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Settlement agreements and restraints of trade

When an employer enters into a settlement agreement (or separation agreement) with an employee relating to the termination of the employment contract on certain agreed terms, it is important to have such agreements drafted professionally, to make sure that all of the potential legal consequences have been fully considered and addressed. Even so, it may happen that those professionals get it wrong sometimes! In a recent case [Wheelwright v CP De Leeuw Johannesburg (Pty) Ltd (JA 81/2022) [2023] ZALAC 6 (21 February 2023)], the Labour Appeal Court had to interpret the contents and effect of such a settlement agreement and whether the settlement terms had extinguished the employee’s restraint of trade, or whether it remained in place. The case started as a severance pay dispute that had been referred to the CCMA and that was eventually settled at arbitration (there were legal representatives assisting both parties). The settlement agreement consisted of two parts:

  1. The standard CCMA settlement agreement, that stated: “This agreement is in full and final settlement of the dispute referred to the CCMA as well as in full settlement of all statutory payment due to the applicant as reflected at paragraph 5 of this agreement...”

  2. Annexure A to this agreement, drafted by the parties’ legal representatives. which expanded on the settlement terms and contained the following clause: “….full and final settlement of all and any claims which the parties may have against each other whether such claims arise from contract, delict, operation of law, equity, fairness or otherwise”

Subsequent to the conclusion of this settlement agreement, the former employer sought to interdict the former employee from working for a competitor, based on the restraint of trade that he had signed in his initial contract of employment. The Labour Court found in favour of the employer party, but on appeal to the Labour Appeal Court, the latter found as follows:

  • The full and final settlement clause in the specifically drafted Annexure, includes any and all claims between the parties – not just that which had been referred to the CCMA;

  • At the stage that the settlement agreement was signed, the employee had already been dismissed (retrenched) and the employer should have been aware that the restraint could be infringed – yet it did not specifically exclude the restraint provisions from the settlement agreement so that it could continue to remain operative;

  • As such, the clause in Annexure A of the signed settlement agreement was wide enough to extinguish the restraint of trade obligation as well.

Lesson for employers and legal advisors When entering into separation- / settlement agreements, make sure that consideration is given to specifically excluding certain previously given undertakings/obligations on the part of the employee from the settlement provisions – to make sure that there is no doubt about the rights and obligations that would remain in place despite the settlement. Apart from restraints of trade, this could also include confidentiality agreements, intellectual property agreements, and so on.

© Judith Griessel


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