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South Africa: enforcing restraints of trade during the COVID-19 pandemic

1 March 2021
– 7 Minute Read

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A restraint of trade is an agreement usually between an employer and an employee, and in certain instances, may be contained in shareholder agreements and be binding on shareholders. The purpose of a restraint of trade is to protect an interest of the restrainor. Confidential information (or trade secrets) and customer (or trade) connections are commonly recognised as being interests deserving of protection.

The starting point in restraints of trade is that they are enforceable. Like all other agreements, they are only unenforceable to the extent that the enforcement would be contrary to public policy.  Companies seeking to enforce a restraint of trade, are required only to invoke the restraint and prove a breach of its terms. The onus is on the restrainee to show that the restraint is not enforceable because it is unreasonable and is against public policy.

Public policy requires that agreements, freely entered into should be honoured. At the same time, public policy dictates that individuals should be free to take part in economic activities to earn a living. This is a right enshrined in section 22 of the Constitution, which provides everyone the right to choose a trade, occupation, or profession freely. A court is therefore required to balance these considerations and make a value judgment on the reasonableness of a restraint. 

Whether a restraint of trade is unreasonable is determined with reference to whether the restraint unreasonably restricts a person’s freedom of trade or work, taking into account the circumstances of each case, and the situation prevailing at the time of enforcement of the restraint (and not necessarily the circumstances prevailing at the time of agreeing to the restraint of trade). The circumstances prevailing at the time of enforcement, may necessarily require a consideration of the COVID-19 pandemic and its effect on the industry and the availability of work, together with any other relevant factor.

Of relevance to the reasonableness of a restraint are the following considerations:

  • Does a party have an interest that is deserving of protection after termination of the agreement?
  • Is that interest being threatened by the other party?
  • Does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically active and unproductive?
  • Is there an aspect of public policy, having nothing to do with the relationship between the parties that requires the restraint to be maintained or rejected?

Does the restraint go further than necessary to protect the relevant interest?

Oomph Out of Home Media (Pty) Ltd v Brien and another [2021] JOL 49492

The Facts

Mr Brien was an erstwhile employee and director of Oomph Out of Home Media (Pty) Ltd (the Company) and continued as  a shareholder when he terminated his employment. During his employment, Mr Brien signed a restraint of trade agreement as well as a shareholders agreement containing a restraint. At the time of the termination of his employment, the Company owed Mr Brien in excess of ZAR 1.2 million in remuneration. 

Mr Brien resigned and commenced employment with a competitor of the Company.  In terms of a restraint of trade agreement between Mr Brien and the Company, Mr Brien agreed to be restrained for a period of 18 months from the date of termination of his employment from amongst other things, being employed by a competitor of the Company. . 

The restraint was geographically far-reaching and restrained Mr Brien from working for a competitor in 29 African countries. The competitor operated in two of those countries. In addition, the shareholders agreement prohibited Mr Brien from disclosing the Company’s confidential information and trade secrets to a competitor.

The Company became aware of Mr Brien’s employment by its competitor in March 2020. However, urgent proceedings were only launched in the Gauteng division of the High Court in May 2020. The matter was struck from the roll due to a lack of urgency.  By that stage, Mr Brien had been in the employment of a competitor for approximately three months.  

During that time, South Africa was in phased period of lock-down, with a number of businesses unable to operate under Alert level 4 and 5. Following the matter being struck from the roll, the matter was heard again on 28 July 2020 and judgment was delivered on 3 February 2021.

The Judgment

The court accepted that Mr Brien had made contact with the Company’s customers and business associates and found that the he was in possession of the Company’s confidential and proprietary information. Mr Brien did not deny his conduct, and confirmed that he was employed by a competitor.

In considering whether the restraint was reasonable, the court placed emphasis on the prevailing situation at the time of the enforcement of the restraint. The court found it relevant that at the time of enforcing the restraint, the Company owed Mr Brien in excess of ZAR 1.2 million, a situation that must have prevailed for some time. The court commented that it was unlikely that a healthy working relationship would endure in such a situation. The departure of Mr Brien appeared to be the most viable option available to him as a result of the Company’s conduct.

In considering the prevailing circumstances at the time of enforcement, the court could not overlook the unexpected invasion of the COVID-19 pandemic in South Africa and globally. The Company argued that Mr Brien could remain economically active in the economy by working in another field that he had qualifications, being communications.

The court rejected this argument as absurd and unreasonable since Mr Brien had not worked in another field for nine years and had pursued a career in advertising and marketing. The court found that for Mr Brien to be forced out of a career of his choice and to start working in a different field at a time when many businesses were closing down, retrenchments and lay-offs being common place and individuals doing everything possible to survive and cope was unreasonable and contrary to public policy and constitutional values.

The court declined to enforce the restraint.

Conclusion

Whether a restraint will be enforced by a court turns on whether the restraint is reasonable with reference to the particular facts before the court. Restraints are determined on a case-by-case basis and much will turn on the particular facts of a case and the prevailing circumstances at the time of enforcement of the restraint.  

The prevailing circumstances may include a consideration of the impact of COVID-19 on the South African economy and the availability of work at that particular point in time. Going forward, this may be a relevant factor, but would not necessarily be decisive of whether a restraint is unreasonable.

Other equally relevant considerations include the nature of the work, the geographic location of the restraint, the duration of the restraint, and whether the individual has trade connections or access to confidential and proprietary information that is deserving of protection. A court will be called upon to decide whether in all the circumstances of the case it has been shown that the restraint clause should properly be regarded as unreasonable.

Accordingly, the judgment should not be interpreted to mean that the COVID-19 pandemic creates a bar to the enforcement of restraints of trade in the short-to-medium term future as the economy recovers, but, its impact on a particular industry must be taken into consideration when assessing whether a restraint is reasonable, together with the availability of work and all other relevant factors.