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Restraints of Trade - Trade Connections

RESTRAINTS OF TRADE

“No person can be unreasonably prevented from earning a living in the public domain. The right to trade and practice a profession is highly prized. In the workplace, restraint of trade agreements have become valuable tools in the hands of employers, protecting the circulation of their identifiable confidential information and trade secrets by employees post-employment.”[1]

Restraint of trade agreements are notoriously tricky to enforce and interpret. One need only recall the judicial debate between Wallis AJ, sitting on the Durban bench and Davies J, sitting in the Western Cape. The judgments of Den Braven SA (Pty) Ltd v Pillay (Wallis) and Advtech Resourcing (Pty) Ltd v Kuhn (Davis) come to mind. The constitutional right to freedom of profession, trade and occupation must be balanced with the doctrine that guides our law of contract, namely pacta sunt servanda.

In the matter of Super Group Trading (Pty) Ltd v Naidoo[2015] JOL 33772 (KZD), pending the adjudication of Super Group’s application for a final interdict, founded on an alleged restraint of trade entered into between Super Group and Naidoo, Super Group applied for a temporary interdict. The Court found that there was indeed a contract as alleged by Super Group, that included as one of its terms, the restraint.

What is of interest for the purposes of this post is that the Court sets out, in a pithy digestible judgment, what the legal position is where an employer seeks to enforce a restraint of trade agreement on the basis of a risk of harm to its trade connections and in particular the employer’s connections with its customers.

The need of an employer to protect his trade connections arises where the employee has access to customers and is in a position to build up a particular relationship with the customers so that when he leaves the employer’s service he could easily induce the customers to follow him to a new business.

That said, a protectable interest in the form of customer connections does not come into being simply because the former employee had contact with the employer’s customers in the course of their work. The connection between the former employee and the customer must be such that it will probably enable the former employee to induce the customer to follow him to a new business.

The court adopted the American “customer contact” doctrine, and quoted from Heydon, The Restraint of Trade Doctrine (1971) at 108, stating that the “customer contact” doctrine depends on the notion that:

“the employee, by contact with the customer, gets the customer so strongly attached to him that when the employee quits and joins a rival, he automatically carries the customer with him in his pocket”.

The English case of Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688 (HL) at 709 has it that he relationship must be such that the employee acquires

‘such personal knowledge of and influence over the customers of his employer … as would enable him (the servant or apprentice), if competition were allowed, to take advantage of his employer’s trade connection…’

The Court added that the applicability of the “customer contact” doctrine is essentially a question of fact in each case, and in many, one of degree. 

Much depends on the duties of the employee, her personality, the frequency and duration of contact between her and the customers, where such contact takes place, what knowledge she gains of their requirements and business, the general nature of their relationship (including whether an attachment is formed between them, the extent to which customers rely on the employee and how personal their association is, how competitive the rival businesses are, in the case of a salesman, the type of product being sold and whether there is evidence that customers were lost after the employee left.

On the facts presented, the Court found that Super Group was not able to establish a protectable proprietary interest.

[1] Saldulker J in Strike Productions (Pty) Ltd v Bon View Trading 131 (Pty) Ltd 2010 BIP 327 (GSJ).

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

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