The effect of the covid 19 pandemic on restraint of trade clauses

1. INTRODUCTION

• The Covid-19 pandemic continues to wreak havoc by causing enormous disruptions in the social and economic sectors of the country.
• The enforceability of restraint of trade clauses in employment contracts has now been brought into question, especially with so many people already struggling to survive and coping financially.
• In the recent judgment of Oomph Out of Home Media (Pty) Ltd v Brien and Another[1], the court had to consider this question.
• In this article, we will consider what exactly a restraint of trade clause is, whether it is generally enforceable by our courts and the stance of our courts in light of the Covid-19 pandemic.

2. WHAT IS A RESTRAINT OF TRADE CLAUSE?

• A restraint of trade clause (in the context of an employer and employee relationship) is an express contractual arrangement which limits the ability of an employee to accept future employment with a similar company for a certain period of time and within a certain geographical area.
• These restrictions are usually imposed to protect the confidential information (including trade secrets) that an employee has access to and which can be utilized by such an employee or a competitor to the detriment of the current employer.

3. ARE RESTRAINT OF TRADE CLAUSES ENFORCEABLE IN SOUTH AFRICA?

• The current legal position in South Africa is that a restraint of trade clause in an agreement is prima facie
• The first question that needs to be answered in determining whether a restraint of trade clause is enforceable, is whether the party seeking to enforce the restraint of trade clause has a protectable interest?
• If answered in the affirmative, it has to be determined whether the restraint is reasonable.
• In order to determine whether a restraint of trade clause is reasonable and therefore enforceable, the court, in the matter of Basson vs Chilwan 1993 3 SA 742 (A), laid down a test and formulated the following questions to be answered:
• Is there an interest of the employer which is deserving of protection at the termination of the agreement?
• Is such interest being prejudiced by the former employee?
• If so, does such interest of the employer outweigh that of the former employee, so that the former employee is precluded from being economically active and productive?
• Is there another facet of public policy, having nothing to do with the relationship between the parties, which requires that the restraint should either be maintained or rejected?
• A restraint clause will be unreasonable if an employee is prevented, after the termination of the contractual relationship, from taking part freely in the commercial and professional world without a protectable interest of the other party being served thereby. Such a restraint is contrary to public policy.  Similarly, a restraint in an agreement that goes further than reasonably necessary to safeguard any protectable interest of the employer will be unenforceable (Thor Industries (Pty) Ltd vs GEE 6 Superweld CC 2011 2 SA 146 (W)).
• The onus, therefore, rests on the party seeking to avoid the “restraint” clause to prove that its enforcement would be contrary to the public interest (Magna Alloys and Research SA) (Pty) Ltd vs Alice 1984 4 SA 874 (A)).

4. WHAT IS THE COURT’S STANCE ON A RESTRAINT OF TRADE CLAUSE IN THE COVID-19 PANDEMIC?

• In the recent matter of Oomph Out of Home Media (Pty) Ltd v Brien and Another[2], the First Respondent, an erstwhile employee and director of the Applicant and a current shareholder in the Applicant, tendered his registration during the course of February 2020 due to the irretrievable breakdown of his relationship with another director and also due to the fact that he had not been paid his full salary for quite some time.
• During March 2020, the First Respondent took up employment with the Second Respondent, a business competitor of the Applicant both in South Africa and other African countries.
• Consequently, the Applicant contended that the First Respondent was in alleged breach of the restraint of trade.
• The Applicant sought the enforcement of compliance from the First Respondent in terms of a restraint of trade provision in a shareholders agreement that was concluded between the two parties. The Applicant further sought an order against the Second Respondent prohibiting it from employing and associating with the First Respondent and using the Applicant’s confidential information and trade secrets as held by the First Respondent. There were also concerns raised by the Applicant that the First Respondent was able to entice the Applicant’s customers, business associates as well as its employees from leaving the Applicant, which would ultimately allow the Second Respondent to have a competitive edge over the Applicant.
• The First Respondent claimed that the restrictions would preclude him from earning a living. To this, the Applicant responded by contending that the First Respondent could remain active in the economy by considering other avenues of employment.
• The court was faced with considerations on the reasonableness of the restraint of trade with the invasion and effect of the Covid-19 pandemic.
• The court considered the reasonableness of the restraint, or lack thereof, in light of the principle laid down in Magna Alloys and Research SA (Pty) Ltd v Alice 1984 4 SA 874 (A)[3]:

“Covenants in restraint of trade are valid. Like all other contractual stipulations however, they are unenforceable to the extent that the enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably restricts the covenanter’s freedom to trade or to work. Insofar as it has that effect that the covenant will not, therefore, be enforced. Whether it is unreasonable must be determined with reference to the circumstances of the case. Such circumstances are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and in particular of the situation prevailing at the time enforcement is sought.”

• Considering the aspect if circumstances mentioned in the Magna Alloys case, being the circumstances prevailing at the time of the enforcement of compliance with the restraint of trade, the court found that it could not overlook the unexpected invasion of the Covid-19 pandemic which occurred shortly after the First Respondent took up employment with the Second Respondent.
• The Court found that it was absurd and unreasonable for the Applicant to try and force the First Respondent out of a career of choice and to have him start working in a different field, in a time where Covid-19 has raised a lot of uncertainty on the future of many businesses. With individuals doing everything possible to survive under the devastating effects of the Covid-19 pandemic, the request of the Applicant was found to be unreasonable and contrary to public policy and the values laid down in our Constitution.
• Ultimately, the court concluded that the restraint of trade relied upon by the Applicant was unenforceable.

5. CONCLUSION

• The judgement in the Oomph Out of Home Media – case could create challenges for businesses that have protectable interests that are deserving of protection from employees leaving their employment.
• To minimise the risk of a court finding that your business’ restraint of trade clauses are unreasonable and therefore unenforceable, we suggest that a careful review is undertaken to ensure that the restraint of trade clause goes no further than what is required to protect the clearly identifiable protectable interests of your business (including trade secrets and confidential information) and the existing relationships with your clients.

Should you require any assistance with the review of your restraint of trade clauses, please feel free to contact one of our specialist attorneys for assistance.

Louis Stroebel                                                            Heidi Wagner

LLB; LLM (Import/Export Law)                                   BCom (Law); LLB

Director                                                                        

Corporate and Commercial Law                         

E-mail: Lstroebel@sstlaw.co.za                          

Phone: 012 361 9823

[1] Oomph Out of Home Media (Pty) Ltd v Brien and Another (2021) JOL 49492 (GJ).

[2] Oomph Out of Home Media (Pty) Ltd v Brien and Another (2021) JOL 49492 (GJ).

[3] Magna Alloys and Research SA) (Pty) Ltd vs Alice 1984 4 SA 874 (A).