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Restraint of Trade Clauses During a Pandemic

Restraint of Trade Clauses During a Pandemic

In the leading case of Magna Alloys and Research SA (Pty) Ltd v Ellis, the Appeal Court held that restraint of trade clauses are valid and enforceable. However, like any other contractual clauses, they are unenforceable to the extent that such enforcement is contrary to public policy. A contractual clause is against public policy if it is unreasonable and unreasonably restricts a person’s freedom to trade or to do work.

The Magna case further states that whether something is unreasonable is determined with reference to the circumstances of the case, such as those that prevailed at the time the contract was entered into and the circumstances when enforcement is sought.

In the recent case of Oomph Out of Home Media v Brien and another, the High Court had to determine the enforceability of a restraint clause.

The first respondent, Mr Brien, had been employed by the applicant, Oomph Out of Home Media, since 2015. Mr Brien had concluded a restraint of trade agreement and a shareholder agreement, which also contained a restraint clause, with Oomph Media. He resigned in February 2020 and accepted employment with Oomph Media’s competitor. Oomph Media then sought an order to, inter alia, enforce the restraint provisions.

In determining the validity of Oomph Media’s claim, the High Court applied the principles established in Magna and took the following prevailing circumstances into consideration:

  • Oomph Media was struggling financially and owed Mr Brien R 1.2 million in arrear salary.
  • A healthy employment relationship between the parties was unlikely to endure because of Mr Brien being owed money.
  • The COVID-19 pandemic and the national lockdown occurred shortly after Mr Brien joined Oomph Media’s competitor.
  • Due to the pandemic many businesses closed down, retrenched, and laid off employees.
  • Mr Brien had worked in the advertising and marketing industry for nine years.

Considering the facts of this case, the High Court held that the restraint of trade agreement could not be enforced as it was unreasonable and contrary to public policy.

The significance of this case is that it confirms that restraint of trade clauses are still valid and enforceable, despite the devastating effects the COVID-19 pandemic has had on the South Africa economy. However, employers are cautioned that the effects of the COVID-19 pandemic on their businesses, and in turn their employee’s working conditions, will be considered as one of the factors in the assessment of whether the enforcement of a restraint of trade clause is against public policy and thus unenforceable.

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