Transfer of a restraint of trade in the sale of a business as a going concern

Laser CNC (Pty) Ltd had employed one Fick, in 2010 and in 2011, he signed a restraint agreement. 

Rishal Bipraj

In 2012, Laser Junction, purchased the business of Laser CNC as a going concern and in terms of s197 of the Labour Relations Act (“LRA”), Laser CNC transferred its business and employees, together with their contracts of employment to the applicant. The applicant purported also to take transfer of the restraint agreement. The court held, however, that assuming the contract of employment was transferred because s197 expressly provided for it, the same could not be said for the restraint agreement.

Section 197 of the LRA provides for the transfer only of contracts of employment to a new employer. It is designed to ensure that the transfer of a business does not prejudice the employees. The court considered what a contract of employment is in terms of the Basic Conditions of Employment Act (BCEA) and decided that these contracts contain basic conditions of employment more favourable to the employee. The court held that the corollary of this is that a restraint that is less favourable than the BCEA to an employee cannot be a term in a contract of employment.

If less favourable, and therefore excluded from a contract of employment, then a restraint cannot be transferred by operation of law under s197. The applicant tried to use the restraint agreement to discourage Fick from leaving its employ and when he did leave, the applicant applied to Court to enforce the restraint. The Court found that the restraint was not merely less favourable but manifestly unfavourable to Fick. Accordingly, it did not meet the definition of a contract of employment and could not be transferred to the applicant by operation of law.

The court also considered public policy and concluded that the right to fair labour practices in the Constitution and in the LRA is intended to protect employees because the common law did not do so adequately. A restraint favouring the applicant with no quid pro quo for a respondent other than the right to work is a typical example of a one-sided restraint that seeks to backtrack on these protections. A one-sided restraint agreement in employment is different from other restraint agreements in which parity of bargaining prevails. Therefore, as a general rule, in so far as a restraint agreement reverses such protections, it is against public policy and unenforceable.

This article is written by Rishal Bipraj, an Associate in the Commercial Department at Garlicke & Bousfield Inc

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