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Restraint of Trade Agreements

What is a restraint of trade agreement?

It normally forms part of the terms and conditions of a contract of employment. A restraint of trade is an agreement between an employer and an employee, or a provision in an employment contract that restricts an employee from being employed by a competitor of the employer, or establishing a business in competition with the employer following termination of employment.

Restraint of trade & labour law

The first important thing to understand is that restraint of trade agreements do not fall under labour law, but are instead regulated by the Law of Contract.

Thus, if an employee and employer do sign a restraint of trade and end up in a legal dispute about the contract with the employer, the employee will not be able to turn to the CCMA or Bargaining Council for help.

The second point to consider is that case law in South Africa shows that restraint of trade agreements are legally enforceable, despite the common belief that they are not. Employees should not assume that a restraint agreement is a bluff by an employer. Therefore, signing (or later breaking) the contract should not be done lightly.

When can a restraint of trade agreement be enforced?

Case law in South Africa has set some precedents for restraint of trade agreements. As an example, in a dispute between an employer and an engineer who defected to its biggest competitor, the Supreme Court of Appeal ruled in 2007 that there was an obvious risk that the employee would disclose confidential information to his new employer.

Since the engineer received a great deal of proprietary training from the employer, the court found that the restraint of trade agreement was not unreasonable nor against public policy. The employee was interdicted from taking up his new job.

In a 2008 case between another company and a former employee, the Supreme Court of Appeal decided that the restraint was unenforceable. It reasoned that the employee had not acquired any confidential client information and had not received any training.

Since she was not leaving the business with anything she did not bring with her, the employer had no commercial interests to protect and it would be unreasonable to restrict her commercial activities.

What does this mean?

As the examples above indicate, the law around restraint of trade agreements can be quite complicated. But it can be summed up as follows: restraints are meant to stop the employee “stealing” intellectual property, clients and so on from the employer, but that does not mean that the employer can steal an employee’s livelihood. A restraint does not mean that an employee will never be able to continue his career in the same occupation at a different employer.

Employers must consider the following aspects when entering into a restraint of trade agreement:

  • How long will it last.
  • The geographical areas and business domains it covers.
  • The circumstances under which it will apply.
  • The nature of the commercial interest the employer seeks to protect.
  • How will it affect the employee’s ability to make a living if he leaves.

It is fair for the employer to ask an employee not to take privileged customer or product information to a direct competitor. However, it would be unfair for an employer to insist that an employee may not work anywhere else.

Restraint of trade contracts are contentious and complicated. Both employer and employee need to be rational and reasonable in how they approach them. There are no hard and fast guidelines for restraints.