News | Routledge Modise | 27 August 2013

Restraint of Trade Clauses in Employment Contracts

Section 22 of the Constitution Act 108 of 1996 provides that every citizen has the right to choose their trade, occupation or profession freely. It further provides that the practice of a trade, occupation or profession may be regulated by law. Having said that, an observer may then wonder why the concept of a restraint of trade is still relevant in our law. It has, however, been held that restraint of trade clauses in contracts of employment are not unconstitutional. In order to pass constitutional muster, a restraint of trade clause in an employment contract must comply with the common law rules governing restraint of trade.

A restraint of trade clause is commonly included in an employment contract to enable an employer to protect his business from competition from ex-employees. In terms of a restraint of trade agreement, an employee is prevented from starting his own business in competition with his employer, or working for competitors for a specified period in a specified geographical area after termination of his employment contract.

The restraint of trade is not enforceable if it is contrary to public policy on account of it unreasonably restricting a person's right to trade or practice a profession. In order to determine the reasonableness of a restraint of trade agreement all the circumstances of the case must be taken into consideration. The circumstances to be taken into account are not restricted to those existing at the time the restraint was entered into, but must be widened to include circumstances that prevailed since the restraint was entered into, as well as the circumstances existing at the time enforcement of the restraint is sought.

In Basson v Chilwan and Others, 1993 (3) SA 742 (A) the court identified five questions that should be asked when considering the reasonableness of a restraint of trade agreement.

These are:

• Does the party have an interest that deserves protection after termination of the agreement?
• If so, is that interest threatened by the other party?
• In that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
• Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?;
• Does the restraint go further than necessary to protect the interest?

Where the interest of the party sought to be restrained weighs more than the interest protected, the restraint is unreasonable and consequently unenforceable.

Restraints also transfer from one employer to another pursuant to section 197 of the Labour Relations Act, 1995.