The Supreme Court of Appeal of South Africa in the 2006 decision of Reddy v Siemens (Pty) Limited 2007 (2) SA 486 (SCA) considered, inter alia, whether restraints of trade are unconstitutional in that they deprive a person of their right to choose their occupation or profession without hindrance.

Facts

  • Reddy had previously been employed by Siemens and had resigned to become employed with Ericsson as a solutions integrator. (At the time he resigned from Siemens he held the position as a systems engineer.)
  • When he took up employment with Siemens he agreed in his employment contract from being employed by a competitor for a period of 1 year after the termination of his employment and he undertook not to disclose trade secrets and confidential information belonging to Siemens.
  • After Reddy resigned from Siemens to take up the employment with Ericsson, an urgent application was brought by Siemens to interdict him from taking up a position with Ericsson. The court of first instance granted the interdict.
  • Reddy was granted leave to appeal the judgment.

Onus

  • The court when considering the matter referred to the Magna Alloys and Research (SA) (Pty) Limited v Ellis 1984 (4) SA 874 (A), the leading case on restraints which introduced a significant change to the approach of our courts to agreements in restraint of trade by declining to follow the earlier decisions based on English precedent that an agreement in restraint of trade is prima facie invalid and unenforceable.
  • This approach was reversed in Magna Alloys which held that restraints of trade were valid and enforceable unless they are unreasonable and this contrary to public policy. Thus the consequences of the decision is that a party who challenges the enforceability of the agreement has the burden of proving that it was unreasonable. Reddy argued that this was in conflict with section 22 of the Constitution which guarantees every citizen the right to choose his or her trade or occupation freely. The court held that in the present case it mattered not as to where the onus lies as the result would be the same. In the circumstances the court called for a value judgment and the issue of onus played no role.

Value judgment

  • When determining the reasonableness of the restraint, the court held that it must make a value judgment with two principal policy considerations in mind:
    • The first is that the public interest requires that parties comply with their contractual obligations; and
    • The second is all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions.
  • The court found that it would not be in the public interest for a restraint to be enforceable if it prevents a party, after the termination of his or her employment from partaking in trade or commerce without a corresponding interest of the other party deserving of the action. A restraint which is considered to be reasonable between the parties may for some other reason be contrary to the public interest.
  • The court considered four questions laid down in Basson and others 1993 (3) SA 742 when considering the reasonableness of the restraint namely:
    • Does the one party have an interest that deserves protection after termination of the agreement?
    • If so, is that interest threatened by the other party?
    • In that case, does such an interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
    • Is there an aspect of public policy having nothing to do with the relationship between the parties that requires the restraint be maintained or rejected?
  • The judge in the Basson case found that where the interest of the party sought to be restrained weighs more than the interest to be protected, the restraint is unreasonable and consequently unenforceable.
  • The court in this case considered the test laid down in the Basson case against section 36(1) of the Constitution:
  • “The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors, including:
    1. the nature of the right;
    2. the importance of the purpose of the limitation;
    3. the nature and extent of the limitation;
    4. the relation between the limitation and its purpose; and
    5. less restrictive means to achieve the purpose.”
  • After reviewing S36(1) above the court found that the value judgment required by Basson essentially covered determining whether the restraint was “reasonable” and “justifiable” in an open and democratic society based on human dignity, equality and freedom. Essentially the court found that the four questions identified in Basson took account the principles referred to in S36(1) of the Constitution.
  • On the facts before it, the court held that Reddy was in possession of confidential information in respect of which the risk of disclosure by his employment with a competitor assessed objectively was obvious. The court found that Reddy’s loyalty would be with his new employers and the opportunity to disclose confidential information at his disposal, whether deliberate or not would exist. The restraint the court found, was intended to relieve Siemens precisely of this risk of disclosure and found the restraint to be neither unreasonable nor contrary to public policy.
  • The court found that public policy requires contracts to be enforced and Reddy was required to honour the agreement that he concluded and that the restraint of trade was not against public policy and therefore should be enforced.

Conclusion

This judgment is a clear indication of the approach to be followed i.e. that a restraint preventing an employee from joining a competitor, if limited to a reasonable period, will most likely to be upheld in the event that the party seeking to enforce it can establish that there is secret information to which the employee was privy and could be disclosed to a competitor if the employee wished to do so.

This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.