The enforceability of restraint of trade clauses
A restraint of trade clause is a contractual provision that restricts a person's freedom to carry on a trade, profession or business with certain parties, in certain areas or for a certain period. Restraint of trade clauses is often used in employment contracts, partnership agreements, sale of business agreements and franchise agreements to protect the legitimate interests of one party from being harmed by the other party's competition.
However, restraint of trade clauses also interferes with the constitutional right of every person to choose their trade, occupation or profession.
Therefore, the question arises: when is restraint of trade clauses enforceable under South African law?
The test for enforceability
The general principle is that restraint of trade clauses are valid and enforceable unless they are contrary to public policy. Public policy is determined by reference to the values and principles enshrined in the Constitution, such as human dignity, equality and freedom.
The test for whether a restraint of trade clause is contrary to public policy is whether it is reasonable between the parties and consistent with the interests of society. This test involves a balancing exercise between two competing interests: on the one hand, the interest of the party seeking to enforce the restraint in protecting its proprietary interests (such as goodwill, trade secrets or customer relationships) from unfair competition, and on the other hand, the interest of the party subject to the restraint in pursuing their economic activity and livelihood.
The reasonableness of a restraint of trade clause depends on various factors, such as:
The nature and duration of the relationship between the parties;
The scope and extent of the restriction imposed by the clause;
The value and importance of the proprietary interests sought to be protected;
The likelihood and degree of harm that would be caused by breach or enforcement;
The availability and adequacy of alternative remedies;
The impact on third parties and society at large.
The burden of proving that a restraint of trade clause is unreasonable lies on the party challenging its validity.
Recent case law
The courts have applied this test in various cases involving different types
of restraint clauses. Some examples are:
In Den Braven SA (Pty) Limited v Pillay, an employee was restrained from working for any competitor or soliciting any customers or suppliers within South Africa for 12 months after termination. The court held this was unreasonable because it was too broad in geographical scope and duration. It also found no evidence that the employee had access to confidential information or had influence over customers.
In Reddy v Siemens Telecommunications (Pty) Ltd, an employee was restrained from working for any competitor within Africa for 12 months after termination. The court held that this was reasonable because protecting the employer's substantial investment in training and developing the employee's skills and knowledge was necessary. It also found that there were sufficient opportunities for employment outside Africa.
In Spar Group Ltd v Sea Spirit Trading 162 CC t/a Paledi, a franchisee was restrained from carrying on any business similar to Spar within a 5km radius of its premises for ten years after termination. The court held that this was reasonable because it was necessary to protect the franchisor's goodwill and reputation. It also found that there were sufficient opportunities for business outside the restricted area.
Conclusion
Restraint of trade clauses are standard contractual provisions, but they are not automatically enforceable under South African law. They must pass the test of reasonableness based on public policy considerations. This requires carefully analysing each case according to its facts and circumstances.
If you have any questions or concerns about your rights or obligations under a restraint
of trade clause, you should seek legal advice from a qualified lawyer who can assist you with your specific situation.
