Demystifying restraint of trade clauses

So you have finally mustered the courage to leave your current job? You have landed that coveted dream position with your erstwhile employer’s competitor.

Better still, you have finally amassed enough capital to start your own business and compete directly with your former employer. Your entrepreneurial spirit and desire for career advancement is commendable.

However, you need to proceed with caution because the road to your new-found vocation could be littered with legal land-mines. Employer and former employee have been known to end up at loggerheads over the employee’s desire to traverse greener pastures.

This conflict usually arises from the fact that the departed employee may be privy to the innermost workings of his previous employer’s enterprise.

Such intimate familiarity with, among other things, his former employer’s business strategy, sensitive proprietary information and trade secrets naturally causes the employer considerable discomfort when the employee joins a competitor or becomes the competition. As a pre-emptive measure, most employers insist that employees must commit to a covenant in restraint of trade.

In the case of Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874(A) a restraint of trade was defined as an obligation voluntarily undertaken by the employee to refrain from the exercise of freedom of trade in favour of the employer in the exercise of freedom of contract.

The employee voluntarily agrees to have their freedom to carry on trade, profession, business or other economic activity restrained for a certain period of time after leaving employment.

Covenants in restraint of trade are used to protect the employer’s business interests and are usually found in the contracts of those employees who, by virtue of their jobs, could threaten the business if they left to join competitors or become the competition. Left unchecked, such clauses have the potential to effectively take away an employee’s livelihood.

While it can be argued that parties to a covenant in restraint of trade concluded it of their own free will, it is also important to remember that when negotiating employment contracts, employees often find themselves with little room to bargain.

In National Foods Ltd v J A Mitchell (Pvt) Ltd T/A Mitchell’s Bakery 1997 (2) ZLR 14 (H) the High Court held that, in terms of the common law, restraint clauses are perfectly legal and enforceable as long as they are not unreasonable or in conflict with public policy.

A restraint of trade is, on the face of it, valid and the employee who seeks to resile from it bears the burden to show that it is against public interest and unenforceable.

Ordinarily, where a valid contract is freely and voluntarily concluded, its terms will be enforceable regardless of apparent unfairness, harshness or unreasonableness. However, a restraint of trade covenant may be resisted on the grounds that it is unreasonable. The reasonableness or lack thereof of a covenant in restraint of trade is a question of law to be determined by the courts.

The court will seek to strike a balance between the need to protect the company’s proprietary interests and the employee’s need to earn a living. In Mangwana v Mparadzi 1989 (1) ZLR 79 (SC) the Court held that the limitation imposed by the clause must be reasonable.

The two conflicting interests which must be balanced in the exercise of determining whether or not a restraint clause is valid were identified in the case of Book v Davidson 1988(1) ZLR 365(S).

In that case the Court observed that the first of these competing interests is public interest which generally requires that the sanctity of a contract be upheld and people be bound to their obligations.

On the other hand, is the interest of society that all people be permitted, as far as possible, to engage in commerce and partake in their professions, taking into account that freedom of trade is a fundamental right.

A restraint clause will only be enforceable where it protects a legitimate and recognised business interest.

Recognised business interests include; trade connections, trade secrets and confidential information. In the case of Greendale Hardware & Electrical (Pvt) Ltd v Bangaba 2007 (2) ZLR 17 (S), the Court observed that the correct test of the validity of a covenant in restraint of trade is whether there are proprietary rights for the protection of which the restraint was imposed by the employer and undertaken by the employee.

If there are proprietary interests to be protected the next question is what are they being protected against and is the restraint more than is reasonably necessary for the protection of the proprietary interests.

The clause itself must identify the type of work to which the restraint applies and the extent to which it will be limited. It must also identify the geographical area covered by the restriction and spell out the duration of the restriction.

A restraint of trade may assume any of the following forms; there are “non- compete” clauses where an employee undertakes not to compete with their employer either by joining a competing business or becoming a competitor himself.

There are “non-solicitation/non-dealing” clauses which bar an employee from doing business with the employer’s customers either on behalf of a competing firm or in the employee’s personal capacity. Non-dealing clauses prevent the employee from dealing with the clients regardless of who initiates contact. These examples are by no means exhaustive.

In the case of Greendale Hardware & Electrical (Pvt) Ltd v Bangaba 2007 (2) ZLR 17 (S), the Court held that a restraint of trade that is too wide as to time or place or scope of the restrictions, is unreasonable. So too, is a restraint that does no more than merely protect an employer against potential competition from a former employee who is using knowledge and skill acquired under his employ in a new business venture; such a restraint is just too general to be reasonable.

An employee remains entitled to use any personal skill or experience acquired while working for a previous employer.

Justice Malaba described this as the freedom to use to the fullest a man’s improving ability and talent.

The right of an individual to free economic activity is enshrined in the Constitution of Zimbabwe (“the Constitution”) as a fundamental right. Section 64 of the Constitution provides that every person has a 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.

It is self-evident that a restraint in trade is a curtailment of the right provided in section 64. We are yet to see a constitutional challenge of a covenant in restraint of trade in this jurisdiction.

Such a challenge would, no doubt, make for a very interesting debate as to how an employee’s rights can be protected in so far as his right to freedom of trade is guaranteed in section 64, whilst also taking into consideration that a restraint of trade clause seeks to protect the rights of an employer who is also entitled to protection under the same Constitution. This discourse deserves an article of its own.

Jacob Mutevedzi is a commercial lawyer and commercial arbitration practitioner contactable on jmutevedzi@gmail.com, on Twitter @jmutevedzi_ADR and on +263775987784. He writes in his personal capacity.-herald.cl.zw