- Restraints of Trade
One of the most contentious and regularly litigated issues in our courts relates to what is referred to as “restraint of trade” contractual clauses. Such clauses are typically found in employment agreements or agreements for the sale of a business or of various business rights, for example in the form of a franchise agreement.
Part of the value of a business is often determined by the extent of the goodwill of customers towards the business. Are there many and loyal customers? Customer loyalty sometimes attaches to the business itself, but may also be a function of the individuals around whom the business has developed. In such a case the seller may sell the business but then compete with that self-same business knowing that he or she will be able to attract the customers from the sold business back to the seller’s new business. A purchaser of the business may therefore be willing to pay more for the business if he is given an undertaking by the seller that the seller will, for a given period, not interfere with the customer relations of the sold business and will refrain from competing with the purchaser's new business. The parties’ thinking may be that after a few years the new owner will have been able to establish him or her in the new business so that the need for protection against competition by the former owner will by then have dwindled. The parties may then agree to insert a restraint of trade clause that will have this effect. The courts will, in these circumstances, typically enforce such a clause.
Restraint of trade clauses are often also found in employment agreements. Sometimes the parties even agree that the employee will receive some form of compensation if he accepts a restraint of trade clause in the employment agreement. In the employment situation an employer will often argue that the employee has, through the transfer of knowledge concerning the employer’s confidential information and trade secrets, know-how and experience to the employee by virtue of his employment, been put in a position where he will have become privy to the trade secrets and trade connections of the employer. This might unfairly enable the employee to forge links with customers and suppliers from which the employee should not be able to derive benefit at the expense of the employer if he leaves the employer’s service. Section 22 of the Constitution provides that “Every citizen has the right to choose their trade, occupation or profession freely.” The argument is sometimes made that these provisions of the Constitution mean that an employee should be relieved of his obligations in terms of a restraint of trade clause, especially if the clause significantly limits the former employee's ability to obtain employment.
Part of the value of a business is often determined by the extent of the goodwill of customers towards the business. Are there many and loyal customers? Customer loyalty sometimes attaches to the business itself, but may also be a function of the individuals around whom the business has developed. In such a case the seller may sell the business but then compete with that self-same business knowing that he or she will be able to attract the customers from the sold business back to the seller’s new business. A purchaser of the business may therefore be willing to pay more for the business if he is given an undertaking by the seller that the seller will, for a given period, not interfere with the customer relations of the sold business and will refrain from competing with the purchaser's new business. The parties’ thinking may be that after a few years the new owner will have been able to establish him or her in the new business so that the need for protection against competition by the former owner will by then have dwindled. The parties may then agree to insert a restraint of trade clause that will have this effect. The courts will, in these circumstances, typically enforce such a clause.
Restraint of trade clauses are often also found in employment agreements. Sometimes the parties even agree that the employee will receive some form of compensation if he accepts a restraint of trade clause in the employment agreement. In the employment situation an employer will often argue that the employee has, through the transfer of knowledge concerning the employer’s confidential information and trade secrets, know-how and experience to the employee by virtue of his employment, been put in a position where he will have become privy to the trade secrets and trade connections of the employer. This might unfairly enable the employee to forge links with customers and suppliers from which the employee should not be able to derive benefit at the expense of the employer if he leaves the employer’s service. Section 22 of the Constitution provides that “Every citizen has the right to choose their trade, occupation or profession freely.” The argument is sometimes made that these provisions of the Constitution mean that an employee should be relieved of his obligations in terms of a restraint of trade clause, especially if the clause significantly limits the former employee's ability to obtain employment.