Introduction
Restraints of trade agreements that limit competition

Recourse where there is no signed restraint of trade agreement in place
Comment


Introduction

The South African courts have increasingly been asked to provide recourse to employers to protect their proprietary interests where a former employee leaves and starts a business in competition with the employer. If the employer has appropriate restraint of trade agreements in place, the employer could seek to enforce those agreements and obtain an interdict restraining the employee from continuing to breach the restraint. However, in the absence of a restraint agreement, would an employer have any recourse at all?

Two recent judgments considered the enforcement of restraint of trade agreements and the legal position of parties where no restraint agreement has been concluded.

Restraints of trade agreements that limit competition

In Freepak BK v Duraan (an as yet unreported judgment of the Northern Cape High Court, delivered on October 18 2013), Mr and Mrs Duraan managed the business of Freepak in Kimberley, which sold packaging material to wholesale and retail customers throughout the Northern Cape, Free State and Gauteng provinces. The Duraans were salespeople and "the face of the business" for 16 and 15 years, respectively. It was common cause that they were both instrumental in building Freepak from a struggling concern into a huge enterprise.

The Duraans were subject to restraint of trade obligations, in terms of their respective contracts of employment with Freepak. The terms of the restraint of trade provided, among other things, that for a period of five years after the termination of employment for whatever reason, neither Duraan could be involved in any other business that sold similar products to Freepak.

During February 2013, Mr Duraan was subjected to a disciplinary enquiry and summarily dismissed. Mrs Duraan thereafter tendered her immediate resignation. The Duraans then set out to open a business that sold packaging material in competition with Freepak, their previous employer. Accordingly, Freepak brought an application to enforce their respective restraint of trade obligations.

Freepak argued that the Duraans had been privy to confidential information of the business and, consequently, were aware of the pricing structure of its products, profit margins and certain discounts which could be negotiated with clients. Furthermore, Freepak sought the protection of its customer connections on the basis that the Duraans:

  • had virtually exclusive and personal contact with its clients in the Northern Cape;
  • were in possession of the cellphone numbers of the clients; and
  • had client relationships such that clients would call one of the Duraans directly on a regular basis to place orders, to discuss their business needs and, if required, to negotiate pricing.

Even though the terms of the restraint were silent in respect of a specific geographical area within which the restraint would operate, Freepak sought an order that the restraint would operate only in the Northern Cape, as that was the area in which the Duraans had operated.

The Duraans sought to avoid the restraint by arguing, among other things, that the restraint was invalid and unenforceable because it was overbroad and stood to exclude them from participation in the only economic activity in which they had any experience. They also alleged that it would be unreasonable to enforce the restraint in circumstances where Freepak had dismissed Mr Duraan, which led to the resignation of Mrs Duraan. The Duraans also sought to challenge the restraint on the basis that Freepak had no proprietary interest worthy of protection, as they were not privy to any of Freekpak's confidential information because all decisions were made at the head office in Bloemfontein. The Duraans did not dispute that they had client contact details, but argued that this was not indicative of a customer connection, and that a distinction should be drawn between possession of the clients' lists and customer connections. Relying on Automotive Tooling Systems (Pty) Ltd v Wilkens(1), the Duraans argued that they had no training and largely acquired knowledge of the business and experience as a result of their own drive, personality and initiative, which they contended constituted skills, general knowledge and experience which they could not be restrained from using.

The court restated the test as set out in Basson v Chilwan(2) in determining the reasonableness (or otherwise) of a restraint. It held that Freepak did not make out a compelling case that the Duraans had been privy to its confidential information. However, turning to the possibility of a protectable proprietary interest in the form of customer connections, the court relied on the principle set out in Den Braven SA (Pty) Ltd v Pillay(3). This principle provides that once it has been concluded that an applicant has trade connections through customer contact which can be exploited by a former employee if employed by a competitor that is trading in a range of similar products there is a risk of harm to the applicant. The court found that the Duraans did indeed have customer connections with Freepak's clients. The court accordingly found that the risk of harm to Freepak's customer connections could not be discounted in circumstances where the Duraans had been the 'face' of Freepak's Kimberley branch for more than a decade and had almost exclusive dealings with its clients throughout the Northern Cape.

The court dismissed out of hand the contention that it would be unreasonable to enforce the restraint in circumstances where Mr Duraan had been dismissed by Freepak, and confirmed that it was clear from the terms of the restraint that it would be triggered after all forms of termination of employment.

Therefore, the court enforced the restraint against the Duraans, restraining each of them for a period of two years from the date of termination of their employment from being involved in any other business which sold similar products as Freepak in the Northern Cape.

In the same month, the Labour Court in Omnirapid Mining and Industrial Supplies (Pty) Ltd v Engelbrecht (an unreported decision by Justice Rabkin-Naicker, dated October 31 2013) also ordered a former employee not to compete with the business of her former employer for a period of one year by interdicting the employee from advertising, marketing or contacting certain identified customers. In this instance, the employee, who had 20 years' experience in the valve sales industry, had terminated her employment as a sales manager to start her own business selling valves.

Recourse where there is no signed restraint of trade agreement in place

Recent cases suggest that even where an employer does not have a signed restraint of trade agreement in place, it will not necessarily be left without a remedy.

First, a recent private arbitration award has confirmed that the absence of a signed restraint agreement does not mean that it is the end of the road for an employer. In certain circumstances, the tacit acceptance of a written restraint of trade agreement may be established and the restraint accordingly enforced on an employee.

In this specific case, two employees, who had been the co-proprietors of a business that was acquired by another company, resigned from their employment to set up a company which would compete with the business that they had sold. The acquisition agreement concluded between the employees and the acquiring company was subject to the fulfilment of a number of conditions precedent by a particular date, including the conclusion of restraint agreements. Although the parties disputed whether restraint agreements had been concluded, it was common cause that the acquiring company was not in possession of any signed restraint agreements. However, the parties complied with other obligations arising from the acquisition, such as transferring of shares, and the employees were each paid the agreed purchase consideration, which consideration they accepted.

The arbitrator considered the conduct of the parties and the specific circumstances of the case and concluded that the employees had tacitly accepted the restraint agreements. The arbitrator accordingly granted an interim order interdicting the employees for a period of three years from conducting themselves contrary to the unsigned restraint of trade agreements.

Whether an unsigned restraint of trade agreement will be binding will always depend on the particular circumstances of the case, but the mere fact that the employee has not signed the written agreement does not necessarily mean that the agreement is not binding. The conduct of the parties during the negotiation of the agreement, surrounding circumstances and the conduct of employees in relation to the implementation of the unsigned agreement could lead to a conclusion that the agreement is binding.

In another case, the Supreme Court of Appeal reiterated the principle enunciated in the earlier Appellate Division decision in A Becker & Co (Pty) Ltd v Becker(4), to the effect that even where the restraint period has since expired, the seller of a business will still not be permitted to solicit business from its former customers. In G Van der Watt v Jonker(5) the Supreme Court of Appeal considered an appeal against a judgment of the High Court enforcing a restraint of trade agreement against Mr and Mrs Van der Watt.

In this case, Mr Jonker had started various petroleum companies, forming part of what was referred to as the 'Agri Group'. Mr Van der Watt, a family friend, started working for Jonker in some of the businesses. Van der Watt was ultimately offered shares in two of the Agri Group companies and started another company in the Agri Group, which he co-owned with Jonker. The parties thereafter acquiesced to a separation of the group companies. A written agreement was concluded recording the terms on which the parties agreed to separate the businesses, each as a going concern. In terms of this agreement, and in order to effect a fair and equitable division, Jonker would pay the Van der Watts R2 million. Both parties provided reciprocal restraint of trade undertakings in favour of the other party enduring for 10 years.

After the Van der Watts started a petroleum business, Dynamic Fuels, within the prohibited areas referred to in the restraint, Jonker sought interdictory relief in terms of the restraint of trade agreement. The court found that the uncontroverted facts demonstrated that the Van der Watts had actively solicited Agri Group customers by marketing their petroleum products at the Koppies Club, which a number of them frequented, at a golf day, and had also made at least one direct approach to an Agri Group customer. The court stated that there was no difference between the type of general canvassing conducted by the Van der Watts to Agri Group customers and the type of solicitation considered by the Appellate Division in Becker. Therefore, it was not necessary to prove that the Van der Watts had made direct overtures to Agri Group customers.

The court held that the matter fell squarely within what it referred to as the 'Becker principles', in that the Van der Watts sought to take back that which they had sold – namely the old customers with whom they did business while part of the Agri Group. The court referred to the following extract from Becker:

"When a business is sold with its goodwill, but without any express promise not to compete, the seller is privileged to open a new business in competition with the buyer; but he is under obligation not to solicit his former customers or to conduct his business under such a name and in such a manner as to deprive the buyer of the 'goodwill' that he paid for."

The Supreme Court of Appeal thus upheld the findings of the High Court and enforced the restraint on the Van der Watts for a period of 10 years.

This judgment is not only authority for the enforcement of a restraint of trade agreement. It also reiterates the principle that, even at the end of the restraint, the seller of a business is still prohibited from soliciting the goodwill that it previously sold. Therefore, where a former proprietor who remains in the business as an employee terminates his or her employment to start a business in competition with his or her former employer, even in the absence of a valid restraint agreement, the employee (ie, the seller) may be prohibited from soliciting his or her old customers.

Comment

The best way to protect an employer's proprietary interests from exploitation by a former employee remains a restraint of trade agreement. Employers should periodically identify which of its employees are privy to confidential information or have customer connections, and seek to ensure that appropriate restraint of trade agreements are concluded with those employees. However, in the absence of a signed restraint of trade agreement employers are not necessarily without recourse as the courts, in certain instances, have still afforded some protection to employers. Careful legal advice should therefore be taken in those circumstances to establish whether an employer has any right of recourse.

For further information on this topic please contact Regina Milo at ENSafrica by telephone (+27 11 269 7600), fax (+27 11 269 7600) or by email (rmilo@ENSafrica.com).The ENSafrica website can be accessed at www.ENSafrica.com.

Endnotes

(1) 2007 (2) SA 271 (C).

(2) 1993 (3) (SA) 742 (A).

(3) 2008 (6) SA 229 (D).

(4) 1981 (3) (SA) 406 (A).

(5) 2012 (JOL) 28266 (SCA).