Drafting restraint clauses:  The following quote and the summary is taken from an important judgment of SCA justice Malcolm Wallis when he started acting in the High Court. Although it was criticized by Davis J in Mozart Ice Cream Classic Franchises (Pty) Ltd v  Davidoff it remains significant for practitioners because it accepted that such clauses need to be drafted to meet future unknown events.

“Against the background of those practical realities there seems to me nothing wrong with a restraint of trade agreement that seeks to cover all existing and future eventualities, provided only that its terms do not give rise to the inference mentioned by Botha J that it was intended to operate in terrorem.  I think it quite impractical to suggest that restraint agreements be drafted on the basis of greater accuracy and precision. That demands a prescience that is rarely present in life”.

It can never be foreseen whether employees will resign and join competitors or choose to establish their own competitive business or decide to market their skills as consultants generally to other participants in the same industry. Every possibility must be covered and this results in great detail and unfortunate prolixity. In such drafting notice must be taken of case law that is by no means consistent.  Accordingly practitioners they should not be blamed for including clauses proclaiming that the clauses are severable. Nor should practitioners be criticized for including acknowledgments when the reported cases suggest that there may be some value in such acknowledgements.

The task of practitioners is to secure as best they can that their clients will enjoy protection at the end of the day.  The ability of practitioners is also limited when drafting such agreements to predict with accuracy what a court will in the future regard as fair and reasonable in the light of facts that are not known at the time the agreement is drafted.

“Against the background of those practical realities there seems to me nothing wrong with a restraint of trade agreement that seeks to cover all existing and future eventualities, provided only that its terms do not give rise to the inference mentioned by Botha J that it was intended to operate in terrorem.  I think it quite impractical to suggest that restraint agreements be drafted on the basis of greater accuracy and precision. That demands a prescience that is rarely present in life”.

Legitimate apprehension expressed by Justice DM Davis

Jordaan v CCMA (DT Gouws Properties CC) (PA1/09) [2010] ZALAC 10; (2010) 31 ILJ 2331 (LAC) ; [2010] 12 BLLR 1235 (LAC) (11 May 2010)

“That story can be summarised thus.

The relationship between Mr Jordaan and the company, via Mr Gouws as a majority shareholder, had unquestionably deteriorated. By 14 July the agenda of the meeting prefigured the course of conduct on which Mr Gouws was intent in so far as Mr Jordaan was concerned. By 22 July, Mr Jordaan had been stripped of his managerial position and it was clear that he was now living on “borrowed time”. Mr Gouws was concerned, as a result of these developments, with the possibility of Mr Jordaan setting up business in competition to the company.

None of his employees had entered into a restraint of trade agreement with the company. He explained that he was anxious that these particular employees could leave his employ. A few passages from Mr Gouws’s evidence suffice:

“The situation in the office is obviously tense. Jacques Jordaan was cajoling and having private meetings with all and sundry in an effort to get them to go with him.”

“Further, I was led to believe that he (Jacques Jordaan) was opening up in competition, and I was tempting (sic) to protect my business as best I could, which is why I took the steps I did. I said what I said is that it is a very awkward having a wife as a competing estate agent in your office. Notwithstanding that fact, that Rina is an honest person, I would have kept her had she wanted to stay.”

The evidence shows that Mr Gouws consulted with his attorney to determine how best to protect the business assets of the company.

As he said:

“The assets of an estate agent are intellectual properties, and database of clients, and the relationship one builds up with them. It is common practice that the estate agency spends an awful lot of money branding itself in order to get people to come to them. But once an agent has a client, the client follows the agent, notwithstanding the fact that in most events the agency was the one responsible for that action to happen.”

This evidence, together with much of the balance of his evidence, indicates a legitimate apprehension that, were Gouws to have done nothing, he would have lost key staff. The organisational rationale for ensuring that employees, not I might add, only employees affected by the Jordaan connection, was to ensure loyalty to the company and to obviate the possibility that it could have been denuded dramatically of intellectual assets, namely employees who, by the making of the business held the value of the company.

Excerpts from judgment of Justice Wallis without footnotes

Den Braven S.A. (Pty) Ltd v Pillay (2899/2008) [2008] ZAKZHC 22; 2008 (6) SA 229 (D); [2008] 3 All SA 518 (D) (27 March 2008) per Wallis AJ (as he then was)

“[21] The restraint undertaking is in a printed form and was obviously not prepared with Mr. Pillay’s situation specifically in mind. Its terms are broad and general and it is plainly intended to be suitable for use for any employee of the Applicant at any level of its business, whether a sales person like Mr. Pillay or the managing director. This is confirmed by a consideration of Mr. Pillay’s letter of appointment. That letter is itself in a standard form and indicates that his employment is based on certain terms and conditions including those recorded in a document entitled ‘Den Braven Company Policies’. Under the heading ‘Standard Terms and Conditions’ it is said that his terms and conditions of employment are detailed not only in that document but also in a ‘Restraint of Trade’. The use of standard form contracts in the context of employment relations is a common occurrence and particularly so where the employer is ultimately part of an international group of companies. This restraint undertaking bears all the hallmarks of such a contract. Returning to the restraint itself it has clearly been in use for a number of years inasmuch as in clause 1.1.13 thereof ‘the territory’ is defined as being:-

“The area comprising Southern Africa including the independent states of Venda, Bophuthatswana, Ciskei, Transkei, Namibia, Botswana, Swaziland, Lesotho, Zambia, Malawi and Mozambique.”

The advent of democracy in South Africa has not caused the Applicant to revise this contract.

[22] The restraint undertaking deals with three matters namely the restraint itself, a prohibition upon the use or disclosure of confidential or secret information and the treatment of inventions and intellectual property arising from the employee’s efforts whilst in the employ of the Applicant.

It contains in clause 1 a definition section in which the expressions ‘DEN BRAVEN’, ‘DEN BRAVEN customer’ ‘DEN BRAVEN employee’, ‘DEN BRAVEN product’ and ‘the protected business’ are defined. These definitions are in broad terms. Thus ‘DEN BRAVEN’ is defined as including both the Applicant and all its present subsidiaries as well as any future subsidiaries acquired or coming into existence between the date of the restraint undertaking and the termination date.

The restraint itself is said to be in favour of both the Applicant and its holding company, which is a company incorporated in the Netherlands, and its subsidiaries. Its customers are defined as anyone who was a customer in respect of a DEN BRAVEN product during the pre-termination period. That could on the face of it extend not only to the initial purchaser from the Applicant but also to any person to whom the product was resold.

Its employees are defined as anyone who was an employee, officer or agent of or consultant to the Applicant during the pre-termination period.

That is also more extensive than the common understanding of an employee. The pre-termination period is a period of one year immediately preceding the termination date.

The termination date is defined as the date on which the employee ceases for any reason whatsoever to be an employee of the Applicant and the restraint period is a period of two years immediately following the termination date. The protected business is the ordinary business of DEN BRAVEN carried on during the pre-termination period.

. . . . .

[29] I have quoted these portions of the judgment of Ngcobo J in extenso because, in my respectful view they are pertinent to a problem that has reared its head on a number of occasions in regard to restraint of trade agreements. In at least three cases under the interim Constitution the Court was asked to consider the impact of s 26 of the interim Constitution on such agreements.

In several cases an argument was advanced that the common law principles should be altered because restraint of trade agreements constituted an infringement of the rights conferred upon the person bound thereby in terms of s 26(1) of the interim Constitution. Whilst that argument was not upheld in those cases it was again raised in relation to the provisions of s 22 of the Constitution. In one of these it was held that:-

“The restraint of trade clause in the contract constitutes a limitation on First Respondent’s fundamental right to freedom of trade, occupation and profession. It is inconsistent with the Constitution to impose the onus to prove a constitutional protection on the First Respondent. Accordingly Applicant, which seeks to restrict First Respondent’s fundamental right, has the duty of establishing that First Respondent has forfeited his right to constitutional protection”.

In the result the court held that an applicant seeking to enforce the provisions of a restraint of trade agreement not only had to prove the breach or threatened breach of that agreement but had to show that the restraint was reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom. This approach also appears to have the support of the court in Advtech, supra.

. . . . .

[36] Finally, reverting to legal principle, one of the perennial problems in the field of restraint of trade agreements has been that of over-breadth. At the stage when the contract is concluded it is often difficult to foresee with any degree of exactness which interests of the employer will warrant protection after the termination of the employment and what actions by the employee may constitute an infringement of those interests. This is always a difficult question when one is dealing with an ongoing relationship, such as employment, in the context of a business which is constrained by market forces to adapt its operations to meet current exigencies.

Both the employment relationship and the nature of the business tend to change over time. In order to accommodate this the usual result is that those who draft restraint of trade undertakings tend to err on the side of generosity. That is compounded by their endeavours to foresee and forestall the endeavours that former employees may adopt to circumvent restraint undertakings. In the result, when the time for enforcement arose, whilst the conduct of the former employee might fall squarely within the terms of the restraint, its breadth would provide fertile ground for an argument that it was unreasonable and hence unenforceable.

[37] In order to deal to some extent with this situation the courts in South Africa, following English decisions, adapted the doctrine of severability to the particular situation of a restraint of trade undertaking. In summary the rules that were evolved were the following. In order for the unreasonable and therefore unenforceable portion of the restraint to be excised it had to constitute a distinct portion of the undertaking. The apparent intention of the parties needed to be that the excised portion was sufficiently distinct from the other portions of their agreement that it could be inferred that in its absence they would nonetheless have concluded the contract as truncated. The starting point for any consideration of severability was the notional “blue pencil” test whereunder the offending portion of the agreement had to be capable of grammatical excision leaving the balance as an independent whole bearing the same meaning as it had borne prior to the excision.

. . . . .

[45] In the result Botha J concluded that the proper approach to the enforcement of restraint of trade undertakings should be the following :-

“…[W]hen a restraint according to its terms as agreed upon is found to be unreasonably wide in its scope of operation, the Court can, in a proper case, enforce the restraint partially, by issuing an order incorporating the addition of such limiting words to the restraint as agreed upon as are appropriate to restrict its scope of operation to what is found to be reasonable.

I have said “in a proper case”, because it is clear that the Court’s power of partial enforcement in the manner indicated must be subject to limitations. As I do not profess to be able to envisage, even approximately, the different situations that can arise in which the Court’s power may be invoked I shall make no attempt to circumscribe in general terms the circumstances under which the Court might or might not be prepared to exercise such power. I shall simply mention the features of the present case which have occurred to me as being circumstances making it a proper case in which to exercise the power referred to.”

The factors to which the learned judge then referred were firstly that the form of order sought was narrower than the restraint clauses as agreed upon; secondly that the words that needed to be inserted did not constitute a radical departure from the terms of the restraint and thirdly, although the restraints when viewed as a whole were extensive and covered a multitude of forms of conduct sought to be prevented, there was no reason to believe that they were calculated to be unduly oppressive towards the Respondent or were designed to operate in terrorem.

. . . . .

[47] I have deliberately analysed at some length the judgment in National Chemsearch v Borrowman because it seems to me that the principles adopted in that judgment and endorsed in Magna Alloys and the line of cases in the Supreme Court of Appeal that now extends to Reddy v Siemens Telecommunications, have not always been appreciated or applied. Thus for example, Professor Christie in his work on the law of contract refers to one or two cases in provincial divisions from which he infers that the judgment of Botha J “is only mildly revolutionary”. A fair reading of the judgment makes it plain that this description is inaccurate. The judgment transformed the approach of our Courts to the enforcement of restraint of trade agreements. As Botha J himself recognised it rendered the existing rules as to severability on the context of a restraint of trade agreement academic. It should have reinforced the view that in the field of restraint of trade agreements the ordinary contractual principles of severability applied in relation to provisions in a contract that are illegal or void for vagueness, have no role to play.

[48] With respect, it seems to me that it is in this area that Davis J erred in Advtech ([2007] JOL 20680). In that case, as in this one, the restraint of trade agreement was widely drawn. However, the conduct complained of was that the employee had gone to work for a competitor in the same town servicing the same clients. In those circumstances the order being sought would have been directed at the employment that the Respondent was undertaking. However, the Court held that “this is a case where the Court is being asked to narrow the very essence of the restraint clause”.

Accordingly, so it held, the restraint clause could only be saved by way of an application of the severability clause, which was in its terms similar to the clause in the agreement before me and to that which was considered by Smalberger JA in Sasfin (Pty) Limited v Beukes .

On the basis of that decision Davis J held that the agreement as a whole was unenforceable “for being over-broad, too wide in scope”. He condemned the attempt of the Applicant to seek under the guise of a severability clause to request the Court “to develop what is in effect, an entirely different contract.”

. . . . .

[50] I regret to say that I find myself in profound disagreement with these conclusions which seem to me to be both contrary to established and binding precedent and to show a lack of appreciation for the commercial realities that underpin the drafting of restraint of trade agreements. As regards the authorities I have dealt with those above.

They show in my view that it is inappropriate to have resort to general principles of severability in approaching a restraint of trade agreement that is too widely drawn but which is sought to be enforced only in respect of conduct that manifestly falls within its terms and in respect of which the enforcement would be fair and reasonable in accordance with the norms of public policy derived from the Constitution. In my view it forms no part of the analysis in that situation to ask whether the agreement as a whole is so broad that it will be unenforceable if enforcement is sought of its terms in their entirety.

The mere fact that only limited relief is being sought will ordinarily indicate that this is the case.

The proper approach in my view is for the Court to ask itself whether the conduct that the Applicant seeks to restrain by way of an interdict is conduct that falls within the terms of the restraint agreement and from which the former employee agreed to abstain. If the answer to that question is in the affirmative the court then moves to an analysis of whether it should, in accordance with the principles of public policy, enforce the agreement to that extent by granting relief to the Applicant. It has no need in those circumstances to have regard to those portions of the agreement that are more extensive than the relief actually being sought.

[51] It is also wrong, I believe, for Courts reflexively to criticise those who draft restraint of trade agreements in very broad terms for doing so. I have already mentioned that both the employment relationship and the conduct of business is dynamic and ever- changing.

It is wholly undesirable and inconvenient to both the employer and the employee to have to engage in an on-going and relatively continuous process of renegotiating the terms of a restraint undertaking in order to accommodate new elements that enter into their relationship, whether by way of the acquisition of additional confidential information or because the employee is promoted to a higher position in the firm or because the nature of the employer’s business changes or it chooses to conduct its business through different business structures, for example, by the creation of subsidiaries or the closure of existing subsidiaries and bringing their business back within the fold of the mother company.

Equally it can never be foreseen whether an employee will simply resign to take up similar employment with a competitor or choose to establish his or her own competitive business or decide to market their skills as a consultant generally to other participants in the same industry. Every possibility must be covered and this result in great detail and unfortunate prolixity. In drafting account must be taken of an extensive body of case law that is by no means consistent. Accordingly they should not be blamed, when the courts said under the old dispensation that an intention that different portions of an over-broad agreement needed to stand on their own if severability was to operate, for inserting a clause proclaiming that fact as clearly and comprehensively as possible. Nor should they be criticised for including a string of acknowledgments of dubious value when the reported cases suggest that nonetheless there may be some value in the party sought to be restrained having made such acknowledgements.

After all the task of the draftsman is to secure as best they can that their client will enjoy protection at the end of the day.

Lastly, as Didcott J pointed out the ability of lawyers drafting agreements to predict with accuracy what a court will in the future regard as fair and reasonable in the light of facts that are not known at the time the agreement is drafted is limited.

Against the background of those practical realities there seems to me nothing wrong with a restraint of trade agreement that seeks to cover all existing and future eventualities, provided only that its terms do not give rise to the inference mentioned by Botha J that it was intended to operate in terrorem.

I think it quite impractical to suggest that restraint agreements be drafted on the basis of greater accuracy and precision. That demands a prescience that is rarely present in life. It is significant that in the present case there is no complaint by Mr. Pillay that he did not understand the scope and ambit of the restraint imposed upon him or that it prohibited him from taking up employment with a competitor.

[52] I am mindful of the fact that in one case a restraint agreement drafted in broad terms, as was the one before me, was described as having been “maliciously and skillfully drawn in order to be as wide as possible and to cover as many situations as possible.” However, unless there is something in the circumstances in which the restraint was concluded or that emerges expressly from the language to justify the inference that its terms are dictated by some improper purpose, it seems to me wrong to condemn a broadly phrased agreement as malicious.

Courts do not lightly draw such an inference, particularly where there is an entirely plausible alternative, namely that the draftsman was seeking to be as prescient as possible and to cover all potential situations in which the employer’s interests might need protection against the possible conduct of the particular employee. It would also be relevant in this regard to consider whether the restraint agreement has been drafted generally for use in the employer’s business and for signature by employees at various different levels within the business. That fact will go far to indicating that there is no improper intention underlying the extensive terms of the agreement.” [emphasis added]