The Labour Appeal Court was recently confronted with the question whether a restraint of trade agreement is enforceable in circumstances where the employer and employee entered into a settlement agreement which was made "in full and final settlement" of all matters between them.[1]

The employee referred a dispute to the CCMA for unfair dismissal. At the CCMA, the parties (being the employer and former employee) resolved the dispute between them and concluded a written settlement agreement.

The terms of the settlement agreement were recorded in two documents. The first document was the standard CCMA agreement, which contained the following clause:

"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..."

The second document was prepared by the parties which was attached to the standard CCMA agreement. The relevant parts of the second document read as follows:

"The parties have agreed to the full and final settlement of all matters between them and wish to record the terms of the settlement of this agreement." and

"This agreement is in 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." (Emphasis added)

During the period of his employment, the employee had given certain restraint undertakings to the employer. Subsequent to the conclusion of the settlement agreement, the employee breached the terms of the restraint undertakings. As a consequence of the breach of the restraint undertakings, the employer sought to enforce the restraint undertakings against the employee.

The employee challenged the enforceability of the restraint of trade agreement on the basis that the settlement agreement concluded between the parties was made in full and final settlement of all and any claims which the parties may have against each other.

It was common cause that the employee acted in breach of the restraint undertakings. The question before the Labour Appeal Court was whether the terms of the settlement agreement disposed of the restraint of trade.

The employee contended that reference to "full and final settlement to all matters between them" and the further reference in the second document to "full and final settlement of all and any claims which the parties may have against each other", included all claims between the parties arising out of the restraint of trade agreement, which prohibited the employer from enforcing any rights which it might have had in terms of the restraint of trade agreement.

Conversely, the employer contended that it had not waived its rights in terms of the restraint of trade agreement and that the settlement agreement meant only to cover matters that were referred to the CCMA, which manifestly did not, include disputes concerning the restraint of trade agreement.

After careful analysis and interpretation of the wording of the terms of the settlement agreement (having regard to both documents), the court held that –

• the wording in the second document went beyond a mere repetition of the words used in the standard CCMA form. The court held that this clause was not relevant to the specific issues which have been referred to the CCMA;
• the task of judicial interpretation of contract is not to divine a meaning of a contract which the court considers to be the contract that the parties might or ought to have entered into which may be ethically preferably;
• the second document (drafted by the parties) was specifically constructed by the parties who chose the express words which they considered would represent the purpose they had in mind in reaching a settlement agreement;
• the employer was aware that the employee may not adhere to the restraint of trade agreement and that there was a possibility that the employer's proprietary interest would be infringed; and
• if the employer was concerned about the protection afforded to it under the restraint of trade agreement, it should have carved out an exclusion so that the restraint of trade agreement continued to be operative despite the conclusion of the settlement agreement.

Based on the above reasoning, the court upheld the employee's appeal, which in essence meant that the employer's right to enforce the restraint undertakings had been disposed of and that the restraint of trade agreement was in these circumstances, unenforceable.

This case illustrates the importance to be extremely careful when entering into settlement agreements that are "in full and final settlement" of a dispute. Employers should seek to retain rights (such as restraints of trade, confidentially and intellectual property agreements) to ensure that a former employee does not claim that the settlement agreement disposed of those rights. It is advisable that any settlement agreement should clearly state what dispute is resolved and which rights or obligations are not affected by the settlement agreement.