When you buy a business, much of what you pay for is goodwill: the customers, supplier relationships, reputation and know-how that keep revenue coming in. That value can disappear quickly if the seller opens a competing business down the road and calls their old clients.
A restraint of trade is the main tool buyers use to protect that investment. For sellers, the restraint is often one of the most important terms they will sign, because it can limit what they do for years after the sale. Getting the wording right matters on both sides of the deal.
This article explains how South African courts approach restraints given by sellers, how they differ from employment restraints, where competition law comes in, and what buyers and sellers should agree.
The starting point: restraints are generally enforceable
Since the Appellate Division’s decision in Magna Alloys and Research (SA) (Pty) Ltd v Ellis (1984), a restraint of trade in South Africa is valid and enforceable unless the party bound by it shows that enforcing it would be unreasonable and therefore against public policy. The burden is on the person trying to escape the restraint.
In Basson v Chilwan (1993), the court framed the reasonableness enquiry around a few questions:
- Does the party relying on the restraint have an interest that deserves protection?
- Is that interest being threatened by the other party’s conduct?
- If so, does that interest outweigh the restrained party’s interest in being free to trade and work?
- Is there some other public policy reason why the restraint should or should not be enforced?
Courts can also enforce a restraint only in part, for example by reducing its period or area, rather than striking it down completely.
Why sale-of-business restraints are treated differently
Restraints in employment contracts are often attacked on the basis that the employee had little bargaining power and needs to earn a living. A seller of a business is usually in a different position. The seller has negotiated at arm’s length, often with advisers, and has been paid for the goodwill, which may include a portion of the price that reflects the restraint itself.
For these reasons, courts tend to be more willing to enforce restraints given by sellers, and for longer periods. In Van der Watt v Jonker (2011), the Supreme Court of Appeal described a restraint agreed when business partners separated their interests as a commercial restraint rather than an employer-employee one, and held that a ten-year restraint was not unreasonable in that context. Reasonableness still depends on the facts, so a long restraint will not be enforced simply because it appears in a sale agreement.
The implied restraint on canvassing old customers
Even where the agreement contains no express restraint, the law protects a buyer who has paid for goodwill. Under a principle confirmed in Becker & Co (Pty) Ltd v Becker (1981) and applied in Grainco (Pty) Ltd v Van der Merwe (2014), a seller who sells a business with its goodwill may not canvass the customers the business had at the time of the sale.
This implied term has limits. It binds the seller, not necessarily the seller’s shareholders or new entities. It prevents canvassing, not dealing with customers who approach the seller unprompted. It does not cover customers acquired after the sale. Because of these gaps, buyers should not rely on the implied term alone.
Who should be bound
A common drafting mistake is to bind only the selling entity. If a company sells its business, the people who actually hold the relationships are usually its shareholders, directors and key managers. The restraint should bind the seller and, where appropriate, each of its principals personally, as well as entities they control. If key employees are transferring with the business, their own employment restraints and confidentiality undertakings should be reviewed too.
Competition law: keep the restraint ancillary
Restraints are not only a contract law issue. Section 4(1)(b)(ii) of the Competition Act 89 of 1998 prohibits agreements between competitors that divide markets by allocating customers, suppliers, territories or types of goods or services. A restraint that goes beyond what is needed to protect the goodwill being sold can start to look like market division between competitors.
Commentators have noted growing scrutiny of restrictive clauses in commercial agreements in 2026. In practice, a restraint is easier to defend where it is genuinely tied to the sale, limited to the business actually sold, and no wider in period, territory or product scope than necessary. Where the transaction is a notifiable merger, the competition authorities may also look at the restraint as part of their review.
What a well-drafted restraint should cover
- Restricted activities: a clear description of the competing business, linked to what the business actually does, rather than a vague reference to “any similar business”.
- Territory: an area that reflects where the business trades and where its customers are.
- Period: a duration that matches how long it will take the buyer to secure the goodwill, often linked to customer contract cycles or an earn-out period.
- Non-solicitation: express clauses on soliciting customers, suppliers and employees, which are often easier to enforce than a broad non-compete.
- Confidentiality: protection of customer lists, pricing and know-how, which should survive the restraint period.
- Separate restraints: a “cascading” or severable structure, so that a court can enforce a narrower version if the widest one is found unreasonable.
- Consideration: an acknowledgement that the purchase price includes payment for the restraint, which supports enforceability. The tax treatment of any amount allocated to the restraint should be checked with your tax adviser.
Practical steps for buyers and sellers
- Identify the goodwill. Buyers should know which customers, regions and products drive value before negotiating the restraint.
- Bind the right people. Include individual shareholders and directors who hold the relationships, and sign them up as parties.
- Be specific and proportionate. Narrow, well-reasoned restraints are more likely to be enforced and less likely to raise competition concerns.
- Sellers: plan your next move. If you intend to stay in the industry, negotiate carve-outs for activities, regions or existing interests before signing.
- Align the documents. Make sure the sale agreement, shareholders’ agreement, employment contracts and any consulting arrangements with the seller are consistent.
- Act quickly on a breach. If the seller competes or canvasses, gather evidence and seek legal advice promptly. Delay can weaken an application for an urgent interdict.
How O’Reilly Law can help
We act for buyers and sellers of businesses, including on share and asset sales, management buy-outs and earn-out structures. We draft and negotiate restraints, non-solicitation and confidentiality clauses that fit the deal, advise on competition law risks, and help clients enforce or resist restraints in court when disputes arise.
Contact us to discuss the restraint in your sale or purchase.
Related reading: Share sale or asset sale? Choosing how to buy or sell a business · Restraint of trade: when can an employer stop an employee joining a competitor?
This article is general information and not legal advice. Correct as at November 2026.