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There is a common assumption among employees (and many employers) that restraint of trade covenants are invalid and unenforceable especially in light of the right for South Africa citizens to choose their trade, occupation, or profession freely as enshrined in the Constitution of the Republic of South Africa, 1996 (“the Constitution”). This assumption is incorrect as the Appellate Division (now the Supreme Court of Appeal) has held, in the landmark case of Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A), that covenants in restraint of trade are valid and enforceable.
Unlike the approach adopted by English courts, the court in Magna Alloys, held that restraints of trade are not prima facie unenforceable or invalid and that every restraint of trade agreement signed by an employee is assumed to be lawful and enforceable, and the onus lies on the employee, if he or she wishes to be released from the restraint, to show that the restraint is unreasonable and contrary to public policy. Covenants in restraint of trade were again examined in light of the Constitution and it was held that the Constitution did not intend to alter the law laid down in Magna Alloys and similar cases.
The test to determine the reasonableness of a restraint of trade agreement was set out in Basson v Chilwan and Others 1993 (2) SA 742 (A) and requires that the following must be assessed:
- Is there an interest of the one party, which is deserving of protection at the termination of the agreement?
- Is that interest being prejudiced by the other party?
- If so, does the interest weigh up qualitatively and quantitatively against the interest of the latter party that the latter should not be economically inactive and unproductive?
- Is there another facet of public policy having nothing to do with the relationship between the parties but which requires that the restraint should either be maintained or rejected?
Other factors that are considered by courts in determining the reasonableness of a restraint include, inter alia, (i) the length of time for which the restraint operates, (ii) the geographical area to which the restraint applies, (iii) whether a restraint payment was paid to the employee, (iv) whether the employee still has the ability to earn a living, and (v) the proprietary interest or capital asset that the employer seeks to protect.
However, in determining the reasonableness of a restraint, a court must ultimately weigh up two principal, but conflicting, public policy considerations, namely that public interest requires that parties should comply with their contractual obligations (i.e. pacta sunt servanda) as opposed to the consideration that all persons should, in the interests of society, be freely entitled to engage in economic activity and to pursue a livelihood. It is important to note that the maxim pacta sunt servanda has its roots in constitutional principle especially as the court in Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 406 (SCA) held that “contractual autonomy is part of the freedom informing the constitutional value of dignity”.
These public policy considerations have recently been considered and applied by the High Court and the Labour Court in respect of the enforcement of restraints of trade during the current COVID-19 pandemic.
In the judgment of Oomph Out of Home Media (Pty) Limited v Brien and another {2021} JOL 49492 (GJ), the High Court essentially held that it would be unreasonable and contrary to public policy to uphold a restraint of trade during the COVID-19 pandemic despite having found that the first respondent possessed and exploited the applicant’s confidential client information in contravention of a restraint of trade. In considering whether the restraint of trade was reasonable, the High Court placed emphasis on the prevailing situation at the time of the enforcement of the restraint and in this regard, it held that it could not overlook the “unexpected invasion” of the COVID-19 pandemic in South Africa and globally and that the enforcement of the restraint in light thereof “is plainly unreasonable and contrary to public policy and constitutional values”. It is important to note that the High Court, in making its determination, did not consider the principle of pacta sunt servanda nor did it consider whether the partial enforcement of the restraint through the use of the doctrine of restriction would have been appropriate in the circumstances in order to protect the applicant from unlawful competition (i.e. the exploitation of its confidential client information by the first respondent).
The approach adopted in Oomph Out of Home Media was similarly followed by the Labour Court (Durban) in the case of Bearings International, a division of Hudaco Trading (Pty) Ltd v Trevor Veeradu (D280/2021) (30 June 2021) which, inter alia, held that from “March 2020 till the next foreseeable future the economic world has been hard hit by the advent of Covid-19. Very many employees have since lost their jobs and in this country, as with many others, unemployment has risen to uncontrollable levels, leaving families destitute. Finding a job at this time is notoriously difficult. In the circumstances, the restraint should be rejected.” Again, the Labour Court did not consider the principle of pacta sunt servanda or whether the partial enforcement of the restraint would be appropriate (especially as the Labour Court had found that the respondent possessed the applicant’s trade secrets).
Having regard to these aforegoing decisions, it appeared that employers would have significant difficulty in enforcing restraints of trade during the COVID-19 pandemic. Naturally, this was particularly concerning for employers seeking to protect their proprietary interests, especially as it appears that there is no end in sight for the current COVID-19 pandemic.
The Labour Court (Johannesburg), in two recent cases, has however rejected the public policy approach adopted in Oomph Out of Home Media where employers have sought to enforce restraints of trade despite the employees in both instances, attempting to rely on the decision of Oomph Out of Home Media to argue that their restraints of trade should not be enforced during the COVID-19 pandemic.
In Prima Interactive (Pty) Ltd v Lemon and others (J246/2021) (30 April 2021), the Labour Court expressly rejected the approach adopted in Oomph Out of Home Media and held that “[w]hat this approach ignores is that the Coronavirus is no respecter of persons, and that employers and employees are equally vulnerable in the face of the pandemic. While it is no doubt true that many employees have borne the brunt of the economic devastation that the pandemic has visited on our society and the economy in particular, businesses have not been unaffected. Restraint undertakings are sought and enforced to protect legitimate proprietary interests of an undertaking. There is no reason, once those undertakings have been judged legitimate, that they must yield to the bare assertion that alternative employment would be difficult to secure, whatever the cause.” Moreover, the Labour Court held that the fourth stage of the enquiry established in Basson v Chilwan does not entitle a court to make assumptions about the state of the labour market as a basis to reject a restraint undertaking.
Similarly, the Labour Court in Bulldog Abrasives Southern Africa (Pty) Ltd v Dan Llewellyn Davie and another (J123/2021) (20 May 2021) considered the approach adopted in Oomph Out of Home Media and held that the decision was “clearly wrong”. More importantly, the Labour Court held that “to suggest that enforcing a restraint in a COVID-19 situation is contrary to public policy is to stretch the meaning of public policy beyond what it is supposed to be. As consistently held, public policy requires that parties to a contract freely entered into to be bound by such a contract. It cannot be said that during the pandemic employment opportunities are completely closed out. […] What Rabie CJ was referring to was not instances like the current pandemic, but he was linking the prevailing circumstances to the boni mores of the society. I do not believe that the boni mores of the society will accommodate a complete shift from the maxim pacta sunt servanda because of the current pandemic.”
Unfortunately and having regard to the principle of stare decisis, none of the aforegoing conflicting judgments have conclusively settled the issue of whether restraints of trade are enforceable during the COVID-19 pandemic. Notwithstanding the aforegoing, the approach adopted by the Labour Court in Bulldog Abrasives Southern Africa and Prima Interactive is, in my view, the correct approach that should be adopted in determining whether a restraint of trade is reasonable and enforceable in light of public policy considerations particularly as employers should not be prevented by public policy from enforcing a restraint of trade covenant where an employee has unlawfully breached his or her contractual undertakings. Hopefully this issue will be swiftly and decisively determined by the Supreme Court of Appeal (or the Labour Appeal Court) in order to provide much needed certainty in the circumstances.
It is however important to note that each restraint of trade matter will need to be determined on its own facts on a case by case basis. The general principle remains that a restraint of trade will only be enforceable if the restraint is reasonable (having regard to the test prescribed by Basson v Chilwan) and is not contrary to public policy.
Marc Humphries
Directors: Legal, Johannesburg