Should I and can I include a restraint of trade provision in our employment contracts?

Should I and can I include a restraint of trade provision in our employment contracts?

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7 min read
Employee or appoint someone

Make sure to include restraints only when necessary.

A restraint of trade clause is sometimes frowned upon. These clauses however still serve an important purpose and if included in the right situation and drafted correctly, restraint clauses will provide valuable protection to a business.

Before we jump into more detail surrounding the enforceability of restraint clauses, we need to have a look at the typical restraint provisions that are included in employment contracts.

Non compete (general)

Certain employees will have access to sensitive information in a business (for example the way in which the business operates and obtains its competitive advantage). If this information lands in the hands of a competitor or a former employee uses this information for their own benefit, the business may lose a competitive advantage that it took years to develop. A non-compete provision can be helpful to address some of these concerns.

The aim of a non-compete provision in an employment contract is to restrain an employee from competing with the business after the employment comes to an end.

Generally, when you want to include a non-compete provision in an employment contract, you need to address:

  • the territory to which the restraint will relate (for example is it limited to a province or specified radius defining territory); and
  • the duration that the restraint will apply after the employment comes to an end. 

Non-solicitation (customers / clients)

There may be key accounts that your business depends on. If your business should lose one of these key accounts to a former employee, it can be devastating. This situation is where a non-solicitation provision can be helpful.

The aim of these non-solicitation provisions is to place a restraint on an employee whose employment comes to an end, to lure (solicit) other customers/clients of the business away from the business to another business.

If you want to include a non-solicitation provision of this kind in an employment contract, you need to:

  • define what will constitute a customer/clients for purposes of the restraint; and
  • specify the duration that the restraint will apply after the employment comes to an end. 

Non-solicitation (other employees)

The loss of a whole team in a business unit can be devastating for a business. An employee can decide to jump ship but knows that they will need the rest of the team to make things work. This situation is where this type of non-solicitation provision can be helpful.

The aim of these non-solicitation provisions is to place a restraint on an employee whose employment comes to an end, to lure (solicit) other employees of the business away from the business to another business.

If you want to include a non-solicitation provision of this kind in an employment contract, you need to specify the duration that the restraint will apply after the employment comes to an end. 

Restraint on use of trade connections

Certain employees will, in the course of fulfilling their obligations in terms of the employment contract, build up a particular relationship with the trade connections of the business. If the employee leaves the employment of the business, the employee will be in the position to induce these trade connections to follow them to a different business.

The aim of provisions relating to the restraints placed on the use of trade connections is similar to that of a non-solicitation clause relating to customers/clients.

If you want to include provisions relating to the use of trade connections of this kind in an employment contract, you need to:

  • define what will constitute a customer/clients for purposes of the restraint; and
  • specify the duration that the restraint will apply after the employment comes to an end.

Confidential information and trade secrets

Hand in hand with restraint provisions will always be confidentiality provisions. During an employee’s employment, they will gain knowledge of business methods, "customer lists" and "supplier lists”, other trade secrets or confidential information. 

Your business has a proprietary interest in the above-mentioned information that requires protection. Including appropriate confidentiality provisions in all your agreements that you conclude with either employees or contractors is a must.

Are restraints enforceable?

There is the misconception that if a contract is unfair it cannot be enforced. It is not as simple as that and most of the time a contract will, in the absence of factors like fraud and duress, be enforced even if its terms are unreasonable or unconscionable or restrict a person's freedom to participate in trade.

In short, a restraint of trade is in principle enforceable; it will only be unenforceable (not invalid or void) if it is contrary to public policy or the public interest.

Another important aspect that needs to be kept in mind is that the person that is bound by the restraint will need to show that the restraint is contrary to public policy or the public interest.

What will a Court look at when considering public policy and public interest -

There are two considerations that will need to be weighed up against each other –

  • agreements freely concluded should be honoured, and
  •  everyone should be free to enter the business or professional world.

Trade secrets and confidential information are two kinds of interests that Courts have found to be worthy of protection.

Also, trade connections and relations with customers, suppliers, potential customers and others have also been found to be interests that are with your protection.

The function of the Court is not to remake a contract. A Court will not relieve one party from any term which he or she finds onerous or unexpectedly harsh.

When will a restraint be against public policy?

The essential criterion in determining whether a restraint of trade clause is contrary to public policy is that of reasonableness.

 When determining the reasonableness of a restraint the Courts have looked at the following:

  • The specific interest that the Party is trying to protect:
    • trade secrets and confidential information are two kinds of interests that Courts have found to be worthy of protection.
    • trade connections and relations with customers, suppliers, potential customers and others have also been found to be interests that are with your protection.
  • Is the interest that requires protection being prejudiced?
  • If the interest that requires protection is being prejudiced, how does that interest way up qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
  • Is there another facet of public policy not having anything to do with the relationship between the parties which requires that the restraint should either be enforced or disallowed?
  • Is the restraint wider than is necessary to protect the protectable interest?
  • Is the restraint consistent with section 22 of the Constitution?

When looking at reasonableness, regard should also be given to the nature, extent and duration of the restraint as well as other factors peculiar to the parties and the bargaining powers and interests.

In conclusion, you must ensure that restraint of trade provisions are only inserted into an agreement to restrain a party to the extent necessary to protect a protectable interest. There is no hard and fast rule when to include restraint of trade provisions and each situation is different and requires careful considerations of the facts.

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