Restraints of Trade are Valid

There is a common misconception that restraints of trade are invalid and cannot be enforced. The general rule is that they are valid and enforceable unless they are held to be contrary to public policy.

The number one fallacy about legal contracts relates to restraints of trade. People often sign these documents believing that they are not valid. Provided that the restraint meets the requirements below, it can be devastating for an employee to find that is not able to work in her field of expertise for a period of time, more often that not without any additional remuneration or compensation.

The starting point in regard to restraints of trade is that they are valid and enforceable unless a Court finds that they are contrary to public policy. Practically, the employee will also need to fund very expensive litigation, generally against an employer with deep pockets.

Here are some guidelines

The most controversial category by far. You cannot legislate against competition and just because a sales person knows your pricing doesn't give rise to a good reason for the restraint. There must be more. Have you trained the employee, are their technical aspects of the products, and does the employee develop very strong relationships with customers that she did not have before? These are the types of questions that need to be asked.

However, it is always important to bear in mind that the employee is required to demonstrate to the court that the restraint is contrary to public policy. A very expensive exercise. Often these restraints are good deterrents.

Restraints of trade concluded as part of a sale of shares transaction or a sale of business are generally strong, provided they are well drafted.

The rationale behind these restraints is often that the purchaser is looking to protect what it has paid for.

Directors have unlimited access to corporate information. They also generally are involved in developing strategy and are part of te decision making processes. That being the case, they are in a position to do significant damage if they join the opposition. Plus, they are generally well rewarded for their position. We would say these restraints are generally strong.

Shareholders are slightly different. Depending on the organization they may have very strong insights into the inner workings of the company, or, they may just be passive shareholders as is the case with a listed entity. So this category will depend on the shareholders level of involvement.

Technical staff in say engineering firms often have access to very confidential information. If you were say part of Tesla's technical team, the company would have very good reasons to restrain you. The real question here is the extent to which you would be able to do damage to the company if you took the company's trade secrets and confidential information to a competitor.

Generally, there are good reasons for these restraints.

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Megan Collins

B Comm LLB

011 784 1910