The Effect of a Restraint of Trade Clause When a Business is Sold

Restraint of Trade Clause

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A restraint of trade is a provision within an employment contract which stipulates that in the event of termination of employment, an employee is restricted from taking up similar employment. The restraint of trade is not absolute and the circumstances surrounding every restraint of trade are different, therefore each case must be examined in isolation.

Does a restraint of trade transfer with a business as a going concern under section 197 of the Labour Relations Act? Section 197 of the Labour Relations Act, 1995 protects employment where a business transfer occurs. In terms of section 197 and section 197B(1)(b), a “transfer” means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern.

In the recent case of Slo-Jo Innovation (Pty) Ltd v Beedle and another [2023] (LC), the court had to decide if Beedle was in breach of a restraint of trade clause. Beedle commenced employment as a sales representative with Slo-Jo Trading, a designer beverages company, in 2007. Her contract of employment contained a restraint of trade clause. As Slo-Jo Trading’s business grew, Beedle’s responsibilities increased, and she took on the function of introducing new products. In 2015 she headed the newly established research and development team, which allowed her to form a close relationship with the company’s primary manufacturer, Fruition, which produced most of its bespoke and exclusive products. During 2018 Slo-Jo Trading underwent an internal restructuring, and three new companies, responsible for separate elements of the business, were established. One of the new subsidiary entities was Slo-Jo Innovation. Slo-Jo Trading employees responsible for research and development were transferred to Innovation. Beedle transferred to Innovation on the same terms and conditions of employment.

In early 2020 Beedle resigned from Innovation and became involved with Flavourpro, a direct competitor of Innovation and Slo-Jo Trading. Innovation launched an urgent application in the Labour Court to enforce the restraint of trade clause contained in Beedle’s contract of employment. Beedle and Flavourpro opposed the application, raising several points in limine. The court dismissed the points in limine, and the matter was then enrolled for hearing of the urgent main application to enforce the confidentiality and restraint clauses in Beedle’s contract.

The court confirmed the well-established principles that a restraint of trade agreement is valid and that a restraint clause will be enforceable if there is an interest that requires protection and insofar as it is reasonable. All the employer needs to show in an application such as the present is that there is confidential information to which the employee had access and which she could transmit, if so inclined. It is not necessary to show that the employee has in fact used information confidential to the employer. Similarly, in relation to customer connections, it is not necessary to do more than show that trade connections through customer connections exist and that they could be exploited by the employee if employed by a competitor.

The court reiterated that the reasonableness enquiry involves answering certain questions, namely:

  • Whether a party has an interest that deserves protection after termination of the agreement.

  • Whether that interest is threatened by the other party.

  • How such interest weighs qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive.

  • Whether there is an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected.

  • And whether the restraint goes further than necessary to protect the relevant interest.

Taking the above principles into account and considering the evidence tendered by both parties, the court found that the authorities were clear —Innovation needed only to show was that there was confidential information to which Beedle had access and which, in theory, she could transmit to Flavourpro, or any other new employer should she desire to do so.

The court was therefore satisfied that there was nothing before it to show that Beedle was not capable of obtaining alternative employment in the food industry, excluding the beverage industry, or that, if she was not employed in the beverage industry, she would have no prospects of employment. She had consequently failed to show that the restraint was unreasonable and unenforceable.

The Court held that a “contract of employment is transferable under the provisions of section 197 of the LRA, including all the terms agreed to between the parties, not only those that are more favourable than the provisions of the Basic Conditions of Employment Act”. Furthermore, the effect of section 197(2)(b) of the LRA is that “if the obligation was in existence at the time of the transfer, it continued in force beyond the transfer”. In the interests of justice, the court ordered Beedle to pay half of Innovation’s costs.

Beedle took the case on appeal, but the court accordingly found that, given the facts of the case, the restraint was reasonable. The appeal was dismissed with costs.

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