In our previous article, we emphasised the importance of proper employment contracts and highlighted the significance of including clauses relating to restraint of trade agreements – all aimed at adding an extra layer of protection for your business interests. In this article of our “Mind Your Own Business” series, we unpack the relationship between restraint of trade clauses and unlawful competition by drawing lessons from the landmark Magna Alloys case, and exploring how these clauses play a pivotal role in preventing departing employees from engaging in activities that harm your business and ensuring the enforcement of such agreements.
What is Unlawful Competition? Unlawful Competition refers to those actions taken by former employees that directly compete with their former employer’s business interests in violation of restraint of trade agreements. Such actions may include poaching clients, soliciting employees, or using confidential information to gain a competitive advantage.
The Magna Alloys case was a landmark ruling in South African labour law that significantly impacted the enforceability of restraint of trade agreements. In this matter, the court found in favour of the employer, emphasising the need to protect legitimate business interests and the enforceability of reasonable restraint of trade clauses.
The court established that restraint of trade clauses must be reasonable in scope, duration, and geographic extent to be enforceable. A clause that imposes an undue restriction on an employee’s right to pursue their livelihood is likely to be deemed unreasonable and unenforceable.
Including well-drafted restraint of trade clauses in your employment contracts is crucial for preventing unlawful competition. These clauses effectively deter departing employees from engaging in activities that could harm your business, preserving your client base, trade secrets, and intellectual property – but also provide you with recourse if the terms of the restraint are broken.
In case where an ex-employee breaches the restraint of trade agreement, you have the legal right to seek remedies and enforce the contract through legal action. By demonstrating the reasonableness of the clause and the protectable business interests, you can prevent the ex-employee from unlawfully competing and mitigating potential harm to your business. And, should the new employer have tactically employed the ex-employee to, by their employment, unlawfully obtain confidential information or fruits of labour and thereby springboard their own business, that employer is acting in cahoots by also competing unlawfully with the erstwhile employer.
In the South African labour context, the function of restraint of trade clauses is crucial in thwarting illegal competition and securing your business. Insights from the Magna Alloys case reveal that the enforceability of such clauses largely depends on their reasonableness and dedication to the safeguarding of genuine business interests. To maintain a competitive and robust business amidst the potential threats posed by exiting employees who might engage in detrimental activities, it is vital as an employer to include well-composed restraint of trade agreements in your contracts.
By Annelien Breed | Executive Director (CEO SA)