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[2014] ZAGPJHC 206
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Dovelight Trading 17 (Pty) Ltd T/A Auto Mate Service Centre v Scyton Autocc Formely Auto Mate Fourways and Others (2013/39121) [2014] ZAGPJHC 206 (21 May 2014)
IN THE HIGH COURT OF SOUTH AFRICA
GAUTENG LOCAL
DIVISION, JOHANNESBURG
CASE
NO. 2013/39121
DATE:
21 MAY 2014
In the application of:-
DOVELIGHT TRADING 17 (PTY) LTD t/a
AUTO-MATE SERVICE
CENTRE
..................................................................
Applicant
And
SCYTON AUTOCC formerly AUTO-MATE
FOURWAYS
......................
First
Respondent
RODNEY RAI
GOVENDER
.............................................................
Second
Respondent
RAKHEE DHARRAMRAJH
BALRAM
................................................
Third
Respondent
AUTO CREW
FOURWAYS
...............................................................
Fourth
Respondent
JUDGMENT
NICHOLLS, J
[1]
The applicant seeks to enforce a restraint
of trade clause contained in a franchise agreement. It claims
interdictory relief against
the first and second respondent
restraining them from being engaged in any business which directly or
indirectly competes with,
or is similar to, the business that was
carried on by first respondent, the franchisee, within a 15 km radius
of the specific premises.
The interdict is sought from 24 July
2013 to 24 July 2014.
[2]
The applicant is the successor in title to
Auto-Mate Franchising (Pty) Ltd (“Auto-Mate”) which
entered into a written
franchise agreement with first respondent as
franchisee and the second respondent as principal member of the first
respondent.
The first respondent has been placed in liquidation
and consequently no relief is sought against the first respondent.
The third
respondent is the wife of the second respondent. The
third respondent is the director of the fourth respondent, a company
which now effectively carries on an identical business to that which
the first respondent conducted in terms of the franchise agreement,
at the same premises. Relief is sought only against the second
respondent.
[3]
The
first respondent, represented by the second respondent, concluded a
franchise agreement with Auto-Mate on 23 July 2008 for a
period of 5
years. The franchise agreement entitled the franchisor to cede
and assign its rights and obligations in terms
of the agreement.
[1]
On 10 October 2012, the applicant and Auto-mate concluded a written
assignment agreement in terms of which Auto-Mate’s right,
title, interest and obligations in respect of the franchise agreement
were ceded to the applicant. The applicant is as a result
the
successor in title to Auto-Mate.
[4]
The restraint of trade contended for by the
applicant is found in clause 35 of the franchise agreement and
provides:
“
35.
RESTRAINT OF TRADE
35.1
As consideration for the granting of the franchise by the franchisor,
the franchisee or the principal, as the case may be,
undertakes that
during the term of this agreement and for a period of 1 (one) year
from the date of termination of this agreement
for whatever reasons,
he will not:
35.1.1
in any capacity whatsoever, be directly or indirectly engaged,
interested or concerned in any business which directly or
indirectly
competes with or which is similar or related to the business;
35.1.2 …
35.1.3
…
35.2
The restraints above shall apply with in a 15 km radius (as the crow
flies) from the premises.
35.3
Except for the sole purpose of conducting its business in accordance
with the provisions of this agreement, at any time, whether
before or
after the termination of this agreement, the franchisee and the
principal shall not disclose or use, or permit the disclosure
or use,
whether directly or indirectly, for the franchisee’s own
benefit or for the benefit of any third party, any information
or
knowledge concerning the business system which may be communicated to
the franchisee and/or the principal or which the franchisee
and/or
the principal may acquire in carrying out their obligations under
this agreement.
35.4
The franchisee and the principal record and agree that the
undertakings given by them in terms of this clause are fair and
reasonable as regards their nature, extent and period and necessary
to protect the franchisor’s interest.
35.5
The restraints set out in paragraphs 35.1 to 35.3 shall be construed
as being severable and divisible and in the event that
any of them is
or becomes invalid and/or unenforceable, it shall not affect the rest
of this agreement, which shall remain in full
force and effect.”
[5]
Clause 2.1 of the franchise agreement
provides that the agreement is subject to a lease agreement being
concluded by the first respondent
and the landlord over the premises.
Further, the lease should give Auto-Mate a right of first refusal
over the leased premises.
Although the applicant positively
asserted that this suspensive condition had been fulfilled, it is now
common cause that the lease
agreement contained no right of first
refusal in favour of Auto-Mate. This means that Auto-mate or its
successor in title was unable
to exercise this right at the expiry of
the 5 year lease.
[6] On 25 June 2013, approximately a month before the 5 year period
of the agreement came to an end, the applicant addressed a
letter to
the first respondent making various demands for financial records in
terms of the franchise agreement, and informing
the first respondent
that upon termination of the franchise agreement, the lease agreement
should be ceded to it.
[7]
In response thereto the first respondent’s attorneys addressed
a letter to the applicant dated 5 July 2013 stating that
the
franchise agreement had failed for want of fulfilment of the
suspensive condition contained in clause 2.1. It was
accordingly
denied that there was any valid written franchise
agreement in existence. Instead it was contended that although a
“franchise
relationship” had been established, this
relationship was not governed by the terms of the failed written
franchise agreement,
but had its own terms and conditions. This
was the first time that the applicant was made aware of the
non-fulfilment of
the suspensive condition. The letter went on to
cancel the “franchise relationship” with effect from
24H00, 31 July
2013.
[8]
The second respondent now runs a similar business from the same
premises, being the fourth respondent. The respondents
contend that
the franchise agreement is null and void in that the suspensive
condition was not fulfilled. Therefore the restraint
of trade clause
is unenforceable. This argument fails to take into account Clause 2.2
of the franchise agreement which provides:
“
2.2 Should the suspensive conditions
not be fulfilled within a reasonable period of time then:
2.2.1
the confidentiality undertakings and restraints set out herein shall
nonetheless apply by virtue of the disclosures which
have been made
to the franchisee both before and after the commencement date
regarding, inter alia, the franchisor’s trade
secrets and the
business system;
2.2.2
this agreement shall terminate and cease to be of any further force
and effect and the parties shall be restored to their
status quo ante
and any of equipment and/or product and all documentation delivered
by either party to the other party shall be
returned
[9]
This clause caters for the eventuality where, as in this matter, a
suspensive condition is not fulfilled but the franchisee
has been
privy to trade secrets and confidential information. This is
precisely the situation envisaged by clause 2.2.1.
Here the
suspensive condition has been partially fulfilled in that the first
respondent entered into the lease agreement over the
premises but
failed to include a right of first refusal in favour of Auto-Mate. In
such instances it is expressly stated in clause
2.2.1 that the
restraints and confidentiality undertakings remain intact,
irrespective of whether the suspensive agreement is fulfilled
or not.
[10]
Clause 2.2.2 restores the status quo ante should the suspensive
condition not be fulfilled in a reasonable time. On the second
respondent’s own version the franchise agreement continued,
albeit in terms of a tacit agreement whose terms were essentially
those of the written franchise agreement. It does not assist the
respondent to argue that the agreement was terminated in terms
of
clause 2.2.2 once there was no right of first refusal contained in
the lease agreement. In this instance the fact that the suspensive
condition had not been fulfilled was within the exclusive knowledge
of the first and second respondents until the applicant was
alerted
thereto by the respondents’ attorneys in July 2013. Counsel for
the respondents was constrained to concede that the
terms of the oral
agreement contended for were the same as those of the written
franchise agreement, including the restraint clause.
There can be no
doubt that notwithstanding non-fulfilment of the suspensive
conditions, the restraints and confidentiality undertakings
nonetheless apply.
[11]
Insofar as it is argued by the second respondent that should the
restraints survive, the restraint period commenced within
a
reasonable period after the non-fulfilment of the suspensive
condition, namely in November 2008, and has accordingly expired,
this
proposition has no merit . Such an interpretation would lead to the
untenable situation where the first respondent while conducting
its
business as a franchisee of the applicant for almost five years using
the applicant’s goodwill, signage and intellectual
property,
was simultaneously serving its period of restraint of trade. To
suggest that the restraint operated during this period
would make a
mockery of the restraint. Such an interpretation of clause 2.2 leads
to a patent absurdity which could never have
been within the
contemplation of the parties.
[11]
Equally problematic is the submission that the restraint of
trade provisions are enforceable only against the first respondent
as
the agreement provides for the first respondent or the second
respondent to be bound by the restraint, as opposed to the
first and second respondents. The wording of clause 35.1 sets out
that the undertaking is by the “
franchisee or the principal,
as the case may be”.
The second respondent is the principal
of the franchisee, the first respondent, and therefore the restraint
is applicable to him.
[12]
The respondent’s further submission is that the assignment only
pertains to the rights and obligations between Auto-Mate
and the
first respondent and therefore there is no cause of action against
the second respondent. It is contended that on a clear
and
unmistakeable reading of the assignment agreement, Auto-Mate sold,
ceded and transferred, ceded and assigned to the applicant
as a
going concern, all of its rights, interest and obligations in and to
the franchise agreement with the first respondent
[2]
(as opposed to first
and
the second respondent). Therefore, so the argument goes, the
applicant acquired no rights or claims against the second respondent
in terms of the assignment agreement and has no cause of action
against the second respondent.
[13]
The assignment agreement transfers and
cedes all rights and interest and obligation in the “
merx”
which is defined as the franchise agreements and the intellectual
property. It is common cause that this includes the franchise
agreement between Auto-Mate and the first respondent. The assignment
agreement does not distinguish between a written franchise
agreement
or the tacit agreement contended for by the second respondent. The
restraint of trade clause binds the second respondent
as principal of
the first respondent. The applicant has a cause of action against the
second respondent, either in terms of the
written agreement or the
tacit agreement.
[14]
The further submission of the second
respondent is that based on a proper interpretation of the franchise
agreement the restraint
of trade clause was intended to operate only
in the event that the franchise business continued to operate from
the premises after
the termination of the franchise agreement. As it
is common cause that the franchise business no longer operates from
the premises,
and a new business is operated by the second respondent
from the same premises, this business cannot be regarded as a
“
business which directly or
indirectly competes with, or is similar or related to, the business”.
The rationale behind the restraint was
to protect the business from competition from the first and second
respondent but if the
business no longer operates the need for
protection falls away.
[15]
What this argument fails to
consider is that the restraint of trade is intended to protect the
intellectual property of the
applicant as franchisor. It does not
operate to protect the goodwill of the franchisee. Whilst the
agreement was in force the applicant
received license fees from the
first and second respondent for the use of its name and intellectual
property. What is being protected
in terms of clause 35 is not the
goodwill of the franchisee’s business but the goodwill of
the applicant as franchisor.
It is irrelevant whether the new
business operates from the original premises or next door.
[16]
Finally it is argued that there is a
material dispute of fact which cannot be resolved on the papers and
for this reason alone the
application should be dismissed. It is
common cause that: there was a franchise agreement between Auto-Mate
and the first respondent
for a period of five years; the agreement,
either written or tacit, was assigned to the applicant in terms
of the assignment
agreement; the suspensive condition was partially
fulfilled; the second respondent operates a similar, if not
identical,
business from the same premises. The real
question is whether on a proper interpretation of the relevant
clauses of the franchise
agreement, the second respondent was
entitled to do so, or whether his conduct by doing so fell foul of
the restraint of
trade clauses. There is no dispute of fact that
cannot be resolved on the papers alone. Most of the facts are common
cause and
what is in dispute is the interpretation of the franchise
agreement.
[17]
On
a proper interpretation of the franchise agreement, read in the light
of its context and purpose,
[3]
it is clear that the conduct of the first and second respondents
constituted a breach of the restraint of trade clause. For the
reasons set out above the applicant should succeed in its
application. The applicant seeks attorney client costs including the
costs of two counsel. The punitive costs are provided for in clause
39.4 of the franchise agreement and I shall therefore grant
this
prayer. However, I am of the view that this matter does not warrant
the cost of two counsel.
In the result I make the
following order:
1.
The second respondent is interdicted and
restrained from being engaged, interested or concerned with any
business which directly
or indirectly competes with, or is similar
to, the business that was carried on by the first respondent, within
a radius of 15km
from the premises situate at shop No LG1, The Buzz
Shopping Centre, Cnr Witkoppen and Nerine Road, Fourways,
Johannesburg, with
effect from 24 July 2013 until 24 July 2014.
2.
The second respondent is to pay the costs
of this application on an attorney client scale.
C. H. NICHOLLS
JUDGE OF THE HIGH COURT
GAUTENG LOCAL DIVISION
JOHANNESBURG
Appearances
Counsel for the
applicant: Adv. J. Daniels
Instructing
Attorneys : Cliffe Dekker Hofmeyr Inc.
Counsel
for the 2
nd
respondent : Adv. E. A. Limberis SC
Instructing Attorneys : Goldman Judin Attorneys
Date
of hearing : 8 MAY 2014
Date of judgement : 21
MAY 2014
[1]
Franchise agreement clause 48
[2]
Assignment agreement, clause 3
[3]
Bothma-Batho
Transport(Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk
2014 (2) SA 494
(SCA)