Trade Contracts

Benhilda Shambare

16 Dec, 2022

Restraint Of Trade Clauses in Contracts

INTRODUCTION

It has been said “Restraint of trade clauses/ contracts are not worth the paper they are written on”. This article seeks to ascertain if there is any veracity in this statement.

There is misconception surrounding restraint of trade clauses/contracts. This stems from the fact that restraint of trade clauses/contracts are void unless they are reasonable and protect a legitimate business interest. This has not always been the case. This position was adopted by the courts after the ruling in the South African landmark case on restraint of trades in 1984. To demystify this misconception, this article will look into what restraint of trade is, where it is found, how it is used and by who, and how to ensure that it is enforceable.

WHAT IS A RESTRAINT OF TRADE CLAUSE?

There is no universally accepted definition of what a restraint of trade clause or contract is, but it generally, it is a provision in an employment contract, shareholder’s contract, supplier contract or any other commercial contract, that is meant to take effect in the event of termination of that contract. The parties to the contract are a covenanter (usually employer) and a covenantee (usually employee). The covenanter restricts the covenantee his or her liberty in the future to work for, carry on trade, practice his or her profession, business or perform any other economic activity with other parties usually competitors who are not party to the contract.

Examples of such contracts include; where a managing director agrees not to solicit persons who were employees or customers of the company during his or her period of office and employment, or where an employee agrees not to compete with the employer after the employment contract terminates, or where the seller of a business agrees not to compete with the buyer after the sale, and where a retiring partner agrees not to compete with the firm.

THE PURPOSE OF A RESTRAINT OF TRADE CLAUSE IN A CONTRACT

The purpose of a restraint of trade clause in a contract is to safeguard the employer’s proprietary interests from being accessed by the employer’s competitors. These interests include trade secrets, confidential information, goodwill, trade connections, price lists, chemical formulae and strategic business plans.

HISTORY OF THE PRINCIPLE OF RESTRAINT OF TRADE CONTRACTS

In Zimbabwe like many other countries, restraint of trade contracts are governed by case law rather than legislation. They have for a long time been considered contrary to public policy and therefore unenforceable. The constitutionality of restraint of trade contracts was settled by the Appellate Division of South Africa, as it was then called in the case of Magna Alloys & Research (SA) (Pty) Ltd v Ellis in 1984. The court held that a restraint of trade contract is valid and enforceable unless it is contrary to public interest. It follows that a restraint of trade clause/contract that is contrary to public policy is not void, it is just simply unenforceable.

FREEDOM BATTLES

Section 64 of the Constitution of Zimbabwe provides that “every person has the right to choose and carry on any profession, trade or occupation, but the practice of a profession, trade or occupation may be regulated by law.” Simply put, this provision means that any person may take up any occupation they desire and practice it as long as they do not break the law in so doing.

The Zimbabwean courts respect the sanctity of contracts and take a keen interest in ensuring that parties observe and perform their obligations therein, as they would have entered and concluded freely and voluntarily. Zimbabwean public policy is rooted in the Constitution where the fundamental rights are enshrined.

Restraint of trade clauses/contracts create a tricky situation in that a person is allowed to choose any profession, trade or occupation. At the same time if a person has signed a restraint of trade contract, he or she is restricted from choosing any profession, trade or occupation, taking into account that the principle of sanctity of contracts supports the enforcement of contracts. The courts have settled this predicament by balancing the freedom of trade on one hand, and the freedom of contracting on the other hand, thereby allowing sanctity of contracts to prevail unless the contract is unreasonable.

REASONABLENESS

The reasonableness of a restraint of trade clause/contract is determined by the nature of the activity, length of period of the restraint, and the geographical area covered by the restraint.

In a decided case, the Supreme court held that “A restraint of trade which does no more than protect the employer against mere competition from a former employee by preventing him or her from carrying on business similar to that undertaken by him or entering the services of an undertaking carrying on business similar to that undertaken by him in fear that in doing so the employee would exercise the knowledge and skill acquired during employment with him is an unreasonable restraint. So is a restraint of trade which is too wide as to time or place or scope depending, of course, on the nature of the business carried on and the duties of the employee.”

The South African Supreme Court also arrived at the same conclusion in the restraint of trade landmark Magna case and held that “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 work. Insofar as it has that effect the covenant will be 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 in the covenant. Account must also be taken of what has happened since then and, in particular of the situation prevailing at the time of enforcement is sought.”

PROVING REASONABLENESS

The onus to prove that a restraint of trade clause/contract is unreasonable lays with the party attempting to resile from it, as was held in a decided case. The reasonableness is tested at the time when the party seeking to enforce it approaches the court for said enforcement. Effectively, the enforcement of a restraint of trade clause/contract stops the erstwhile employee who had access to confidential and information about the former employer from joining the former employer’s competitor. The court may also even order that the employee pays damages or the new employer pay profits it has made from the information it received from the employee to the employee’s former employer.

ENFORCEABILITY

Restraint of trade clauses/contacts are open to abuse and may result in unfairness as an employee could end up economically inactive for a long period. Before a court makes a determination as it relates to the enforceability of a restraint of trade clause/contract it first must consider if there is a party who actually has an interest that deserves protection after the termination of a contract. If it does, it must then ascertain if such interest is threatened by the other party. Next, the court must consider if the threat weighs qualitatively or quantitively against the interest of the other party not to be economically inactive. Finally, it considers if there is any aspect of public policy that requires that the restraint be maintained or rejected. After the court has considered all these factors will it enforce the restraint if it is not contrary to public policy and not unreasonable.

It is worth noting that the restraint will not be enforced merely to prevent competition. There must be a legitimate interest that must be protected. The interest of the employee is also considered in the particularly him or her being able to earn a living using his or her legitimately obtained skill, experience and knowledge.

PROTECTING EMPLOYERS

Employers should ensure that contracts are up to date and contain reasonable restraint of trade clauses, that sufficiently protect the employer’s legitimate interest and are tailored to suit the individual circumstances. They should also conduct exit interviews with former employees to remind them of their post-employment obligations, and this can be followed up in writing. In addition, if there is a concern the employee is in breach of restraint obligations, the employer must act swiftly to put the employee on notice that their conduct is improper and the restraints will be enforced.

PROTECTING EMPLOYEES

Employees should carefully review their contracts. If there a restraint of trade clause is included in the contract, an employee must consider the extent of its operation. Should the restraint of trade be overly burdensome or oppressive, the employee should negotiate its amendment before signing the contract. Employers should inform prospective employees or principals of any post-employment obligations that they owe.

CONCLUSION

When couching a restraint of trade clause/contract it is important to be precise on the type of interest to be protected and ensure that the clause is not wider than is necessary to protect the interest, in other words that it is reasonable. A restraint of trade that is unreasonable is against public policy and will not be enforced by the courts. When it comes down to it, this could be the deciding factor for the court to uphold or dismiss the restraint of trade. In the end, restraint of trade clauses/contracts are worth the paper that they are written on, as long as they are reasonable and not contrary to public policy.