In the Labour Court decision of Henred Freuhauf (Pty) Ltd v Davel,(1) Justice Lagrange held that employers should refrain from drafting overbroad restraints and then expecting the court to reformulate them into something more reasonable.
In Henred, the applicant employer sought an urgent interdict for the breach of a restraint of trade agreement by the first respondent employee. The employer's business was the sale of spare parts for vehicle trailers. The employee was a sales representative who sold spare parts, which were either distributed or manufactured by the employer.
On August 3 2006 the employee signed a restraint of trade agreement which prevented him, from the date of termination of his employment, from competing with the employer's business for a period of three years throughout the whole country.
The employee had originally worked for the employer in Vryheid, in the Free State, until the end of March 2009, after which he was transferred to work in the same capacity in Durban. On December 1 2009 the employee resigned; soon after, he was employed by a competitor in direct competition with the employer.
The Labour Court held that:
- knowledge of the spare parts components of the employer's business could be acquired within a relatively short timeframe;
- the employee had no demonstrable knowledge of the applicant's margins; and
- information about the employer's prices appeared to have been freely available.
Further, the court found that there was nothing on the facts to suggest that:
- the market for trailer parts required specialist technical skills and access to confidential information in order to pursue a successful sales strategy; and
- much value could be attached to the employee's relationship with customers, as transactions were elementary by nature and it was difficult to see how they could generate any customer goodwill.
Thus, the court concluded that, on the facts, the employer did not have an interest worthy of protection.
The restraint agreement contained a provision in terms of which it was recorded that each undertaking in the agreement was independent, separate and divisible, and that should a court of law find that any restraint in the agreement was unenforceable, it would not lapse, but would instead be regarded as having been amended to the extent necessary to render it enforceable in terms of the court's judgment. It is on this basis that the employer's legal representative submitted that "the applicant would be content if the restraint were to be imposed for a period of only 12 months in the Durban and Vryheid regions".
Apart from the fact that a modification of the restraint along the lines proposed by the employer's legal representative would require the employee to relocate if he wished to pursue employment in the industry, and given the absence of a protectable interest, the court commented that:
"Moreover, the practice of cutting and trimming a manifestly overbroad restraint at the behest of the party which drafted it is not a practice the court should encourage. It would be wrong to promote the practice of drafting wide ranging restraints, which are only reformulated into more reasonable prohibitions when the matter comes before the court, whereas up to that point the sweeping scope of the provision hangs over the employee like an exaggerated sword of Damocles."
The decision therefore restates and reinforces the court's reluctance to cure an agreement in restraint of trade that is too vast in its scope and application by reformulating it into something more reasonable.
It appears that the message which the court sought to relay was that employers should refrain from drafting an overbroad restraint that would clearly result in an employee living in fear of its implementation, where the implementation of its prohibitions would effectively, and unjustifiably, render ineffective the exercise of the restrainee's right to be a productive worker. Such fear cannot be justified only by the employer's expectation that the restraint will be later cropped to more reasonable terms by the court.
Does the judgment mean that an employer must draft its restraint of trade in narrow terms and hope that it will suffice to enforce sometime in the future?
In Den Braven SA (Pty) Ltd v Pillay,(2) the court held that:
"one of the perennial problems in the field of restraint of trade agreements has been that of over-breadth. At the stage when the contract is concluded it is often difficult to foresee with any degree of exactness which interests of the employer will warrant protection after termination of the employment and what actions by the employee may constitute an infringement of those interests. This is always a difficult question when one is dealing with an ongoing relationship, such as employment, in the context of a business which is constrained by market forces to adapt its operations to meet current exigencies. Both the employment relationship and the nature of the business tend to change over time. In order to accommodate this, the usual result is that those who draft restraint of trade undertakings tend to err on the side of generosity. That is compounded by their endeavours to foresee and forestall the endeavours that former employees may adopt to circumvent restraint undertakings. In the result, when the time for enforcement arose, whilst the conduct of the former employee might fall squarely within the terms of the restraint, its breadth would provide fertile ground for an argument that it was unreasonable and hence unenforceable."
The court held that it is wrong for courts to criticise those who draft restraint of trade agreements in broad terms. It stated that:
"both the employment relationship and the conduct of business is dynamic and ever-changing. It is wholly undesirable and inconvenient to both the employer and the employee to have to engage in an on-going and relatively continuous process of renegotiating the terms of a restraint undertaking in order to accommodate new elements that enter into their relationship ... Every possibility must be covered and this results in great detail and unfortunate prolixity. In drafting account must be taken of an extensive body of case law that is by no means consistent. Accordingly they should not be blamed, when the courts said under the old dispensation that an intention that different portions of an overbroad agreement needed to stand on their own if severability was to operate, for inserting a clause proclaiming that fact as clearly and comprehensively as possible. Nor should they be criticized for including a string of acknowledgements of dubious value when the reported cases suggest that nonetheless there may be some value in the party sought to be restrained having made such acknowledgements. After all the task of the draftsmen is to secure as best they can that their client will enjoy protection at the end of the day."
The judgments discussed do not appear to be mutually exclusive; rather, they seem to congregate in the principle that there is nothing wrong with a restraint that seeks to cover all existing and future eventualities – provided that its terms do not give rise to the inference that it was intended to operate in terrorem (ie, by way of threat). The court will not draw such an inference lightly, particularly where there is an entirely plausible alternative – such as that advocated in Den Braven, where the draftsman was seeking to be as prescient as possible to cover all potential situations in which the employer's interests might need protection against the possible conduct of the particular employee.
For further information on this topic please contact Theo Broodryk at ENSafrica by telephone (+27 11 269 7600), fax (+27 11 269 7899) or email ([email protected]).
Endnotes