Novel ruling as restraint of trade backfires
Publish date: 11 October 2017
Issue Number: 77
Diary: A Matter of Justice
Category: A Matter of Justice
When things got too bad at work, he left. It wasn’t just the voluntary retrenchment programme or the resignation of top management, or that the company could not pay its suppliers. It was the damage to his own reputation that decided Karl Fick: he had to quit his job, even though he did not yet have any alternative.
Just as he was contemplating leaving South Africa, hoping to find work in Tanzania, Durban company, Pinion and Adams, offered him work.
Fick shone at the new place, but in quick succession three strange things happened. His old firm, Laser Junction, began talks with his new firm about a joint venture. Then, just a few weeks after that plan collapsed, senior management at Laser Junction offered him a lot more money to go back. Though he turned down the offer the discussions ended amicably. So what happened next came out of the blue: his old firm brought a restraint of trade application to bar him from working for Pinion and Adams or any similar company in the Durban area for 15 months.
You have to wonder why they did it. The rewards of winning were so much less than the legal and reputational costs of losing. But the judge who heard the case had an answer. After considering argument and all the facts, she concluded the company brought their action against Fick in ‘retaliation’ for turning down their job offer. But it backfired. Laser Junction lost the case and must pay costs. And the company won’t be making any ‘best employer’ list right now.
Fick started working at Laser CNC in 2010 and at the end of his three-month probation period signed a memorandum of agreement on ‘secrecy and restraint’. Some months later the company finalised an employment contract with him for the post of sales clerk. That agreement prohibited him from using confidential information for an indefinite period after the end of the agreement.
A year later the company was bought by Laser Junction, Fick was promoted from sales to procurement and from February 2016 he was officially a purchasing officer, responsible for buying raw materials. Then came the decline in company fortunes that prompted Fick to quit the job and led, in turn, to the company’s restraint application against him.
Laser Junction argued that when it bought the business from Laser CNC, all the ‘contracts’ were transferred to it – including the restraint agreement signed between Fick and Laser CNC.
But Fick had a different view. The restraint fell away when the new company took over. Besides, he had signed a new employment contract with Laser Junction that replaced all previous agreements. And there were other grounds for disputing that the original restraint was still valid: for example, it contemplated a restraint on Fick in his capacity as ‘internal sales clerk’, a position he no longer held by the time he left.
These facts and arguments set the stage for the decision of Judge Dhaya Pillay, a member of the High Court in KZN whose previous experience as a Labour Court judge was evident at key moments in her judgment.
Not all the agreements in place at the time Laser Junction bought Laser CNC were transferred to the new outfit, she said, analysing the Labour Relations Act and its provisions related to what happens when a new company takes over. The LRA only permitted the transfer of agreements that were contracts of employment, defined as agreements favourable to an employee – ‘which the restraint agreement was not’.
‘Consequently, no valid restraint agreement existed between the parties,’ she concluded.
There were also public policy reasons not to hold the restraint enforceable.
The Constitution and the LRA were the necessary bedrock of fair labour practices, as ‘the common law did not do so adequately or at all’. Between them they elevated the protection of employees, boosting their bargaining position, she said.
Restraints of trade had to be carefully considered to ensure that the ‘common law does not creep in to snatch away hard won constitutional and statutory provisions’. Among the considerations for a court deciding on the enforceability of such a restraint was the ‘relative bargaining position’ of the parties. Where the parties were relatively equal, court protection was less important. But the courts had to be particularly careful where employees were vulnerable, ‘depending on others for jobs’, and with little bargaining power – like Fick, for example.
A court had to assess the reasonableness of the restraint ‘through the lens of constitutional and labour law protections’. ‘In so far as a restraint agreement reverses such protections, as … this case does, it is against public policy and unenforceable.’
Where the restraint is ‘not one-sided’ and the employee received more in exchange for the restraint than simply ‘securing a job’, that would be different. A one-sided agreement however was ‘a weapon in the hands of an employer against an unarmed employee’ and would not be enforceable.
Pillay found Laser Junction had no ‘protectable interest’ and even if it had, this had been dissipated in relation to Pinion and Adams, through disclosures made when the two companies discussed their joint venture.
Fick’s case was different from other matters where employees deliberately set out to use skills, confidential information and trade connections in violation of a restraint agreement. He searched for new employment as he feared for his job because of the difficulties being experienced at his old firm.
Clearly, Fick had talents and capabilities and these were recognised by the old employer: when the situation at Laser Junction improved, it offered him a significantly better-paid position. Fick however said no. ‘This (restraint) application is in retaliation against (Fick) rejecting that offer,’ said the judge, referring to the company’s ‘churlish’ behaviour and its misrepresentation of key facts in the case. She also noted there was no indication of similar restraints on any other member of Laser Junction’s staff.
The judgment in Fick’s case is novel, resolving the restraint dispute in a way not seen before. It views the situation through a constitutional lens rather than following the more traditional approach, by putting policy considerations at the forefront of the analysis and focusing on the impact and significance of the unequal relationship of the parties.
From regularly trawling through judgments of the courts in sub-Saharan Africa I have noticed that other countries rarely if ever produce cases dealing with restraint agreements. South Africa on the other hand has considerable and developing case law on the issue. Just why this country should be so different from all the rest isn’t obvious to me, but the Fick case will inevitably add to the debate.