The Current Law on Restraints Of Trade

Restraints of trade are always a hot issue for both employees and business and debates rage about their enforceability.

Verlie Oosthuizen of Shepstone & Wylie Attorney's employment law department looks at the current law on restraints of trade and how it works, in the firm's latest commercial review.

She outlines that there are two main forms of restraints:

1. A seller of goodwill in a company promises not to carry on a similar business in competition with a purchaser; and

2. An employee agrees with an employer not to compete against them by setting up rival business or by entering the service of a rival trader.

"A third form of restraint, which is quite unusual, occurs when business rivals agree not to compete. The prevailing common law is that restraint is enforceable in principle and will only be unenforceable, not invalid or void, if it is contrary to public policy or the public interest," explains Oosthuizen.

The onus of proving that the restraint is unenforceable and contrary to the public interest rests on the person seeking to avoid the restraint and this onus is not easy to discharge. The Court will look at geographic area, the duration of the restraint and the manner and extent to which the employee will be restrained to determine whether a restraint is reasonable.

Oosthuizenpoints out that there are two main considerations that a court will always bear in mind when dealing with a restraint case are the competing interests of the parties. On the one hand, the fact that agreements freely entered should be honoured and on the other, the principle that everyone should be allowed to enter business or the professional world and should be able to practice their trade or profession.

She adds that one of the most important legal concepts in a restraint matter will always be whether there is a "protectable interest". This is a concept that was introduced in the case of Basson v Chilwan 1993 (3) SA 742 (A). In determining whether there is a protectable interest the court will look at the following:

• Is there an interest that deserves protection after the termination of the agreement?
• Is that interest being prejudiced or under threat of being prejudiced?

If the answer is yes, how does that interest measure up, when weighed qualitatively and quantitatively against the interests of a person to remain economically active?

• Is there an aspect of public policy that requires the restraint to be rejected or maintained?

If there is no legally recognisable interest to protect and the restraint merely seeks to exclude or eliminate competition it will be considered to be unreasonable, contrary to public policy and unenforceable.

In the recent SCA judgment of Automotive Tooling Systems (Pty) Ltd v Wilkens 28 ILJ 145 (SCA) this concept was discussed in some detail.

"This case noted that there is a very thin dividing line between an employee using his own skill, knowledge and experience (which he cannot be restrained from using), and the use of an employer's trade secrets or confidential information or other interest (which he can be restrained from using)", comments Oosthuizen.

The case involved a business which manufactured special purpose machinery in a highly specialised technological field. The employees, who were skilled tool makers, were restrained in terms of their employment contract. When they left the company they went to work for a major client of the employer.

The employer approached the Court to enforce the restraint and alleged that its former employees were using confidential, technological "know-how" that was learnt during their employment with them. The employer alleged that that "know-how" constituted a proprietary interest that was worthy of protection.

The Court pronounced that the interest must be one belonging to the employer, rather than the employee. It must be "proprietary to the employer". In this case the Court found that the know-how that the employer sought to protect was nothing more than machine manufacturing skills.

The skills had been acquired in the process of the respondents developing their trade. They belonged to the employees' general stock of skill and knowledge which they could not be prevented from exploiting. Another recent case from the Supreme Court of Appeal on restraints is Reddy v Siemens [2006] SCA 164 RSA (2007) 28 ILJ 317 (SCA). In this case the Court asked "Does the restraint go further than necessary to protect the interest?"

It was found that a value judgment is required when determining whether a restraint is enforceable and one must examine whether the restraint is "reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom."

Mr Reddy was a systems engineer with Siemens for 8 years when he decided that he wanted to go and work for their competitor Ericsson. When he was interdicted from taking up employment with Ericsson the judge of the court a quo said that it was not necessary for him to find that Reddy would use confidential information and trade secrets, it was sufficient that he could use it.

This was even though Reddy was not going to be involved with any of his old Siemens clients and the extensive training that he had received on the Siemens systems would be of no more than academic value as the Ericsson systems were completely different.

The Court found that Reddy was in possession of confidential information which, when assessed objectively, was at risk of being exposed to a competitor if he commenced employment there. "His loyalty will be to his new employers and the opportunity to disclose confidential information at his disposal, whether deliberately or not, will exist."

Reddy's restraint was found to be enforceable as he was clearly in possession of confidential information which constituted a protectable interest.