What is the Law on Restraint of Trade?
Contracts can be very scary things. People often sign their names without reading through the text in detail and end up agreeing to things they really shouldn’t. Some of the stipulations of a contract may only come into effect years later and many individuals are blindsided by the restrictions that they are suddenly beholden to. A prime example of this phenomenon can be seen in the form of Restraints of Trade. These regulations are not uncommon in modern-day contracts but many people are still hazy on the rules surrounding them. So what do you need to know? What is a Restraint of Trade? When does it become Unreasonable and What does the Law say about all this? What is the Law on Restraint of Trade?
A Restraint of Trade is a fairly common element usually found in employment contracts that seeks to protect the interests of the employer by restricting the work that may be done by the employee following their departure from the company or by limiting their disclosure and/or use of confidential information. In certain scenarios, Restraints of Trade can also apply to shareholders.
Perhaps the easiest way to understand these Trade Restrictions is through simplified examples.
- A managing director of a company who has developed an intimate knowledge of the inner workings of the business alongside an understanding of their long and short term goals may be restricted from working for a rival business within the same city for a period of a year following their departure from the company.
- A person working for a popular beverage corporation may be restricted from sharing the secret recipe used to create the beverage as this is considered confidential information.
Of course, these restrictions will vary wildly depending on the business that you work for and the contractual obligations that you agree to. But don’t these limitations on trade seem kind of unconstitutional?
How Legal is a Restraint of Trade?
While Section 22 of the Bill of Rights does make provisions for freedom of trade and profession, contracts that are freely signed by the employee are usually considered to be lawful and enforceable and, in most cases, you will have to work with the restrictions you agreed to in the contract.
That said, while these contracts certainly curtail the freedoms of the individual, there is a limit as to how overbearing they can become. One of the few instances in which a Restraint of Trade may be challenged is when it is considered to be unreasonable.
When is a Restraint of Trade considered Unreasonable?
Restrictions that are too broad, unenforceable, or which go against public policy may be legally disputed. When determining whether or not a restraint is reasonable, a court will consider many factors including, but not limited to –
- Is there an interest deserving of protection? (ie, are there trade secrets that should be protected?)
- Is that interest being threatened?
- Are there any relevant policies or laws which would make this restriction either unenforceable or illegal?
- What is the time frame of the restraint?
- What kind of geographical area does the restriction apply to?
- Does the employee still have the ability to earn a living?
At the end of the day, one of the main things a court will have to consider is how the rights and freedoms of the employee compare to the interests of the other party.
Using the above example of a managing director, it may be reasonable to mandate that the individual is not allowed to join a rival company within the same city as his previous company for a one year period. That said, it would be unreasonable to request that he does not join a rival company anywhere in the country or that he may not join a rival company for a period of 50 years.
It is also important to remember that a court will not only consider the reasonableness of the restrictions at the time of their signing but also their reasonableness at the time of their implementation, in other words, certain restrictions that may have been acceptable when the contract was signed may now be considered unreasonable given the current climate (this is especially true in the age of Covid).
Lastly, it is the responsibility of the person being restrained to prove that the restrictions are unreasonable.
What is the Purpose of a Restraint of Trade?
As noted, Restraints of Trade are contractual obligations used by employers to safeguard certain interests. In most instances, they are used as a way to prevent immediate and potentially unfair competition to the employer’s business. If, for example, a sales manager were to leave a company with knowledge of that organisation’s entire client database, a Restraint of Trade may prevent him/her from immediately using that information in another company.
How do I get out of a Restraint of Trade?
Generally speaking, Restraints of Trade are considered legal and enforceable unless they are proven to be unreasonable.
Simply put, unless you can prove that your restraint is in some way unreasonable, it will be quite difficult to get out of it once you sign your name. It is for this reason that employees are always encouraged to be hyper-vigilant when signing contracts as the various clauses included in the text could have far-reaching consequences for their future employment prospects.
What does Restraint of Trade Include?
Restraints of Trade are often very personalised as they are determined by an individual’s own contract, thus the specific restraints that may apply in any given scenario will be highly contextual. Usually, these restrictions prevent an employee from working in a specific field following their departure from a company, for example, a chef may be allowed to continue working in the hospitality industry in general but may be prohibited from catering for specific events in a particular area for a set amount of time.
Additionally, restraints may forbid the use of certain information such as trade secrets for competitive purposes. It should be noted, however, those restraints preventing a former employee from starting their own business could be hard to enforce so long as the employee does not use the information that they have gained in an improper manner.
In Conclusion – What is a Restraint of Trade and When does it become Unreasonable?
A Restraint of Trade is a type of contractual obligation that is agreed upon by an employee and employer when the former enters into the company. This agreement usually restricts the future work capacity of the employee for a certain amount of time in the event of their departure from the company. Simply put, a Restraint of Trade will normally stipulate that a former employee cannot immediately engage in certain types of work that could harm the interests of the employer, this is commonly achieved by prohibiting future work –
- In specific geographic locations
- For a set amount of time
- In certain fields
For example, a real estate agency may prevent former employers from doing similar work in the same city for a period of 1 year. These restraints can also be applied to the sharing or use of the information such as trade secrets/confidential data.
These contracts are seen as legal and enforceable until they are proven to be unreasonable. A court of law will determine whether or not the restrictions are reasonable by weighing the interests of the employer with the rights and freedoms of the employee. Additionally, certain factors regarding the restrictions may be considered such as –
- The size of the prohibited work area
- The duration of the ban
- The extent of the ban in relation to future work prospects
- The relevant circumstances when the restraints are enacted
- Whether or not the contract is at odds with any public policy
The onus is on the employee to prove that a Restraint of Trade is unreasonable, if they cannot do so it will be very difficult for them to get out of their obligations. It is for this reason that employees should be very careful when signing contracts as the various stipulations found within may have long-lasting effects.
By contrast, Restraints on Trade can be very useful tools for employers as they can prevent the immediate growth of rival business ventures which utilise insider information, for example, a former employee with an intimate knowledge of the company’s client base may be prohibited from using that information to poach clients for a rival organisation.
Some restraints are notably hard to enforce, however, especially those which involve confidential information which is not being used in an improper manner by the former employee.
Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.
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