Restraint of Trade

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?How do courts consider restraint agreements now and are they enforceable?The line between protectable interest and competition in restraint agreements

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.

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 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 signature as it may be possible to renegotiate the terms before committing to such.

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