Covenants in restraint of trade

Legal Matters With Arthur Marara

This week we are continuing with our conversation on common law illegality. I hope you got time to read the first part of the article. If you missed it, you can read it on The Sunday Mail website.

We are going to look at one type of common law illegality and then proceed to deal with the consequences of illegality. Our focus is on covenants in restraint of trade. You may have heard about this concept before. If not, I will demystify it for you.  In the coming weeks, I will take you through the consequences of illegality.

Nature and legality

A restraint of trade is 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. It is, therefore, prima facie valid and the onus is on the employee who seeks to resile from its burden to show that it is nonetheless against public interest and unenforceable (In GREENDALE HARDWARE & ELECTRICAL (PVT) LTD v GOODFELLOW BANGABA SC 15/07).

A covenant in restraint of trade cannot be enforced if it is contrary to public policy or unreasonable in terms of geographical scope and time frame. (Mangwana v Muparadzi 1989 (1) ZLR 79 S) See also Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874(A); Book v Davidson 1988(1) ZLR 365(S) at 385D.

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 leave to join competitors or decide to venture into the same line of business themselves, thereby becoming competitors.

The law respects the freedom of the employer and employees to enter into these agreements. Therefore, as a general rule, they are prima facie valid and the onus is on the employee who seeks to resile from it to show that it is nonetheless against public interest and unenforceable. See Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874(A); Book v Davidson 1988(1) ZLR 365(S) at 385D.

The Supreme Court of Zimbabwe dealt with the question of unreasonableness of a restraint of trade in Greendale Hardware & Electrical (Pvt) Ltd v Goodfellow Bangaba SC 15/07,  where Malaba JA held that “The unreasonableness of a restraint of trade is a question of law. Its determination involves the application by a court of a legal standard to the facts of a particular case. The relevant circumstances are those existing at the time the restraint of trade is sought to be enforced in so far as they impinge upon public interest. What constitutes public interest changes from time to time.

“As such, the unreasonableness of a restraint of trade would not depend upon the fact of approval or disapproval of the conduct of the respondent by the managing director of the appellant.”

“A restraint of trade which is otherwise unreasonable would not become reasonable merely because of a provision that the consent of the covenantee shall be sought before the prohibited conduct is undertaken. It is not a question of the restraint. It is a question of the legality of the restraint.”

The correct test for the validity of a restraint of trade in a contract of employment 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.

In Herbert Morris Limited v Saxelby (1916) AC 688 at 710, Lord Parker said: “… the reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection, or in the nature of trade secrets for the protection of which such a restraint is … having regard to the duties of the employee … reasonably necessary.”

A restraint of trade which does no more than protect the employer against mere competition from a former employee by preventing him or her from carrying on business similar to that undertaken by him or entering the services of an undertaking carrying on business similar to that undertaken by him in fear that in doing so the employee would exercise the knowledge and skill acquired during employment with him is an unreasonable restraint. So is a restraint of trade which is too wide as to time or place or scope depending, of course, on the nature of the business carried on and the duties of the employee.

The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if it has been acquired in the service of his employer. It is this freedom to use to the full a man’s improving ability and talent which lies at the root of the policy of the law regarding this type of restraint. The additional knowledge and skill acquired during employment belong to the employee and their exercise cannot be lawfully restrained by an employer as they are not his property.

To preclude a former employee from carrying on his natural trade in any part of the country on his own, or in association with others, is a very strong prohibition which requires exceptional justification. It appears to me that the restraint sought to be enforced by the appellant in this case is in effect a restraint against mere competition from the respondent in the use after termination of employment, of personal knowledge and skill in the trade in which he is involved, acquired during the period of employment with the appellant.

 

LEGAL DISCLAIMER: The material contained in this post is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article/post. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.

Arthur Marara is a corporate law attorney practicing law in Harare, Zimbabwe. He is also a notary public and conveyancer. He is also passionate about labour law, commercial, and family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]