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