RESTRAINT OF TRADE AGREEMENTS – ARE THEY STILL VALID ?

INTRODUCTION:

The use of Restraint of Trade agreements in employment contracts is widespread but they remain controversial.  The reason for the debate is that the restraint agreement involves two different and key legal principles. 

The first principle is that each person should be free practice the trade of his choice. This is a right which is protected by the Bill of Rights in the Constitution. 

 A restraint of trade of agreement restricts or limits that freedom by preventing the employee to practice a trade in a particular industry and usually within a specified geographical area.

 I have found that many employees insist that a restraint agreement cannot possibly prevent him or her from practicing his chosen profession.  

 Balanced against this view is the second important principle which is that contracts should remain enforceable.  The principle lends certainty to our commercial dealings and underpins our legal system .  The principal has its origins in Roman Law and is known as pacta sunt servanda.   Simply put, parties are free to conclude contracts of their choice and a person is expected to keep his promise.

 A person who seeks to avoid the consequences of a restraint of trade agreement is really asking the Court to condone his breach of promise.   

ENFORCEMENT OF RESTRAINT OF TRADE:

 The Court may decide not to enforce the restraint if it is shown to be contrary to public policy or unreasonable.  The employee is required to show that the restraint would be unreasonable. 

 In determining the question of reasonableness, the Court considers the following questions:

 1.              Does the employer have a protectable interest in the form of trade secrets, other confidential information or trade connections? 

1.1           For purposes of this test, a trade secret is information that is of use in the industry (in which the employer & employee are involved); that is not public knowledge and is of economic value to the company. 

 1.2           A trade connection refers to a company’s customers or suppliers.  Our courts recognise the right of an employer to protect such trade connections but only where the employee has built up a close working relationship with those customers / suppliers such that it can influence them to transfer their trade.  Mere knowledge of the names of the clients or suppliers would not suffice. 

 2.              If YES, is that protectable interest being prejudiced by the employee’s conduct? The answer to this depends on the facts.   It is not necessary for an employer to show actual harm has already taken place.  If there is serious potential for harm, the Court may regard the restraint as reasonable and thus enforceable.

3.              If the answer is YES, the Court then balances the interest of the employee to work in his or her chosen filed against the employer’s right to protect its trade information.

4.              Whether or not there are any other public policy issues which are relevant?

RECENT CASES:

The enforceability of a restraint agreement was recently considered by the Supreme Court of Appeal in the case of Digicor Fleet Management (Pty) Ltd vs Steyn & Another.

The Company was involved in the sale of motor vehicle tracking devices and Mrs. Steyn had been employed as a sales executive. The Court refused to enforce a restraint agreement concluded between Mrs. Steyn and the company.  Although Steyn had signed an agreement in which she undertook not to work for a competitor of the Company for two years after the termination of her employment, the court found that the Company did not have a proprietary interest that was threatened by Steyn.  She had acquired no confidential information while in the employ of Digicore, and had taken with her when she left no more than she had brought to Digicore in the first place – her own experience, expertise and contacts. The restraint was thus not reasonable and was accordingly unenforceable.

A further basis for the Court’s decision was that the company had previously focused its attention on fleet management and other fleet management systems.  Mrs. Steyn was not targeting this area or product in her new work.  Mrs. Steyn did, however, admit to having contacted one of the company’s clients but she claimed that the client had decided not to transfer its business to her new company.

The Court concluded that she had not breached her obligations to the Company.  On first reading, this conclusion appears a bit strange - surely an employer should be able to prevent a former employee from soliciting its existing clients ? (particularly where the identity of the client was disclosed by virtue only of her employment).  The finding illustrates the test for a customer connection amounting to a protectable interest.  It is only where that employee has the client “in his or her pocket” that a protectable interest (in the form of a customer connection) arises.  Mere knowledge of the name of the client is insufficient.  If, in this case, the client had transferred its business in response to the call from Mrs. Steyn, it would have indicated that she did have a strong customer connection  to the client. 

Another recent case (judgement dated 12 December 2008) which ruled in favour of the employee is the case of Nashua, Cape Town vs Wesley Dempster.

Mr. Dempster worked as a sale representative for three years and then resigned to take up employment with a competitor.   The company approached the Court to enforce the restraint agreement.

Mr. Dempster denied having any access to trade secrets or confidential information. He argued that he was working for the competitor outside the area in which the Company operated.   He had also signed a further agreement with his new employer not to disclose any information to them that he had regarding the business of Nashua or to target any of Nashua’s clients.

In deciding not to enforce the agreement, the Court relied on the fact that Mr. Dempster was working outside the franchise area belonging to Nashua.  Whilst there may have been some risk that he could transfer contacts and information to his other colleagues (who did work in the same area as Nashua), the Court held that such risk did not outweigh Dempster’s right to work.

Other facts considered by the Court were that Mr. Dempster was a junior employee who did not hold a particularly influential or key position in the company.  The Court also took into account the fact that Mr. Dempster had received no benefit in return for the restraint undertaking other than the chance to work for the company. 

The Company had also not previously acted consistently in enforcing its restraint of trade agreements.

As regards the debate as to whether our new Constitution has changed the validity of restraints, the Court ruled that:

“In my view it is inevitable that, as the values of dignity, equality and freedom which underlie our Constitution take root, greater weight will be given to the right of every citizen to choose their trade, occupation or profession freely and that the courts will look more critically at restraint  of trade agreements.”

Conclusion:

Restraint of trade agreements remain valid and enforceable in our law.   The above cases were decided on the basis that there was no real prejudice to the Company’s protectable interest. 

Even where the employee’s conduct does infringe on the employer’s protectable interest, however, the Court applies a value judgement.  The above quote from the Nashua judgement seems to suggest that where the interests are evenly balanced, the Court may well lean in favour of the employee.

We strongly recommend that both employees and employers alike take appropriate advice before concluding a restraint of trade agreement.

Prepared by:

Luke Brodziak

De Rooy van Staden Brodziak Attorneys

Tel: 021 422 5605

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