Precedent

Precedent is a blog dedicated to providing a simplified understanding of South African law through case law summaries and explanations of legal concepts.

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Restraint of trade simplified

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Restraint of Trade explained?

RESTRAINT OF TRADE

The term “restraint of trade” is something we often hear or read about at academic institutions, in books and even on television shows. However, do we really know what it is and what significance it holds in the world of business and law?

WHAT IS IT? 

A restraint of trade (R.o.T) is a provision/clause within a legal contract between a buyer and a seller of a business, or between an employer and employee that places a future limitation on the economic activities of the seller or employee.

There are two contexts in which a restraint of trade can exist, namely between a buyer and a seller (regarded as being on equal footing) and between an employer and employee (regarded as being on unequal footing).

Examples:

Equal footing

Restricting the former owner of McDonalds from opening a restaurant like McDonalds within a 20 km radius for 2 years in his contract of sale.

Unequal footing 

Restricting a former employee from working for the competition or starting a competing business of his/her own within a 100 km radius for 3 years in his/her contract of employment.

PURPOSE

Normally, the purpose of the R.o.T is to protect the buyer and/or employer’s proprietary interests, trade secrets, confidential information such as the client-customer base and anything that gives them their competitive edge, from falling into their competitor’s hands.

WHAT EXACTLY DOES THE R.o.T LIMIT?

Restraints of trade can only limit objective knowledge and not subjective knowledge.

Subjective knowledge = Mental and manual skills

Objective knowledge = Access to data base/secret formula/influence over clients/etc

LEGAL TENSION

The Constitution         V.         pacta sunt servanda 

    (Economic freedom)                (contracts are binding and enforceable)

This tension is mitigated through determining the reasonableness of the case. In South African law all reasonable restrictions are valid and enforceable, while all restrictions that are found to be unreasonable are void and unenforceable.

Reasonable restriction: 

Telling the former owner of McDonalds that he cannot open a restaurant like McDonalds within a 20km radius for 2 years.

Unreasonable restriction:

Telling a professional soccer player that he cannot play for a different team in continent for 3 years – this is unduly harsh and would therefore result in the R.O.T being illegal and unenforceable.

NB! Courts don’t have the power to reduce a restraint, if it’s unreasonable the whole thing is void.

HOW TO GET OUT OF A R.o.T

There are three ways to escape from the provisions stipulated in a restraint of trade:

The seller/employee can successfully litigate.

The seller/employee can provide written undertakings to the buyer/employer. 

The seller/employer can negotiate with the buyer/employer.

WHAT HAPPENS IF I BREACH MY R.o.T? 

When an employee or seller fails to abide by the provisions of his/her contract of sale or employment, by going to work for the competition or starting their own competing business, they open themselves up to being sued for damages by their former employers/buyers.

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Does the Prescription Act apply in cases that fall within the ambit of the Labour Relations Act?

The Labour Relations Act 66 of 1995 (‘LRA’) was enacted in to ensure fair employment practices and protection of employee rights in the workplace. The LRA confers a variety of rights to employees and trade unions representing employees. It also manages relations between employees, trade union representatives and employers by providing procedures that should be followed when disputes arise out of the employer-employee relationship. The LRA makes provision for time allocations in which each step must been taken before a claim lapse. In other words, if a dispute arises and an employee fails to approach a relevant body that is competent to deal with such dispute within a certain time provided by the LRA, the employee’s claim falls away and cannot be heard before any commission, tribunal or court. However, exceptions may be made if an employee presents justifiable grounds as to the reason it failed to act on time.

The Prescription Act 68 of 1969 regulates the period of time in which a debt is claimable from a debtor. This period of time is referred to as ‘prescription’. Prescription starts from the day the debt is incurred and runs until the last date on which the debt will lapse, which is the expiration of the claim. After expiration the debt can no longer be claimable from the debtor. The period of prescription in debts arising from contracts is usually three (3) years. For context purposes, a debt means a wrongful act and a debtor means wrongdoer. Therefore, a claim of debt means that an aggrieved party is seeking restitution from the wrongdoer.

This piece explores whether the prescription period (three (3) years in this instance) applies to the contractual relationship of an employer and employee by taking into consideration the Constitutional Court case of FUWA v Pieman’s Pantry (Pty) Ltd [2018] ZACC 7.

In this case the applicant, a union representing employees who participated in an unprotected strike, alleges that the employees were unfairly dismissed by the respondent. The applicant approached the Commission for Conciliation Mediation and Arbitration ('CCMA') and sought reinstatement of the employees, but the CCMA lacked the jurisdiction to arbitrate matters pertaining to unprotected strikes. The CCMA issue a certificate non-resolution.

Three and a half years later the applicant referred the dispute to the Labour Court for adjudication. The respondent argued that the applicant's claim had no standing because it had already prescribed in terms of the Act (equivalent of the statute of limitations). In the applicant's counter argument, it stated that the period of prescription was interrupted by having referred the dispute to the CCMA. The applicant was able to justify bringing the matter past the date of prescription before the Labour Court. However, the dispute was further referred for appeal in the Labour Appeal Court where the court stated that labour law matters that are governed by the LRA, also fall within the ambit of the Prescription Act. The court held that the applicant's claim already prescribed and issued an order barring the applicant from approaching any other court to contest the fairness of the employees' dismissal by the respondent.

Considering whether the Labour Appeal Court's decision to apply the Prescription Act was appropriate, the Constitutional Court in its majority concurred that the Prescription Act should enjoy application in labour related matters along with the LRA, on condition that the referral of a dispute for conciliation to the CCMA will interrupt (pause) the prescription period. However, in a minority judgment Acting Justice Zondi opined that the Prescription Act was inconsistent with the provisions of the LRA because the LRA provides it's own time limits and procedures for labour related disputes. He further held, that the LRA was chiefly enacted to enhance labour laws by giving expression to section 23 of the Constitution. Section 23 states that "everyone has a right to fair labour practices". In essence, the LRA should be interpreted in accordance with its constitutional mandate and independent of any other statute, save the Constitution.

This case serves as an interesting development in the complex functioning of South African labour laws, as the position of prescription finding application in labour matters is relatively new, albeit the decision of the apex court favouring its application.

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