Restraints of Trade in Employment Contracts

A Restraint of Trade is a valuable and important provision in any employment contract. It must be carefully drafted to protect the employer and be consistent with the legal considerations. This note focuses on what a Restraint of Trade is and which considerations an employer must keep in mind when wanting to enforce it against a former employee.

What is a Restraint of Trade and how can an Employer successfully enforce it against a former Employee?

Restraints of Trade (“ROT”) appear in many employment contracts. They protect the protectable interests of the employer, such as customer information, contacts, pricing structures and supplier information. It prevents the employee from working in the same trade, engaging in the same business venture, working for a competitor, and/or from recruiting former employees and/or customers from the previous employer.

The ROT can apply for a specified period and/or area and a reasonable specified period even after termination of employment.

Contrary to popular belief ROTs are, as a general principle, binding and enforceable. Hence, it was held in Magna Alloys and Research (SA) (Pty) Ltd v Ellis that all contracts, including ROTs, are valid and enforceable, if not contrary to public policy. In ROT’s there are two competing interests which must be weighed against each other: (1) it is in the public interest to enforce compliance with contractual terms entered into freely, even if they are unfair, versus (2) the individual’s right to freely engage in commerce or a profession of their choice.

The ROT must thus be judged against the criteria of reasonableness and public policy.

The factors relevant to determine the validity of the ROT, as confirmed in Esquire System Technology (Pty) Ltd v Cronje are the nature and the reasonableness of the restraint in respect of its extent and duration and, particularly whether the employer has a protectable interest. This of course depends on the facts of each case.

The reasonableness of the ROT will be judged by considering the circumstances that will arise if the ROT is enforced at the time when the Court is approached, rather than those which were present when the contract was concluded, as appears from Oomph Out of Home Media (Pty) Ltd v Brien.

Since ROTs are, on the face of it, enforceable, the burden of proving their invalidity rests on the employee who challenges the ROT. This can be done by proving on a balance of probabilities that the enforcement of the ROT will be contrary to public policy as was the case in Esquire System Technology (Pty) Ltd.

However, due to the nature of the proceedings, the Court will judge the reasonableness of the ROT by reference to various factors, rather than the onus, which is discussed in more detail in C Garbers’ “The New Essential Labour Law Handbook”. It is thus important for a ROT to set out clearly the protectable interests which the employer seeks to protect by the ROT, and by having the employee recognise in writing the validity of the protection sought. That allows the employer to prove that the ROT was reasonable on a balance of probabilities, which will be in the employer’s best interests to prove.

The mere undertaking by the former employee to not breach the ROT will have no effect on the decision regarding its enforcement, according to New Justfun Group (Pty) Ltd v Turner, which also confirmed the employer only needs to invoke a restraint and prove a breach has occurred, and the employee must then make out a case as to why the ROT is unenforceable.

If the employer runs a risk of the former employee using confidential information at another employer that is in direct competition with the previous employer, it will not offend public policy to hold the employee to the ROT. This principle is apparent from Garden Route Insurance Brokers v Liz-Mare Roberts and Another (unreported) where this firm acted for the Applicant, as well as the Ball v Bambela Bolts (Pty) Ltd and New Justfun Group decisions.

An ROT which only seeks to eliminate competition or prevent an employee from using their own knowledge, expertise, or skill, even if it were obtained in developing a specialized skill, will not be enforced as per Basson v Chilwan. The employer’s protectable interest must thus go beyond this.

The enforcement of the ROT can also be determined by the Court wholly or partially. Some provisions in the ROT can thus be determined to be unreasonable, therefore unenforceable, while others are found to be reasonable, therefore enforceable.

During the (usually urgent) proceedings, consideration must also be given to whether the new employer, who is enabling the former employee to be in breach of the ROT, ought to be joined as a respondent.

A ROT is a powerful tool in any employment contract. It must be carefully drafted to protect the employer and be consistent with the legal considerations of reasonableness and public interest, and a protectable interest on the employer’s part. A court will not enforce a restraint which serves no interest other than preventing fair competition.

Contact us if you require assistance in the drafting or enforcement of an ROT.

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List of References:

1. Magna Alloys & Research (S.A.) (Pty) Ltd v Ellis [1984] 2 All SA 583 (A).
2. Esquire System Technology (Pty) Ltd t/a Esquire Technologies v Cronje and Another (2011) 32 ILJ 601 (LC).
3. Basson v Chilwan and Others 1993 (3) SA 742 (AD).
4. Oomph Out of Home Media (Pty) Limited v Brien and Another (10233/2020) [2021] ZAGPJHC 124.
5. New Justfun Group (Pty) Ltd v Turner and Others (2018) 39 ILJ 2721 (LC).
6. Ball v Bambela Bolts (Pty) Ltd & another (2013) 34 ILJ 2821 (LAC).
7. Garden Route Insurance Brokers v Liz-Mare Roberts and Another (unreported) (Case Number P23/22 handed down on 15 March 2022) (LC).
8. Garbers, C The New Essential Labour Law Handbook 7ed (2019).