Restraint of trade is a common term in employment contracts – especially in industries where there is fierce competition. Employers often seek to protect their trade secrets, client bases and market advantage through clauses like restraint of trade. While this legal tool is widely used, it also raises significant questions about its fairness and enforceability, particularly in South Africa, where both the employer’s business interests and the employee’s right to work are considered. In this blog, we explore the fundamentals of restraint of trade, when it’s used, as well as its legal and ethical implications for both employers and employees in South Africa.
What Is a Restraint of Trade?
A restraint of trade is a contractual clause that prevents an employee from competing with their former employer for a specified period, within a certain geographic area, or in a particular market. This provision aims to protect the employer’s confidential information, client relationships and other business interests by limiting the employee’s ability to work for a competitor or start their own competing business.
When Is Restraint of Trade Used?
In South Africa, restraint of trade clauses have become pretty standard in employment contracts across various industries, but particularly in sectors where employees have access to sensitive information or client lists. Some common scenarios where a restraint of trade might be included are:
Senior Management and Executive Positions
Individuals in these roles often have inside knowledge of the company’s strategies, client relations and proprietary data. A restraint of trade is used to prevent them from leveraging this knowledge to benefit a competitor or their own business after leaving the company.
Specialised Skills or Trade Secrets
Employees with unique skills or knowledge of trade secrets, especially in industries like manufacturing, technology or pharmaceuticals, may be subject to restraint of trade clauses. This ensures that critical company innovations and know-how are not taken to a competitor.
Sales and Client-Based Roles
Salespeople, account managers or employees who build relationships with clients are often restricted from ‘poaching’ those clients when they leave the company. This prevents them from competing directly.
Mergers and Acquisitions
In the context of business sales or mergers, restraint of trade clauses can be used to prevent the seller from starting a competing business in the same industry.
Legal Context in South Africa
In South African law the guiding principle is pacta sunt servanda (agreements must be kept), meaning that a restraint of trade agreement will typically be enforced as long as it is reasonable.
The South African Constitution guarantees the right to choose one’s trade, occupation or profession, which can be used as a counterargument to these clauses. This introduces a balancing act between the enforceability of the agreement and the employee's constitutional right to work. Here are some key factors courts consider when determining enforceability:
Duration of the restraint
Geographic scope
Nature of the industry and market
Protection of legitimate interests
Impact on the employee’s right to work
Ethical Considerations
While restraint of trade clauses are legally enforceable in South Africa, there are ethical questions surrounding their use, which also need to be considered:
1. Balancing Employer and Employee Rights: While employers have a right to protect their intellectual property and client base, employees should not be unreasonably restricted from pursuing new opportunities in their field.
2. Good Faith and Fairness: Employers are encouraged to apply restraint of trade clauses in good faith and in a manner that is fair to both parties. Fairly negotiated and clearly defined restraints, on the other hand, protect both the employer’s interests and the employee’s rights.
Challenging a Restraint of Trade
Employees who feel that a restraint of trade clause is overly restrictive or unreasonable have the right to challenge its enforceability in court. The burden of proof lies with the employee to demonstrate why the clause should not be enforced. South African courts often take a pragmatic approach and will either enforce or partially enforce a restraint based on what is fair and reasonable under the circumstances.
Conclusion
In South Africa, restraint of trade agreements are powerful tools for protecting business interests, but they must be used judiciously. Employers and employees alike should ensure that these clauses are clearly defined, reasonable in scope, and do not unfairly restrict future employment opportunities. At Louw & Heyl Attorneys, we specialise in helping both employers and employees navigate the complexities of restraint of trade agreements, ensuring that legal protections are upheld while respecting the rights of all parties involved.
If you are considering including a restraint of trade clause in your contracts, or if you are an employee concerned about the implications of such a clause, contact Louw & Heyl Attorneys for expert legal advice tailored to South African law.
Comments