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The enforceability of restraint of trade agreements

Many employers require their employees to sign an agreement saying that, if they resign, they won't go and work for one of your competitors. Are such contracts enforceable?

There is little more annoying for a business person than to take on a new employee, give him or her on-the-job training, and then, just when the employee is starting to earn his keep, find that the employee resigns. When the employee then goes and works for the opposition, that is salt in the wound.

Many employers try to prevent employees job-hopping to their trade competitors by requiring new employees to sign a restraint agreement, in which they agree that, if they resign, they will not take up employment with a competing business within a defined geographical area for a specified period of time.

Are restraint agreements of this kind legally enforceable? If the employee were to resign in order to take up employment with a competitor, could the erstwhile employer get a court interdict to prevent the ex-employee from working for the competitor?

The Supreme Court of Appeal has said (in the case of Reddy v Siemens, discussed below) that the question of the validity and enforceability of restraint agreements involves balancing two policy considerations -

"A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint. The first is that the public interest requires that parties should comply with their contractual obligations ?The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions. Both considerations reflect not only common-law but also constitutional values."

The way in which our courts have achieved this balance is by ruling that restraint agreements are enforceable unless they are against public policy. Such agreements will be against public policy if they do no more than attempt to restrain competition, since competition is regarded as a healthy component of the economy. For the restraint to be legally enforceable, the employer imposing the restraint must have what the courts have called a "proprietary interest" or a "protectable interest" (such as confidential information) that is worthy of legal protection.

Two recent Supreme Court of Appeal decisions, one of which upheld a restraint agreement and the other of which struck down a restraint agreement illustrate the application of these principles.

In Reddy v Siemens Telecommunications (Pty) Ltd, decided in 2007, Reddy had entered employment with Siemens and had signed a restraint agreement in which he undertook not to work for any competitor in the same province for a year if he were to resign.

He was trained by Siemens, locally and abroad. He then resigned his job with Siemens in order to take up employment with a rival company in a position similar to the one he had occupied at Siemens.

The court ruled that, in these circumstances, there was an obvious risk that Reddy would disclose confidential technological information to his new employer. Thus, the restraint was not unreasonable nor against public policy. The court said that Reddy had entered into the restraint agreement voluntarily, and public policy required that contracts should be enforced.

In Digicore Fleet Management (Pty) Ltd v Steyn, decided in 2008, Digicore was attempting to enforce a restraint agreement signed by its ex-employee, Steyn, who had resigned and gone to work for a competitor.

On the evidence placed before it, the court found that Steyn had not been given any training by Digicore, had not acquired any confidential client information, and had brought her own business contacts into the job. When she resigned, said the court, she took with her no more than she had brought into the business, namely experience and business contacts.

Consequently, Digicore had no proprietary interest worthy of legal protection. All that the contractual restraint would achieve would be to prevent Steyn from being commercially active, and that would not be reasonable. Consequently, the court ruled that the restraint agreement was unenforceable.

The difference between the two cases is that, in the first case, the employee had acquired specific technological information in the course of the training provided by his ex-employer, which could be used by a competitor to the ex-employer's prejudice.

In the second case, the employee had not been given any training by the first employer, and had acquired no confidential information. The first employer had no proprietary interest worthy of legal protection.

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