Unlawful Competition

Unlawful Competition

In circumstances where businesses employ wrongful – or simply unlawful – tactics to compete with others, it is referred to in common law as unlawful competition. Crucially, a business has to hold the intention to wrongfully act to its own advantage which, in turn, will consequently have to be to the prejudice and disadvantage of another for it to be criticised for unlawfully competing with another.

There are various forms of unlawful competition, only the most noteworthy which are explained below:

Misuse of another’s confidential informationUse of another’s fruit of labour Procuring another party to breach a contract with a third partyRestraint of trade

Typically, an employee acting in his scope of his employment with his employer obtains substantial knowledge and access to confidential information. Whilst most employers define what they regard as confidential information in their employment agreements – normally depicted as “client information, supplier lists and/or price lists” – it is essential to consider what the effect of such information would have, should it be utilised by a competitor, in order to consider if and what information could be regarded as unlawful.

Moreover, an employee holds a common law duty against his former employer not to divulge or misuse its confidential information.

Similarly, businesses entering commercial negotiations, tend to sign Non-Disclosure Agreements with the aim of protecting each other’s confidential information. Naturally, it assists a contracting party to simply rely on contractual remedies in the case of breach to enforce its rights to protect the confidential information, however, confidential information obtained unlawfully would be protectable through interdictory relief based on common law remedies.

Whilst the use of another party’s confidential information is a perfect example of this guise of unlawful competition, by devising a stratagem to utilise any other aspects of another’s business to the advantage of a third party’s business which will consequently enable it to springboard in the particular industry, is unlawful – it would always harm the business responsible for creating its own fruits through hard labour.

By poaching or soliciting employees who have learnt their skills and experience from a competitor, would naturally cause a business to excel in the industry which would, in turn, compromise the competitor who has lost a valuable employee who was an asset formed from valuable investments in time, money, efforts and otherwise, is Unlawful Competition. Business relationships in suppliers, partners and clients are other examples of subject matters that can be used as another’s fruit of labour.

It would be unjustified and unlawful to engage in conduct which would assist another party to breach its contract with a third party – the breach in itself gives rise to remedies only to the disposal of the innocent party against the party in breach. Whilst many examples of such intentional intervention to the benefit of the intervening third party exist – and whilst such interference holds great commercial value for such party – one of the most common examples is the employing of a party contractually bound to a restraint of trade agreement.

Once a restraint of trade undertaking is considered to be reasonable and enforceable and an erstwhile employee breaches the provisions thereof, it is advisable to inform the employer of the fact that a restraint of trade agreement exists inter partes. An undertaking from the new employer should be sought not to employ this person any further, by failure of which such employment will constitute a procurement of the employee to breach his restraint of trade agreement with the previous employer.

The most common guises of these restraint provisions are found in employment- and shareholders’ agreements in circumstances where a certain interest of a group of shareholders or employer needs particular protection to avoid unfair competition. Essentially, a person in one or more of these positions will undertake, by signing an agreement (or undertaking) that he or she accepts and appreciates that his or her employer or, in other circumstances, co-shareholders or directors; or even the purchaser of his or her business, that such party/ies have a proprietary interest worthy of protection.

In turn, such interest is – notionally – more protectable than the right of the person undertaking such restraint and, it is being protected by restraining such person not to engage competitively or otherwise, for a certain required and reasonable period and territory and on the conditions of what the restrained actions in relation to the competitive involvement in the labour market, or otherwise, will entail.

HOW DID COURTS PREVIOUSLY CONSIDER RESTRAINT AGREEMENT?
Persons holding a position in a business, with specific reference to employees and shareholders, may perceive that a restraint of some or other form contained in their inter partes agreements is a provision not likely to be enforced by Court.

It is being said that the Courts will not favourably consider an application to restrain someone from contravening restraint provisions, should it entail that the restrained cannot freely trade in the manner it wishes to trade. Previously, our courts treated restraints of trade as contrary to public policy and being prima facie void.

HOW DO COURTS CONSIDER RESTRAINT AGREEMENTS NOW AND ARE THEY ENFORCEABLE?
In reality, Courts have to balance two conflicting principles when they consider enforcing a restraint of trade – the sanctity of contract and the freedom of trade. These dichotomous principles have been balanced by Courts and it pronounced that the onus is on the person resisting enforcement of a restraint to prove that it offends against public policy (Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A)).

Running in conjunction with this consideration, the principle of sanctity of contract is fundamental to our common law and on that basis, courts seek to enforce the provisions of contracts. Courts have pronounced that they will not enforce contracts that are against public policy.

With this in mind and in later developments in case law, a Court made the following remark: “The Constitution does not take such meddlesome interest in the private affairs of individuals that it would seek, as a matter of policy, to protect them against their own foolhardy or rash decisions. As long as there is no overriding principle of public policy which is violated thereby, the freedom of the individual comprehends the freedom to pursue, as he chooses, his benefit or his disadvantage”.

This does however not mean that a Court will allow an unjustified restriction on the right to freedom of trade. The onus would therefore naturally be placed on the Applicant or Plaintiff who alleges that there was a contravention of the restraint of trade provisions so restricting the Respondent or Defendant. The onus may, therefore, stretch further in that the Applicant and/or Plaintiff would also need to fully convince the Court that such restriction was reasonable and justifiable in a democratic society based on principles of equality and dignity. The Courts came to the conclusion that the position in South African law is that restrains of trade are prima facie valid and enforceable.

Whilst a restriction of a person’s freedom of trade could be argued to be contrary to public policy, ironically enough, that it is the same principle that enabled that same person to be in the position he was when he originally agreed upon the terms of such restraint. A person should freely be contracting in the business and professional world. Therefore, a party alleging that the restraint of trade is against public policy bears the onus of proving it. A court will now only interfere when an unreasonable restriction is placed on a person’s freedom to trade.

THE LINE BETWEEN PROTECTABLE INTEREST AND COMPETITION IN RESTRAINT AGREEMENTS
The Court which is requested to enforce such provisions should consider whether such provision is not simply laid down to exclude competition, but has at goal to actually protect a propriety interest of the Plaintiff and/or Applicant that is worthy of protection. This, however, does not mean that the restrained shareholder or employee can now freely await the Plaintiff and/or Applicant to convince the Court without any duty to prove anything.

Once the Plaintiff and/or Applicant has successfully convinced the Court, which may not be such a comprehensive or cumbersome onus, the Respondent and/or Defendant should then prove to Court that such a provision was unreasonable and against public policy to avoid the Court enforcing the Restraint of Trade provision and concomitant implications with specific reference to damages suffered by the Plaintiff and/or Applicant wholly or in part.

It is, therefore, crucial to always send the draft agreement providing for such restraints to your attorney, prior to the signature as it may be possible to renegotiate the terms before committing to such.

ATTORNEYS

 

DOUW GERBRAND BREED

MANAGING DIRECTOR

 


MARLI VENTER

ASSOCIATE


STEFAANS GERBER

JUNIOR ASSOCIATE


LOUW DU TOIT

JUNIOR ASSOCIATE


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