South Africa: Anything You Can Do I Can Do Better! Recent Judgments Where A Former Employee Starts A Business In Competition With The Employer

Last Updated: 25 February 2014
Article by Regina Milo

Most Read Contributor in South Africa, September 2016

In recent times, our Courts have increasingly been approached to provide recourse to employers to protect their proprietary interests where a former employee leaves and starts a business in competition with the employer. Where 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 dealing with the enforcement of restraint of trade agreements make for interesting reading in this regard. They are considered below and the legal position where no restraint agreement has been concluded is also discussed.

Restraints of trade agreements which limit competition: recent developments

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

Mr and Mrs Duraan were subject to restraint of trade obligations, in terms of their respective contracts of employment with Freepak. The terms of the restraint of trade inter alia provided that for a period of five years after the termination of employment for whatever reason, he/she could not be involved in any other business which sells similar products as 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 which sells packaging material in competition with Freepak, their previous employer. Freepak, accordingly, 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 also 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 cell phone numbers of the clients and that their relationship with clients was 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 only operate in the Northern Cape as that was the area in which the Duraans had operated.

The Duraans sought to avoid the restraint by arguing inter alia that the restraint was invalid and enforceable because it was overbroad and stood to exclude them from participation in the only economic activity in which they had any experience. It was 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 did not have a proprietary interest worthy of protection as they were not privy to any confidential information of Freepak because all decisions were taken 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 upon the case of Automotive Tooling Systems (Pty) Ltd v Wilkens 2007 (2) SA 271 (C), the Duraans argued that they did not have any 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 utilising.

The Court restated the test as set out in Basson v Chilwan and Others 1993 (3) (SA) 742 (A)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 upon the principle contained in the judgment of Den Braven SA (Pty) Ltd v Pillay and Another 2008 (6) SA 229 (D). 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 who 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 a customer connection 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 has 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.

The Court therefore enforced the restraint against Mr and Mrs Duraan, 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 sells 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 Rabkin-Naicker J, dated 31 October 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 twenty years' experience in the valve sales industry, had terminated her employment as a Sales Manager to start her own business selling valves.

Does an employer enjoy any recourse where there is no signed restraint of trade agreement in place?

Recent cases suggests that, even where an employer does not have a signed restraint of trade agreement in place, it would 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 upon an employee.

In this specific case, two employees, who had been the co-proprietors of a business which was then acquired by another company, resigned from their employment with the business to set up a company which would compete with the business that they had sold. In brief, 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 or not restraint agreements had been concluded, it was common cause that the acquiring company was not in possession of any signed restraint agreements. The parties however complied with other obligations arising from the acquisition of the company, 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 written agreement has not been signed by the employee 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 (SCA) reiterated the principle enunciated in the earlier Appellate Division (AD) case of A Becker & Co (Pty) Ltd v Becker and others 1981 (3) (SA) 406 (A), to the effect that even where the restraint period has since expired, the seller of a business would still not be permitted to solicit business from its former customers. In G Van der Watt & another v Jonker and others 2012 (JOL) 28266 (SCA), the SCA considered an appeal against a judgment of the High Court enforcing a restraint of trade agreement against Mr and Mrs Van der Watt ("the Van der Watts").

The facts of this case are as follows: Mr Jonker 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 upon 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 a period of ten 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 actively solicited Agri group's 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 a Agri Group customer. The Court stated that there was no difference between the type of general canvassing conducted by the Van der Watts to the Agri Group customers and the type of solicitation considered by the AD in Becker, and it was not necessary to prove that the Van der Watts had made direct overtures to Agri Group's 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 whilst part of the Agri Group. The Court referred to the following extract from the Becker case:

"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 SCA thus upheld the findings of the High Court and enforced the restraint upon the Van der Watts for a period of ten 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 which he previously sold. Therefore, where a former proprietor who remains in the business as an employee, terminates his employment to start a business in competition with his former employer, even in the absence of a valid restraint agreement, the employee (i.e. the seller) may be prohibited from soliciting his old customers.

The best form of protection 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 and/or have customer connections, and seek to ensure that appropriate restraint of trade agreements are concluded with those employees. In the absence of a signed restraint of trade agreement, however, employers are not necessarily without recourse as our 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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