Navigating restraints of trade in South Africa

As our law develops, a very important question arises for every business owner in South Africa: How can I protect the secrets of my trade while investing in the furtherance of my business? A restraint of trade is defined as a clause in an employment contract that restricts an individual from conducting trade or profession in a competitive market. In South African law, there is no formal legislation relating to restraint of trade.

What is “Restraint of Trade”

The concept of restraint of trade is based on the idea of unlawful competition and is then enforced in a contract through a restraint of trade clause. Section 18 of the Constitution affords each citizen the right to freedom of association. Furthermore, Section 22 allows people to freely choose their trade, occupation, or profession. Regarding Section 23, each South African citizen has the right to fair labour practices. The Competition Act 89 of 1998 does not provide a clear definition of unlawful competition but proposes to prohibit the same.

One of the initiating steps when starting a new business or taking on a new employee is to provide training and orientation. In doing so, the employee is exposed to specific procedures, processes, methodologies, recipes, and the like, more formally known as the secrets of the trade, to further the business. Whilst no law prohibits competition, there is a limitation in the South African law of contract, which provides limited protection of the proprietary rights of business owners.

The Role of Employment Contracts

Once training is provided and such sensitive information is disclosed to an employee in good faith, it becomes impossible to reverse the information disclosed or undo habits adopted by an employee once an employee’s employment is terminated. Therefore, a need has arisen for the protection of trade secrets that an employee learns and adopts.

The law makes provision to include a clause in an employment contract which stipulates that for a limited duration, and depending on the industry/business, an employee is restricted from conducting business or performing work which falls within the same description or industry as that which the employee was already taking part in before the termination of their employment. This is done to ensure that the employee takes none of the secrets of the trade of a specific business to direct competitors to gain an unfair competitive advantage.

Case law

The restraint of trade clause in an employment contract provides protection for a limited duration, normally between 6 and 12 months, after an employee leaves their previous employer.

The validity of such a clause has been questioned and discussed in our case law as follows:

  • In the landmark case of Magna Alloys and Research SA (Pty) Ltd vs Ellis 1984 (4) SA 874 (A), it was held that a restraint of trade clause is enforceable if it is reasonable and unenforceable if it is contrary to public policy. It was further held that the onus is on the party who alleges that the restraint of trade is unenforceable to prove that it is unreasonable.
  • In Reddy vs Siemens Telecommunications (Pty) Ltd (2006 ZASCA 135; 2007(2) SA 486 (SCA), it was held that the maxim pacta servanda sunt, which is the contractual obligation for agreements to be met, needs to be weighed up against the Constitutional right in section 22, which provides for the right to engage freely in trade, commerce, or a chosen profession.
  • In the matter of Botha & another vs Carapax Shadeports (Pty) Ltd 1992 (1) SA 202 (A), it was held that an ordinary restraint of trade is entered into for the benefit of the business itself and not that of the owner and that such benefit is incidental to the business and part of its goodwill. As such, when a company is transferred in terms of section 197 of the Labour Relations Act, there is a cession of the rights passed through the contract, which will entitle the new owner to enforce the restraint. However, if the benefit of the restraint does not form part of the goodwill, then it is not enforceable.
  • In the case of Micros South Africa (Pty) Ltd and Others v Kleynhans and Others (074606/2023) [2023] ZAGPPHC, the court held that the decision to enforce a restraint against an employee should consider legitimate interest, reasonableness, and protection of confidential information. The court held that where an employee voluntarily agreed to sign a restraint of trade and the ex-employee’s actions now create a substantial risk of taking proprietary interests to a competitor, the court would grant an interdict restraining the ex-employee.

In conclusion, a restraint of trade is enforceable provided that it is reasonable, and the prejudice from applying such a clause does not outweigh the right to freedom of trade as provided for in the Constitution. It is also applicable within the restructuring of an organisation if it is stipulated in the employment contract between the employer and the employee.

Please feel free to contact our offices on 086 173 7263 if you require any assistance navigating the restraint of trade in your industry.