Checking the facts on Restraints of Trade

I signed a Restraint of Trade. Now I want to quit my job. Is the restraint of trade legal?” This question is regularly asked by employees – generally around the time that the employee decides to look for other employment. Sometimes the question is only asked after the employee has taken up a position at another company – often the competitor. And then they get a fright when suddenly faced with legal action based on a restraint they had forgotten that they had even signed.

 

The general rule of thumb is: Restraint of Trade Agreements are indeed valid. Unless a court determines otherwise. A court will declare a restraint of trade to be invalid if it finds the restraint to be against public policy, which renders the document unreasonable and unenforceable. The obligation of proving that the restraint is against public policy and unreasonable falls on the (ex-)employee.

 

The South African Appellate Division (as it was then known) set out a test to determine the reasonableness of a restraint in the 1993 case of Basson v Chilwan. The questions to be asked are:

  • Does the employer have an interest that is worthy of protection after the termination of employment?
  • If so, does the employee threaten that interest?
  • Does the employer’s interest outweigh the employee’s interest (the employee’s interest being the right to be economically active and productive)?
  • Is there any aspect of public policy, having nothing to do with the relationship between the parties, that requires the restraint to be maintained or rejected?

 

Only if the employee’s interests outweigh those of the employer’s would the restraint be regarded as unreasonable and unenforceable.

 

The next question, of course, is “what is an interest that is worthy of protection?” Proprietary interests that the court considers worthy of protection include:

  • Confidential information: this is company information that is not in the public domain, is capable of application in the industry, is not generally known by people, and has economic value to the employer.
  • Trade connections: being the employer’s relationships with customers, prospective customers and suppliers. In particular, the court will consider whether the employee has built up a relationship with the customer / supplier of a nature that, when s/he leaves the company, s/he is able to influence the customer / supplier to follow them to their new employment.

 

A reasonable restraint of trade is one that is drafted to protect the employer’s protectable proprietary interests. The restraint cannot be more stringent than is necessary to protect these proprietary interests. And it will only be enforced if the court believes that the confidential knowledge gained is sufficiently important, or the relationship that the employee has built up with trade connections is sufficiently strong to cause damage to the employer.

 

So, employers, the message is clear: be reasonable in drafting your Restraints of Trade.

 

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.

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