Automotive Tooling Systems (Pty) Ltd v Wilkens & others (2007) 28 ILJ 145 (SCA)

1. There mere fact that a contract is unsuccessfully designed to escape the provisions of the law does not in itself render it unenforceable. It is unenforceable only if the true nature of the relationship is one that the law forbids.
2. An agreement in restraint of trade is enforceable unless it is unreasonable. It is generally accepted that a restraint will be considered to be unreasonable, and thus contrary to public policy, and therefore unenforceable, if it does not protect some legally recognizable interest of the employer but merely seeks to exclude or eliminate compensation.
3. Where the know-how for which the employer seeks protection is nothing other than skills acquired by employees in the course of developing their trade and do not belong to the employer, they do not constitute a proprietary interest vesting in the employer. These skills accrue to the employees as part of their general stock of skill and knowledge which they may not be prevented from exploiting. As such the employer has no proprietary interest that might legitimately be protected. A restraint in these circumstances is inimical to public policy and unenforceable.

After some time in the company’s employment, two employees (skilled toolmakers) entered into ‘independent contractor’ agreements in terms of which their status was changed from employee to independent contractor with no material change to the work they performed. These agreements contained ‘restraint of trade’ and confidentiality clauses. The employees resigned and took up employment elsewhere. The company viewed this as a breach of the restraint clause. The High Court held the service agreements to be unenforceable because they had been concluded “in fraudem legis” - with the intention of circumventing the provisions of the LRA by avoiding the employment relationship.

On appeal to the Supreme Court of Appeals, it was held that the mere fact that a contract is unsuccessfully designed to escape the provisions of the law does not mean that it is unenforceable. It is unenforceable only if the true nature of the relationship is one that the law forbids; in this case the law does not forbid the contracts of employment.

With regard to the restraint of trade clause, the court asked if the company had a proprietary interest worthy of protection. An agreement in restraint of trade in enforceable unless it is unreasonable, which it is if it is simply designed to exclude or eliminate competition. The court found that the know-how for which the company sought protection was nothing other than the specialized skills in manufacturing machines. These skills had been acquired by the employees in the course of developing their trade and did not belong to the company. They belonged to the employees as general stock of skill and knowledge which they could not be prevented from exploiting. The restraint of trade was therefore against public policy and therefore unenforceable.

Extract from the judgment:

[At para 6]   The court below held the service agreements unenforceable in their entirety because they had been concluded in fraudem legis, to circumvent the provisions of the Labour Relations Act 66 of 1995 (in particular tjose relating to collective bargaining.) The grounds for that conclusion were that they purported to create relationships of independent contractors between the appellant and each of the first and second respondents whereas the substance of the relationship was one of employment. This does not appear to me to be a sound conclusion. There mere fact that a contract is unsuccessfully designed to escape the provisions of the law does not in itself render it unenforceable. It is unenforceable only if the true nature of the relationship is one that the law forbids. Accepting for present purposes that the service agreements were, in truth, contracts of employment, the law does not forbid them, and the restraints are not forbidden in themselves.

[8]   At issue in this case …is whether the appellant does have a proprietary interest worthy of protection. An agreement in restraint of trade is enforceable unless it is unreasonable. It is generally accepted that a restraint will be considered to be unreasonable, and thus contrary to public policy, and therefore unenforceable, if it does not protect some legally recognizable interest of the employer but merely seeks to exclude or eliminate compensation…

[9]   Thus the mere fact that the first and second respondents have taken up employment with AMS Manufacturing, assuming that it is in competition with the appellant, does not in itself entitle the appellant to any relief if all they will be doing is applying their skills and knowledge acquired whilst in the employ of the appellant. It is only if the restriction on their activities serves to protect  proprietary interest relied on by the appellant that they would be in breach of their contractual obligations…The crux of this matter therefore is whether the appellant has a proprietary interest in the ‘know-how’ that was acquired by the employees. This is a question of fact…

[20]   In my view, the facts establish that the know-how for which the appellant seeks protection is nothing other than skills in manufacturing machines albeit that they are specialized skills. These skills have been acquired by the first and second respondents in the course of developing their trade and do not belong to the employer – they do not constitute a proprietary interest vesting in the employer – but accrue to the first and second respondents as part of their general stock of skill and knowledge which they may not be prevented from exploiting. As such the appellant has no proprietary interest that might legitimately be protected. The restraint is therefore inimical to public policy and unenforceable.