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.

Where Would One Find a Restraint of Trade Clause? 

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.”

What Is the Restraint of Trade Clause? 

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:

  • Trade secrets;
  • Methodologies and plans;
  • Customer information and details;
  • Confidential information;
  • Software tools; and
  • Technical knowledge and know-how in relation to the company and its clientele.

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.

What Should the Restraint of Trade Clause Specify? 

The restraint of trade clause should specify the following:

  • The employee or shareholder is not permitted to perform certain work nor use any trade secrets or any proprietary information of their employer or the company in which they hold shares for the purpose of conducting the same or a similar business that would be in competition with the employer or company.
  • An employee is restrained from eliciting or ‘poaching’ clients of the company to follow the employee or shareholder to their new business venture, which may have a similar model or be the same as that of the employer.
  • The employee or shareholder is also restrained from conducting or carrying out any work that would be in direct or similar competition with the company they are employed by or hold shares in, generally for a prescribed period of time and within a specific geographical area.
  • The geographical area to which the restraint is applicable and the period it will be in place. This should not be so restrictive that the employee or shareholder cannot be employed or hold shares in a company anywhere in the country.
  • The restraint will be in place for a certain period of time. Again, this should not be so restrictive that the employee or shareholder cannot be employed or hold shares in a company for decades, for example.

What Are the Factors to Take Into Account When Considering if a Restraint of Trade Is Enforceable? 

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:

  • whether a restraint payment was made to an employee or a shareholder when the employment contract was concluded, or the shareholders’ agreement was signed;
  • whether the employee or shareholder will still be able to earn an income if the restraint is imposed;
  • whether the employee or shareholder will have to relocate in order to still be able to earn such an income; and
  • what the proprietary interest is that the company or the employer seeks to protect.

How Do You Know If You Have Breached Your Restraint of Trade? 

An employee or shareholder may have breached a restraint of trade if they:

  • violated a non-compete clause by conducting a similar or the exact same business as the employer or company in which they are a shareholder. Such conduct then results in them being in unlawful competition with the employer or company;
  • solicited clients to rather move over to their new company, knowing full well that those clients are clients of their employer or the company they are a shareholder in;
  • disclosed confidential information to a third party or competitor of the employer or company, as such information may have even been used to establish another company operating in the same way; or
  • breached the time period or geographical location where the employee or shareholder has been prohibited from carrying on business or employment for a certain period of time, in a certain field, and in a certain geographical location.

What remedies is an Employer or Company Entitled To if an Employee or Shareholder Has Breached Their Restraint of Trade? 

The employer or company would be entitled to:

  • institute legal action in order to enforce the restraint of trade provision in the contract by interdicting the employee or shareholder from using the company or employer’s information for their own benefit;
  • impose financial penalties on the employee or shareholder, or
  • claim damages due to the employee or shareholder’s conduct in breaching the restraint of trade.

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.

Does a Restraint of Trade Have a Time- or Geographical Limit?

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.

What Should Be Done If an Employee or Shareholder Does Not Want To Sign A Contract Containing A Restraint Of Trade? 

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