13 December 2008

Back to the future of restraint clauses

Restraint of trade finds its place in the South African legal system as a means to protect the interests of the party in whose favour it is imposed by restricting a competing party's freedom of economic activity. Two competing freedoms are pitted against one another, the freedom of contract i.e. pacta servanda sunt and the freedom of trade. Thus, proprietary interests such as trade secrets, confidential information, and goodwill or trade connections are protected.

The bench mark case of Magna Alloys & Research (SA) (Pty) Ltd v Ellis brought an end to the South African application of the English law of restraint of trade, which provided that such restraints were prima facie illegal and void. Instead, the Appellate Division submitted that restraints of trade should be treated as any other contractual term to the extent that it does not contravene the public interest. Freedom of contract was therefore the preferred value. In particular, the yardstick for determining the enforceability of a restraint of trade clause was to be the "public interest".

According to Magna Alloys, the party seeking to escape the restraint bore the onus of showing, on a balance of probabilities, that the restraint conflicts with public interest. The question one must ask, however, is whether this dicta passes constitutional muster. This question was raised and dealt with succinctly in Advtech Resourcing (Pty) Ltd t/a Communicate Personnel Group v Kuhn and Another. Whilst the views expressed by Davis J in this matter do not overrule the authority laid down by the Appellate Division in Magna Alloys, it is surely only a matter of time before the argument advanced by Davis J regarding the onus in these matters is advanced on behalf of an employee in either the Supreme Court of Appeal (SCA) or Constitutional Court.

Davis J rightly points out that these provisions, although embodying substantially similar rights (for purposes of restraint of trade), differ in one fundamental manner: Section 8(2) of the 1996 Constitution, as affirmed in Khumalo and Others v Holomisa requires a vertical and horizontal application of the Bill of Rights.

This major change in interpretation sets the framework on which this decision is based, and sets the scene for the court to develop the common law. Indeed, the court was clearly not at odds as to whether such development was needed when one considers that our common law must reflect the underlying values of our constitution and in particular, principles such as public policy. This is made clear by a number of cases, of which the proverbial case of Barkhuizen v Napier provides that contracts are subject to the Constitution. Contractual terms that are restrictive and inimical to the values in the Constitution are, therefore, simply unenforceable.

Thus a community oriented interpretation should be favoured over an individualist interpretation and therefore suggesting a move from a more libertarian interpretation to one that gives the individual with no leg to stand on, a basis on which to assert his/her rights, thereby tipping the scales to allow for a balance of power.

An interpretation that favours the employee must, in order to give effect to public policy, place the onus of proof with the employer who must show that its application is reasonable in the circumstances.

Gavin Stansfield

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