Validity of restraint of trade agreements

Bradley Workman-Davies & Kelly Sease

Werksmans

In many cases when employers hire executive-level, management or key employees, there is a recognition that these hires can impact the success of the business, due to the individual s recognition in their industry, or knowledge and experience, or client and customer relationships, or a combination of all of these qualities

Equally, employees can gain invaluable experience and form meaningful networks due to their positions at their employer

As such, it is not uncommon that employers seek ways to protect their proprietary interests after executive or key employees leave the organisation One such way is by incorporating restraint of trade provisions/clauses in employment contracts

This is an important innovation since there is nothing implicit in the employment relationship which allows for post-termination protection against unfair competition Any such protections must be concluded in contract between the parties

This is so that in the event of termination of the key person s employment, the restraint of trade clauses operate to restrict the employee from taking up employment of similar work/nature in competition with their former employer

Although these kinds of undertakings are fairly restrictive of an individual s rights to conduct a trade of their own choosing, and the constitutionality of such undertakings is sometimes queried, it must be appreciated that in SA these kinds of restrictive covenants are prima facie enforceable by a court However, since the courts are sensitive to the inroads which these kind of undertakings make on an individual s basic rights, the courts always reserve the discretion to assess the reasonableness of the restraints

When deciding whether restraints are valid and enforceable, courts will consider various factors, such as whether the employer has a protectable interest and result in being potentially prejudiced by the employee and whether the restraint is reasonable and against public policy Specifically, any posttermination restrictions must be for a reasonable specified period and should operate only within a specific geographical location

It is evident that enforceability of restraint of trade clauses is not as simple and straightforward as one may think The enforceability of a restraint of trade agreements/clauses may involve making a value judgment by the court tasked with enforcement to decide whether the restraint is reasonable in balancing the various rights and interests of the parties, and therefore enforceable

When drafting such clauses or agreements employers should consider all possible circumstances surrounding the termination of the employment to enjoy the full benefits arising therefrom

Also, care should be taken when settling disputes with employees

When contractual relationships have been concluded which would usually endure beyond the termination of the employment relationship, these should be specifically carved out from the ambit of a settlement, failing which the approach of the labour appeal court in Wheelwright (see article on pg 8) would be likely