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RESTRAINTS OF TRADE: PRIVITY OF CONTRACT VS FREEDOM OF TRADE

RESTRAINTS OF TRADE: PRIVITY OF CONTRACT VS FREEDOM OF TRADE

A restraint of trade is an agreement between an employer and its employee which provides that, during and/or after termination of employment, the employee is restrained from performing similar work in competition with his/her former employer, for a prescribed period of time and in a specific geographical area.

When an employer seeks to enforce a restraint of trade in court – which is usually done by means of an interdict - the principles of pacta sunt servanda (privity of contract) and freedom of trade, as protected in Section 22 of the Constitution of South Africa, must be carefully weighed up to achieve a result which is reasonable and does not offend public policy.

A court which is called upon to enforce a restraint of trade must, firstly, establish whether the restraint of trade exists (i.e. was there a binding agreement to this effect). Thereafter, it must establish whether the employer has a proprietary interest which is deserving of protection. In Dickinson Holdings Group (Pty) Ltd and Others v Du Plessis and Another 2008 (4) SA 214 (N), the court held that although there is no closed list of proprietary interests, there exist two main categorises which can be protected by a restraint of trade, namely trade connections (e.g. customers) and trade secrets (e.g. confidential information).

In Advtech Resourcing (Pty) Ltd t/a Communicate Personnel Group v Kuhn and Another 2008 (2) SA 375 (C) the court held that where a proprietary interest is found to be present, it must then be established that the restraint is reasonable and necessary to protect this proprietary interest.

The Appellate Division in Magna Alloys and Research (SA) Ltd v Ellis [1984] (4) SA 874 (A) held that restraint of trade agreements are enforceable unless they are contrary to public policy because they impose an unreasonable restriction on the former employee’s freedom to trade or to work. Ultimately, the duration and scope of the restraint should not be any longer or wider than is necessary to protect the interest of the employer.

The court in Sizonke Trading Nelspruit (Pty) Ltd and Others v Vorster and Others (3085/2019P) [2020] ZAKZPHC – where Tomlinson Mnguni James was the Applicants’ local attorney of record – having found that a binding restraint of trade existed and that the Applicants had a proprietary interest deserving of protection, applied the following five step test from Omni Technologies (Pty) Ltd t/a Gestetner Eastern Cape v Barnard & Others [2008] 2 All SA 207 (SE) to assess the reasonableness of the restraint of trade in casu:

Does the one party have an interest that deserves protection after termination of the agreement?
If so, is that interest threatened by the other party?
In that case, does such interest weigh up qualitatively and quantitively against the interest of the other party not to be economically inactive or unproductive?
Is there an aspect of public policy having nothing to do with the relationship between the parties that requires the restraint to be maintained or rejected?
Does the restraint go further than necessary to protect the interest?

and found that the Applicants had established a clear right to the protection of their proprietary interests, which they reasonably apprehended were under threat by the conduct and knowledge of the Respondents, hence they were entitled to enforce the covenant of restraint.

In conclusion, it is important to emphasise that restraints of trade are not a mechanism to eliminate competition, but serve to protect the legitimate proprietary interests of the employer in a manner which does not infringe on the economic activity of the employee more than is reasonable necessary.

Contributor: ZAMA CHIYA (Candidate Attorney) (Litigation Department) (Umhlanga Office)

Reviewed by: TAMSIN JONES (Senior Associate) (Litigation Department) (Umhlanga Office)

E-mail: zamac@tmj.co.za / tamsinj@tmj.co.za

Tel: 031 566 2207