Restraint of trade agreements

I have seen debates about the enforceability of restraints of trade provisions a number of times in business fora.  More often than not the people giving advise (generally not lawyers) believe that an employer is not permitted to prevent an employee from earning a living, particularly in the area he/she works in.  Another factor which I have seen come up is the “right to earn a living”.  The bottom line is usually that employers have their hands tied and can’t do much to prevent unscrupulous employees from setting up shop in competition across the road.

In a nutshell, restraint of trade provisions are enforceable against employees.  The courts look at two competing considerations; freedom of contract and the “right to earn a living” and use reasonableness to strike the balance between the two.  If restraint of trade provisions are not reasonable (for example, they cover a geographical area that is too wide given the employee’s activities on behalf of the employer, the duration of the restraint is too long or the scope of the restraint is too wide) then the court will not enforce the provisions.  There must also be a valid interest worthy of protection (known as a “protectable interest”).  Examples of a protectable interest include goodwill and client relationships.  Employers are not permitted to stifle competition just for the sake of blocking competition.

Restraint of trade provisions can be vital for the protection of your business.  Imagine you spend years building up relationships with your clients and establishing your business and brand in the marketplace and one of your key employees sets up a competing business on the back of your business and, virtually overnight, solicits your clients across to his/her competing business.  The impact could be devastating.  To help protect against this employers are well-served incorporating properly drafted restraint of trade provisions into their employment contracts.  This gives employers the option of enforcing those restraint of trade provisions should employees leave and set up competing businesses.  The big deterrent to enforcing restraint of trade provisions, aside from the uncertainties that are a part of legal proceedings (the so-called “vagaries of litigation”) is the bill at the end of the day.  Typically restraint of trade provisions are enforced by applying for a court order forcing the employee to refrain from his/her wrongful conduct and to comply with the provisions of the restraint for so long as it is in force.  This can be costly (depending on what is involved, the costs could reach R100 000, or even higher).  In the context of these costs it is important to bear in mind what the potential downside is.  If this employee could cost you hundreds of thousands of rands then it is worth litigating.  Another important consideration is whether other employees will be encouraged by your failure to enforce restraint of trade provisions against an errant employee and take a similar path and set up their competing businesses.  The end result of this could be even more devastating.

There are different approaches to the enforcement of restraint of trade provisions.  Some companies will enforce a restraint, regardless of the possible threat by the employee because it is more important to deter similar conduct by other employees (I have seen this tactic work so well that the initial flurry of instructions to enforce restraints dried up in short order once the message was received by the client’s employees).  Sometimes a well worded letter of demand will do the trick and show the ex-employee that you mean business.  I always advise my clients to be prepared to follow through if they send a letter of demand, though.  If you send a letter of demand, your ex-employee calls your bluff and you do nothing then future threats will be regarded as being empty and you may have irreparably damaged your credibility.

As I mentioned above, the bottom line is that restraint of trade provisions are enforceable in principle.  They must be properly drawn up and you should prepare yourself to get serious about them if you are threatened with the end of your business by an unscrupulous employee.  It pays to think ahead.

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