The restraint of trade clause and entrepreneurs in contemporary South Africa

February 1st, 2021

The current economic climate in South Africa (SA), especially considering the consequences that COVID-19 has had on the possible economic capabilities of a multitude of South Africans, some may ponder the wealth and riches that entrepreneurial endeavours could provide them and may save them from total economic ruin. But how does one go about this safely and legally? The purpose of a restraint of trade clause, most typically, is to prevent and/or oblige employees to refrain from competing with their previous employer for the business and/or commerce of such an employer. But how does one enter the market as an entrepreneur in the industry for which one is trained and educated without unlawfully competing with your previous employer?

It is important to note that in South African law there is no codified legal principle of restraint of trade. The concept of restraint of trade is, therefore, birthed from the principle of unlawful competition and codified in a contract through a restraint of trade clause. Since restraint of trade clauses are founded on the principle of unlawful competition, one should study what constitutes unlawful competition as it plays out in the employment environment. The founding principles of all labour laws in SA, are found in the Constitution. Section 18 of the Constitution affords each South African citizen the right to freedom of association and s 22, the right to choose their trade, occupation, or profession freely. In terms of s 23, each South African citizen has the right to fair labour practices. The Competition Act 89 of 1998 (the Act) does not provide a clear definition of unlawful competition but proposes to prohibit same through its purpose. The Act further prevents horizontal and vertical practices between firms, the definition of which includes a natural person, such as an employee, if such practices have the effect of substantially preventing or lessening competition in the market. However, if a party to the agreement can prove that any technological, efficiency or other pro-competitive gain, resulting from the agreement, outweighs the effect, such horizontal and vertical practices can be allowed.

The Labour Court, in ABSA Insurance and Financial Advisors (Pty) Ltd v Jonker and Another, ABSA Insurance and Financial Advisors (Pty) Ltd v Jonker and Another (LC) (unreported case no C741/17 and C742/17, 17-11-2017) (Steenkamp J) confirmed that South African law recognises two forms of unlawful competition, being –

  • unfair use of a competitor’s fruits and labour; and
  • the misuse of confidential information in order to advance one’s business interests and activities at the expense of a competitor.

In Waste Products Utilisation (Pty) Ltd v Wilkes and Another 2003 (2) SA 515 (W) at 571 F – G the elements, which a claimant needs to satisfy to prove the existence of unlawful competition were summarised as follows –

  • the claimant must have an interest in the confidential information, but such interest does not have to be ownership;
  • the information in which the claimant has an interest is of a confidential nature;
  • a relationship must exist between the claimant and the defendant, on whom the claimant seeks to impose a duty to preserve the confidence of information imparted to them, such as the relationship between an employer and an employee;
  • the defendant must have knowingly appropriated the confidential information;
  • the defendant must have made improper use of that information, whether as a springboard or otherwise, to obtain an unfair advantage for themselves; and
  • the claimant must have suffered damage as a result of such improper use.

Of importance to restraint of trade clauses in instances of entrepreneurial endeavours, is the concept of trade connections. In the matter between Rawlins and Another v Caravantruck (Pty) Ltd [1993] 1 All SA 389 (A), the Appellate Division held that an employee could be found liable for damages in a claim based on unlawful competition, if the employee used the trade connections of their previous employer in an improper manner, to advance their own agenda. By example, where the entrepreneur approached the clients of a previous employer, prior to establishment of their own company and/or leaving the employ of their employer, as the court might infer that the entrepreneur improperly used the trade connections, which include its customers, to further their own business interests. This is furthermore substantiated by the judgments in the Waste Products, Jonker and Forwarding African Transport Service CC t/a FATS v Manica Africa (Pty) Ltd and Others [2005] 1 BLLR 104 (D), and the principle of the reasonable person, as same would result in contravention of the provisions contained in ss 22 and 23 of the Constitution.

Based on the provisions of ss 18, 22 and 23 of the Constitution, as well as the judgments of Waste Products, Jonker and FATS, an entrepreneurs’ previous employer will not be able to restrain them from continuing with starting their own company, if the business is carefully considered not to be in violation of the principles set out in the judgments above. In essence, if the entrepreneur does not make improper use of that information gained from previous employment, whether as a springboard or otherwise, to obtain an unfair advantage for themselves; and the previous employer does not suffer damage as a result of such use (therefore, the use is not improper), a litigant will have difficulty to enforce the restraint of trade. A restraint of trade should, therefore, not be used to prevent the entrepreneur from entering into the economic trade again, but rather to proportionally protect the interests of the previous employer against improper use and abuse by the ex-employee.

Gilles van de Wall BA Law LLB (UP) is a legal practitioner at Johanette Rheeder Incorporated in Centurion.

This article was first published in De Rebus in 2021 (Jan/Feb) DR 9.