Restraints of Trade

Restraints of Trade – Opinion of the Labour Court:

 

The position before and after the Constitutional dispensation has been summed up in and confirmed by Steenkamp J in both Esquire System Technology (Pty) Ltd t/a Esquire Technologies v Cronjé and Another (2011) 32 ILJ 601 (LC) and Continuous Oxygen Suppliers (Pty) Ltd t/a Vital Aire v Meintjes & Another Case no J 2073/11 (unreported, Labour Court Johannesburg, 17 October 2011).

In summary, as per para 36 of the Esquire judgement, Steenkamp J usefully sets out the present position of the law including the application of the Constitution:

  • Covenants in restraint of trade are [generally enforceable and] valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, i.e. one which unreasonably restricts the covenantor’s freedom to trade or to work.
  • Insofar as it has that effect, the covenant will not be enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case.
  • Such circumstances are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time the enforcement is sought.
  • Where the onus lies in a particular case is a consequence of the substantive law on the issue.
  • What that calls for is a value judgment, rather than a determination of what facts have been proved, and the incidence of the onus accordingly plays no role.
  • A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint:
  • the first is that the public interest require[s] that parties should comply with their contractual obligations, a notion expressed by the maxim pacta sunt servanda;
  • the second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions.

Both considerations reflect not only common-law but also constitutional values. Contractual autonomy is part of freedom informing the constitutional value of dignity, and it is by entering into contracts that an individual takes part in economic life. In this sense, freedom to contract is an integral part of the fundamental right referred to in s 22 [of the Constitution].

In determining whether a restraint of trade is enforceable and valid, a Court will consider a number of factors/principles. Therefore, as a guideline and to ensure that employers’ restraints of trade are protected and not contrary to public policy, these factors should [at the very least] be adhered to:

  1. The restraint of trade must be in writing and signed by the employee [Practicalities];
  1. It must define the business of the employer to determine the protectable interest [Proprietary and Protectable Interest];
  1. It must set out for how long the employee is restrained and in what area [Reasonableness];
  1. It must record that the employee is aware of all its terms and voluntarily concluded the same [Duress]; and
  1. It must specify what activity of the employee will be restrained (such as employment with a competitor or soliciting the employer’s staff or customers) [Specificity, and not vagueness and/or “one size fits all” approach].

Every matter dealing with restraint of trade agreements is dealt with on a case-by-case basis by the Courts, taking into consideration:

  1. The Factors/Principles as listed hereinabove;
  1. The Business of the employer [because the mere elimination of competition is not an interest deserving of protection by way of a restraint of trade];
  1. The Position held by the person against whom the restraint is being enforced and the subject-matter contained in that position (Senior/Management level or Key Employee versus Entry-Level Employee);
  1. Balancing the Interests of both individuals involved; and
  1. Public Policy – Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?

There is no one-size-fits-all approach that can be taken when dealing with restraint of trade agreements.

[Compiled and written by: Jeanne Pauw]