Post-termination fiduciary duties of ex-employees and restraint of trade agreements

Introduction

Whilst implementing the employer-employee contractual relationship the employee may inevitably come into contact with the employer’s secrets of the trade. It may also become inevitable that the employee may eventually end up working for a former employer’s competition. The use of knowledge and experience gained whilst working under one employer may be useful whilst working for another employer. This inevitable interaction between what one may gain in knowledge and experience whilst employed by one employer may be a source of conflict when the employee leaves employment. Employers have seen a desperate need to come up with restraint of trade agreements that are aimed at precluding employees from working for their competition or becoming competition themselves.

This discussion focuses on the fiduciary duties that accrue to employees when they leave employment. In this discussion, it shall be noted that the fiduciary duty accruing to employees includes loyalty to the company in so far as not stealing its trade secrets. It also entails not violating restraints of trade validly entered between a company and its former employee. We discuss the law behind the application of restraint of trade agreements. We outline the important court decisions that have looked into this subject. The legal principles used by these courts will also be outlined. At the end of this discussion, it shall be concluded that the Constitution cannot be ignored when the subject under discussion is under scrutiny.

Freedom of trade in terms of the Constitution of Zimbabwe, 2013

The subject matter will be very limited and even incomplete without knowledge of the constitutional framework governing the law of profession, commerce and profession. The Constitution of Zimbabwe provides:

“Every person has the right to choose and carry on any profession, trade or occupation, but the practice of a profession, trade or occupation may be regulated by law”.[1]

The provision empowers every person to choose what they want to pursue in terms of their trade and occupation. Arguably, this provision puts into question the notion of restraint of trade agreements. A restraint of trade is a clause in a contract in which the employee undertakes that he or she will not act in competition with an employer upon separation. Its application may thus go against the constitutional principles stated above.

As a result of the need to balance these interests, courts have had to come up with rules applicable to the restraint of trade agreements. These rules as devised by the courts provide the framework within which restraint of trade must be viewed. The rules discussed hereunder include the fact that a restraint of trade is only enforced where there is a breach of the agreement, that it must be reasonable and that there must be protectable interests.

Breach of a restraint of trade

A party that seeks to enforce a restraint of trade must first prove that there has been a breach of the agreement.[2] The evidence may be in the form of the former employee providing services to clients belonging to his or her former employer. The breach of the restraint of trade will compel the employer to enforce it. Enforcement is usually in the form of an interdict precluding the employee from continually acting contrary to the former employer’s protectable interests.

Reasonableness of a restraint of trade

The generally acceptable principle applying to restraint of trade agreements is that the agreement must be reasonable for it to be enforceable.[3] A former employee found violating a restraint of trade agreement that he or she had with the former employer may argue that the restraint of trade cannot be enforced because it is unreasonable. In Forsure (Pty) Ltd v Byron Robert Puckle and Another the court found that a restraint of trade that covered the whole Republic of South Africa was unreasonable and thus could not be enforced.

The locus classicus of the need to have a reasonable restraint of trade contract is the South African case of Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984(4) SA 874 (A). The court in this case correctly held that a restraint of trade that is contrary to public policy is unenforceable because it will be unreasonable.[4] The court also held that each restraint of trade contract, before a court, must be analyzed individually to ascertain if it’s violating public policy and thus unreasonable. Regarding the reasonableness of a restraint of trade, the court in Sibex Engineering Services (Pty) Ltd v Van Wyk and Another 1991 (2) SA 482 (T) had this to say:

“A contractual restraint curtailing the freedom of a former employee to do the work for which he is qualified will be held to be unreasonable, contrary to the public interest and therefore unenforceable on grounds of public policy if the ex-employee (the covenantor) proves that at the time enforcement is sought, the restraint is directed solely to the restriction of fair competition with the ex-employer (the covenantee); and that the restraint is not at that time reasonably necessary for the legitimate protection of the covenantee’s protectable proprietary interests, being his goodwill in the form of trade connection, and his trade secrets. If it appears that such a protectable interest then exists and that the restraint is in terms wider than is then reasonably necessary for the protection thereof, the Court may enforce any part of the restraint that nevertheless appears to remain reasonably necessary for that purpose.”

Interests worth protection.

In addition to the principles discussed thus far, a restraint of trade can only be enforceable if there is an interest worth protecting.[5] This may include trade secrets like customer lists.[6] In Forsure (Pty) Ltd v Byron Robert Puckle and Another, the court made a factual finding that there was no interest worth protecting considering that, the employee had only worked for the employer for a period of less than a year.[7] There was no evidence that the former employee was taking employees away from his former employer.

Balancing the interest of the parties

A court faced with a restraint of trade litigation is duty-bound to consider all the circumstances of the case before resolving the dispute. The process entails weighing the interests of the employer against those of the employee. Inevitably the constitutional rights indicated above may also be weighed. After weighing the interests of all the parties concerned, the court in Forsure supra observed:

“In addition, there is no justifiable reason to enforce a national restraint when balanced against offending the right of Mr Puckle to work in a profession in which he is solely skilled and competent, albeit, same was acquired or enhanced while in the employ of Forsure.”

The fact that the employee was solely skilled in the only profession that the employer sought to restrain him from practising was one of the factors that discouraged the court from enforcing the restraint of trade in this case. The court was also persuaded to not enforce the restraint of trade because of the failing economy[8] and the reduced job market. It sought to protect the employee from these difficulties once the restraint of trade is enforced.

Duty not to steal employers’ secrets on separation.

The court in Big Catch Fishing Tackle Proprietary Limited and Others v Kemp and Others[9] decisively concluded that a director or an employee is precluded from utilising the former company’s trade secrets or violating any interest of the company that is worthy of protection.[10] It was also held that it is only commercially viable and confidential information that should not be utilised by a former director or an employee.[11] It was further held that a director or an employee only interferes with his or her fiduciary duty after resignation only when he or she sabotages the company’s business or makes use of information that is confidential for the benefit of his company, himself or a rival.

The director or employee must not also interfere with the existing contracts of the company he or she was formerly engaged with. The court also argued that a person must be allowed to be productive and be allowed to engage in trade as a function of their constitutional rights. Post resignations restraints are generally not supported by the courts.[12] It further argued that a resigned director must be able to make use of the experience, knowledge and skill that he or she acquired whilst still in the employ of the company that he or she left. The employee and director who have resigned from the company, whilst they can make use of the knowledge they acquired whilst still working for the company may not steal the trade secrets belonging to the company, they resigned from.

Conclusion

From the foregoing discussion, it can be noted in summation that a restraint of trade agreement can be enforced provided it meets certain conditions. These conditions include reasonableness. It also includes the fact that the restraint of trade must apply to interests that are worth protecting. Employees are under a legal obligation not to steal an employer’s trade secrets such as customer lists or other interests worth protecting.

In enforcing restraint of trade agreements, the court cannot ignore the constitutional protection afforded the right of an individual to participate in a trade or profession of their choice. The courts have legal obligations to ensure that persons are productive. One cannot ignore the fact that we live in a volatile world. A world in which the economies are battling pandemics and diseases as well as wars. Several job cuts have been witnessed of late. We are therefore likely to see several restraints of trade agreements set aside in the interest of ensuring that persons are productive in full support of the Zimbabwean Constitution.


[1]           Section 64 of the Constitution of Zimbabwe, 2013.

[2]           Forsure (Pty) Ltd v Byron Robert Puckle and Another (South African case number J727/2022) on paragraph 17.

[3]           See Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984(4) SA 874 (A).

[4]           See Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984(4) SA 874 (A) in which the court held that: “Acceptance of public policy as the criterion means that, when a party alleges that he is not bound by a restrictive condition to which he had agreed, he bears the onus of proving that the enforcement of the condition would be contrary to public policy. The Court would have to have regard to the circumstances obtaining at the time when it is asked to enforce the restriction. In addition, the Court would not be limited to a finding in regard to the agreement as a whole but would be entitled to declare the agreement partially enforceable or unenforceable.”

[5]           In Sibex Engineering Services (Pty) Ltd v Van Wyk and Another 1991 (2) SA 482 (T) it was held that: “The proprietary interests that could be protected by such a restraint were essentially of two kinds. The first kind consisted of the relationships with customers, potential customers, suppliers and others that go to make up what is compendiously referred to as the “trade connection” of the business, being an important aspect of its incorporeal property known as goodwill. The second kind consisted of all confidential matter which is useful for the carrying on of the business and which could therefore be used by a competitor, if disclosed to him, to gain a relative competitive advantage. Such confidential material is sometimes compendiously referred to as “trade secrets”.”

[6]           Big Catch Fishing Tackle Proprietary Limited and Others v Kemp and Others.

[7]           In Forsure (Pty) Ltd v Byron Robert Puckle and Another on paragraph 37 and 38 the court made the following factual findings: “Regard must also be had to the fact that Mr Puckle was less than a year in the employ of Forsure and the confidentiality it seeks to protect is not absolute or permanently protectable. [38] As well, there is no evidence to show that Mr Puckle would lure Forsure’s employees to joint Ubersure; which is, in any event, unlikely given that contention by Forsure that all its employees are bound by respective restraint of trade agreements.”

[8]           In Forsure (Pty) Ltd v Byron Robert Puckle and Another on paragraph 39 the court remarked that: “He would have to contend with being economically inactive in a constrained economic climate and labour market that is hemorrhaging jobs on the terms that are overtly far-reaching given the diminished threat to the proprietary interest sought to be protected.

[9]              (17281/18) [2019] ZAWCHC 20 (5 March 2019).

[10]            Big Catch Fishing Tackle Proprietary Limited and Others v Kemp and Others on paragraph 36.

[11]            Big Catch Fishing Case on paragraph 37.

[12]            Big Catch Fishing case on par 40.

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