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Rogue Business Partners

Can you prevent a business partner from leaving and starting a competing business?

Rogue Business Partners

Restraint of trade agreements are a common defence against unscrupulous employees. Should you put the same measures in place for shareholders? Or is it inherently unlawful for a business partner to abandon your work together and start a competing business? A recent Labour Court ruling provides some insight.

In this particular case, the founders of a marketing agency brought in additional partners to grow their business. Unfortunately, just a few months later, these ambitious plans were blindsided by COVID and the business struggled to keep operating. The relationship between the founders and their partners had also deteriorated, so the founders decided to leave and start a new agency.

Unsurprisingly, the partners were unhappy with this turn of events and approached the Labour Court for an interdict. They argued that the founders were bound by a restraint of trade agreement, but the Labour Court quickly dismissed this claim since the founders had refused to sign the new employment agreements that their partners had drawn up for this very reason.

The partners further argued that, even in the absence of a valid restraint of trade, the founders' decision still amounted to unlawful competition since, as employees, they had a common law duty of good faith not to abuse the company's assets or affairs for their own interests. The partners claimed that the founders had neglected this responsibility by soliciting customers for their new venture.

The Labour Court affirmed that the founders did owe the company a duty of good faith, but only while they were employed there. This responsibility ended when they terminated their employment and started a new agency. In the absence of a restraint of trade agreement, extending someone's duty of good faith beyond the term of their employment would undermine their constitutional right to free trade.

Therefore, the Labour Court dismissed the partners' appeal and the founders were free to continue with their new agency.

The lesson for all entrepreneurs is loud and clear: make sure any business partners are bound by a restraint of trade agreement, otherwise there may be nothing stopping them from abandoning you and using customer connections, trade secrets, and other confidential information to start a competing business.