Does a Restraint of Trade Agreement Survive the Transfer of a Business?

​In a recent judgment*, the High Court had to determine whether a restraint agreement survives the transfer of a business. The Court concluded that it is a fact-specific enquiry that involves determining whether the benefit created by the restraint constituted a component of the goodwill transferred to the purchaser.

The applicants in this matter were Avis Southern Africa (Pty) Limited (Avis) and two of its wholly-owned subsidiaries, Zenith Car Rental (Pty) Limited (Zenith) and Zeda Car Rental (Pty) Limited (Zeda), collectively known as Avis and its subsidiaries. Avis and its subsidiaries approached the High Court on an urgent basis for interim relief to restrain its former two employees (the first and second respondents) from acting in breach of certain restraint of trade undertakings. While the application against the first respondent, was struck from the roll for lack of urgency, the matter proceeded against the second respondent.

The background

The second respondent commenced employment with Zeda in 1999 and in 2003, entered into an agreement of restraint of trade with Zeda – the original restraint. Avis was later acquired by Barloworld South Africa (Pty) Limited (Barloworld). In 2008, the second respondent's employment was transferred to Barloworld and she therefore entered into a contract of employment with Barloworld. Although the Barloworld contract of employment contained a standard confidentiality clause, the contract did not include any restraint undertakings. The second respondent retained this position until the transfer of her employment to Zenith in 2021 at which time she was required to enter into a contract of employment with Zenith. Notably, the contract with Zenith provided that it superseded all previous contracts of employment and did not contain any restraint of trade provisions. When the second respondent resigned from Zenith early this year (2023), she began the process of registering a company in Mauritius which intended to provide consulting services in the mobility and tourism industry.

The argument

Avis and its subsidiaries contended that the original restraint was incorporated into the second respondent's contract of employment with Barloworld and continued to apply. They therefore sought an order interdicting the second respondent from competing in breach of the original restraint undertakings for 12 months from the termination of her employment.

The question before the Court was whether the original restraint undertakings were transmitted from Zeda to Barloworld and subsequently to Zenith following the transfer of her employment to the latter on 7 September 2021.

The finding

In examining the legal principles that inform the transfer of restraint provisions from one business to another, the Court held that where a business is sold, the subject of the sale is to be determined from the terms of the agreement of sale between the seller and the purchaser. Where the benefits created by a restraint should be transferred as part of the goodwill under a sale of business agreement, the transfer must take place by way of a cession – a legal act of transfer. Simply put, an agreement through which the transferor (in this case, the second respondent) agrees to transfer Zeda's rights associated with the restrictive covenants to the transferee (in this case, Barloworld in 2010 and Zenith in 2021) applies. The cession must meet the common law requirements for it to be valid. The Court further held that the introduction of the statutory regime envisaged by section 197 of the Labour Relations Act (LRA) did not alter the common law position. Section 197 of the LRA does not result in an automatic statutory assignment of the contractual rights created by a restraint agreement. Rather, the ordinary principles of cession must first be satisfied.

Fatal to Avis' and its subsidiaries' case was that it failed to show that the transfer of the second respondent's employment to Barloworld was part of a sale of business agreement and that such sale included a cession of the goodwill of Zeda's business, which included the benefits created by the original restraint. Avis and its subsidiaries argued that because it was recorded in writing that the second respondent's current terms and conditions would not be impacted but would remain the same upon her assuming employment with Zenith, this meant that the right to enforce the original restraint by implication continued to apply as part of the terms and conditions of her employment.

The Court disagreed and held that if Barloworld took no cession of the contractual rights derived from the original restraint, it did not become entitled to enforce the original restraint obligations against the second respondent. It follows, therefore, that if the original restraint did not survive the transfer of the second respondent's employment to Barloworld, then the transfer of her employment to Zenith could not have vested it with a right to enforce the original restraint. The Court also concluded that Avis, as the holding company, remains a separate juristic person from its subsidiaries and its status as a holding company does not vest it with any special rights to enforce the original restraint unless a cession of the rights associated with the restraint was effected to Avis.

The lesson

When employment contracts are transferred following a business transfer, employers should therefore be mindful to ensure that, any restrictive covenants that form part of the goodwill of the business are transferred by satisfying the ordinary principles of cession. In other words, there must be an agreement between the employee and subsequent employer that such restrictive covenants are enforceable by the new employer.

* - Avis Southern Africa (Pty) Limited and Others v Porteous and Another (2023/0817898) [2023] ZAGPJHC 1160 (16 October 2023).


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