SOUTH AFRICA: REASONABLENESS OF A TWO-YEAR RESTRAINT OF TRADE
The Labour Appeal Court (LAC) recently handed down two judgments on the same day in which it has on the one hand upheld a two-year restraint of trade agreement and on the other hand, reduced the operation of the restraint to one year.
Sadan and Another v Workforce Staffing (Pty) Ltd
In the matter of Sadan and Another v Workforce Staffing (Pty) Ltd (available here), the LAC found a two-year restraint of trade which prevented the appellants from taking up employment with the respondent’s competitors anywhere in South Africa to be unreasonable and contrary to public policy, and reduced the restraint period to one year.
In this matter, both employees were subject to the same restraint of trade, which had been incorporated into their employment contracts with the company. During their employment, they established close relationships with the company’s customers and had become privy to information regarding, among other things, the company’s pricing strategies, costing of its products and profit margins. They also had access to the company’s client database, marketing material, business strategies and financial information. Following their resignations, the company approached the Labour Court to enforce their restraints of trade. The Labour Court upheld the restraints.
On appeal the LAC held that, although the company’s proprietary interest was worthy of protection throughout the whole of South Africa, the two-year operation of the restraint of trade agreements was unduly excessive. This was in circumstances where the company could not provide convincing and compelling reasons to justify the period of the restraint.
In this regard, the Court found that two years was an inordinately long time for the appellants’ replacements to meet with clients and develop relationships (which is the justification the company provided for the duration of the restraint). The LAC highlighted the importance of ensuring that the duration of a restraint of trade achieves the objective sought, that is, the legitimate protection of a proprietary interest. It must not merely seek to render an employee unemployed for the period.
Beedle v Slo-Jo Innovations Hub (Pty) Ltd
In the matter of Beedle v Slo-Jo Innovations Hub (Pty) Ltd (available here), the employee was appointed as the head of research and development and possessed knowledge of the specific nature of the company’s operations in the beverages industry. In terms of the employee’s restraint of trade agreement, she was prohibited from, among others, being employed by a competitor in the beverages industry in South Africa for a period of two years following the termination of her employment with the company.
The LAC found that, given the company’s operations throughout South Africa, the geographical scope of the restraint of trade was reasonable. With regard to the duration in which the restraint sought to operate, the LAC balanced the employee’s freedom of trade against the proprietary interest sought to be protected by the company.
The company led evidence that established that the two-year period in which the restraint operated was justifiable, as it sought legitimately to protect the company’s proprietary interests: that is, once approached by a customer, it took a period of between 24 and 36 months to conceptualise a particular product for that customer before bringing it to market. Accordingly, the operation of the restraint of trade for a two-year period would protect the company during this required lead time. The LAC accordingly upheld the two-year operation of the restraint.
While the legal position in South Africa is that a restraint of trade agreement is valid and enforceable, unless it is shown by the party challenging it to be unreasonable, the two judgments handed down by the LAC demonstrate the evidence that will need to be led by the employer and the conservative approach adopted by our courts when determining the reasonableness of a long restraint.
In this regard, in the absence of convincing and compelling reasons that justify the duration of the restraint, our courts may reduce the operation of an otherwise reasonable restraint to a period that, in its judgement, will sufficiently protect the interest sought to be protected, while also protecting an employee’s freedom of trade.
Employers who seek to enforce long restraints will, accordingly, need to be prepared to justify them.