In South Africa, restraint of trade agreements are commonly included in employment contracts to safeguard a company’s interests when an employee leaves the organisation. These agreements aim to prevent employees from engaging in activities that could harm the former employer, such as working for a competitor, starting a competing business, or misusing confidential information gained during their employment.
Legal Basis of Restraint of Trade
South African law generally recognises the validity of restraint of trade agreements. The legal foundation for their enforceability stems from the principle of pacta sunt servanda – the idea that agreements freely entered into must be honoured.
This means that a restraint of trade clause is enforceable unless it can be proven to be unreasonable and contrary to public policy.
The South African Constitution upholds the right to choose one’s trade, occupation, or profession, which forms part of the debate around the reasonableness of a restraint of trade. However, the courts have found that while these constitutional rights are important, they must be balanced against the employer’s right to protect its legitimate business interests.
Criteria for Enforceability
When a dispute arises regarding the enforceability of a restraint of trade agreement, the party seeking to escape the restraint (usually the former employee) bears the burden of proving that the restraint is unreasonable. If they fail to do so, the restraint is upheld.
The reasonableness of a restraint of trade agreement is assessed based on several factors:
Legitimate Interest:
The employer must demonstrate that it has a legitimate interest worth protecting, such as trade secrets, client relationships, or sensitive business information.
Geographical Scope:
The scope of the restraint should be limited to the area where the employee’s activities could potentially harm the employer. A broader geographical restriction may be considered unreasonable if the employee’s activities do not affect the business in certain regions.
Duration of the Restraint:
Courts assess whether the restraint period is reasonable. Longer restraints may be considered too restrictive unless the employer can justify the duration as necessary to protect its interests.
Public Interest:
The courts also consider whether enforcing the restraint would unfairly limit an employee’s ability to earn a living. Public policy requires balancing the employee’s right to work with the employer’s right to protect its business.
Recent Developments and Case Law
South African case law has continually evolved around restraint of trade disputes. Notable judgments from the Constitutional Court and other high courts have upheld the general enforceability of these agreements, but have also clarified the need for reasonableness.
In the case of Basson v Chilwan (1993), the court set out a key test for determining whether a restraint is reasonable. The court ruled that to be enforceable, the employer must show:
- That the restraint protects a legitimate interest;
- That the interest is deserving of protection;
- That the employee’s action would harm that interest; and
- That the restraint does not impose an unreasonable limitation on the employee’s ability to earn a livelihood.
Recent judgments emphasise that each restraint of trade case is determined by its specific facts. Courts scrutinise whether the terms are reasonable in the context of the industry, the employee’s role, and the nature of the employer’s business.
Balancing Employer Protection and Employee Freedom
Ultimately, restraint of trade agreements in South Africa are a balancing act between protecting businesses and ensuring individuals are not unfairly restricted in their professional opportunities. South African courts lean toward fairness, ensuring that agreements are neither excessively restrictive nor unnecessarily broad.
Employers should draft restraint clauses carefully, ensuring they are specific, limited in scope, and proportionate to the interest being protected. Employees, on the other hand, should seek legal advice before signing contracts that include restraint of trade clauses to understand the implications fully.
In South Africa, restraint of trade agreements serve an important role in protecting employers’ business interests. However, they must be balanced against the rights of employees to engage in their chosen trade or profession. While these agreements are enforceable, they must pass the reasonableness test in order to stand in court. Both employers and employees should be mindful of the legal intricacies involved and seek expert advice to navigate this complex area of law.
