Restraint of trade agreements
Tue, May 30, 2006 at 11:30
I have seen debates about the enforceability of restraints of trade provisions a number of times in business fora. More often than not the people giving advise (generally not lawyers) believe that an employer is not permitted to prevent an employee from earning a living, particularly in the area he/she works in. Another factor which I have seen come up is the "right to earn a living". The bottom line is usually that employers have their hands tied and can't do much to prevent unscrupulous employees from setting up shop in competition across the road.
In a nutshell, restraint of trade provisions are enforceable against employees. The courts look at two competing considerations; freedom of contract and the "right to earn a living" and use reasonableness to strike the balance between the two. If restraint of trade provisions are not reasonable (for example, they cover a geographical area that is too wide given the employee's activities on behalf of the employer, the duration of the restraint is too long or the scope of the restraint is too wide) then the court will not enforce the provisions. There must also be a valid interest worthy of protection (known as a "protectable interest"). Examples of a protectable interest include goodwill and client relationships. Employers are not permitted to stifle competition just for the sake of blocking competition.
Restraint of trade provisions can be vital for the protection of your business. Imagine you spend years building up relationships with your clients and establishing your business and brand in the marketplace and one of your key employees sets up a competing business on the back of your business and, virtually overnight, solicits your clients across to his/her competing business. The impact could be devastating. To help protect against this employers are well-served incorporating properly drafted restraint of trade provisions into their employment contracts. This gives employers the option of enforcing those restraint of trade provisions should employees leave and set up competing businesses. The big deterrent to enforcing restraint of trade provisions, aside from the uncertainties that are a part of legal proceedings (the so-called "vagaries of litigation") is the bill at the end of the day. Typically restraint of trade provisions are enforced by applying for a court order forcing the employee to refrain from his/her wrongful conduct and to comply with the provisions of the restraint for so long as it is in force. This can be costly (depending on what is involved, the costs could reach R100 000, or even higher). In the context of these costs it is important to bear in mind what the potential downside is. If this employee could cost you hundreds of thousands of rands then it is worth litigating. Another important consideration is whether other employees will be encouraged by your failure to enforce restraint of trade provisions against an errant employee and take a similar path and set up their competing businesses. The end result of this could be even more devastating.
There are different approaches to the enforcement of restraint of trade provisions. Some companies will enforce a restraint, regardless of the possible threat by the employee because it is more important to deter similar conduct by other employees (I have seen this tactic work so well that the initial flurry of instructions to enforce restraints dried up in short order once the message was received by the client's employees). Sometimes a well worded letter of demand will do the trick and show the ex-employee that you mean business. I always advise my clients to be prepared to follow through if they send a letter of demand, though. If you send a letter of demand, your ex-employee calls your bluff and you do nothing then future threats will be regarded as being empty and you may have irreparably damaged your credibility.
As I mentioned above, the bottom line is that restraint of trade provisions are enforceable in principle. They must be properly drawn up and you should prepare yourself to get serious about them if you are threatened with the end of your business by an unscrupulous employee. It pays to think ahead.
Technorati Tags: unlawful competition, restraint of trade
Reader Comments (56)
I realy have a friend that was fired form his job but he has a restraint of trade agreament. does the agreament still stand up in court if he starts his own competing company.
I realy have a friend that was fired form his job but he has a restraint of trade agreament. does the agreament still stand up in court if he starts his own competing company.
I realy have a friend that was fired form his job but he has a restraint of trade agreament. does the agreament still stand up in court if he starts his own competing company.
I realy have a friend that was fired form his job but he has a restraint of trade agreament. does the agreament still stand up in court if he starts his own competing company.
Hi Maggie
That would really depend on the terms of his agreement. Often these agreements survive termination of employment and would pose a challenge to an ex-employee who starts a competing business.
Hi Maggie
That would really depend on the terms of his agreement. Often these agreements survive termination of employment and would pose a challenge to an ex-employee who starts a competing business.
Hi Maggie
That would really depend on the terms of his agreement. Often these agreements survive termination of employment and would pose a challenge to an ex-employee who starts a competing business.
Hi Maggie
That would really depend on the terms of his agreement. Often these agreements survive termination of employment and would pose a challenge to an ex-employee who starts a competing business.
I have a trade restraint that is for two years and covers the whole of South Africa and all states around us in Africa. Would that be considered to be unreasonable
I have a trade restraint that is for two years and covers the whole of South Africa and all states around us in Africa. Would that be considered to be unreasonable
I have a trade restraint that is for two years and covers the whole of South Africa and all states around us in Africa. Would that be considered to be unreasonable
I have a trade restraint that is for two years and covers the whole of South Africa and all states around us in Africa. Would that be considered to be unreasonable
Hi
I am currently employed as a sales consultant for a higher end jewellery company with branches in all the major shopping centres in south africa. I had to sign a restraint of trade agreement when I started as I would not have gotten the job otherwise. It states that I am not allowed to work in this field within a 50km radius of any of their shops - which means I need to leave the jewellery trade if I want to earn a living. Have you in your experience come across this for (just) a sales consultant, and do you think they might be able to enforce the agreement? I am not involved in activities within the company that I feel might be jeopardised should I work from someone else, as all I do is sell what is in the store I work from. I am currently very unhappy within my work environment and would like to leave if possible. I am also not looking at opening my own company, but am considering applying at another company for a sales position. Thank you for your time and I hope you can assist. Regards Pieter Ps, I am afraid that someone might come across my correspondence and have therfore used a psuedonym, if you can and would like to respond to my query, please do so at the e-mail provided and I can provide you with my real details, hope you can understand - I just don't want to risk anything. (sorry for this)
Hi
I am currently employed as a sales consultant for a higher end jewellery company with branches in all the major shopping centres in south africa. I had to sign a restraint of trade agreement when I started as I would not have gotten the job otherwise. It states that I am not allowed to work in this field within a 50km radius of any of their shops - which means I need to leave the jewellery trade if I want to earn a living. Have you in your experience come across this for (just) a sales consultant, and do you think they might be able to enforce the agreement? I am not involved in activities within the company that I feel might be jeopardised should I work from someone else, as all I do is sell what is in the store I work from. I am currently very unhappy within my work environment and would like to leave if possible. I am also not looking at opening my own company, but am considering applying at another company for a sales position. Thank you for your time and I hope you can assist. Regards Pieter Ps, I am afraid that someone might come across my correspondence and have therfore used a psuedonym, if you can and would like to respond to my query, please do so at the e-mail provided and I can provide you with my real details, hope you can understand - I just don't want to risk anything. (sorry for this)
Hi
I am currently employed as a sales consultant for a higher end jewellery company with branches in all the major shopping centres in south africa. I had to sign a restraint of trade agreement when I started as I would not have gotten the job otherwise. It states that I am not allowed to work in this field within a 50km radius of any of their shops - which means I need to leave the jewellery trade if I want to earn a living. Have you in your experience come across this for (just) a sales consultant, and do you think they might be able to enforce the agreement? I am not involved in activities within the company that I feel might be jeopardised should I work from someone else, as all I do is sell what is in the store I work from. I am currently very unhappy within my work environment and would like to leave if possible. I am also not looking at opening my own company, but am considering applying at another company for a sales position. Thank you for your time and I hope you can assist. Regards Pieter Ps, I am afraid that someone might come across my correspondence and have therfore used a psuedonym, if you can and would like to respond to my query, please do so at the e-mail provided and I can provide you with my real details, hope you can understand - I just don't want to risk anything. (sorry for this)
Hi
I am currently employed as a sales consultant for a higher end jewellery company with branches in all the major shopping centres in south africa. I had to sign a restraint of trade agreement when I started as I would not have gotten the job otherwise. It states that I am not allowed to work in this field within a 50km radius of any of their shops - which means I need to leave the jewellery trade if I want to earn a living. Have you in your experience come across this for (just) a sales consultant, and do you think they might be able to enforce the agreement? I am not involved in activities within the company that I feel might be jeopardised should I work from someone else, as all I do is sell what is in the store I work from. I am currently very unhappy within my work environment and would like to leave if possible. I am also not looking at opening my own company, but am considering applying at another company for a sales position. Thank you for your time and I hope you can assist. Regards Pieter Ps, I am afraid that someone might come across my correspondence and have therfore used a psuedonym, if you can and would like to respond to my query, please do so at the e-mail provided and I can provide you with my real details, hope you can understand - I just don't want to risk anything. (sorry for this)
I am currently employed as a sales consultant for a motor dealer. I want to resign & go into finance but my employer is holding me to restraint of trade, is this legal. I am entering a different field?
I am currently employed as a sales consultant for a motor dealer. I want to resign & go into finance but my employer is holding me to restraint of trade, is this legal. I am entering a different field?
I am currently employed as a sales consultant for a motor dealer. I want to resign & go into finance but my employer is holding me to restraint of trade, is this legal. I am entering a different field?
I am currently employed as a sales consultant for a motor dealer. I want to resign & go into finance but my employer is holding me to restraint of trade, is this legal. I am entering a different field?
Hi Pieter and Nadine
Thanks for commenting. Whether your restraints are going to be enforceable will depend on the specifics of your contracts. The terms of those contracts will determine whether the restraints are enforceable.
Hi Pieter and Nadine
Thanks for commenting. Whether your restraints are going to be enforceable will depend on the specifics of your contracts. The terms of those contracts will determine whether the restraints are enforceable.
Hi Pieter and Nadine
Thanks for commenting. Whether your restraints are going to be enforceable will depend on the specifics of your contracts. The terms of those contracts will determine whether the restraints are enforceable.
Hi Pieter and Nadine
Thanks for commenting. Whether your restraints are going to be enforceable will depend on the specifics of your contracts. The terms of those contracts will determine whether the restraints are enforceable.
Hi,
I am currently seeking another job, however, the job which I would like to apply for is a tour operator too, however, there are a few differences. I will also be in a different position in the potential company, however, I have a restraint of trade request in my agreement contract.
Is this restraint enforceable?
Thank you