Contracts in restraint of trade – the law

Contracts in restraint of trade – the law

An agreement in restraint of trade is prima facie enforceable. The onus rests on the party seeking to avoid a restraint clause to prove that it is contrary to public policy.

The approach to restraints of trade is neatly summarised by Malan AJA in Reddy v Siemens Telecommunication, as follows:

·         A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint.

o   The first is that the public interest requires that parties should comply with their contractual obligations, a notion expressed by the maxim pacta servanda sunt.

o   The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or their 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 s 22 of the Constitution that guarantees ‘[e]very 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 by the Constitution.

·         In applying these two principal considerations the particular interests must be examined.

o   A restraint would be unenforceable if it prevents a party after termination of his or her employment from partaking in trade or commerce without a corresponding interest of the other party deserving of protection. Such a restraint is not in the public interest.

o   Moreover, a restraint which is reasonable as between the parties may for some other reason be contrary to the public interest. In Basson v Chilwan and others Nienaber JA identified four questions that should be asked when considering the reasonableness of a restraint:

§  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 qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?

§  Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected? Where the interest of the party sought to be restrained weighs more than the interest to be protected the restraint is unreasonable and consequently unenforceable. The enquiry which is undertaken at the time of enforcement covers a wide field and includes the nature, extent and duration of the restraint and factors peculiar to the parties and their respective bargaining powers and interests.