A brief overview of restraints of trade agreements

Employers should be mindful of two cases which were heard in the Labour Courts recently involving restraints of trade. The one case dealt with the suspension of a restraint of trade court order, pending the finalization of an appeal. A company obtained a court order against its former employer, restraining the ex-employee from taking up employment with its competitor.

The ex-employee lodged an appeal against that order. The company immediately launched an urgent application to court saying it will be severely prejudiced if the existing court order was suspended pending the outcome of the appeal, as it was losing customers and business to the competitor.

The default position when there is an application for leave to appeal, is that the court order is suspended until the outcome of the appeal process is finalised. This means that the successful party cannot execute on or act upon that order. There are certain circumstances when the court can depart from this default position. One would need to show the existence of "exceptional circumstances", proof that you will suffer irreparable harm [if the order is not granted] and sufficient proof that the other party will not suffer irreparable harm. All three of these requirements have to be met or the application will fail.

The Labour Court refused to suspend the existing court order saying that the Company failed to meet all three requirements. In the other case, the Labour Appeal Court reiterated what requirements have to be met by an employer for the court to make an order enforcing a restraint of trade.

A restraint of trade agreements must be reasonable for it to be valid, binding and enforceable. If not, the court will not enforce it. The court will look at the competing interests of the right of parties to freely contract with each other and the right of an individual to freely engage in their chosen industry or occupation.

The test to determine whether a restraint of trade agreement is reasonable is to establish:

(a) whether one party has an interest that deserves protection after termination of the agreement;

(b) whether that interest is threatened or being prejudiced by the other party; (c) if so, whether that interest weighs qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive; and (d) whether there is an aspect of public policy that requires that the restraint be maintained or rejected.

A company Ford Ermelo obtained an interdict in the Labour Court its former employees from being employed by or starting a business which competes with Ford Ermelo for a period of 12 months and within a 300 kilometre radius from the company's business premises.

The company said that the former employees had access to confidential information relating to their relationships with clients, banks, service providers and suppliers and strong profitable relationships with customers and had intimate knowledge of the business.

They claimed that if that information was shared with competitors, it would damage and erode their position and competitive advantage they enjoyed in the market. The court delivered its judgement in June 2024, saying that it was satisfied that there was sufficient evidence justifying the enforcement of the restraint of trade against the former employees.

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