Restraint of trade: how does it work?
More likely than not, a vast majority of employment contracts these days contain a restraint of trade clause. A restraint of trade clause, typically found in an employment contract, provides that the employee, after termination of employment, be restrained from performing similar work or accepting future employment in competition with his current employer, usually for a certain period of time after his termination of employment. There is no piece of legislation which regulates restraint of trade rights and thus is strictly a contractual arrangement between employer and employee.
In general there is a duty on employees to comply with restraint of trade clauses after termination of employment. However, some restraint of trade clauses may be deemed to be unenforceable.
The real difficulty lies in determining whether a restraint of trade clause is enforceable or not. In determining whether a restraint of trade clause is enforceable or not, a court will enquire into whether the prohibition on competition is reasonable. In Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A) the court laid down the test that a restraint of trade is enforceable and lawful unless it is shown to be unreasonable. This means that the employee then bears the onus to avoid enforcement of the restraint of trade. In determining the reasonableness, two basic principles come into conflict, namely the principle that everyone should have complete freedom to trade and earn a living as and where he pleases and in contrast, the principle of sanctity of contracts which means that all contracts freely entered into should be enforced.
Determining whether a restraint of trade is reasonable and enforceable
In determining whether a restraint is reasonable and thus enforceable, a court will consider, inter alia, the following factors:
is there an interest deserving of protection at the termination of the agreement;
is that interest being prejudiced;
if so, how does the interest weight up qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive;
is there another facet of public policy not having anything to do with the relationship between the parties which requires that the restraint should either be enforced or disallowed; and
is the restraint wider than is necessary to protect the protectable interest.
Enforcing a restraint of trade
A restraint of trade is enforced by means of an interdict sought by the employer whereby the employee is interdicted and restrained from taking up employment. If a final interdict is sought, three things need to be established, namely (i) there must be a clear right; (ii) an injury actually committed or reasonably apprehended; and (iii) the absence of any other satisfactory remedy.
Accordingly, employees should at all times be fully aware of the potential effect that a restraint of clause may have on them and similarly, employers should always ensure that any restraint of trade clause inserted in their agreements are drafted carefully to ensure that they are enforceable to the extent necessary in order to protect their protectable interests.
If you are either an employee or employer seeking some guidance on your restraint of trade provisions, we can advise you one the best way to approach your specific matter.