South Africa: How Reasonable Is A Restraint Of Trade Clause In An Employment Contract?

Introduction

Our Constitution,¹ directs that we all have the right to freedom of trade.² So, when you (as an employee) are required to agree to a restraint of trade agreement, essentially restricting you from carrying out your line of work for a specified time period, that hardly sounds fair, right? Well, let us unpack this further.

Although protected by the constitution, the right to freedom of trade is not an absolute right, that is to say, it does not simply trump another's right to protect their business interests all in the name of someone else being able to trade freely and earn a living. So, in many ways this entails a balancing act – carefully protecting the interests of both parties.

A Recent Case - Facts

The High Court in the Eastern Cape recently had to consider this issue in the case of Diedre Steyn Physiotherapy Inc v Stander. ³ The Respondent (a former employee of the Applicant) had been employed at the Applicant's (the Respondent's former employer) physiotherapy practice as a physiotherapist for 9 years when the Respondent terminated her contract of employment with immediate effect. Despite the Respondent being bound to a restraint of trade clause - which restricted her from working within a 10km radius of the Applicant's practice, including St George's hospital, for a period of 9 months and from poaching the Applicant's existing clients - the Respondent managed to secure new clients on her own from the very hospital. The Applicant alleged that this was a breach of the restraint of trade clause because the Respondent's new clients stemmed directly from the hospital where the Applicant's practice would ordinarily receive referrals from, as a result of trust relationships developed with the doctors there.

Maintaining good relationships with the doctors at the hospital was paramount to the goodwill and therefore the success of the Applicant's practice. As an employee of the practice, the Respondent   herself was instrumental in forging and maintaining these relations. The Applicant argued that the above-mentioned goodwill of the practice was a protectable interest and therefore worthy of the protection of the restraint of trade being enforced on the Respondent. The Respondent challenged the very point that there was a protectable interest at all, therefore claiming that the restraint of trade was unenforceable.

Applicable law

Where a restraint of trade agreement has been concluded, our law will uphold and enforce it unless it is shown that doing so would contravene public policy by unreasonably restricting one's right to trade.⁴ In substantiating the previous point, the restraint must also be shown to be unreasonable.⁵ A value judgement ought to be made by looking at a list of considerations to determine whether the restraint would be reasonable, as set out in the case of Basson v Chilwan & Others.⁶ The last consideration would be whether the restraint of trade goes further than necessary in aims of protecting said interests.

Conclusion

The matter was not one of a threat per se to the Applicant's business. This was because the threat had already materialised in that the Respondent had benefitted from referrals, and in light of that, the Applicants protectable interests had been compromised. Plainly, this justified the restraint of trade. Although justified, was the restraint reasonable? The onus of proving this fell squarely on the party alleging unreasonableness, who was the Respondent in this case,⁷ which she subsequently failed to do. The court decided in favour of the Applicant and held that the restraint would not limit the economic trading of the Respondent seeing as there were other hospitals where the Respondent could offer her services. Therefore the restraint was not against public policy.

Overall, a restraint of trade clause could limit your trading even if not completely halt your right to work. Consider whether you are not greatly prejudicing yourself before signing an agreement to this effect. Ensure that you understand exactly how your trade will be restricted, in which geographical location and the duration of such restriction. If you are uncertain, seek professional advice from an Attorney at SchoemanLaw prior to entering into a restraint of trade agreement, and once the restraint of trade clause kicks in, in other words if and when your employment is terminated.

Footnotes

1. Constitution of the Republic of South Africa, 1996.

2. Section 22 of the Constitution of the Republic of South Africa, 1996.

3.(440/2020) [2020] ZAECPEHC 14 (9 June 2020).

4. Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A). 

5. Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 486 (SCA). 

6. 1993 (3) SA 472 (A) pg 743G-I.

7. BHT Water Treatment (Pty) Ltd v Leslie and Another 1993 (1) SA 47 (W).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.