What Is The Meaning of Restraint Of Trade Agreements in South Africa?

Written by: Juanice Jooste

28 October 2024

Restraint of Trade Agreements Explained

In today’s fast-paced professional world, contracts play a pivotal role in shaping our daily interactions—whether through employment agreements, business partnerships, or sales transactions. Among these, restraint of trade agreements stands out as a significant yet often misunderstood element of employment and business contracts.

Employment agreements can be utilised to impose certain limitations on individuals’ actions after the termination of a professional relationship, often to protect the interests of the employer. Understanding the intricacies of restraint of trade agreements is crucial, whether you are an employer, employee, business owner, or partner. At Burger Huyser Attorneys, our legal experts can guide you through the complexities of drafting, enforcing, or opposing restraint of trade agreements, ensuring your rights and interests are safeguarded.

Where Do We Find Restraint Of Trade Agreements?

A restraint of trade is an agreement that forces one party to the agreement to cease practicing a specific profession, trade, or business for a reasonable time.

Restraint of trade agreements commonly appears in the following contexts:

• Employment Contracts:
  • When an employee leaves an employer, they undertake not to compete with that employer in that field and a specific region, for a specified period of time.
• Sale of Businesses:
  • Sellers commit to refrain from engaging in similar businesses that would compete with the buyer’s enterprise.
• Partnership Agreements:
  • Partners agree not to compete with the partnership or remaining partners if they exit the business.

What Do Courts Consider When Enforcing A Restraint Of Trade Agreement?

Courts consider two primary principles when enforcing a restraint of trade agreement:

• Sanctity of Contract:
  • Courts uphold the principle that agreements entered into voluntarily should be honoured.
• Freedom of Trade:
  • Courts also balance the individual’s right to engage in economic activity without undue restriction.

What Is The Sanctity Of A Contract Principle?

The sanctity of a contract refers to the principle that agreements, once entered into, should be honoured and upheld. Evaluating this principle involves assessing how feasible it is to maintain the terms of the agreement. Key considerations in this evaluation include:

• Whether the agreement imposes unreasonable restrictions on the parties’ ability to support themselves financially in the future.
• The potential for the agreement to limit future economic activity or opportunities.

Ultimately, the evaluation seeks to balance the importance of honouring agreements with ensuring that they do not unduly restrict a party’s financial independence or ability to sustain themselves in the future.

What Is The Freedom Of Trade Principle?

Freedom of trade traditionally focused on whether an individual could engage in economic activity without restriction. Under English law, our courts initially regarded restraint of trade agreements as contrary to public policy and void unless the party seeking enforcement could prove the restraint was reasonable.

However, the modern approach prioritises the sanctity of contract over freedom of trade. Restraints of trade are now presumed valid and enforceable unless the party opposing enforcement can demonstrate that the agreement is contrary to public interest.

This shift means the onus has moved to the party resisting enforcement to prove that the restraint undermines public interest. If successful, the restraint will not be declared void but merely unenforceable.

How Do Courts Confirm Whether A Restraint Of Trade Agreement Is Reasonable?

In Basson v. Chilwan and Others [1993], the courts formulated a test to confirm whether a restraint of trade agreement was unreasonable by asking the following questions:

• Is there a legitimate interest of one party needing protection?
• This question helps to evaluate whether the restraint of trade is protecting interests worthy of protection. If there is a lack of protecting worthy interests, such as trade secrets, client lists, or goodwill, the restraint of trade will be unenforceable and against public policy.
• If the above answer is in the affirmative, the next question is if the enforcer’s interests are threatened by the actions of the other party.
  • This means that the actions of the person against whom the restraint of trade is enforced will threaten the interests of the restraint of trade enforcer. This threat needs only to be a mere risk of infringement that has been objectively tested for this question to be positive.
  • An example of this would be when an employee leaves their employment for a competing employer for a similar position. This is because the new employer will have loyalty, and the possibility of confidential information arising and being disclosed at the new place of employment is more probable.
  • Is the Protected Interest More Important Than the Restrained Party’s Right to Work and Be Productive?
• To answer this, courts weigh the interests the enforcer seeks to protect against the restrained party’s right to remain economically active and productive. A restraint of trade is only valid if it limits the restrained party’s actions within a specific area, for a specific period, and in a specific trade, providing necessary protection to the enforcer without imposing excessive hardship.
• The scope of the restriction—geography, time, and trade—must be narrowly tailored to protect the enforcer’s goodwill while remaining reasonable. Restraints are deemed acceptable only if they restrict competition within a defined area and timeframe, allowing the enforcer to safeguard their interests without unduly compromising the restrained party’s right to work.
• Ultimately, the reasonableness of a restraint of trade depends on the circumstances of each case, balancing fairness and economic productivity.
• Is there a public interest reason for enforcement or removal?
  • Whether a restraint of trade should be enforced will have to be evaluated by the circumstances leading up to and surrounding the enforcement. The enforcement can also be done partially, as the enforcement of the court order relates directly to public policy and not to the agreed-upon terms in the contract. There are, of course, limitations to partial enforcement, such as why partial enforcement needs to be granted in the first place.

What Are The Factors For The Reasonability Of A Restraint Of A Trade Agreement?

A restraint of trade agreement is likely to be deemed reasonable if it:

• Protects the enforcer’s goodwill or other legitimate interests.
• Limits competition in a specific area for a reasonable duration.
• Does not necessarily restrict the restrained party’s ability to earn a living.

How Can Courts Partially Enforce A Restraint Of Trade Agreement?

Courts can partially enforce a restraint of trade agreement by tailoring its application to specific circumstances. For example:

• Reducing the geographic scope.
• Shortening the duration of enforcement.

However, partial enforcement is subject to limitations, such as the rationale for modifying the original agreement.

What Are The Practical Considerations For A Restraint Of Trade Agreement?

Restraints of trade agreements require careful drafting and evaluation to ensure enforceability while balancing the rights of all parties involved. Employers and business owners should:

• Clearly define the scope, duration, and geographic area of the restraint.
• Avoid overly restrictive clauses that could render the agreement unreasonable.

Restraints of trade agreements are complex and require careful consideration when being drafted or opposed in court. These agreements are powerful tools for safeguarding business interests but must be balanced against an individual’s right to economic freedom.

Courts evaluate each case based on its unique circumstances, taking into account factors like reasonableness, public interest, and enforceability.

If you have any questions about restraint of trade agreements or need assistance with drafting, enforcing, or challenging a restraint of trade, contact Burger Huyser Attorneys. Our experienced legal team is here to guide you through this intricate area of law, ensuring your rights and interests are fully protected. Book a consultation at your nearest branch today!

Contact Burger Huyser Attorneys, and book a consultation.

To speak to one of our experienced attorneys in South Africa for immediate assistance, contact us on the numbers below:

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DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE