Restraint of trade warning for businesses in South Africa

While companies and employers can apply and enforce restraint of trade on former employees in South Africa, the country’s courts will make them work to prove it is necessary, reasonable, and consistent.

According to Rosalind Davey and Lenja Dahms-Jansen, partners at law firm Bowmans, recent court judgements have delivered some hard lessons for employers who have been trying to enforce these kinds of agreements.

They noted that, while circumstances of every restraint of trade matter differ, there are common denominators among companies who have taken the matter to court and failed, or only partly succeeded.

This common denominator is the company not doing its homework and bringing the evidence it needs to prove why the restraint is necessary, or having a poor track record of applying it consistently.

“A cardinal legal principle of a restraint of trade is that, to be enforceable in South Africa, it must be reasonable,” the experts said.

When preparing restraints of trade, there are three key questions that need to be asked to determine whether it is reasonable.

• Is there a proprietary interest — such as trade secrets, confidential information, trade connections — that warrants protection through a restraint of trade undertaking?
• If so, does the employee pose a threat to such proprietary interests if there is no restraint?
• Finally, is the restraint reasonable as to scope, duration, and geographical location?

The legal experts cited a recent case where the employer sought to enforce a 24-month restraint of trade agreement against an employee with excellent customer relationships and an exceptional sales record who had resigned to join a competitor.

The employer sought to enforce the restraint of trade against the employee, seeking to bar them from joining a competitor or soliciting business from its customers for two years.

“After weighing up the parties’ competing interests, the court issued an unusual ruling – a partial enforcement of the agreement,” the experts said.

“While our courts have been known to make partial enforcement orders before, this one was significantly shortened.”

Instead of 24 months, which is considerably longer than the usual six to 12 months of a restraint of trade, the court imposed a two-month period before the former employee could take up a position with a competitor and four months before they could start contacting their former customers.

This likely reflects the court’s attempts to balance the competing interests that were at play, which can be summed up by the two legal-policy considerations at stake in an enforcement matter.

On the one hand, it is accepted in our law that it is in the public interest to hold parties to their contractual undertakings.

On the other, it is in the public interest that all people are able to be productive in society and engage in their trade, occupation or profession of choice.

“The lesson here for employers is to be crystal clear and highly specific in defining the proprietary interest they want to protect, and to be equally specific in assessing the risk an employee would pose,” the experts said.

“When matters reach the courts, hard evidence is the best policy.”

Another trap for employers

According to Dahms-Jansen and Davey, another trap that employers can fall into when applying a restraint of trade is not being consistent in enforcing it.

In a different court battle, an employee alleged that their former employer didn’t always apply and enforce a restraint of trade when people left.

While the company denied this, it failed to produce evidence to substantiate its contention.

“To make matters worse for the employer, the court was concerned that the employee was only informed that the restraint of trade would be enforced after they had resigned,” the legal experts noted.

“The issue of a company’s track record in enforcing restraints of trade is a relatively novel one in South African courts, and employers should take note of it and prepare accordingly.”

If a company has historically not enforced such agreements, it should ask itself why.

Is it because it sees restraints of trade as a blanket means to protect its interests, only to be enforced as and when it deems this necessary? If that is so, the restraints of trade may not provide the protection necessary.

“As we have seen, that approach will not go down well with our courts, which want specifics and detailed evidence,” they said.

“Companies that have been inconsistent in applying restraints of trade should make a point of informing employees who have signed these that, going forward, they will be doing so.”

Companies should note that they will need to follow through on this, the legal experts said.