Section 197 & the endurance of a restraint of trade agreement

In the recent case of Waco Africa (Pty) Limited t/a Form- Scaff v Martina Sack (J2393/19) (23 December 2019) the Labour Court was faced with the endurance of a restraint of trade agreement in circumstances where a transfer of a business in terms of section 197 of the Labour Relations Act 66 of 1995, as amended (“the LRA”) came into effect. In particular, it was argued that the contract of employment issued by the “new employer” superseded the restraint of trade agreement concluded between the employee and the “old employer” in accordance with the legal principles of novation.

Written By of Cowan-Harper-Madikizela Attorneys

The facts of the case are briefly as follows: On 26 April 2017, the employee entered into a contract of employment with Doka South Africa (Pty) (Ltd) (“Doka”), in the role of Regional Sales Manager reporting to the Managing Director. The employee also concluded a restraint of trade agreement for a period of 24 months, which stated that “the restraint shall endure in favour of the successor-in-title”.

During August 2019 the employee’s employment was transferred from Doka to Waco Africa (Pty) Limited t/a Form-Scaff (“Form-Scaff”) in accordance with section 197 of the LRA. Inherently all the rights and obligations which existed between the employee and Doka continued in force as between the employee and Form-Scaff.

During November 2019 the employee resigned from the employment of Form-Scaff and sought to join one of its major competitors. The employee concededly not only possessed Form-Scaff’s confidential information but had also established strong customer connections with its customers.

The employee’s defence and justification for seeking to join a major competitor of Form-Scaff was premised upon the principle of novation. It was argued that the new contract of employment concluded with Form-Scaff, and which did not contain a restraint of trade agreement, superseded the contract of employment concluded between Doka and the employee and the ancillary restraint of trade agreement.

The Labour Court in evaluating the defence of novation endorsed the Supreme Court of Appeal’s finding in National Health Laboratory Service v Lloyd-Jansen van Vuuren 2015 (5) SA 426 (SCA) wherein it was held that the intention to novate is never presumed and essentially a question of the intention of the parties, inferred from all the circumstances.

The Labour Court found that in circumstances where there were no express or inferred declarations of the parties’ intention to effect novation, the restraint of trade agreement was binding and not superseded by the new contract of employment. The new contract of employment particularly only replaced the Doka employment contract.  The Court was accordingly satisfied that there existed no basis to infer that Form-Scaff had waived any of its rights in relation to the restraint agreement.

In circumstances where it has become increasingly prevalent for employees to take up employment with competitors, it is critical that restraint of trade agreements are comprehensive and irrefutable. Furthermore, as the Courts have set particularly onerous requirements for the enforcement of restraint of trade agreements, a well-drafted and tailored restraint of trade agreement would not only strengthen an employer’s position should a dispute subsequently arise, but would also deter employees from taking up employment with competitors, thus mitigating an employer’s risk customarily associated with such conduct.

It is preferable and best practice for a restraint of trade to be contained in a separate agreement, particularly as employees often seek to suggest that they were either unaware of the restraint whilst signing the contract of employment or later seek to evade their contractual obligations by relying on opportunistic principles such as novation.

Tanya Mulligan

Tanya Mulligan
Executive in Employment

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