UNIT 8 TUTORIAL 1

Is the restraint of trade in the partnership agreement valid?

In restraint of trade the following questions should be identified to answer this

question:

1. Manga Alloys and Research (Pty) Ltd v Ellis

2. Basson v Chilwan
3. Reddy v Siemens Telecommunications (Pty) Ltd

Study the cases in pages 204-208 of the prescribed textbook.

The enforcement of a restraint of trade provision is a balancing act between:

1. The sanctity of contracts and

2. The freedom of trade.

The traditional approach of our courts:

1. To give preference to freedom of trade.

2. All restraint of trade contracts were against public policy unless one of the
parties wishing to enforce it can prove that the restraint was reasonable.

The traditional approach was changed in the Manga Alloys case:

 The courts favoured sanctity of contracts

 This meant that a restraint of trade is valid unless a party wishing to escape it
can prove that the restraint is against public interest/public policy.
 In such a case restraint would be unenforceable.

In Basson v Chilwan:
  The court said that a restraint of trade would be against public policy if the
consequence of the restraint would be unreasonable.

The question of reasonableness is determined by weighing:

1. The interests of the community (which is the competing views of sanctity of

contract and the freedom to trade) on the one hand and
2. The individual interests of the contracting party on the other hand.

The court also puts forward the test to determine if the restraint of trade is
reasonable.

In Basson v Chilwan the test is comprised of these four questions:

1. Is there an interest of one party worthy of protection?

2. If so, is that interest threatened by the conduct of the other party?
3. If so, then does such interest weigh up qualitatively and quantitatively against
the interest of the other party to be economically active and productive?
4. Finally, is there another aspect of public policy having nothing t do with the
relationship between the parties that requires the restraint of trade to be
maintained or rejected?

In regard to question 1, although no protectable interest is mentioned in the set of

facts, goodwill is often viewed as a protectable interest. Goodwill refers to
commercial reputation and trade connections of the partnership. So yes, the restraint
of trade is aimed at protecting the goodwill of the partnership (Rakesh and Samuel)
within a geographical area and therefore there is a protectable interest.

In regard to the second question, by opening up the practice close to the partnership
(Rakesh and Samuel), Gugulethu’s conduct is threatening the interest of business of
the partnership.

In regard to question 3:

 This involves weighing up the protectable interest of the restraint enforcer

(Rakesh and Samuel) and the restraint denier (Gugulethu).
  The question is whether the restraint goes further than necessary to protect
the interest (which is protection in terms of the first question). It may only
restraint activities insofar as it is necessary to protect the partnership’s
interest. This comes down to the reasonableness of restraint.
 Geographical area: the restraint of trade is aimed at protecting the goodwill of
the partnership from the geographical area of Randburg, Johannesburg and is
limited to this area, this could be considered a reasonable restriction.
 Duration: The second consideration is the duration of the restraint being
limited to a specific period of time (not indefinitely) which gives an indication
that it is reasonable.
 All competition prohibited? The restraint does not prohibit all competition.
 Based on the above, it is indicative that the restraint would be reasonable.

In regard to question 4, one should consider whether there are any other public
interest/policy considerations other than the mere questions of reasonableness/
unreasonableness. In this case, there are none.

In the case of Reddy v Siemens Telecommunications adds to the Basson v Chilwan

test by adding the following question:

The fifth question concerns itself with whether the restraint goes further than
necessary to protect the interest.

 Where the interest of the party sought to be restrained weighs more than the
interest protected, the restraint is unreasonable and consequently
unenforceable.
 There must be an interest worthy of protection.
 The enquiry which is undertaken at the time of enforcement covers a wide
field and includes the nature, extent and duration of the restraint and factors
peculiar to the parties and their respective bargaining powers and interests.
Taking into account the rules of law and their application, we now answer whether
the restraint of trade between Gugulethu and the partnership was valid.

 Magna Alloys noted that a restraint is valid unless the party wishing to escape
the restraint of trade can prove that the restraint of trade is against public
interest/policy.
 In Basson v Chilwan it was noted that a restraint of trade would be against
public policy if the restraint is unreasonable.
 To determine the reasonability of the restraint, the Basson test must be
applied.
 Reddy v Siemens Telecommunications adds to the case.

Having applied the test in the set of facts, it indicates the restraint would likely be
reasonable under the circumstances (especially after considering the limited duration
of the restraint and the specific location in which it operates). Thus the restraint is not
against public policy and must then be valid.