RESTRAINTS OF TRADE

Can a Court Enforce a Restraint of Trade & Prevent the Person from Earning a Living?

Many people incorrectly believe that the South African courts will not enforce a restraint of trade agreement (also known as a non-compete agreement) on the basis that everyone has the right to earn a living and that this right cannot be infringed.  

Many people also incorrectly believe that for a restraint of trade to be enforceable, the person being restrained must receive a financial payment, however this is not the case in South Africa.  The fact that a person is paid a reasonable sum of money in return for signing a restraint of trade agreement is not decisive and may influence a court to more readily enforce the restraint.  

The South African courts will enforce a restraint of trade agreement provided that certain requirements are met. The enforcement of restraint of trade agreements is guided by the principles established by South African contract law, particularly (A) the principle of pacta sunt servanda which emphasizes that agreements which are entered into freely and voluntarily must be honoured and (B) constitutional rights, particularly the right to the freedom of economic activity or the right to trade freely.

Key Requirements for Enforcing a Restraint of Trade Agreement

1. Existence of a Valid Agreement

The restraint of trade must be part of a valid and binding agreement between the parties. This agreement is typically included in employment contracts, partnership agreements, or sale of business agreements.

2. Reasonableness of the Restraint of Trade

• Geographical Area: The geographical area covered by the restraint should be reasonable. For example, if the entity wishing to enforce a  restraint of trade only conducts business within one of the provinces in South Africa, for example the Western Cape, it would be unreasonable to attempt to restrain someone from joining a competitor in the whole of South Africa. It is important to note that if a court finds that the area is too wide and therefore unreasonable, it may enforce the restraint of trade in a particular area for example in the province or magisterial district where the company conducts business. 
• Duration The length of time for which the restraint is in effect must also be reasonable. The most common time period used in restraint of trades in South Africa is 12 months, which time period has been seen by the courts as being reasonable. Obviously the longer the period of the restraint of trade the more problematic it will be to enforce it. It is important to note that the courts may enforce a restraint of trade for a shorter period if it is of the view that the period is too long. 
• Nature of the Activities The restraint should only cover the specific activities that need to be restricted to protect the legitimate interests of the party seeking enforcement. It cannot be overly broad and restrict unrelated activities.

3. Protectable Interest

The party seeking to enforce the restraint must show that they have  genuine, legitimate and valid protectable interest/s, such as trade secrets, confidential information, client relationships, or other proprietary interests that could be harmed if the restraint is not enforced. 

Any information that is in the public domain will obviously not be seen as trade secrets or confidential information.  

4. Not Against Public Policy

While restraint of trade agreements are generally enforceable, they must not be contrary to public policy. The South African Constitution protects the right to the freedom of economic activity.  If a restraint of trade agreement is found to be excessively restrictive and unfair, it may be considered contrary to public policy and therefore unenforceable.

5. Balancing of Interests

South African courts will balance the interests of the business against the interests of the individual subject to the restraint. The court will assess whether the restraint is necessary to protect the business’s interests and whether it unfairly restricts the individual’s ability to earn a living.

Judicial Approach

The onus is always on the party seeking to escape the restraint to prove that it is unreasonable and/or contrary to public policy and if they fail to do so, the restraint will typically be enforced.

When determining the enforceability of a restraint of trade agreement, the South African courts decide each case on its own merits by weighing the rights of both parties. 

To safeguard enforceability, employers would be well advised to err on the side of caution and draft restraint of trade agreements which are (i) visibly necessary to protect their interests, (ii)  apply for a reasonable period of time, (iii) in a defined geographic area, and (iv) apply only to those critical factors which would place them at risk. 

Understanding the enforceability of restraint of trade agreements in South Africa is crucial for both employers and employees. If you’re unsure about how to draft or enforce such an agreement, please make sure that you obtain expert legal advice.