Restraint of trade agreements – the Barkhuizen case

By | 31st December 2008

A recent Cape Provincial Division decision handed down by Davis J should alert corporations to the fact that the land mark Constitutional Court decision of Barkhuizen v Napier (2007 (5) SA 323 (CC)) “Barkhuizen” is already impacting on the manner in which consenting parties regulate their contractual relations.

The primacy of the principle of pacta sunt servanda would appear to be no more. The Constitution is the sovereign law, and by virtue of s8 read with s39(2) and the recent Constitutional Court decision in Barkhuizen it would seem that autonomy in the private sector stands to be trumped whenever the Constitution so demands.

In the recent decision of Advtech Resourcing (Pry) Ltd t/a Communicate Personnel Group v Kuhn and Another (2008 (2) SA375 (C) Davis J held that: “the position ‘post-Barkhuizen’ is that contractual terms are subject to constitutional rights” ( para 26). The outcome of the Advtech decision was, therefore, that the Respondent’s s22 right to choose her trade, occupation or profession freely, could not be trumped by the Applicant’s contractual right to prevent her from acting in breach of a restraint of trade agreement. The restraint was held to be overbroad, unsalvageable by the severability clause and hence unreasonable. It could not pass the proportionality assessment and as such the scales had to be tipped in the Respondent’s favour.

Davis J even went so far as to invite reform of the law regulating restraint of trade agreements to bring it in line with the pre-Magna Alloys (Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A)) position which was governed by English Law and placed the onus on the employer (covenantee) to prove the reasonableness of the contract between the parties. Davis J thus noted the following: “[t]here is therefore, a powerful and important argument which should prompt courts to grasp the nettle and either through the prism of s8 or s39(2) revisit the entire issue of restraint of trade within the context which I have outlined.” (para 32).

This context to which Davis J refers is one in which “our transformative constitution needs to engage with the concepts of power and community” (para 30). The traditional libertarian and individualistic concept of contractual autonomy needs to be recast in light of the founding values of the Constitution and the Bill of Rights.

The notion of ubuntu also needs to play a role insofar as the principle of freedom of contract should be viewed in light of the concept of a “community of contracting persons” (para 31) and not simply in light of what the actual contracting parties dictate; particularly as the discretion usually lies with the more powerful contracting party. The ultimate compass by which to measure the enforceability of contractual terms is now the Constitution.

Davis J thus contends “the Courts will invalidate and refuse to enforce agreements contrary to public policy. Public Policy is now informed by the Constitution.” A further consideration on which Davis J reflected in determining the enforceability of the restraint of trade agreement between the Respondent ex-employee and Advtech Resourcing (a personnel recruitment agency) was the “dignity of work” (para 27). The case of Affordable Medicines Trust and Others v Minister of Health and Others (2006 (3) SA 247 (CC)) bears relevance:

“[w]hat is at stake is more than one’s right to earn a living, important though that is. Freedom to choose a vocation is intrinsic to the nature of the society based on human dignity as contemplated by the Constitution. One’s work is part of one’s identity and it is constitutive of one’s dignity. Every individual has a right to take up an activity which he or she believes himself or herself prepared to undertake as profession and to make that activity the very basis of his or her life and here is a relationship between work and the human personality as a whole. It is a relationship that shapes and completes the individual over a lifetime of devoted activities; it is the foundation of the person’s existence.” (para 27)

Davis J concluded that recent Constitutional Court jurisprudence should be the catalyst that spurs a reversion by the Superior Courts to the pre-Magna Alloys jurisprudence on restraints of trade insofar as the dignity of work ought to, at the very least, demand that an employer justify a limitation on the right to work. (para 28)

However, Davis J was bound to reach his decision based on the reasoning of the Supreme Court of Appeal in the recent case of Reddy v Siemens Telecommunications (Pty) Ltd (2007 (2) SA 486 (SCA)) in which the Court left open the question of changing the onus in restraint of trade cases.

Despite this, the application of the current law on restraint of trade agreements led to the same outcome. In weighing up the competing considerations of the public interest in ensuring that parties comply with their contractual obligations and the principle that all people should, in the interests of society be productive and permitted to engage in their chosen trade or vocation. Davis J tipped the scales in favour of the latter and held that the overbroad restraint agreement could not be enforced, nor severed from the body of the contract.

The Application was dismissed with costs.

Download a copy of the original article as published in Without Prejudice here.