May 16, 2017

What to know about your restraint of trade

Contrary to widespread belief, a restraint of trade is an enforceable agreement between an employer and employee that restricts an employee from taking up employment with a competitor or commencing a business which will essentially be in competition with the employer.

A restraint enables an employer to protect the proprietary information of its business such as trade secrets, confidential information, customers and clients, as well as the goodwill of the business. It is of paramount importance that an employer can show that he/she has a protectable interest and that his/her business interests are being prejudiced by the employee for an employer to successfully enforce a restraint of trade.

There has been a fair bit of development through various supreme court judgments concerning the enforceability of restraints of trade.  Historically, restraint of trade agreements were unenforceable unless the employer could prove that it was reasonable. The current position is that the onus is now on the employee to prove that the restraint is unreasonable or against public policy and public interest.

A court will take into account whether the business interest is being prejudiced by the employee (bearing in mind that parties should comply with their contractual obligations), or whether the business interest weighs heavily against the employee’s interest (all persons should be free to enter and take part in the business or professional world), and whether an unnecessary restriction on the employee will result in the employee not having the ability to thrive economically.

It should be kept in mind that the restraint might be enforceable due to the employer being able to demonstrate a clear right and protectable interest. The courts, however, do tend to be a bit more favourable to the employee when it comes to geographical and time limitation as far as restraints are concerned. These would also have to be reasonable but will be dependent on the merits and circumstances of each matter and, obviously, the nature of the employer’s business.  A time limitation of more than a year and/or a geographical area as big as Gauteng might be construed as unreasonable depending on the aforementioned factors.

Employers should be mindful that irrespective of whether a restraint agreement has been concluded, it remains unlawful, according to the common law, for an employee to take or utilise confidential information, which includes client details, and use it to compete with their erstwhile employer.  Under such circumstances and even without a restraint agreement, the employer will have recourse against such an employee.

Employers should consult an attorney to assist in drafting an enforceable restraint agreement or a restraint clause to be included in employment agreements. Employees should consult an attorney prior to embarking upon a business venture that may be construed as being in competition with their erstwhile employer or when considering joining the competition of your employer.

Author: Arno Bosch

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