Introduction
Restraint of trade clauses in employment contracts aims to protect employers from competition by former employees. These clauses restrict an employee’s ability to engage in similar business ventures or practice their trade within a specified period and area after leaving their employer. While such clauses are generally enforceable, they must not unreasonably restrict an individual’s freedom to trade or pursue a profession, as this would be contrary to public policy.
Purpose and Scope of Restraint of Trade Clauses
The legitimate objective of a restraint of trade clause is to safeguard the employer’s goodwill, customer connections, and trade secrets. As highlighted in Reeves and Another v Marfield Insurance Brokers CC and Another, the restraint remains effective for a reasonable period after the employment relationship ends, regardless of how the termination occurred. For example, a hairdresser might agree not to work in another salon within a 30-kilometre radius for one year after leaving employment.
Challenges Faced by Employees
Employees often face a weaker bargaining position and may be unable to negotiate the terms of a restraint clause effectively. These clauses can be harsh or unfair, potentially preventing employees from pursuing their occupation even when they are not directly competing with their former employer.
Judicial Approach to Restraint of Trade Clauses
Balancing Interests
The leading case, Magna Alloys & Research (SA) (Pty) Ltd v Ellis, established that all contracts, including those in restraint of trade, are generally valid unless they are contrary to public policy. The court emphasised the need to balance the public interest in enforcing agreements against the societal benefit of allowing individuals the freedom to trade and pursue professions.
Public Policy and Reasonableness
In Sunshine Records (Pty) Ltd v Flohing & Others, the court identified two vital considerations: the public interest in enforcing contractual obligations and the public interest in allowing free commerce and professional activity. The restraint must be reasonable in nature, extent, and duration, considering the interests of both parties.
Burden of Proof
In restraint of trade disputes, the onus of proving the reasonableness of the clause lies with the employee, as established in Basson v Chilwan & Others. The employee must demonstrate that enforcing the restraint would be unreasonable under the circumstances. The court will consider the circumstances prevailing at the time enforcement is sought, not when the contract was concluded.
Special Considerations
Circumstances of Termination
The circumstances surrounding the termination of employment are relevant in evaluating the reasonableness of the restraint. While wrongful termination alone may not invalidate the clause, fraudulent or bad-faith termination by the employer could tip the scales against enforcement. This was discussed in Reeves and Another v Marfield Insurance Brokers CC and Another.
Partial Enforcement
Courts are not limited to enforcing or invalidating the entire restraint clause; they may enforce parts of it if deemed reasonable. This approach allows courts to modify the contract to reflect a more balanced agreement effectively.
Constitutional Considerations
The South African Constitution, particularly section 22, protects the right to choose a trade, occupation, or profession freely. In Fidelity Guard Holdings (Pty) Ltd v Pearmain, the court held that while restraints of trade limit this right, such clauses are enforceable if they comply with common law requirements and are not contrary to public policy. The common law, as developed by the courts, satisfies the requirements of section 36(1) of the Constitution, which allows for the limitation of rights under certain conditions.
Conclusion
Restraint of trade clauses in employment contracts are designed to protect the legitimate interests of employers but must be reasonable and not overly restrictive. The South African courts have developed a balanced approach to these clauses, weighing public interest considerations and ensuring that individuals retain the freedom to engage in commerce and professional activities. The burden of proof lies with the employee to demonstrate unreasonableness, and courts may partially enforce these clauses to reflect fairness and public policy. Contact an expert at Schoemanlaw.
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