TO ENTER INTO OR NOT TO ENTER INTO A RESTRAINT OF TRADE AGREEMENT OR NON-DISCLOSURE AGREEMENT?

TO ENTER INTO OR NOT TO ENTER INTO A RESTRAINT OF TRADE AGREEMENT OR NON-DISCLOSURE AGREEMENT?

Having a ‘vague idea’ of what these two agreements are is not enough.  One must know and fully understand the implications and consequences of entering into such agreements.

There is a general misconception that these agreements are not actually enforceable.  Parties who enter into such agreements thinking that the provisions of these agreements are not enforceable are likely to be ‘unpleasantly surprised at some point in the future.

Once an agreement is signed, the parties to such written agreement are bound by the terms and conditions contained therein, whether they actually read the contents of the agreement or not.  The terms of the agreement are thus enforceable against either party, by the other.

This applies to agreements containing Restraint of Trade and/or Confidentiality provisions as well.

Thus, make sure that you read the terms and conditions of any contract carefully, and that you fully understand all the terms and conditions contained therein, before you sign the agreement to confirm that you are agreeing to all such terms and conditions.

Restraint of Trade

What is a Restraint of Trade Agreement?

A Restraint of Trade agreement restricts a person from working in the same industry or competitive environment for a specified period of time and within a specified jurisdiction or area. 

The purpose of the agreement is to protect an employer’s goodwill, customer connections and trade secrets and limit competition with the entity.

Our law does not have formal legislation or legal principles that specifically govern a Restraint of Trade agreement.  As a result, it falls under the law of contract and is governed by the principles of unlawful competition and other common law doctrines.

Unlawful competition governs the process of competition between businesses to ensure that it remains fair and reasonable.  It intends to curtail the undue benefit or advantage obtained by a trader at the expense of its competitor.

Therefore, Restraints of Trade are entered into to protect the (protectable) interests of an entity wishing to eliminate the risk of unlawful competition.

Why would you need a Restraint of Trade?

In order to ensure that a ‘protectable interest’ (i.e. goodwill, customer connections or trade secrets) is not compromised; a Restraint of Trade agreement is recommended.

If it is unclear whether there is a risk of unlawful competition (a risk of a protectable interest being compromised), the case of Waste Products Utilisation (Pty) Ltd v Wilkes and Another[1], summarises the elements or test to determine if there is such a risk:

  • There must be an interest in the information (customer connections or trade secrets), which interest does not have to be ownership, and which is of a confidential nature;
  • There must be a relationship with the individual on whom it is sought to impose a duty to preserve the confidence of information imparted to such individual, such as the relationship between an employer and an employee.

Therefore, where information such as customer connections and trade secrets are to be revealed to an individual in the course and scope of their employment or (for example) in a joint venture, and to protect the interests of such entity (to limit the risk of any unfair competition) a Restraint of Trade agreement should be concluded.  

When is a Restraint of Trade Agreement valid and enforceable?

Restraint of Trade agreements are (as a starting point) valid and enforceable.

Only in the event that the enforcement thereof is contrary to public policy or the terms of the restraint are unreasonable, may it be declared to be invalid and / or unenforceable (in whole or in part).

The reasonableness of a Restraint agreement is determined by considering, amongst others things, the following:

  • The length of time for which the restraint operates;
  • The geographical area to which the restraint applies;
  • Whether a ‘restraint payment’ was paid to the individual bound by the agreement (although this is not a requirement for a valid restraint);
  • Whether the individual still has the ability to earn a living; and
  • The proprietary interest or capital asset that is sought to be protected.

Thus, the terms of an agreement that seek to limit an individual’s trading for an excessive period of time or outside a reasonable geographical location, or hinder an individual’s ability to earn a living, can be set aside by a Court and held to be invalid and unenforceable.

In the event that an individual is of the opinion that the agreement is unreasonable, the onus (burden of proof) is on the said individual to prove the unreasonableness.

The party who wants to challenge the validity of the restraint provisions will also have to convince the Court why he / she should not be bound by same, despite having entered into any such restraint agreement voluntarily.

What happens if a Restraint of Trade Agreement is breached?

Where an individual breaches an agreement, the individual can be held liable for damages arising from unlawful competition.

The aggrieved party can also obtain an interdict against the offending party (and any other parties who may be involved), to cause the offending conduct to cease and desist.


Non-Disclosure Agreement

What is a Non-Disclosure Agreement (NDA)?

An NDA is a contract between two parties or more, wherein the disclosure of confidential material, information or knowledge, such as proprietary information or trade secrets, is restricted. 

The parties to an NDA agree not to disclose any information identified in the agreement. The restriction can be for a limited period of time or may survive the termination of an underlying agreement (such as an employment contract) and last indefinitely or in perpetuity.

Thus, it is an agreement, governed by the principles of contractual law, to protect confidential information that has an economic value or the ability to cause damage to one’s reputation, and if revealed, may lead to decline in economic value of the aggrieved party.  

NDA’s are often concluded in conjunction with Restraint of Trade agreements.

Are there different types of NDA’s?

There are three different types of NDA’s:

2.1  A ‘Unilateral’ NDA, which requires one party to disclose its confidential information to the other party, who is required to protect such information;

2.2  A ‘Bilateral’ NDA, which requires both parties to disclose their confidential information to each other, and requires of both parties to protect the other’s confidential information; and

2.3  A ‘Multilateral’ NDA, which is used in more complex and negotiation-heavy deals to govern the confidentiality agreement between the multiple parties, in order to avoid the preparation of multiple agreements that govern the same information.

It is important to note that any contract or agreement that seeks to keep secret or entertain illegal activity is not valid and cannot be enforced.  If an NDA is concluded for this purpose, it is unenforceable.

How is an NDA enforced?

If the agreement has been breached, the aggrieved party may interdict the offending party from the offending conduct (revealing or using confidential information) and if monetary damages can be proved, the aggrieved party can also claim damages from the offending party.

Conclusion

Before concluding either or both agreements in the nature of Restraint of Trade or NDA, it is best to seek legal advice to ensure that these agreements are prepared and concluded correctly and that all the terms and conditions contained in the agreement serve the purpose(s) for which these agreements are intended.

Written by Nikki Govender

This article is for general information purposes and should not be used or relied on as legal or other professional advice.  We do not accept liability for any errors or omissions nor for any loss or damage arising from reliance upon any information contained in this article. Please contact our offices on 031 202 3100 / ca****@ca************.za for specific and detailed advice on this topic and / or in respect of specific facts and circumstances.


[1] Waste Products Utilisation (Pty) Ltd v Wilkes and Another[1] 2003 (2) SA 515 (W) at 571 F – G