How valid is a Restraint of Trade Agreement?

“I signed a restraint of trade when I was employed. Now I want to leave the company. Is my restraint of trade enforceable?” This question is often asked – and usually around the time that the employee has decided to look for another job. Sometimes the question is asked when the employee has taken up a position at another company, often the competitor – and then gets a fright when s/he is faced with legal action based on a restraint s/he had forgotten that s/he had even signed.

The general rule of thumb is that Restraint of Trade Agreements are indeed valid – unless a court determines otherwise. A court will declare a restraint of trade to be invalid if it finds the restraint to be against public policy, which renders the document unreasonable and unenforceable. The onus of proving that the restraint is against public policy and unreasonable falls upon the (ex-)employee.

The Appellate Division (as it was then known) set out a test to determine the reasonableness of a restraint in the 1993 case of Basson v Chilwan. The questions to be asked are:

• Does the employer have an interest that is worthy of protection after the termination of employment?
• If so, does the employee threaten that interest?
• Does the employer’s interest outweigh the employee’s interest (the employee’s interest being the right to be economically active and productive)?
• Is there any aspect of public policy, having nothing to do with the relationship between the parties, that requires the restraint to be maintained or rejected?

If the employee’s interests outweigh those of the employer’s, then the enforcement of the restraint would be unreasonable.

The next question, of course, is “what is an interest that is worthy of protection?” Proprietary interests that the court considers worthy of protection include:

• Confidential information: being the employer’s information that is not in the public domain, is capable of application in the industry, is not generally known by people, and has economic value to the employer.
• Trade connections: being the employer’s relationships with customers, prospective customers and suppliers. In particular, the court will consider whether the employee has built up a relationship with the customer / supplier of a nature that, when s/he leaves the company, s/he is able to influence the customer / supplier to switch their allegiance to the new employer.

A reasonable restraint of trade undertaking would be drafted to protect the employer’s protectable proprietary interests. It is important for employers to be aware that the restraint cannot be more stringent than is necessary to protect the employer’s proprietary interests. And it will only be enforced if the court believes that the confidential knowledge gained is sufficiently important, or the relationship that the employee has built up with trade connections is sufficiently strong to cause damage to the employer.

So, employers: be reasonable in drafting your Restraints of Trade. And employees: think twice before signing one.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.