Legal safeguards against employee-driven competition

MARTIN MASITERA AND FUNGAI CHIMWAMUROMBE

In the world of commerce, fair and lawful competition between established corporations and emerging enterprises is not only encouraged, it is essential for innovation and progress.

However, challenges arise when employees gain access to sensitive trade secrets, proprietary databases or confidential business strategies and subsequently use these information to establish rival businesses during or after their tenure.

To address such situations, the law permits only fair competition. Common law mechanisms, including non-compete clauses and covenants in restraint of trade, are crucial tools that protect businesses from unfair exploitation of their proprietary information.

What is a non-compete clause?

A non-compete clause is a contractual provision, typically embedded within  employment or business contracts , that prohibits  an employee or secondary business partner from engaging in the same line of business as their employer or primary partner.

The core objective  is to prevent the misuse of proprietary information  and trade secrets , as well as to curb high employee turnover that may be driven  by unfair competitive practices.

What is a covenant in restraint of trade?

Closely related, a covenant in restraint of trade is generally inserted into employment contracts to restrict former employees from entering  into direct competition with their previous employer.

This provision is normally referred to as a restrictive clause as it clearly prohibits the engagement of the employee in a certain field of trade be it for their own business or employment by another organisation in that same line of business.

How are these clauses structured?

Typically clauses of this nature are included in contracts drawn up at the inception of the business relationship. Parties bound by such clauses should do so willingly as it is their right, constitutionally, to choose their own profession, trade and occupation. This right therefore can only be limited through their own consent to be bound by such a clause. As enounced by Malaba JA in Greendale Hardware & Electrical v Goodfellow Bangaba SC 15/07, a restraint of trade is an obligation voluntarily undertaken by the employee to refrain from the exercise of freedom of trade in favour of the employer in the exercise of freedom of contract.

For such restrictive clauses to become effective and legally sound, the draftee should include an unambiguous description of the competition. It should be clear as to what business the employee or secondary business partner is restricted from doing

Secondly and of equal importance is duration of the restriction, that is to say a timeframe after which the employee is allowed to engage in the prohibited line of trade. Thirdly, the clause should clearly outline geographical restrictions, meaning that outside of stipulated locations, the restriction falls away and the former employee or business partner is free to engage in their chosen trade and profession without violating their contractual relationship with the former employer.

Although the above components are not exhaustive of what is included in such clauses, they mirror the most important aspects for the provision to be legally enforceable.

The benefits of non-compete clauses and covenants in restraint of trade

The main import of these provisions in business and employment contracts is to protect the business’ trade secrets from competitors thereby solidifying the company’s position in the market and maintaining competitive advantage.

In the absence of these restrictions, business partners and employees alike are much more inclined to share proprietary information and other intellectual property for their own benefit and much to the detriment of the company.

Apart from all the benefits it has for the companies imposing the restrictions, such clauses are viewed as good business practice safeguards as they guarantee that competition remains fair and practical.

Conclusion

Although the significance and meaning of these clauses is quite clear, parties are implored to verify their consent beginning with voluntarily obliging to the restriction and couching the clauses in an efficacious manner that is legally binding and can be verified by courts of law.

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Zenas Legal Practice and can be contacted at fungai@ zenaslegalpractice.com 

Martin Masitera is a legal Associate at Zenas Legal Practice (Nyanga) (Pvt) Limited and can be contacted on martin@zenaslegalpractice.