What exactly is a Restraint of Trade agreement, and how valid is it?
It is a phrase that one often hears, and we generally understand that it has something to do with what you are allowed to do and what you are not allowed to do when you want to resign from one job to start another – but what exactly is it?
Restraint of Trade agreements are not governed by Labour Law, but rather by Law of Contract. There are no hard and fast rules, since employers are involved in different industries with different environments, customers, assets, trade secrets, etc, that need to be protected in different scenarios and in different ways.
To start with, a definition:
In the matter of Petrofina Ltd v Martin 1996, Diplock J defined a restraint of trade as being “a contract in which one party (the employee) agrees with another party (the employer) to limit or restrict his future freedom to trade with another external party, who was not a party to the employer/employee contract”.
An employment contract may often contain a restraint clause in which employer and employee agree on certain limitations or restrictions, which would apply to the employee not only while in the current employment, but also when the employment is terminated.
The purpose of a restraint clause
The purpose of a restraint order is in essence that it does not necessarily imply that an employee would actually use trade secrets and confidential information in his new employment (for a competitor or himself) – but that there is a possibility that he could do so.
The restraint is aimed at preventing a person with the knowledge of confidential technologies or business information, obtained as a result of his current employment, from using them to the detriment of the employer.
It is sufficient that the employee has the opportunity to disclose confidential information at his disposal – he does not actually have to disclose it. The fact that the opportunity exists poses a risk, and the intention of the restraint is to relieve the current employer of precisely this risk of disclosure.
What is our courts’ view?
South African courts apply the common law principle that a restraint agreement is enforcable, unless it is against public policy or interest. In order to make it unenforceble, the onus of proof that it is against public policy or interest is on the employee.
The Supreme Court of Appeal has said that the question of the validity and enforceability of restraint agreements involves the balancing of two policy considerations:
- Public interest: parties should comply with their contractual obligations.
- All persons should, in the interests of society, be productive and be permitted to engage in trade and commerce in order to earn a living.
A reasonable agreement is required
In order to enforce the agreement, an employer would have to show that there was a reasonable agreement in place, and that this agreement has been broken. When this has been done, the court will look at the terms and reasonability of the agreement. Most often, the terms around duration and geographical location will be examined, taken in context with the type of business involved: In certain types of business, a country-wide restraint of 2 years may be deemed reasonable, while in other disciplines 6 months in an area of 5 km may be regarded as appropriate. “It all depends”
Do you actually have something worth protecting?
The employer would also have to show that there is indeed something to be protected. A good question to ask is: What needs to be protected, against what? One can not rely on a restraint of trade order to prevent competition. An employee should not be prevented from making use of his own skills and abilities which are ‘a part of himself’ (even if those skills were obtained in the employment of the employer). The restraint should only place a limit on the employee from being employed by a competitor, or becoming a competitor himself. The employee is restrained only in the choice of his employer, for a limited period. The issue is not that the employee is going to use his skills to work, but rather who he will be working for, and whether he takes with him information or skills that can hurt the original employer. If there is nothing to protect, there is no need to enforce the agreement.
Best time to sign a Restraint of Trade
It is important to examine how and when a Restraint of Trade agreement is signed. If an employee already has an established employment contract, and is then required to sign a Restraint of Trade agreement at a later stage, the employee may allege that he was “forced” to sign the agreement, in fear of losing his job. It would be up to the employee to prove that this was the case.
Restraints of trade are effectively contractual arrangements aimed at delaying competitive activities that would otherwise be legal. To be enforcable, they need to be valid agreements, and they need to be reasonable.
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