What is a contract in restraint of trade?
·
No legislation or
regulation gives an employer a right to this type of protection, and any
restraint must be in writing.
·
A restraint is a
clause in an employment contract that provides that when an employee resigns,
or his contract ends, he may not perform work at a new employer that competes with
his/her former employer, for a prescribed period and in a specific geographical
area.
·
The rationale is to
safeguard the previous employer's protectable proprietary interests, such as
client and customer connections, trade secrets and confidential information.
·
The proprietary
interests that a restraint agreement can protect are of two kinds. The first
consists of the relationships with customers, potential customers, suppliers,
and others (trade connections). The second consists of all confidential matter that
is useful for the carrying on the business that a competitor may use to gain a
competitive advantage (trade secrets).
To what extent can
an employer restrain a former employee?
· If an employee has no special skills or access to client and customer connections, trade secrets or confidential information, it would be unfair and unconstitutional to prevent an employee from taking up work elsewhere to earn a living. An employee generally has the right to choose a trade, occupation, or profession.
· Suppose an employee only possesses the skills of the job that the restraint prevents him from performing. In that case, the consideration of the employee's ability to continue to earn a living may pose a problem for the enforceability of the restraint.
· Ultimately, the courts perform a balancing act between the right of the employee to choose his trade and not to compete unfairly with the former employer at his new workplace. The court must balance conflicting interests between the employer and employee considering the public interest.
· The courts point out that "It is in the public interest that agreements entered into freely should be honoured and that everyone should, as far as possible, be able to operate freely in the commercial and professional world."
· It will generally be contrary to the public interest to enforce an unreasonable restriction on a person's freedom to trade. However, where the proprietary interest of the company which needs protection outweighs the employee's interest in continuing his trade, such restraint will be reasonable and enforceable.
· In Magna Alloys
and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A), the court
laid down the general principle that, on the face of it, restraint undertakings
are not unconstitutional. Every restraint agreement signed by an employee is
assumed to be lawful and enforceable. The onus lies on the employee if he/she
wishes to be released from the restraint to show that the condition is
unreasonable and contrary to public policy.
·
In determining
whether a restraint is enforceable, a court will consider, among other
things, the following factors:
o
the length of time
for which the restraint operates;
o
the geographical
area to which the restraint applies;
o
did the employer pay
the employee a restraint payment;
o
can the employee
still can earn a living;
o the proprietary interest or capital asset that the employer seeks to protect.
· Each matter will need to be determined on its facts on a case-by-case basis. The general principle remains that restraint will only be enforceable if:
o
the employer that is
seeking to enforce the restraint has a legitimate proprietary interest worthy
of protecting,
o
the restraint is evident
in its meaning and application.
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