Written by Ruth Simoné Gray
15 JANUARY 2024
One of the most highly contested clauses in an employment contract is the Restraint of Trade Clause, as this clause must be both fair to the employee and enforceable by the employer to ensure that their proprietary interests can remain protected. This fine balance can only be easily achieved by carefully considering what would be fair and just for both parties.
Even though a restraint of trade clause was generally found in employment contracts, a recent case in the Johannesburg High Court held that it can now also be found in shareholders’ agreements.
Emlink and 4 Others v Matthe and 2 Others (103550/2023) [2023] ZAGPJHC held that a company shareholder can also be restrained from conducting themselves in a manner that breaches the restraint of trade provision contained within the company’s shareholders’ agreement. In this matter, the respondents were held to be in breach of the restraint of trade provision of the shareholders’ agreement by being in direct and unlawful competition with the company in which they were shareholders. In this matter, the respondents had elicited clients to follow them to their new company. As such, they not only breached the restraint of trade provision but also unlawfully interfered with the contractual relationships that the company had with its clients.
The court, therefore, held that the restraint of trade was reasonable and interdicted the shareholder for a period of two years from being “involved in the soliciting of, or the provision of transport services to, any existing client of the First Applicant, through a service provider used by the First Applicant, or otherwise.”
The restraint of trade clause (generally found in employment contracts or shareholders’ agreements) is a clause that is meant to protect the employer’s or shareholder’s proprietary rights, which include but are not limited to:
The above proprietary rights are generally unique to the company or employer and are concepts that the employer or company created to ensure their competitiveness in the market. Proprietary rights are of immense value to a company or employer, resulting in many employers and companies placing a restraint of trade clause in their contracts to protect these proprietary rights.
The restraint of trade clause should specify the following:
Numerous factors must be considered when drafting a restraint of trade clause, especially regarding its reasonability and fairness. It is important to note that the employer or company seeking to protect its proprietary interest has to explicitly state that the proprietary interest belongs to the employer of the company and should be protected. However, a company or employer does not need to show that actual harm has already been done to enforce a restraint of trade. The employer or company merely has to show that there is serious potential for harm being caused if the restraint is not imposed. Other factors that need to be considered are:
An employee or shareholder may have breached a restraint of trade if they:
The employer or company would be entitled to:
The employer or company would also be allowed to ask for all of the above as relief sought against an employee or shareholder for such a breach if the company or employer wished to proceed with litigation.
Fairness and Enforceability: How Do You Strike the Right Balance?
It is important to strike the right balance when weighing the interests of both the employer and employee or the company and its shareholders. The restraint of trade clause should be in line with public policy and be fair to both parties, considering the relationship between them.
A restraint of trade clause has to be reasonable and fair. It cannot impose a restraint that would be applicable for decades and stipulate that it applies throughout South Africa and its surrounding countries. This would be against public policy and considered unfair.
Generally speaking, the shorter the restraint period and the smaller the geographical area it applies to the more reasonable such restraint will be. That is not to say that a restraint of trade must only be limited to a short period or a small geographical area. A restraint could be for 2 (two) years over 2 (two) geographical areas, for example, as long as the person affected can still earn a living somewhere else within the same industry if they so choose.
If an employee or shareholder is unwilling to sign a contract containing a restraint of trade clause, they could sign a non-disclosure agreement instead. This would still ensure that the company’s or employer’s proprietary rights are protected and cannot be disclosed to any third party or used for any benefit of the employee or shareholder.
Whether you are seeking to ensure that your company’s restraint of trade clause is fair and enforceable or uncertain of the implications of a restraint of trade clause in your contract or shareholders’ agreement, it is always advisable to consult with an attorney to assist you with understanding how these clauses work and the impact they could have. For comprehensive support and assistance, contact one of Burger Huyser Attorneys’ expert contract and restraint of trade attorneys. Our expertise and knowledge of restraint of trade in South Africa and contracts containing such clauses will be invaluable in assisting you with any restraint of trade concerns.
DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE
