Restraint of trade clauses: are they practical to enforce?

Many employment contracts, especially in the software design industry, contain so-called Restraint of Trade clauses to protect a company’s trade secrets and specialised know-how from being exploited when a former employee leaves or is head hunted by a competitor. But in a super connected world where information is a currency one should seriously consider whether restraint of trade clauses are still practically enforceable

Restraint of trade clauses protects confidential information. Whether information is confidential in the sense of being a protectable interest is basically a factual enquiry and is there no limit to the potential categories of information which may be regarded as trade secrets, which trade secrets are often specified and listed in employment contracts.

Under the influence of the English law, restraint of trade clauses were regarded as against the public policy and as such invalid until approximately 1994. However, the appeal case Magna Alloys and Research (SA)(Pty) Ltd v Ellis 1984(4) SA 874 (AD) brought dramatic change in this regard when it held that:

“’n Mens kan dus met veiligheid aanvaar dat daar in ons gemenereg niks is wat verklaar dat ‘n bepaling in ‘n ooreenkoms wat die handelsvryheid van ‘n party inkort, bloot om daardie rede ongeldig of onafdwingbaar is nie.”

the court further held that:

“…dit in die openbare belang is dat persone hulle moet hou aan ooreenkomste wat         hulle aangegaan het…”

and that:

“…dit in die belang van die gemeenskap is dat iedereen vir sover moontlik toegelaat moet word om hom vrylik in die handelswereld of in sy beroep te laat geld.”    

These two values became the corner stones against which the enforceability, or otherwise, of a restraint of trade was thereafter judged.

However, the court has a general discretion to narrow down a restraint of trade which was phrased in too wide terms and as such, having been found to be against public norms (contra bones mores) in order to enforce it – National Chemsearch (SA) v Borrowman & Another 1979(3) SA 1092 (T). In the referred case it was held that courts must consider the prevailing circumstances at the time when someone wants to enforce the restraint of trade clause and that courts may also decide to only partially enforce such clauses. Although this case has not received the seal of approval from the Constitutional Court it has been followed by numerous Provincial Courts and reaffirmed in the Court of Appeal in Sunshine Records (Pty) Ltd v Frohling & Others 1990 (4) SA 782 AD.

Thus the general yardstick applied to establish whether enforcement of the restraint of trade clause will be against public interest is reasonableness. In Reeves & Another v Marfield Insurance Brokers CC & Another 1996 (3) SA 768 (AA) the court held that:

“In general, the enforcement of an unreasonable restraint of a person’s freedom to trade will be contrary to the public interest. The principle enquiry therefore is whether, having regard to all the circumstances of the case, the restraint can be said to be reasonable. The onus of proving unreasonableness is upon the party seeking to avert the enforcement of the restraint.”

It is thus clear that the two constitutional values that enter the framework in deciding whether a restraint of trade is reasonable and therefore enforceable or not, is the “freedom to trade” and exercising one’s profession on the one hand and the principle of “pacta sund servanda” on the other hand and did the court state the following in guidance in Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 486 (SCA) as to how courts must exercise their value judgement in this regard:

“A court must make a value judgement with true principal policy considerations in mind in determining the reasonableness of restraint. The first is that the public interest requires that parties should comply with their contractual obligations, a notion expressed by the maxim pacta sund servanda. The second is that all person should in the interest of society be productive and be permitted to engage in trade and commerce for the professions. Both considerations reflect not only common law but also constitutional values. Contractual autonomy is part of freedom informing the constitutional value of dignity, and it is by entering into contracts that an individual takes part in economic life. In this sense freedom to contract is an integral part of the fundamental right referred to in section 22 of the South African Constitution, which guarantees ‘every citizen … the right to choose their trade, occupation or profession freely’, reflecting the closeness of the relationship between the freedom to choose a vocation and the nature of a society based on human dignity as contemplated in the Constitution.”  

The Constitutional Court in Barkhuizen v Napier 2007 (5) SA 323 subsequently held that:

“…the proper approach to the constitutional challenges to contractual terms is to determine whether the term challenged is contrary public policy as evidenced in the constitutional values, in particular, those found in the Bill of Rights. This approach leaves space for the doctrine of pacta sunt servanda to operate, but at the same time, allows courts to decline to enforce contractual terms that are in conflict with the constitutional values, even though the parties may have consented to them.”

This was also confirmed in Den Braven SA (Pty) Ltd v Pillay & Another 2008 (6) SA 229 (D&CLD).

As the law presently stands it is clear that a convenant in restraint of trade (or of a person’s profession) is prima facie valid and enforceable unless the covenantor can prove that it is against public policy and therefore unenforceable. The onus to prove that would be on the covenantor. It will normally be against public policy and invalid if the restraint is unreasonable if weighed against the principles enshrined in the Constitution as referred to above, which principles include: the kind of work that can be performed; the area within which the restraint is to be enforced and the time period limited to the restraint.

Retraint periods of up to twleve months stipulated in contract clauses of the employment contract and the restraint being applicable to specific kind of work the employee may or may not be performing, considering that your company may be directly competing with another who will now employ your former employee, seem to be reasonable, valid and not against public policy.

However, the specification contained in some clauses that stipulates that a restraint is applicable to “any geographic territory in which [a company] does business” seems far too restrictive considering a person’s constitutional right to choose to exercise his or her profession freely. This may have the practical effect that an employee will be barred from exercising his or her profession anywhere in the RSA, which is obviously unreasonable and may render the enforcement of the restraint of trade clause either invalid or only partially enforceable. Restraint of trade clauses usually determine a particular area (x km radius for example) within which a previous employee may not exercise his profession, but does not exclude an entire country or countries.

The practical outcome of any restraint of trade clause in a specific matter will all depend on the extent that a company is willing to actively enforce same.

By

Marietjie Botes
marietjie@dyason.co.za
Twitter: marietj72675939

Electronic signatures worth the screen they are signed on

People sometimes opine that contracts aren’t worth the paper it is written on, and considering paper’s evolution since it was made by the Chinese in 105 A.D. it is clear that the anticipated contractual consequences must have been worthless indeed. But paper, times and technology change. These days’ people may wonder if contracts are worth the screen it is displayed on. Long gone are the days when your inability to find a pen will prove to be an obstacle to the signing of an agreement. But let’s start at very beginning … (with apologies to The Sound of Music)

Common law principles of contract

A contract is an agreement between parties in which they reach a “meeting of the minds” in respect of certain rights and obligations between the parties that is recognised and enforceable by law. The three basic essentials of a contract is: 1) agreement; 2) contractual intention and 3) consideration. Accordingly a contract, unless legislation provides extra requirements, such as that the agreement must be in writing, is validly and legally concluded if parties reach an agreement containing these essentials.

For contracts concluded in the above circumstances it is clear that a “normal” electronic signature would be sufficient.

Electronic signatures

The Electronic Communications and Transactions Act 25 of 2002 (ECTA) defines an electronic signature as data attached to, incorporated in, or logically associated with other data and which is intended by the user to serve as a signature.

Thus considering the above contractual essentials, signing an electronic pad with your finger at the pharmacy will create a binding agreement.

However, section 13(1) of the ECTA provides that:

“Where the signature of a person is required by law and such law does not specify the type of signature, that requirement in relation to a data message is met only if an advanced electronic signature is used.”

Only property and option agreements are (for the time being) legally required to be in writing and therefore requires a signature by law, as contemplated above, which signature will require a so-called advanced electronic signature. All other contracts may thus be signed by merely affixing an electronic signature by attaching data to, or incorporating data in, or logically associating data with other data and which is intended by the user to serve as a signature to the contract – with other words signing on the electronic signature pad and trust the software to do its magic. A contract signed with an electronic signature will have the same legal validity and enforceability as a “physical” or old school paper based contract or even a verbal agreement. The main challenge, as with a verbal agreement, lies with proving the actual agreement reached between the parties and the integrity or authenticity of the signature attached to such a contract.

Contracts in terms of the National Credit Act 34 of 2005

For example: Micro lending agreements are regulated by the National Credit Act 34 of 2005 (NCA) in which an agreement is defined as:

“…an arrangement or understanding between or among two or more parties, which purports to establish a relationship in law between those parties”.

Strangely enough section 2(3) of the NCA does not require a specific method of signature, but provides an option between a “normal” electronic signature OR an advanced electronic signature (the difference which is discussed above) and detailed as follows:

2(3) if a provision of this Act requires a document to be signed or initialed by a party:

(a) an advanced electronic signature, as defined in the Electronic    Communications Act, 2002 (Act No. 25 of 2002); or

(b) an electronic signature as defined in the Electronic Communications Act,

2002 (Act No. 25 of 2002), provided that:

(i) the electronic signature is applied by each party in the physical presence of    the other party or an agent of the party; and

(ii) the credit provider must take reasonable measures to prevent the use of the consumer’s electronic signature for any purpose other than the signing or initialing of the particular document that the consumer intended to sign or initial.

Although the NCA does not per se require a small credit agreement to be in writing or signed, sections 116–119 of the NCA specifically provides for initialling in the margin next to any changes effected to a small credit agreement, if a consumer has already signed a credit agreement, and that under these circumstances changes must be reduced to writing and signed by both consumer and credit provider, even if the changes were initially agreed upon orally between the parties.

It thus seems that the NCA, like other legislation, also aims towards the requirement that agreements must be reduced to writing and signed by all involved parties, even though the NCA currently provides the option to choose between an electronic and an advanced electronic signature at this stage. (Draft Regulations to the Medicines and Regulated Substances Control Act are currently also calling for all electronic signatures on medicine prescriptions to be advanced electronic signatures.) Should the NCA in future be amended to also require the signature of small credit agreements, such a change will then be in line with the stipulations of the ECTA which stipulates that if legislation require the signature of a person without clearly stipulating the type of signature, an advanced electronic signature must be used.

At this stage only a “normal” electronic signature is legally required to conclude a valid small credit agreement.

Signing of blank documents

Further considering concerns regarding the signing of a blank document, the National Credit Regulator specifically warned against this in Volume 1 of their NCA information booklet, because additional terms may be added to an electronic credit agreement after signing thereof. In this regard it should be noted that in terms of section 2(3)(b)(ii) above the credit provider must take the necessary:

“…measures to prevent the use of the consumer’s electronic signature for any purpose other than the signing or initialing of the particular document that the consumer intended to sign or initial.”

Accreditation

The main difference between an electronic signature and an advanced electronic signature as defined in the ECTA is that an advanced electronic signature results from a process that has been accredited by the Director General of the Department of Communication via the South African Accreditation Authority (SAAA) as prescribed in section 34 of the ECTA. Section 38 of the ECTA further stipulates the criteria needed to satisfy the Director General before authentication may be accredited, which criteria mainly involves reasonable software, hardware capabilities and infrastructure of the service provider.

Should you wish to provide a service that can also authenticate the signature it is advisable to apply for accreditation of any so-called authentication services or products.

How to obtain accreditation

  1. the process of applying for accreditation is described in detail in Chapter II, Regulations 5–12 of the Accreditation Regulations issued in term of section 41 of the ECTA that was published in the Government Gazette No.29995 Vol. 504 Regulation Gazette No. 8701 on 20 June 2007;
  2. the SAAA appointed KPMG and PWC to their panel of auditors and must an applicant select one of these auditors, prior to application, to do an audit of the applicant’s procedures, technology, people and facility (which will include an inspection) by following the principles and criteria of the WebTrust Program for Certification Authorities developed by the American Institute of Certified Public Accountants and the Canadian Institute for chartered accountants;
  3. the applicant will be responsible for payment of the audit fee in paragraph b. above;
  4. the chosen auditor will also sign an NDA with the applicant fro accreditation;
  5. the applicant must then complete the Application for Accreditation form (regulation 6(1)) enclosed herewith and pay a non-refundable fee of R20 000-00. It seems that this is a once of fee for the processing of the said application;
  6. the application in e. above must contain all the prescribed information as per regulation 7and supporting documentation as requested in the enclosed form;
  7. as per regulation 8 the application, including the following must only be delivered by hand  to:

    The Deputy South African Accreditation Authority,
    Department of Communication,
    Iparoli Office Park,
    399 (Duncan) Jan Shoba Street, Hatfield:
  • Complete and detailed audit report and comments;
  • Completed application form
  • Proof of payment of the application fee;
  • Signed NDA;
  • Any other prescribed information;
  1. regulation 4(a)(ii) provide for the accreditation of products and services by type and class;
  2. once the application has been processed and granted, the accreditation will be published in terms of regulation 4;
  3. please note that annual audits will need to be submitted to the SAAA and will the applicant/service provider be responsible for those audit fees.

Encryption services

If you also provide encryption services in respect of the ECTA, section 29 of the ECTA requires the Director-General of the Department of Communications to maintain a register of cryptography providers which contains detail like the name, address of the cryptography provider and a description of the type of cryptography services (excluding any confidential information) provided. Section 30 of the ECTA strictly prohibits the rendering of any encryption services or encryption products in the Republic of South African, unless the aforementioned details have been recorded in the said register.

Thus, make sure your contract is worth the screen it is displayed on and read the small print.

By

Marietjie Botes
marietjie@dyason.co.za
Twitter: Marietj72675939