Restraint of trade – enforceability?

Restraint of trade clauses in employment contracts cause many arguments in the legal fraternity and amongst employers and employees, as there are no hard and fast rules to settle these disputes. Labour Law do not regulate restraint of trade agreements. Factors such as different industries, assets and trade secrets will determine the contract of such agreements.

When an employee enters into an employment agreement, the last thing on his mind is the ending of an employment relationship. One of an employers’ priorities is to protect his/her intellectual property, trade secrets, reputation and good will.

Does a restraint of trade clause or agreement provide sufficient protection for the employer’s business and is it enforceable?

To answer this question we need to look at the precedents set by the courts and Reddy v Siemens Telecommunications (Pty) Ltd (251/06) [2006] ZASCA 135; [2006] SCA 164 (RSA) (30 November 2006)is a good example and we still use this Appeal Court judgement today.

In this matter Mr Reddy signed a restraint of trade agreement which prohibited him from working for Siemens’s competitors. In the agreement Mr Reddy also agreed not to disclose trade secrets and confidential information belonging to Siesmens. Siesmens applied to the High Court for an interdict to prevent Mr Reddy from going to work for Ericson, a major competitor at the time. The Court held that it was sufficient cause to grant such an interdict if Siesmens showed that Mr Reddy had the knowledge and that he could use it to the detriment of Siesmens.

Therefor one can conclude that the purpose of a restraint of trade agreement would be to prevent a person from using information he learned at his previous employer to the detriment of such an employer when he moves on to a new job.

Mr Reddy however said that what he learned at Siesmans would be of no use to Ericson. He would not be working with any Siesmens customers and that the restraint was therefor of no force and effect. The Court held that the restraint of trade is indeed enforceable unless it is shown to be unreasonable. The person that alleges that the restraint of trade is unreasonable should prove it.

When determining the reasonableness, the following factors need to be considered:

  • Public interest – parties should comply with their contractual obligations.
  •  In the interest of society, all persons should be permitted to engage in trade and commerce or be employed, in order to earn a living.
  • Is there an interest that deserves protection? If such an interest exists, is such an interest threatened by another party?

In Reddy’s case, his restraint had limited restriction. He was allowed to work and make use of his own skills, and he was just not allowed to work for a competitor. This agreement restrained his choice of employer. The Court found that the restraint was not unreasonable, as Reddy’s loyalty would lie with the new employer. Due to the knowledge and technical know how Reddy has, he may very well have an opportunity to use it. This poses a real risk to Siesmens.

Our courts do enforce restraint of trade in principle. The enforcer of restraint of trade must however be aware of the factors that are considered by our courts. It is of the utmost importance for employers to seek professional advice with regards to the content of restraint of trades. The courts may very well not grant the relief sought due to the incorrect content or terms and conditions.

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LWO Regsadviseur - LWO Legal Advisor

LWO Regsadviseur - LWO Legal Advisor

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