region after the employment relationship is terminated.
The purpose of a restraint of trade provision in an employment contract, is to preserve the employer’s goodwill, technical and business know-how, client links and trade secrets for a specified time, which may result in commercial harm to the employer’s business interests if not preserved. Restraints of trade seek to protect the business interests of the employer against unfair competition from existing or ex-employees who have benefited from trade skills, training and acquaintance with customers of, and from the employer.
It is worth mentioning that existing employees are usually bound by a conflict-of-interest provision in their employment contract, which limits their engagement in trade activities outside the business interests of the employer.
The protection provided by a restraint of trade is maintained, regardless of the manner in which the employment contract is ended, although the surrounding circumstances may be relevant to establish the reasonableness of the restraint. This was the view of the court in Reeves and Another vs Marfield Insurance Brokers CC and Another 1996 (3) SA 766 (A) at 772.
In order to be enforceable and valid, a restraint of trade clause must be reasonable based on the yardstick of public policy. When assessing the reasonableness of a restraint of trade, the nature, extent of the restraint and the period applicable to such restraint of trade come into question.
Typically, restraint of trade provisions stipulate that an ex-employee shall not engage in activities that are in competition with the business interests of the employer within a specified geographical area and for a specified timeframe. In this way the restraint of trade, the general public policy and the provisions of Section 22 of the Constitution of South Africa, Act 108 of 1996, which provides for an individual’s freedom of trade, are harmonised.
In Magna Alloys and Research SA (Pty) Ltd vs Ellis 1984 (4) SA 874 (A) the Court emphasised two important elements to consider when assessing a restraint of trade provision. Firstly, that agreements freely entered into, including ones with a restraint of trade provision, are prima facie valid and enforceable. However, the Court emphasised that contracts that are contrary to public policy cannot be valid and are therefore unenforceable. This is especially true when the restraint of trade is unreasonable and restricts an ex-employee’s freedom to trade to an extent that is contrary to public policy. The court further highlighted that due consideration should be had to the respective bargaining power of the employer and employee when the employment agreement was entered into. Whether or not a restraint of trade provision is contrary to public policy, is assessed on a case by case basis.
In Basson vs Chilwan & Others 1993 (3) SA 742 (A) it was noted that the employer sought to render the employee unproductive and economically inactive by requesting an order that the employee be ordered not to use his skill and expertise within most of Southern Africa for a period of five years. The Court found that such restraint would be unreasonable and unenforceable. The Court emphasised that the following must set the process of inquiry into the reasonableness of a restraining clause:
- Is there an interest of the employer which is deserving of protection at the termination of the agreement?
- Is such interest being prejudiced by the ex-employee?
- If so, does the employer’s interest way up qualitatively and quantitatively against the interest of the ex-employee, that the latter should be rendered economically inactive and unproductive?
- Is there any other facet of public policy (having nothing to do with the relationship between the parties) which requires that the restraint should either be maintained or rejected?
- Is the nature of the restraint wider than necessary to protect the employer’s interest?
In such challenging times as this, when the world is recovering from the COVID-19 pandemic, it is essential that one consults an attorney to get a thorough legal perspective of restraint of trade clauses and their applicability. We are here to advise and assist you. Contact us today for an opinion on the validity and enforceability of
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