A restraint of trade is a provision within an employment contract which stipulates that in the event of termination of employment, an Employee is restricted from taking up employment of similar work. The restraint of trade is not absolute and may only be applied for a reasonable period and within a specific geographical location.
A party seeking to enforce a restraint of trade is required to invoke the restraint agreement and prove a breach thereof. The party who seeks to avoid the restraint bears an onus to demonstrate, on a balance of probabilities, that the restraint agreement is unenforceable because it is unreasonable. The reasonability test for an enforceable restraint of trade was set out in Basson v Chilwan 1993 (3) SA 742 (A) at 7761 I-J and is used to determine the reasonableness of a restraint of trade provision by considering the following:
- Is there an interest of the one-party deserving protection at the termination of the agreement?
- Is such interest being prejudiced by the other party?
- If so, does such interest weigh up qualitatively and quantitatively against the interest of the latter party, that the latter should not be economically inactive and unproductive?
- Is there another facet of public policy having nothing to do with the relationship between the parties but requiring that the restraint be either maintained or rejected?
Insofar as the first leg of the test in Basson is concerned, it is well established that the proprietary interests that can be protected by a restraint agreement are, in essence, of two kinds, namely:
- All confidential matter which is useful for the carrying on of the business and which could be used by a competitor, if disclosed to the competitor, to gain a relative competitive advantage. Such confidential material is compendiously referred to as “trade secrets”, and
- The relationships with customers, potential customers, suppliers, and others that constitute what is compendiously referred to as the “trade connections” of the business.
Whether information constitutes a trade secret is a factual question. For information to be confidential, it must be:
- Capable of application in trade or industry; that is, it must be useful and not be public knowledge and property;
- Known only to a restricted number of people or a closed circle; and
- Of economic value to the person seeking to protect it.
In Kwik Kopy (SA) (Pty) Ltd v van Haarlem and Another 1999 (1) SA 472 (W) at 484E, a further consideration was added, namely, whether the restraint goes further than is necessary to protect the interest. This was adopted in Jonsson Workwear v Williamson and another (2014) 35 ILJ 712 (LC) at para 44, where the Court summarised the factors to be considered and held that:
“In simple terms, therefore, and what needs to be considered in determining whether or not the enforcement of a restraint of trade would be reasonable, are five issues being (a) the existence of a protectable interest, (b) the breach of such protectable interest, (c) a quantitative and qualitative weigh [of] the respective interests of the parties, (d) general considerations of public interest, and (e) whether the restraint goes further than necessary to protect the relevant interest. All these considerations need to [be] determined as a whole, as part of a value judgment to be exercised, to finally conclude whether or not the restraint should be enforced.”
The test in Basson for reasonableness is set out accordingly: whether the party who seeks to restrain has a protectable interest and is being prejudiced by the party sought to be restrained. Further, if there is such an interest, to determine how that interest weighs up, qualitatively and quantitatively, against the other party’s interest to be economically active and productive. Lastly, to ascertain whether there are any other public policy considerations which require that the restraint be enforced. If the interest of the party to be restrained outweighs the interest of the party seeking to restrain, then the restraint is unreasonable and unenforceable.
Article By: Wesley Lazarus
Dispute Resolution Official – CEO George