Why are restraint of trade agreements enforced? - Preparing you for the future of work.

Why are restraint of trade agreements enforced?

A recent article from leading UK law firm Shoosmiths, which came across my desk contained what they refer to as “their top tips” to be borne in mind in regard to the vexed issue which repeatedly comes before our courts, namely, whether restraint of trade agreements should be enforced or not.

Top tips from Shoosmiths that are worth repeating:

• Do not use standard templates across the business, make sure that any restrictions are tailored to the role and seniority of the individual.

• Review the restrictions regularly and update them to extend the provisions where it is clear that the employee's role means that their departure to a competitor would place the business at risk.

• Keep a record of the reasons why the restrictions were extended to include the types of business in which the employee is involved, the main customers and contacts that they deal with and the rationale for the duration of the restrictions.

• Ensure that any amendment to the contract is accompanied by evidence that the changes are directly linked to a promotion, change of position or pay rise so as to avoid any arguments about consideration.

Repeatedly our courts are called upon to opine on whether or not a restraint is unreasonable in relation to the nature of the protectable interest when balanced against the countervailing rights of the employee to work in his or her trade.

In an excellent judgment in the Labour Court of South Africa, Johannesburg, Whitcher J stated, citing two leading cases, that the reasonableness and enforceability of a restraint depends upon the nature of the activity sought to be restrained, the purpose for the restraint, the duration of the restraint, the area of the restraint as well as the parties’ respective bargaining position. The learned judge went on to state that the reasonableness of the restraint is determined with reference to the circumstances at the time the restraint is sought to be enforced. Referring particularly to the facts of the matter that the learned judge was dealing with, the learned judge made the very important point (a point that is often not borne in mind when approaching the courts) that it is an established principle of law that the employee cannot be interdicted or restrained from taking away his or her experience, skills or knowledge even if those were acquired as a result of the training which the employer provided to the employee. It should always be borne in mind, following a very important decision of the Appellate Division of the Supreme Court of South Africa (now the Supreme Court of Appeal) that the following questions always require investigation, namely, whether the party who seeks to restrain has a protectable interest, and whether it is being prejudiced by the party sought to be restrained. Further, if there is such an interest, to determine how that interest weighs up, qualitatively and quantitatively, against the interests of the other party to be economically active and productive. Finally, to ascertain whether there are any public policy considerations which require that the restraint be enforced. If the restraint of the party to be restrained outweighs the interest of the restrainer, the restraint is unreasonable and unenforceable.

Finally, a very important point always to be borne in mind arises out of a recent decision in the Gauteng local division of the High Court of South Africa namely, whether the applicant seeking to enforce the restraint is in fact the correct applicant. This occurs particularly where the entity bringing the application forms part of a group of subsidiary companies under the management and control of a holding company and it is questioned by the party being restrained whether the correct applicant is before the court. Where is it not clear who the “true” applicant really is or where the applicant is incorrectly referred to as a division or a subsidiary of another company, the party sought to be restrained can often avoid the restraint by pointing out that the incorrect applicant is before the court. Employers should pay particular attention to this issue.

It follows from King IV that “human capital” is one of the most important of the six capitals identified in King IV. With the advent of the Fourth Industrial Revolution, and all that flows therefrom, and in this exciting and knowledge world in which we live, ensuring that trade secrets and confidential information are protected within the protections permitted by law, becomes a critically important matter. Directors, prescribed officers and committee members of entities are at risk of being sued by stakeholders who suffer loss as a result of employees leaving entities and joining others taking with them intangible but critically valuable information as a result of inadequate or improper protection being in place. The time has come for taking employment agreements, and the restraint of trade agreements often contained therein, very seriously indeed.

Lizl Combrinck is the managing partner of the litigation and labour department of Judin Combrinck Inc.

Since publication of the above article, two very important judgments have come to our attention. Readers to whom this topic is important should firstly take note of the Judgment in Laser Junction (Pty) Ltd v Karl Leeson Fick which came before the KwaZulu Natal Local Division of the High Court of South Africa on August 8, 2017 (http://www.saflii.org/za/cases/ZAKZDHC/2017/36.html). In the words of Carmel Rickard, the judgment in Fick’s case is novel, resolving the restraint dispute in a way not seen before. It views the situation through a constitutional lens rather than following the more traditional approach, by putting policy considerations at the forefront of the analysis and focusing on the impact and significance of the unequal relationship of the parties. The second case is TIBMS (Pty) Ltd t.a Halo Underground Lighting Systems v Knight and Another (JA29-2017) [2017] ZALAC 59 (18 October 2017). The importance of that case is that its alarming facts offer a serious warning about the need to ensure that a Company’s documents are safely housed and regularly checked. In the words of Carmel Rickard, writing about the judgment, it is an unscrupulous world out there.

Readers’ attention is drawn to the recent judgment of Laser Junction (Pty) Ltd v Fick (6970/2017)[2017] ZAKZDHC 36 (28 September 2017). This case dealt with a very important issue, namely, is a restraint of trade agreement transferrable in terms of s197 of the Labour Relations Act, No. 66 of 1995 (“LRA”). A study of this very important case reveals that a restraint of trade that is less favourable than the Basic Conditions of Employment Act, No. 75 of 1997, cannot be a term in an employment contract and if less favourable would not be regarded as forming part of a contract of employment and accordingly would not be transferable under s197. From this it follows that the restraint trade should always be incorporated in the employee’s contract of employment and should not, as is sometimes the case, be contained in a separate document. It should also always be borne in mind that an employer has a far better chance of enforcing a restraint of trade where a payment has been made to the employee as consideration for the employee agreeing to a restraint of trade. A careful perusal of this judgment by employers is highly recommended.

Since publication of the above, two important decisions of our courts have been delivered in regard to restraint of trade agreements. In the First Judgment (Laser Junction v Carl Fick) the court had to decide whether restraint of trade agreements survive the transfer of a business in terms of Section 197 of the Labour Relations Act. In a judgment which has roundly criticised, the court held that the restraint of trade agreement does not survive the transfer of the business in terms of that Section. It is therefore recommended, and this is very important, that new agreements are signed with the new employer once the transfer has been agreed on the same, or substantially the same, terms and conditions as the previous agreement. The Second Judgment (ABSA Insurance and Financial Advisors v Jonker) is very important because in this case, the Jonkers (husband and wife) previous employed by ABSA, had agreements which prevented them disclosing any confidential ABSA Information. What was lacking in those agreements is that they did not expressly contain restraint of trade provisions. When applying to court for an interdict, ABSA were unsuccessful. The lesson to be drawn from this case is that protecting against confidential information is not sufficient without also having an effective restraint of trade undertaking.


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