A restraint of trade is an agreement that seeks to restrict a party to carry on a trade, business or profession in such a manner or with such persons that he/she sees fit.  Many people believe restraints of trade to be controversial as there are competing rights – freedom or sanctity of contract on the one hand and freedom of trade on the other.

It is important not to cast the net too wide when it comes to drafting restraint of trade agreements.  Our firm frequently assists clients to successfully execute such agreements.  The recent judgment of Bruniquel and Associates (Pty) Ltd v Manje General Suppliers (Pty) Ltd & Others[1] as delivered on 17 February 2022 and discussed below, will illustrate that the restraint of trade clause was unsuccesful due to straightforward reasons, however due diligence and care should be used when drafting such agreements in order to ensure that it is enforceable.

In Magna Alloys[2] the court held that restraint of trade agreements will be valid and enforceable as long as they are not against public policy.  Public policy dictates which social laws are acceptable in society.  The effect of the aforementioned decision is that the onus now rests on the party seeking to avoid the restraint clause to prove its enforcement would be contrary to the public’s interest.

Our firm will gladly assist you to draft, alternatively amend, restrait of trade agreements which will not only be enforceable in a court of law, but will also protect your business’s interests.

The case of Bruniquel unpacked the enforceability of a restraint of trade clause and is summarised hereunder.

 

The Facts

The Third Respondent was a senior sales consultant in the employ of the Applicant.  On or about 3 August 2021 the Applicant became aware that the Third Respondent, through the First and Second Respondents, was using its confidential information and client lists for his own personal benefit.  The Third Respondent had access to the Applicant’s training material and confirdential

[1] Case No: D7091/2021.

[2] Magna Alloys & Research (S.A.) (Pty) Ltd. v Ellis (109/84) [1984] ZASCA 116; [1984] 2 All SA 583 (A)  1984 (4) SA 874 (A) (27 September 1984).

information stored on its shared drive, as well as ‘hard copy material’ in his office.  The First and Second Respondents are businesses in which the Third Respondent is the sole director and they directly competed with the Applicant and actively sought the business of some of its clients.

The employment contract of the Third Respondent contained a restraint of trade clause in which he undertook not to use for his own benefit or the benefit of any other person any trade secrets or confidential information; and for a period of one year after ceasing to be employed, not to compete with the Applicant or to solicit or induce others to solicit any clients or customers of the Applicant for the purpose of inducing them to cease doing business with the Applicant.  The areas in which the restraint of trade were enforced were specified as ‘the Republics of South Africa, Botswana, Namibia and the Kingdom of Swaziland including each magisterial district thereof … within which the employer or companies in the Group conducts business’.

 

The Law

The area of restraint is extremely wide.  The papers did not make out a case for interdicting the Third Respondent from competing with the Applicant in the whole of South Africa, Botswana, Namibia and the Kingdom of Swaziland.  To enforce such an agreement in these circumstances will be against public policy and therefore such clause is unenforceable.

Regarding the confidential information the court held that the fact that such information deals with principles that are in the public domain does not mean that the training material itself is not confidential.  The Third Respondent had no entitlement to the Applicant’s training material when he left its employ, and he was obliged to return it.

Furthermore, counsel for the Third Respondent submitted that such evidence does not show that the Third Respondent came into possession of the confidential material in a dishonest way while he was employed there, but the court did not agree.  The court was of the opinion that the aforementioned does not matter as the only question to ask is what he did with the information when he resigned.

Regarding the client lists the court held that the identities of the Applicant’s customers are not necessarily confidential and refers to Knox D’Archy[1] where the judge held that there is no general restriction on an ex-employee canvassing or doing business with customers of its former employer.  The ex-employee can however lose that right if he had made or copied a list of the employer’s customers or deliberately memorised it.  However, due to the fact that the area of restraint is too wide and therefore unenforceable, the court cannot enforce the restraint of trade regarding the client lists against the Third Respondent.

[1] Knox D’Archy Ltd and Others v Jamieson and Others 1992 (3) SA 520 (W) 526.

 

The Order

The clause in the agreement that prohibits the Third Respondent from competing with the Applicant in the four countries mentioned is unenforceable; the Second and Third Respondents are obliged to return the Applicant’s confidential information, including its data base, client lists and training material; and there will be no order as to costs against the First Respondent.

 

Conclusion

The factors to determine whether a restraint of trade is enforceable is as follows:

  1. Does one party have an interest that deserves protection after the termination of the agreement?
  2. If so, is that interest threatened by another party?
  3. Does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive or unproductive?
  4. Is there an aspect of public policy that requires that the restraint be maintained or rejected?

A reasonable restraint of trade agreement may be used by an employer to protect its trade secrets and confidential information.  Even though a restraint is valid, it may be found to be unenforceable if it is unreasonable and there is no protectable interest.

Kindly contact our offices if you are in need of expert advice regarding restraint of trade agreements.