Restraints of trade – can they be enforced, and if so, when will a Court enforce a restraint of trade agreement ?

The perception is that since the creation of a Constitution in South Africa that the entrenched constitutional right to freedom of trade, occupation and profession, automatically defeats a restraint of trade. This is not correct.

The perception is also that by simply reading the terms of the restraint of trade agreement and looking at the length of time that the restraint applies for, or looking at the size of the geographical area that the restraint covers, that it can be determined whether the restraint will be enforced, however this too is not correct.

So how is it then determined whether a restraint of trade will be enforced ? It is decided by looking at the totality of a number of factors.

Before dealing with those factors, first and foremost it needs to be understood that in principle, every restraint agreement signed by a restrainee is enforceable because parties should comply with their contractual obligations, and it is thus for the restrainee who wishes to be released from the restraint obligations, to show that the restraint is not only unreasonable, but also contrary to public policy.

What this means is that it would be detrimental to society if an unreasonable restriction is placed on a person’s freedom of trade or a person’s freedom to pursue a profession, as it is in the interests of society, that people be permitted, in so far as possible, to engage in commerce or in their professions.

The first step in the process of determining if a restraint is to be enforced, is that the employer must show that there is a restraint agreement in place with the employee; and secondly, the employer must show that the employee has acted in breach of that restraint.

Once the breach has been shown, it then needs to determined, based on all the facts, whether the enforcement of the restraint would be reasonable in the circumstances.

I now turn to deal with the factors that are considered.

5 questions need to be asked :

(a) Does the one party have an interest that deserves protection?

(b) if so, is that interest threatened (breached) by the other party?

(c) how does such interest weigh qualitatively and quantitatively against the interest of the other party to not to be economically active and productive?

(d) 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?

(e) does the restraint go further than necessary to protect the relevant interest ?

What exactly is an interest that is so integral to the above questions ?

A protectable interest in a restraint of trade agreement generally refers to confidential information (trade secrets), and/or to customer connections.

Customer connections is the extent to which an employee could take a customer or client to the new employer, or could easily induce the customer or client to follow the employee to a new business as a result of a close relationship established during the course of employment.

As far as trade secrets or confidential information are concerned, merely calling something confidential/secret, or subjectively believing that information is confidential, does not turn a secret into confidential information, and there are three requirements that need to be satisfied.

The three requirements are that the information must be : (a) capable of application in a trade or industry, ie. it must be useful and not be public knowledge; (b) known only to a restricted number of people or a closed circle; (c) be of economic value to the person seeking to protect it.

It does not suffice if only one of these requirements are met, all three requirements must be met.

Only once it has been established that there is in fact a protectable interest that is deserving of protection, and that interest is being threatened, then at that time the reasonableness of the restraint is looked at, which involves considering the following issues :

the nature of the restraint ( ie. what is it that the employee is being restrained from doing, for example, is the employee not allowed to work for a competitor; is the employee prevented from selling a particular type of item or from rendering a particular type of service, or disclosing particular information);

the duration / length of the restraint period, and

the geographical area of the restraint.

Once all the relevant factors have been considered and analysed, only then will it be determined whether the restraint is enforceable or not.

As the enforceability of a restraint of trade agreement is not a straight-forward exercise, whether you are seeking to enforce a restraint of trade agreement, or you are seeking to avoid a restraint of trade agreement, expert legal advice should always be sought at the first opportunity.