Are restraint of trade agreements important for business?

A restraint of trade is an agreement between an employer and an employee, or a provision in an employment contract that restricts an employee from being employed by a competitor of the employer, or establishing a business in competition with the employer following termination of employment.

TIBMS (Pty) Ltd t/a Halo Underground Lighting Systems v Knight and Another

In a recent case, there was a dispute of fact about the existence of the restraint of trade and a possible hi-jacking of the employer’s business by the employees. The employee conceded setting up a new business venture in direct competition with the employer. The employer failed to produce the restraint of trade agreement and contended that the employees destroyed the restraint of trade agreement. The employer also failed to produce other staff members’ restraint of trade agreements which would have weighed in its favour. The dispute of fact could not be resolved on the paper.

On 23 December 2016, the Labour Court dismissed an application by the appellant (Halo) for an interdict against its two former employees, the respondents (Knight and Breedt), to protect its confidential information and customer connections. The application relied on the terms of alleged restraints of trade agreements between Halo and Knight and Breedt, which prohibited them from being involved in any way with competitors for 24 months.

The application was dismissed by the Labour Court on a single point: a dispute of fact about the existence of the restraint of trade agreements. At issue was whether the respondents had deliberately destroyed the agreements as part of a concerted programme of action designed to hi-jack the business of Halo, or whether no agreements had ever existed.

It was found that the Labour Court was correct in dismissing the application. A costs order was granted in favour of the respondents in the court a quo set aside due to their conduct. Therefore, the appeal was partly upheld and partly dismissed.

Conclusion

Every citizen has the right to choose a trade, occupation or profession freely. However, restraint of trade agreements are completely legal and very much enforceable against South African employees. This is there to protect a business from having its core services stolen from it. Furthermore, these agreements will only be invalid and unenforceable if they are deemed unreasonable. It will be the responsibility of an employee to prove that an agreement is unreasonable. But, for the agreement to be valid, signed copies have to be available.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference:

TIBMS (Pty) Ltd t/a Halo Underground Lighting Systems v Knight and Another (JA29/2017) [2017] ZALAC 62 (18 October 2017)

Raphulu, L and Mkhwanazi, N. “Restraint of trade: a guide for employers”. IOL. https://www.iol.co.za/business-report/economy/restraint-of-trade-a-guide-for-employers-2003761