Restraint of Trade Agreements in Employment Contracts: Time for Pacta Sunt Servanda to bow out?

• Jurisdiction: South Africa
• Pages: 50-70
• Author: Karin Calitz
• Published date: 16 August 2019
• Citation: (2011) 22 Stell LR 50
• Date: 16 August 2019

50

RESTRAINT OF TRADE AGREEMENTS IN

EMPLOYMENT CONTRACTS: TIME FOR PAC TA

SUNT SERVANDA TO BOW OUT?

Karin Calitz

Senior lecturer, Department of Mercantile Law, University of Stellenbosch

1 Introduction

Despite the right to fre edom of trade as provided for in section 22 of the

Constitution of the Republic of South Afr ica, 1996, the maxim pacta sunt

servanda, which has be en regarded as more impor tant than the value of free dom

to trade since the judg ment in Magna Alloys v Ellis1 (“Magna Alloys”), is still

given primacy in ma ny court decisions. Several judgments after the a dvent of

the Constit ution merely conr med the common l aw principles pertaining to

agreements in restraint of t rade and held that these were not in conict with

constitutional pri nciples.2 In Magna Alloys the Appellate Division held that

a contract in rest raint of trade is enforceable like any othe r contract freely

entered into, unless it is aga inst public policy.3 The position in South African

law followi ng this case was thus that , unless the covenantor (employee) could

prove that the terms of the rest raint are unreasonable and ag ainst public policy,

the restraint would be en forceable. This is in contrast to the position in Engl ish

law (which was followed by South African courts up to t he Magna Alloys case)

in terms of which a contr act in restraint of tra de is regarded as against public

policy and thus unenforceable, un less the covenantee (employer) proves that

it is not unreasonable.4

Against this backg round, Davis J of the Cape High Court held in Advtech

Resourcing Ltd t/a Communicate Personnel Gro up v Kuhn5 (“Advtech”) that

the common law contract is now subject t o constitutional rights and t hat the

employer should thus bear the onus of proving that a cont ract in restraint of

trade is r easonable.6

Later in 2008 the Du rban High Court came t o a completely opposite

conclusion in Den Braven Ltd v Pillay7 (“Den Braven”). Wallis J held that

section 22 has no direct ap plication to contracts in rest raint of trade, that

Advtech was wrongly decided and that the enforceabil ity of contracts in

1 1984 4 SA 874 (A)

2 Walton’s Stationery Co (Edms) Bpk v Fou rie 1994 4 SA 507 (O) 513; Knox D’Arcy v Shaw 1996 2 SA 651

(W) 661; Oasis G roup Holdings (Pty) Lt d v Bray 2006 4 All SA 183 (C) para 30

3 Magna Alloys v Ellis 1984 4 SA 874 (A) 893

4 Mason v Provide nt Clothing and Supp ly Company Limited [1913] AC 724 733

5 2008 2 SA 375 (C)

6 Advtech Resou rcing Ltd t/a Communic ate Personnel Group v K uhn 2008 2 SA 375 (C) para 28

7 2008 6 SA 229 (D)

(2011) 22 Stell LR 50

© Juta and Company (Pty) Ltd

restraint of tra de should still be interpret ed in terms of the pri nciples laid

down in Magna Alloys.8

This article will deal with these con icting interpre tations of t he impact

of the Constitution on agree ments in restraint of tr ade as part of employment

contracts. These op posing views call for the issue to be resolved by either the

judiciary or legislator in the i nterests of clarity and certai nty. There is support

for both interpret ations in cases decided before and afte r these judgments as

will be discussed below. The need for a fund amental reconsideration of which

principle should enjoy preference, namely pacta sunt ser vanda or freedom

to trade in est ablishing public policy, as well as the connected issue of who

should bear the onus, will be d iscussed.

2 The detrimental impact of Magna Alloys on e mployees

The English position that contr acts in restraint of tr ade are against public

policy and therefore prima facie void,9 was followed by South Afr ican courts,

apparently without any analysis of whether t here existed any basis for such

a rule in the South Af rican common law.10 In Magna Alloys the Appellate

Division held that there was no rule i n Roman-Dutch law to the effect that

contracts in res traint of trade were unen forceable.11 The court’s decision is

based on only two texts in regard to, rstly, an agreement between partne rs

not to compete after dis solution of the partnership, and secondly, an agree ment

not to compete after the sa le of a business. From these texts it is clear that

the agreements were not regard ed as prima facie invalid and that they were

enforced by the Hooge Raad.12 Although these t wo cases do not concern

restraint agr eements in respect of employment contra cts, the court in Magn a

Alloys clear ly did not regard this as sign icant. Th e court also did not t ake the

legal position on monopolies into consideration. In sever al texts it is clearly

stated that monopolies inf ringing the fr eedom of trade in Roman-Dutch law

were regarded as har mful.13 Restraints which were prejudicial to the public in

this context were invalidate d by the courts.14

The court in Mag na Alloys accepted that the restr aint agreements again st

the public interest will not be en forceable and that an unreason able restraint

(in regard to the interest t o be protected) will usually be a gainst the public

interest.15 The cou rt stated that it is in the public inte rest that persons honour

their own agreement s. The fact that an agreeme nt is unreasonable or unfair

8 Para 35

9 Nordenfelt v Th e Maxim Nordenfelt G uns and Ammuniti on Co Ltd [1894] AC

10 Holmes v Good all and Williams 1936 CPD 35 42; Super Sa fes (Pty) Ltd v Voulgarid es 1975 2 SA 783 (W)

785 D-F

11 Magna Alloys v Ell is 1984 4 SA 874 (A) 890

12 890

13 JT Schoombee “Agree ments in Restraint of Trade: Th e Appellate Division c onfirms New P rinciples”

(1985) 48 THRHR 127 135

14 Even in Roman ti mes the princip al task of the provin cial governor was to pro tect freedom of profe ssional

activity (A Wacke “Free dom of Trade and Clauses in Restr aint of Trade in Roman and Moder n Law”

(1993) 11 Law and History Revie w 1 4) Restraint of tr ades in the employm ent context arose i n regard to a

freed slave and h is master Roman law did not a llow the master to place a r estraint on compe tition of his

former slave (Wacke (1993) Law and His tory Review 9)

15 Magna Alloys v Elli s 1984 4 SA 874 (A) 893

RESTRAINT OF TRADE AGREEMENTS 51

© Juta and Company (Pty) Ltd