Restraint of Trade South Africa is a crucial concept for business owners seeking to protect trade secrets while investing in the growth of their enterprises. It refers to a clause in an employment contract that restricts an individual from engaging in trade or a profession that competes with their employer. Although there is no specific legislation governing restraint of trade in South African law, the courts continue to develop this area through precedent and interpretation.
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.
Restraint of Trade South Africa plays a critical role when starting a new business or onboarding a new employee, particularly during training and orientation. In this phase, employees are exposed to specific procedures, processes, methodologies, recipes, and other proprietary knowledge—collectively known as trade secrets—that drive the business forward. While competition is not prohibited by law, Restraint of Trade South Africa highlights contractual limitations that offer business owners limited protection of their proprietary rights under South African contract law.
The Role of Employment Contracts
Restraint of Trade South Africa becomes highly relevant once training is provided and sensitive information is disclosed to an employee in good faith. After such disclosure, it becomes impossible to reverse the information shared or undo the habits adopted by the employee once their employment ends. This highlights the growing need to protect trade secrets that employees learn and adopt.
The law provides for the inclusion of a restraint clause in an employment contract, which stipulates that for a limited duration—depending on the industry or business—an employee is restricted from conducting business or performing work similar to that undertaken before their termination. Restraint of Trade South Africa ensures that confidential business knowledge is not transferred to direct competitors, thereby preventing 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.
