The enforceability of a restraint of trade agreement

In many instances an employer requires its employees to sign a certain restraint of trade agreement which in essence bind the employee from not being employed by the employers competitors.

What to take note of here would be the fact that an employer would invest its time and money in training the employee to best fit the particular market and just as the employee has sufficient training and insight into the field the employee would resign and go and work for a competitor.

What many employers have now decided to do is have their employees sign a restraint agreement, in which they agree that, should they resign, they will be barred from taking up employment with the employers competing within a defined geographical area for a specified period of time.

Should the employee resign to take on an opportunity with the employers’ competitor, could the erstwhile employer get a court interdict to prevent the ex-employee from working for the competitor?

The Supreme Court of Appeal has said (in the case of Reddy v Siemens) that the question of the validity and enforceability of restraint agreements involves balancing two policy considerations –

“A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint. The first is that the public interest requires that parties should comply with their contractual obligations ? The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions. Both considerations reflect not only common-law but also constitutional values.”

Our courts have achieved a balance by ruling that restraints agreements are enforceable unless they are against public policy. Such agreements will be against public policy if they do no more than attempt to restrain competition, since competition is regarded as a healthy component of the economy. For the restraint to be legally enforceable, the employer imposing the restraint must have what the

courts have called a “proprietary interest” or a “protectable interest” (such as confidential information) that is worthy of legal protection.

Two recent Supreme Court of Appeal decisions, one of which upheld a restraint agreement and the other of which struck down a restraint agreement illustrate the application of these principles.

In Reddy v Siemens Telecommunications (Pty) Ltd, decided in 2007, Reddy had entered employment with Siemens and had signed a restraint agreement in which he undertook not to work for any competitor in the same province for a year if he were to resign.

He was trained by Siemens, locally and abroad. He then resigned his job with Siemens in order to take up employment with a rival company in a position similar to the one he had occupied at Siemens.

The court ruled that, in these circumstances, there was an obvious risk that Reddy would disclose confidential technological information to his new employer. Thus, the restraint was not unreasonable nor against public policy. The court said that Reddy had entered into the restraint agreement voluntarily, and public policy required that contracts should be enforced.

In Digicore Fleet Management (Pty) Ltd v Steyn, decided in 2008, Digicore was attempting to enforce a restraint agreement signed by its ex-employee, Steyn, who had resigned and gone to work for a competitor.

On the evidence placed before it, the court found that Steyn had not been given any training by Digicore, had not acquired any confidential client information, and had brought her own business contacts into the job. When she resigned, said the court, she took with her no more than she had brought into the business, namely experience and business contacts.

Consequently, Digicore had no proprietary interest worthy of legal protection. All that the contractual restraint would achieve would be to prevent Steyn from being commercially active, and that would not be reasonable. Consequently, the court ruled that the restraint agreement was unenforceable.

The difference between the two cases is that, in the first case, the employee had acquired specific technological information in the course of the training provided by his ex-employer, which could be used by a competitor to the ex-employer’s prejudice.

In the second case, the employee had not been given any training by the first employer, and had acquired no confidential information. The first employer had no proprietary interest worthy of legal protection.

It is therefore of utmost importance to weigh up what it is that you have acquired from the new employer and what it is that you have acquired yourself.

Always seek legal advise when it comes to these types of matter as such a case can have dire consequences on both an employee or employer should either of them be uncertain of the legal position.