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[2010] ZAWCHC 563
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ADT Security (Pty) Ltd v Botha and Others (13217/2010) [2010] ZAWCHC 563 (18 November 2010)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE HIGH COURT, CAPE TOWN)
CASE
NO: 13217/2010
In
the matter between:
ADT
SECURITY (PTY) LIMITED
….............................................
Applicant
and
ANTON
JOHAN BOTHA
…....................................................
1
st
Respondent
WILLEM
JACOBUS BOSMAN
….........................................
2
nd
Respondent
MARGER
LAMONT SECURITY CC
…..................................
3
rd
Respondent
JAZZ
SPIRIT 1100
CC
T/A BLUE BAY
GUARDS
AND SECURITY SOLUTIONS
…..........................
4
th
Respondent
JUDGMENT
DELIVERED: 18 NOVEMBER 2010
BINNS-WARD,
J:
[1]
In this matter, in terms of a draft handed in by counsel at the
commencement of his argument, the applicant seeks a final
order:
1.
Interdicting and restraining the first respondent, for a period of
12 months from 1 May 2010, and the second and fourth respondents,
for a period of 36 months from 1 May 2010, from
1.1.
soliciting the business of any of the applicant's customers, whose
names appear on the schedule marked 'List One' on annexure
FA6A to
the applicant's supplementary affidavit deposed to on 27 October
2010;
1.2.
contacting any of the applicant's customers whose names appear on
the schedule marked 'List One' on annexure FA6A to the
applicant's
supplementary affidavit deposed to on 27 October 2010 in order to
solicit business from them away from the applicant;
1.3.
attempting to persuade any of the applicant's customers whose names
appear on the schedule marked 'List One' on annexure
FA6A to the
applicant's supplementary affidavit deposed to on 27 October 2010
from cancelling or attempting to cancel their contractual
relationship with the applicant.
2.
Directing the first, second and fourth respondents to pay the
applicant's costs of suit, including the costs of the hearings
on 23
June 2010 and 27 July 2010.
[2]
The hearing in respect of the abovementioned relief was the sequel
to an earlier application for interim interdictory relief.
The
application for interim relief was opposed. That application was
determined by Blignault J, who handed down a reasoned judgment
on 20
August 2010. I shall assume that any reader of this judgment will
have access to, or be familiar with that given by Blignault
J and
thus shall not unnecessarily repeat the summary of the relevant
facts set out in the earlier judgment. Save for a supplementary
affidavit on behalf of the applicant deposed to on 27 October 2010,
the papers before me are the same as those that served before
the
judge in the proceedings for interim relief.
[3]
Interim relief was granted in terms somewhat wider than those in
which the applicant seeks final relief. The more confined
relief
currently sought arises from the restriction of the affected
customers to those on List One on (the amended) annexure
FA6 to the
applicant's papers. Those are customers or clients of the applicant
who had concluded service agreements with the
applicant, whether
before or after the conclusion of the sale of business agreement
described below. Although a number of bases
for potential relief
were advanced in the founding papers - unfortunately not quite as
coherently as might perhaps have been
done had the draftsperson not
been working under the exigencies of urgency, it is apparent from
the formulation of the relief
sought that what the applicant seeks
is the enforcement of covenants in restraint of trade undertaken by
the first and third
respondents. The relief sought against the
second and the fourth respondents is premised on the allegation that
these respondents
are in reality conducting themselves in a manner
that manifests or facilitates a breach of the restraint of trade
provisions
by which the third respondent close corporation is bound.
The other bases for relief identified in the founding papers
nevertheless
bear some relevance in this connection in that, while
they might have given rise to independent grounds for interdictory
relief,
perhaps even of a wider nature than that actually sought,
they also point to the existence of protectable proprietary
interests
rendering the restraints of trade worthy of enforcement.
[4]
The first and second respondents, who are natural persons, had
previously carried on a business through the vehicle of the
third
respondent close corporation. That business involved the marketing
and sale of security alarm systems and the provision
of linked
security monitoring services. The third respondent concluded a
written agreement with the applicant on 23 January 2006,
in terms of
which it sold its business to the applicant with effect from 1 March
2006. The purchase price, which was subject
to adjustment in various
respects not currently relevant, was R13,5 million; of which R13
million was allocated to the purchase
of the goodwill of third
respondent's business. The agreement included 20 appendixes, most of
which were omitted from the copy
of the deed of agreement annexed to
the founding affidavit. As far as one is able to discern, however,
the expression 'goodwill'
was not specially defined in the •contract
and therefore bears its ordinary meaning.
[5]
It seems generally accepted that the term 'goodwill' is incapable of
precise or comprehensive definition, but its general
implication is
well understood. The goodwill of a business is intangible property,
which can be disposed of by the owner of a
business independently or
separately from the other assets which comprise the undertaking. I
can do no better, with respect,
than to cite Innes ACJ's explanation
of the concept in
Receiver
of Revenue, Cape v Cavanagh
1912
AD 459
at 464-5:
Any
comprehensive definition of that expression is impossible. To quote
from Lindley on "Partnership" (7th edition,
p. 476): "The
term goodwill can hardly be said to have any precise signification.
It is generally used to denote the benefit
arising from connection
and reputation; and its value is what can be got for the chance of
being able to keep that reputation
and improve it." As has been
frequently pointed out, its exact meaning may vary with the
particular business with which
it is in any given instance
connected. It is generally compounded of two elements, personality
and locality; but either of them
may diminish to an extent which
approaches, if it does not attain, vanishing point. The goodwill of
a professional business depends
largely upon personal connection,
and much less upon locality; whereas the very converse may be the
case in regard to the goodwill
of a trading business. So far as a
licensed house is concerned, the connection between the licence and
the goodwill is so close
that the cases in which they are separately
dealt with must be few indeed. ... At the same time, it seems to me
quite possible,
though of rare occurrence in practice, to deal
separately even with the goodwill of a licensed house. An hotel
proprietor of
long standing and, wide repute might quite conceivably
dispose on profitable terms of his premises and their relative
licences,
while expressly retaining the goodwill for himself And if
he did so, there would be nothing to prevent his obtaining a licence
for premises next door and soliciting all his old patrons to
transfer their custom to his new hotel. Whereas if he parted with
the goodwill, as well as the premises and the licences, he could not
so solicit custom.
(Trego
v Hunt,
L.R.,
1896, A.C. 7
, and
Curl
Bros, v Webster,
L.R.,
1904, 1 Ch.D., p. 685). The retention or alienation of the good will
as a separate asset would make all the difference.
It
is clear from that statement that customer connections form part of
the concept of goodwill.
[6]
A party which sells the goodwill of its business is not prevented
thereby from setting up business in competition with the
purchaser,
but is restricted from doing so in a manner that would derogate from
the asset which has been sold. One of the incidences
of this is that
the seller of goodwill might be able to do business with the
customers of the business in respect of which it
had disposed of the
goodwill if they approached it of their own volition, but it would
be in breach of contract if it actively
solicited their custom by
approaching them. See theconcurring judgment of van Heerden AJA in
A
Becker & Co (Pty) Ltd v Becker and Others
1981
(3) SA406 (A) from 417, endorsed as a correct statement of the law
in the principal judgment of Muller JA (Kotze, Diemont
and Trengove
JJA concurring), at 414H-415D. Whether the members of a close
corporation which disposes of the goodwill of the
business conducted
by it are also thereby forbidden to solicit the business's customers
for the purpose of later competing with
the purchaser is something
1
to which, on my view of the evidence, it is not necessary in the
current case for me to decide.
[7]
It follows, however, from the aforegoing that if the purchaser of
the goodwill of a business wishes to exclude completely
the right of
the seller to compete with the purchaser, the sale of goodwill
provision will need to be complemented by a pertinent
covenant in
restraint of trade.
[8]
In the current matter, the third respondent, as seller of the
goodwill, bound itself for a period of 36 months, amongst other
matters, not to accept any business from the clients of the business
that was subject of the sale agreement. The first and second
respondents entered into identically worded covenants in favour of
the applicant as purchaser in their personal capacities.
[9]
Shortly after the conclusion of the sale of the third respondent's
business, the close corporation, which apparently traded
as Blue Bay
Alarms, concluded what was labelled as an 'authorised dealership
agreement' with the applicant.
[10]
In terms of that agreement the third respondent contracted to
recruit alarm account clients for the applicant. The dealership
agreement provided in effect that the first and second respondents,
as representatives of the third respondent, would solicit
custom
from the public within a defined geographic area, referred to in the
agreement as 'the territory'. They would sell or
hire electronic
security equipment of a type approved by the applicant to such
customers and would introduce those customers
to the applicant with
which, if the customers were considered creditworthy, alarm
monitoring and response service contracts would
then be concluded.
The provisions of the aforementioned preceding sale agreement had
indeed contemplated the possible conclusion
of a dealership
agreement and permitted the first and second respondents, as
representatives of the third respondent, to approach
and deal with
the third respondent's erstwhile customers for the purposes of
carrying out the authorised dealer's functions under
the dealership
agreement. The dealer was remunerated for its services under the
dealership agreement by way of a commission on
the service fees paid
to the applicant by the customers introduced by it with whom service
agreements were concluded.
[11]
The third respondent was represented by the first respondent in
concluding the dealership agreement. The deed of agreement
was drawn
in a manner that, by the content of its cover page, suggested that
it was intended that the contemplated parties to
the deed were the
applicant, the third respondent, and first and second respondents -
who are the only members of the third respondent
- in their
respective personal capacities. The relevant provision of the
agreement, apparently intended to bind the first and
second
respondents in their personal capacities, was the 'Personal
Liability' clause (clause 30). It provided that by their signature
thereto they, as members of the third respondent, would bind
themselves as sureties and co-principal debtors with the corporation
for the due fulfilment of its obligations under the contract. The
signing members would also so personally bind themselves to
a 12
month restraint of trade provision. The relevant terms of the
restraint have been set out at para. [13] of Blignault J's
judgment.
However, despite the evident intention that the agreement would be
signed by both the first and second respondents,
only the former
actually did so.
[12]
The dealership agreement also contained a so called
'non-solicitation' clause; the relevant provisions whereof were
quoted
at para. [12] of Blignault J's judgment. In terms of this
clause (in particular, sub-clause 21.2.1), the third respondent
bound
itself for a period of 36 months after the termination of the
agreement not to solicit, whether directly or indirectly, any
customers
who had entered into service agreements with the
applicant.
[13]
The first and second respondents conducted business with the
applicant through the vehicle of the third respondent in terms
of
the dealership agreement until the end of April 2010; at which time
the close corporation gave notice of the termination of
the
agreement with effect from 1 May - that, notwithstanding that the
agreement provided for 90 days' notice of termination prior
to
expiry of the then current executory period of the annually renewed
contract, on 1 February 2011. The termination notice was
given by
way of an email to the applicant over the names of the first and
second respondents. The applicant appears to have accepted
the third
respondent's repudiation of the dealership agreement. By the time
the dealership agreement was terminated, the restraint
of trade
provisions in the sale of business agreement had run their course
and lapsed by effluxion of time.
[14]
The termination of the dealership agreement coincided with the
launch of a new business by the first and second respondents.
The
new business traded under the name Blue Bay Guards and Security
Solutions. The degree of correspondence between the name
of the new
business and that which had been conducted by the third respondent
is notable. It is not in dispute that the new business
is conducted
through the fourth respondent close corporation. It has also not
been placed in dispute that the third respondent
has ceased to carry
on business since the termination of the dealership agreement. It is
also common cause that as at the institution
of these proceedings,
on 11 June 2010, and thereafter until the first respondent's
resignation, on 10 July 2010, the only members
of the fourth
respondent were the first and second respondents. A promotional
article appeared in a local newspaper on 20 May
2010 stating,
amongst other things, that the first and second respondents 'of Blue
Bay Guards and Security Solutions (BBG and
SS), effective as of May
1, have entered into a new and exciting partnership with Chubb in
Plettenberg Bay'. Chubb is described
in the founding affidavit as an
alternative security provider to the applicant. It appears that
Chubb provides the same services
as the applicant and is in
competition with it in the relevant geographic area.
[15]
The facts summarised above give rise to a situation in which it is
clear, subject to his ability to discharge the onus of
showing that
the restraint is unreasonable to the extent that its enforcement
would be contrary to public policy (see
Magna
Alloys and Research (SA) (Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984
(4) SA 874
(A)), that the first respondent is bound by the 12 month
restraint provision in clause 30.2.2 of the dealership agreement.
Before
determining whether the first respondent has discharged that
onus it is convenient to consider the basis of the case against the
second and the fourth respondents. It is premised on two closely
interconnected considerations: (i) an alleged abuse of corporate
personality and (ii) an alleged procurement by the second respondent
as a member of the fourth respondent of a breach of the
third
respondent's obligations in terms of clause 21.2.1 of the dealership
agreement; cf.
Atlas
Organic Fertlizers (Pty) Ltd and Others
1981
(2) SA 173
(T) at 202E-H.
[16]
It is well established that the courts will not countenance the
abuse of corporate personality to enable individuals to
unconscionably avoid contractual obligations and will therefore in
appropriate circumstances, on a fact sensitive basis, disregard
the
distinctness of a corporation's personality from those of its
members and, for the purpose of deciding a matter, look at
the
substance rather than the form of things. Compare, for example, Cape
Pacific
Ltd v Lubner Controlling Investments (Pty) Ltd
[1995] ZASCA 53
;
1995
(4) SA 790
(A) especially at 802D-804E,
Le'Bergo
Fashions CC v Lee
1998
(2) SA 608
(C) and
Gilford
Motor Co Ltd v Home and Another
[1933]
Ch 935
(CA) ([1933] All ER Rep 109) - the latter being English
authority approved in both
Cape
Pacific
and
Le'Bergo
Fashions.
[17]
In
Hulse-Reutter
and Others v Gddde
2001
(4) SA 1336
(SCA) ([2002]
2 All SA 211)
at para. [20], Scott JA
remarked, however, that 'some misuse or abuse of the distinction
between the corporate entity and those
who control it which results
in an unfair advantage being afforded to the latter' must be evident
before a court will undertake
the so-called 'piercing of the
corporate veil'. In the context of the finding on the facts in that
case that there was no evidence
of any abuse of the corporate
personality, I venture, with respect, that the observation was
obiter.
I
in any event do not believe that the learned judge of appeal
intended to derogate from the principle affirmed in Cape
Pacific
that
a generally flexible approach is indicated. As he wrote elsewhere in
the same paragraph, 'Much will depend on a close analysis
of the
facts of each case, considerations of policy and judicial judgment'.
So, for example, in
Alec
Lobb (Garages) Ltd & Ors v Total Oil (GB) Ltd
[1984] EWCA Civ 2
;
[1985]
1 All ER 303
(CA),
[1985] 1 WLR 173
, the court disregarded the
distinction between the separate personalities of a company and its
shareholders in the context of
a lease agreement with the
shareholders personally embodying certain provisions which were in
fact intended by the lessor to
impose unenforceable restraint of
trade terms on the company through which the shareholders traded on
the leased premises. The
court struck down the restraint of trade
provisions as if they had been imposed on the company and not its
shareholders. That
case therefore entailed a
third
party,
the
lessor, striving, in a manner contrary to public policy, to act to
its
advantage
by disguising its purpose by means of a contract ostensibly with the
shareholders rather than the company.
[18]
I believe that that discussion disposes of the argument of the
respondents' counsel, which, if I understood it correctly,
was to
the effect that piercing the fourth respondent's corporate veil took
the applicants nowhere, because all that was behind
the fourth
respondent's veil was the second respondent, and not the third
respondent. The argument reflected, as I have sought
to demonstrate,
an unjustifiably constrained and inflexible apprehension of the
basis upon which the distinctness of corporate
personality may be
disregarded by a court.
[19]
The reason for the apparent cessation of the conduct by the first
and second respondents of a security business through the
vehicle of
the third respondent and the commencement by them, contemporaneously
with the termination of the dealership agreement,
of an essentially
identical business through the vehicle of the fourth respondent is
nowhere explained by the first and the second
respondents. In my
view it is evident, as a matter of probability, that this course was
adopted by the first and second respondents
to avoid the
nonsolicitation undertaking in clause 21.2.1 of the dealership
agreement that prevented the third respondent
from conducting this
business. It also incidentally gave rise to an arguably
impermissible means of purporting to avoid the legal
consequences of
the disposition to the applicant by the third respondent of its
goodwill in terms of the aforementioned sale
agreement. Seen in that
way it is equally evident that the use of the fourth respondent as
vehicle for the conduct of the business
was no more than a dishonest
strategy or device by the first and second respondents, who at all
material times were the guiding
minds of both close corporations, to
avoid the third respondent's contractual obligations.
[20]
The first respondent's resignation as a member of the fourth
respondent was plainly induced by reason of the embarrassment
his
connection with the fourth respondent occasioned by reason of his
being bound by the restraint of trade undertaken by him
in terms of
clause 30.2.2 of the dealership agreement. It was evidently
perceived by the first and second respondents that because
the
second respondent was personally not bound by such restraint he
could continue alone with the business through the vehicle
of the
fourth respondent with impunity. If one were not to look behind the
separate personalities of the third and fourth respondents
and to
judge matters only on the form or structure of the new business
arrangement, the first and second respondents' perception
would be
well-founded. But as soon as one considers the underlying substance
of what was entailed it becomes clear that it would
be
unconscionable to allow the stratagem of the use of such form or
structure to be effective.
[21]
In the circumstances of second respondent's complicity in the abuse
of the fourth respondent's corporate personality in this
way it is
appropriate, on the basis of the principles as they were applied in
the
Le'Bergo
Fashions
and
Gilford
Motors
cases,
to regard the restraint undertaken by the third respondent in favour
of the applicant as enforceable against both the second
and the
fourth respondents. Should the situation of the fourth respondent
change so as to make its continued subjection to the
restraint, in
terms of any interdict which might issue, inappropriate, it would
always be open to it to apply for the amendment
or discharge of such
interdict; cf.
Genwest
Batteries (Pty) Ltd v Van derHeyden and Others
1991
(1) SA 727
(T) at 728-9 and
Le'Bergo
Fashions
at
614J-615B. The second respondent is in any event also susceptible to
being interdicted in delict on the grounds that his actions
were
directed at the procurement of a breach of the applicant's
contractual rights. Inasmuch as there was a complaint that this
basis for relief against the second respondent was clearly
articulated only in the replying papers, it has to be pointed out
that the replying papers were replying papers in the application for
interim relief and that the second respondent failed to
avail of the
opportunity to respond to those allegations in the application for
final relief. The facts proven on the founding
papers by themselves,
however, afforded sufficient basis for the argument based on
delictual relief to be advanced on the applicant's
behalf.
[22]
Turning then to consider whether any basis has been shown on which
the restraints should not be enforced. The respondents
denied that
the applicant had any protectable proprietary interest. This denial
was expressed in the baldest terms and I consider
that the
submission by the applicant's counsel that it could be rejected as
so tenuous as not to raise a real, genuine or
bona
fide
dispute
of fact was well made. It is not denied that the third respondent,
and therefore the first and second respondents as its
human
agencies, were in possession of the applicant's customer lists which
contained contact details in respect of each customer
that would
objectively fall to be considered as 'confidential information' in
the sense of that term established in judgments
such as
Dunn
and Bradstreet (Pty) Ltd v SA Merchants Combined Credit Bureau
(Cape) (Pty) Ltd
at
1968 (1) SA 209
(C) and
Meter
Systems Holdings Ltd v Venter and Another
1993
(1) SA 409
(W) at 428-430; and
Van
Castricum v Theunissen and Another
1993
(2) SA 726
(T) at 731-2. The use by a party of an agreement in
restraint of trade to buttress its common law right to protection
against
the use by others of its confidential information is quite
legitimate. The use by the first, second and fourth respondents of
that information for the purpose of competing with the applicant is
suggested in the number of the applicant's clients who were
persuaded to terminate their contractual relationship in favour of
substitute contracts with Chubb virtually contemporaneously
with the
termination of the third respondent's dealership agreement with the
applicant and the commencement of the fourth respondent's
business
relationship with Chubb. Indeed it is apparent that there was at
least one instance of the soliciting of the applicant's
customers to
that end even before the notification by the first and second
respondents of the termination of the third respondent's
dealership
agreement with the applicant.
[23]
It was also contended that the third respondent had a co-existent
proprietary interest in the customer information that the
applicant
claimed as its property. This was said to arise out of the fact that
the third respondent in many cases had established
its own
connections with the customers prior to their conclusion of any
contracts with the applicant. This happened in the nature
of the
third respondent's discharge of its function as an independent
contractor in terms of the dealership contract. In this
respect the
respondents' counsel placed particular emphasis on the provisions of
clauses 7 and 13 of the dealership agreement.
In my view this
argument missed the point. Even were the premise correct, it would
not afford a basis to avoid the consequences
of the undertaking of
the restraint of trade obligations. By undertaking the obligations
the third respondent subordinated its
interest in the relevant
information to that of the applicant. Moreover, the argument also
overlooks that the very purpose of
the establishment of what is
contended were the third respondent's customer connections in this
regard was to bring about a contractual
relationship between those
customers and the applicant.
[24]
In my judgment therefore the respondents have not shown why the
restraints should not be enforced. I am however unable to
discern a
logical or practical basis for the distinction between the 36 month
time period of the restraint imposed on the third
respondent and
that of only 12 months on the first respondent. The protectable
interests are identical in each case and the third
respondent must
have been recognised by the applicant at all material times as the
alter ego of the first and second respondents.
In the circumstances
I am not persuaded that there is any reasonable basis to impose more
harshly on the second and fourth respondents
than on the first
respondent in the interdictory relief to be granted.
[25]
An interdict will issue against the first respondent notwithstanding
his resignation as a member of the fourth respondent
because I am
sceptical about the genuineness of the intended effect of his act of
resignation. It is unnecessary to find an evidential
basis to
support this scepticism because it is trite that the applicant is
entitled to relief on the facts proven to have existed
at the time
of the institution of proceedings; see
Philip
Morris Inc and Another v Marlboro Shirt Co SA Ltd and Another
1991
(2) SA 720
(A) at 735B-C. On any approach, the first respondent's
conduct thus far gives rise to a reasonable apprehension by the
applicant
of a need for protection by means of interdictory relief.
[26]
It was not in dispute that the costs of the proceedings on 23 June
2010 and 27 July 2010 should follow the result.
[27]
An order will therefore issue:
1.
Interdicting and restraining the first, second and fourth
respondents, for a period of 12 months from 1 May 2010, from
1.1.
soliciting the business of any of the applicant's customers, whose
names appear on the schedule marked 'List One" on
annexure FA6A
to the applicant's supplementary affidavit deposed to on 27 October
2010;
1.2.
contacting any of the applicant's customers whose names appear on
the schedule marked 'List One' on annexure FA6A to the
applicant's
supplementary affidavit deposed to on 27 October 2010 in order to
solicit business from them away from the applicant;
1.3.
attempting to persuade any of the applicant's customers whose names
appear on the schedule marked 'List One' on annexure
FA6A to the
applicant's supplementary affidavit deposed to on 27 October 2010 to
cancel
or
attempt to cancel their contractual relationship with the applicant.
2.
Directing the first, second and fourth respondents, jointly and
severally, the one paying the others being absolved, to pay
the
applicant's costs of suit, including the costs of the hearings on 23
June 2010 and 27 July 2010.
A.G. BINNS-WARD
Judge
of the High Court
1
Cf.
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd
[1995] ZASCA 53
;
1995
(4) SA 790
(A) at 811B-C.