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.
