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Bulletin | Article

Restraints of Trade in the Modern Economy

Reading Time 4 minute read


In this post-recession era, in which significant economic challenges remain and competition for work is fierce, preventing an employee from taking up employment with a competitor where such employment may give that competitor access to an employer’s customers or confidential information is a key weapon. However, companies seeking to restrict the employment horizons of former employees will need to make a very good case indeed. Surprisingly, though, employers continue to try and apply generic restraint of trade contracts to an entire workforce in the hope that the courts will hold employees to their contracts.

In the absence, however, of persuasive evidence that the employer would otherwise suffer pretty badly, the judiciary is not inclined to uphold contracts that interfere with a person's productivity. Too many times, companies make the costly mistake of rushing to court to enforce a restraint without giving thought to the critical issue of what proprietary interest they are seeking to protect.

It is not enough to say that the employee acquired confidential technological or know-how during his or her employment. The courts have been clear that the mere assertion that certain processes and methodologies are confidential does not make them so. In any event, employees are not routinely placed in possession of unique formulae or designs or special methods. More often than not, they will simply have acquired specialised skills, which will have accrued to them as part of their general stock of skills and knowledge.

Of course, there will be cases in which allowing an employee to go and work for the competition poses a clear risk for the former employer. Apart from acquiring information that is in fact confidential, the other traditional protectable interest is the influence acquired by the employee over the employer's trade connections, be these customers or suppliers.

However, even where it is clear that a protectable interest exists, it does not go without saying that the restraint will be upheld. Only reasonable restraints are enforceable and the reasonability of a restraint is decided after weighing up two competing policy considerations. The first is that people should comply with their contractual obligations. The second is that everyone should be productive and permitted to engage in their trade.

In this regard, employers are inclined to make another costly mistake: drafting restraints that are too wide ranging, either in terms of the geographical area to which the work ban relates, and/or the time period for which it is to endure.

The Labour Court has expressed its distaste for this practice: “It would be wrong to promote the practice of drafting wide ranging contracts, which are only reformulated into more reasonable prohibitions when the matter comes to court, whereas up to that point the sweeping scope of the provision hangs over the employee like an exaggerated sword of Damocles”.

Other courts have been more sympathetic. In a 2008 case before the Durban High Court, Wallis AJ (as he then was) said it was wrong for Courts to reflexively criticise those who draft restraint of trade agreements in very broad terms. “I think it quite impractical to suggest that restraint agreements be drafted on the basis of greater accuracy and precision. That demands a prescience that is rarely present in life.”

Be that as it may, it is suggested that one of the primary reasons that restraint of trade clauses have acquired a reputation for being unenforceable is that employers do not give careful enough thought to the terms.

It is may be true that the money spent on lawyers to enforce restraint of trade agreements would perhaps be better spent in the market place, promoting the business and enhancing the customer relationships that are endangered by the former employee. However, there are also times when it will be strategic to embark on such litigation. This can send an appropriate message to the work force and to the market. In such cases, a well constructed, well considered restraint of trade is required.
Another reason to approach restraints of trade with more precision is the impact of social media in forging trade connections. Customer lists, supplier details and client data bases are transferable at the click of a button. Traditional restraint clauses do not necessarily render the protection that employers need against the unauthorised acquisition and use of this information.

The message for employers is that careful thought should be given to which employees could really threaten the business if they left and how they could do so. This is a dynamic exercise in that the restraints regarded as key to the business will need to be re-worked as the relevant employees move up the ranks or as their responsibilities change.

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