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[2022] ZAECMKHC 75
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Imonti Chemicals & Hygiene Systems CC t/a Chemex and Others v Guest and Another (CA 200/2021) [2022] ZAECMKHC 75 (18 October 2022)
FLYNOTES:
RESTRAINT AND SIMILARITY OF BUSINESSES
Labour
– Restraint of trade – Extent to which competitor
business similar to applicant business – Nature
and extent
of business – Respondents contending that businesses
operating on different models – Competitive overlap
substantial – Interdict granted.
IN THE HIGH COURT OF
SOUTH AFRICA
EASTERN
CAPE DIVISION, MAKHANDA
CASE
NO. CA 200/2021
In
the matter between:
IMONTI CHEMICALS &
HYGIENE SYSTEMS CC
t/a
CHEMEX
First Appellant
LUKE LE MARQUAND
Second Appellant
MICHAEL-JOHN
LE MARQUAND
Third Appellant
and
PETER MALCOM GUEST
First Respondent
RED
ALERT TSS (PTY) LIMITED
Second Respondent
Coram: Van Zyl DJP;
Malusi and Laing JJ.
Matter heard
on
:
05
August 2022
Judgment
delivered on:
18 October 2022
FULL
COURT APPEAL JUDGMENT
LAING J
[1]
This is an appeal against the whole of the
judgment of the court
a quo
(excluding certain paragraphs, as indicated). The matter pertains to
the enforcement of a restraint of trade agreement.
[2]
The first appellant (‘Chemex’)
provides sanitary goods and services to customers across the length
and breadth of the
Eastern Cape. It loans various items of equipment
at no charge, provided that the customer purchases the necessary
consumables;
a service and maintenance plan is also included. The
second respondent (‘Red Alert’) provides the same goods
and services,
but in terms of a lease and service agreement. The
question of the nature and extent of the differences between the two
business
models is central to the dispute.
Background
facts
The
appellants’ case
[3]
It is common cause that the first
respondent, Mr Peter Guest, was the founding member of Chemex, which
commenced trading in 1994.
Several years later, he sold 50% of his
member’s interest to the late Mr Christopher le Marquand. The
former was responsible
for setting up a manufacturing process for
industrial chemicals and cleaning consumables, as well as being
responsible for sales
and procurement, which entailed the
establishment and maintenance of customer relationships. The latter
was responsible for managing
Chemex’s administration and
finances, as well as the development of new business. When Mr le
Marquand purchased an equal
share of Mr Guest’s member’s
interest, the parties entered into an association agreement that
included a covenant in
restraint of trade.
[4]
In 2020, Mr le Marquand passed away,
bequeathing his share of the member’s interest to his two sons.
They are cited as the
second and third appellants respectively and
are employed by Chemex. It is apparent that there had been some
friction between the
late Mr le Marquand’s sons and Mr Guest,
which culminated in the second and third appellants’ purchasing
Mr Guest’s
member’s interest and settling of his loan
account in terms of a so-called ‘buy-back’ arrangement.
[5]
The parties entered into the buy-back
agreement on 20 July 2020. This provided for the payment of R 14
million to Mr Guest for the
value of his member’s interest and
the transfer of two luxury motor vehicles in settlement of his loan
account. It also provided
for his appointment as a consultant to
Chemex for a period of five months, during which time he would advise
on the development
of recipes and formulae for the manufacturing of
various products and advise on business operations in general. For
this, he would
earn a fee of R 50,000 per month. The appointment was
important because it would facilitate Mr Guest’s introduction
and referral
of Chemex’s clients to the second and third
appellants. The parties furthermore agreed to lengthy restraint of
trade undertakings,
in substantially the same terms as the
undertakings previously concluded between Mr Guest and the late Mr le
Marquand in terms
of their association agreement.
[6]
The appellants allege that the five-year
period for the operation of the restraint of trade-clause is
necessary for numerous reasons,
inter
alia
: to protect the substantial
purchase consideration paid to Mr Guest; to protect the goodwill and
proprietary interests of the business;
and to prevent Mr Guest from
using confidential and proprietary information, thereby undermining
Chemex’s business.
[7]
They state further that Chemex and the
second respondent (‘Red Alert’) are separate commercial
entities that compete
for customers in the same sectors. Moreover,
the appellants assert that the two entities supply the same products.
[8]
During the first quarter of 2021, the
second appellant received reports that Mr Guest had become involved
with Red Alert in the
manufacturing of chemicals and consumables for
retail. The second appellant consequently met with a director of the
Kempston Group,
which is a major customer of Chemex, and was informed
that Mr Guest had indicated that he was employed by Red Alert as a
business
development manager and was responsible for a new division
thereof, known as Red Alert Chemtec. Mr Guest had allegedly requested
the Kempston Group to transfer its business to Red Alert.
Subsequently, the second appellant met with Red Alert’s chief
executive officer (‘CEO’), Mr Peter Harvey, on 19 April
2021, and confronted him about Mr Guest’s involvement.
From the
meeting, it became apparent to the second appellant that Mr Guest was
actively engaged with Red Alert in establishing
a business like that
of Chemex. Consequently, argue the appellants, Mr Guest is in breach
of the restraint of trade-clause.
[9]
On 20 April 2021, the second appellant
instructed attorneys to request a written undertaking to the effect
that Mr Guest would cease
to be employed by Red Alert and that he
would no longer be involved in any business in breach of his
contractual obligations. The
respondents’ attorneys responded
by way of a letter on 21 April 2021, admitting that Red Alert had
employed Mr Guest to develop
the business of its hygiene division and
that customers would be able to purchase products from the new entity
(to be established)
but pointing out that it would not employ Mr
Guest; he would have nothing to do with it. They denied any breach of
the covenant
in restraint of trade.
[10]
Not satisfied with the above response, the
appellants launched their application for an interdict on 23 April
2021. This was done
on an urgent basis.
The
respondents’ defence
[11]
The respondents opposed the application.
Their point of departure was that Red Alert was not a party to the
agreement that the appellants
sought to enforce. Accordingly, Chemex
could not obtain contractual relief against Red Alert; its case ought
to have been grounded
in the principles of unlawful competition, but
nothing to that effect had been advanced in its founding papers.
There was no basis
upon which the appellants could secure a final
interdict against the entity.
[12]
Red Alert’s CEO, Mr Harvey, deposed
to the second respondent’s answering affidavit. He contends
that Red Alert has several
business divisions that offer a variety of
services, viz: electronic security and armed response; guarding;
cleaning; hygiene;
and emergency medical services. Its cleaning
division, for example, supplies not only the necessary equipment
(mops, brooms, etc)
and consumables (dish-washing liquid, etc), but
also the personnel who provide the service itself. Its hygiene
division operates
in accordance with the same business model; it
leases and services equipment, supplies the consumables, and disposes
of the waste
that is generated.
[13]
In contrast, Mr Harvey asserts that
Chemex’s business model is based on the manufacture and retail
of cleaning and sanitizing
products. He alleges that its hygiene
division constitutes but a small fraction of its overall business.
Whereas he admits that
both Chemex and Red Alert supply hygiene
equipment and consumables, what distinguishes the two entities is the
provision or otherwise
of an accompanying service. As evidence of the
contention that the entities are not competitors, Mr Harvey states
that they never
provide competing quotations to potential customers.
[14]
In relation to Red Alert’s employment
of Mr Guest, Mr Harvey explains that he met with him to discuss
opportunities in late
2020. He indicated to Mr Guest that Red Alert
was interested in establishing a manufacturing entity, Chemtec, so
that it would
not need to purchase consumables from third parties
such as Chemex. To this, Mr Guest allegedly pointed out that he was
prevented
from doing so under his covenant in restraint of trade but
that his son, Vaughan, would be interested. The meeting ultimately
led
to Red Alert’s employment of Mr Guest as a business
development manager on 19 January 2021, to develop the business of
its
hygiene division. Mr Harvey contends that Mr Guest is merely a
salary-earning employee with no shareholding or other financial
interest in Red Alert.
[15]
Consequently, Mr Harvey contacted Vaughan
and together they established Chemtec on or about 5 February 2021.
The purpose of the
entity is to manufacture chemical products for
supply to Red Alert. Once established, Chemtec will be a competitor
to Chemex. Mr
Harvey avers that Mr Guest is not involved at all in
the establishment of Chemtec and has no shareholding or other
interest therein.
The new entity does not need his knowledge or
expertise and will rely on Vaughan’s capabilities, the
assistance provided
by an entity known as PE Chemicals, and the
involvement of two further individuals who have the necessary
manufacturing experience.
[16]
Mr Harvey emphasizes that Red Alert and
Chemtec are two separate entities, each with its own legal
personality. The former does
not possess any manufacturing
capability; this is intended for the latter. The real issue, he says,
is Chemex’s need to prevent
Chemtec from manufacturing
competing hygiene products.
[17]
In a separate affidavit, Mr Guest states
that he has 35 years of experience in blending chemicals for use in
the cleaning and hygiene
markets. He estimates that he developed
approximately 90% of Chemex’s chemical products. The formulae
involved are not particularly
complicated and can be mastered
relatively easily through a process of trial and error. After the
appellants’ purchase of
his member’s interest and the
value of his loan account, Mr Guest’s role as a consultant was
limited; neither the second
nor the third appellants ever sought his
advice.
[18]
Mr Guest asserts, like Mr Harvey, that
Chemex and Red Alert are not competing entities. He provides the
example of the Kat Leisure
Hotel Group’s need for hygiene
services, where the Group’s alleged dissatisfaction with the
services provided by the
existing supplier, Bidvest Steiner, prompted
it to request quotations from competitors, including Red Alert. The
Group never approached
Chemex, despite its purchasing cleaning
products from the entity in question.
[19]
He is adamant that Chemex’s sale of
hygiene products constituted a ‘minute portion’ of its
business. In any event,
Chemex’s customers preferred to
purchase equipment and consumables, rather than enter into a rental
and service agreement,
which was Red Alert’s approach. Mr Guest
emphasizes that he has nothing whatsoever to do with Chemtec.
The
appellants’ reply
[20]
In reply, the second appellant denies that
the supply of hygiene equipment and consumables constitutes a small
fraction of its business,
indicating that it affects 24% of its
customer base and translates into significant turnover for Chemex. To
that effect, he indicates
that the retail of hand soap and related
cleaning consumables constitutes approximately 25% of Chemex’s
annual turnover;
the retail of paper products contributes a further
20% thereto.
[21]
Regarding the Kat Leisure Hotel Group, the
second appellant points out that Mr Guest initially established and
maintained a customer
relationship on behalf of Chemex. After Red
Alert’s employment of Mr Guest, the Group switched suppliers
with the result
that Chemex lost a major customer.
[22]
The second appellant draws attention to the
timeline of events, indicating that Mr Guest’s departure from
Chemex and reports
of his involvement with Red Alert in the
manufacture of chemicals and consumables for retail coincided with
the establishment of
Chemtec, in relation to which Mr Guest’s
son has become a shareholder. Red Alert, argues the second appellant,
needed Mr
Guest for the new business development in question.
Moreover, he points out that Mr Guest’s knowledge of Chemex’s
prices
and profit margins will most certainly be advantageous to Red
Alert for purposes of any attempt to persuade customers to switch
suppliers.
The
findings of the court
a quo
[23]
In the court
a
quo
, the issues were reduced to the
following: whether Chemex and Red Alert conduct similar business;
whether ‘engaged’,
as used in the restraint of trade
clause, can be interpreted to mean ‘employed’; and
whether a case had been made for
the granting of a final interdict
against the respondents.
[24]
The
court
a
quo
found
that there was a dispute of fact in relation to the nature of the
business conducted by the entities in question. It accepted
the
version presented by the respondents and held that, whereas the
businesses may be similar, there were distinguishing features
that
permitted a finding that the entities did not operate in competition
with each other. The court
a
quo
held that ‘engaged’ could indeed be interpreted to mean
‘employed’.
[1]
It
found, too, that it was unnecessary for Red Alert to have been cited
as a party to the proceedings inasmuch as it was not a
party to the
contract which included the covenant in restraint of trade. Finally,
it held that the requirements for a final interdict
had not been met
and dismissed the application with costs.
[25]
The
applicants (who are the appellants in the present matter) applied for
leave to appeal. In granting leave, the court
a
quo
referred to its interpretation of
Kelly
Group Ltd v Capazzoria
[2]
for purposes of deciding whether the entities in question conducted
similar business and mentioned the scarcity of authorities
dealing
with the same issue, indicating that it was persuaded that there was
a reasonable prospect of success on appeal.
[26]
The dispute is now the focus of the present
court.
The
issues to be decided
[27]
From the pleaded facts and the arguments
presented by counsel for the respective parties, it is apparent that
the issues identified
in the court
a quo
remain a useful guide to the way for the appeal court to embark upon
a determination of the matter. A key feature that emerges
is the
extent to which the business of Chemex is like that of Red Alert. The
other major feature is whether the appellants have
made a case for
the granting of a final interdict.
[28]
I pause to mention that the respondents
have not challenged the reasonableness of the covenant in restraint
of trade nor its enforceabillity.
They do not argue that it is
contrary to public policy or the public interest.
[29]
Mindful of the above, the issues can be
refined and set out as follows: (a) what is the restraint of trade
that operates and how
must it be interpreted; (b) to what extent are
the businesses of the entities in question similar; and (c) have the
appellants
satisfied the requirements for a final interdict against
Mr Guest and Red Alert, respectively.
[30]
The earlier dispute in relation to the
meaning of ‘engage’ within the context of the covenant in
restraint of trade
has fallen away. The finding of the court
a
quo
was to the effect that it can be
interpreted widely to include, within the ambit of the restraint, the
scenario where Mr Guest
is employed by a competitor. This has not
been challenged.
[31]
A brief overview of the legal framework
follows.
The
broad legal principles relevant to covenants in restraint of trade
[32]
The
common law has long indicated that a contract is enforceable, in the
absence of fraud or duress, even when its terms are unreasonable
or
unconscionable or restrict a person’s freedom to participate in
trade. The role of the court is not to remake the contract;
consequently, the court will not relieve a party from any term that
he or she finds onerous or unexpectedly harsh.
[3]
[33]
In
the seminal case of
Magna
Alloys & Research (SA) (Pty) Ltd v Ellis
[4]
,
Rabie CJ held, at 897-8, that a restraint on competition is, in
principle, enforceable; it will only be unenforceable when it
is
contrary to public policy or the public interest. Furthermore, in
deciding whether a covenant in restraint of trade is contrary
to the
public interest, regard should be had to two considerations:
agreements freely concluded should be honoured, and everyone
should
be free to enter the business or professional world.
[5]
[34]
The common law approach is based on
navigating a
via media
between the freedom of contract, on the one hand, and the twin
principles of fairness and reasonableness, on the other. Whereas
this
approach has remained largely intact after the advent of South
Africa’s constitutional dispensation, it has inevitably
been
influenced by the application of constitutional values. This is
illustrated in the decisions handed down by the Constitutional
Court
in at least the following cases.
[35]
Ngcobo
J emphasised, in
Barkhuizen
v Napier
[6]
,
at paragraph [70], that while it was necessary to recognise the
doctrine of
pacta
sunt servanda
a court should be able to decline the enforcement of a clause that
would result in unfairness or unreasonableness. This would ensure
that a court could employ the Constitution and its values to achieve
a balance that struck down the unacceptable excesses of freedom
of
contract while seeking to permit individuals the dignity and autonomy
of regulating their own lives.
[36]
More
recently, in
Beadica
231 CC and others v Trustees, Oregon Trust and others
[7]
,
Theron J observed, at paragraph [80], that the common law has always
recognized the role of equity, encompassing the notions of
good
faith, fairness and reasonableness, as a factor in assessing
contractual terms and their enforcement. Nevertheless, a court
may
not refuse to enforce terms on the basis that this would, in its
subjective view, be unfair, unreasonable or unduly harsh.
It is only
when a term or its enforcement is so unfair, unreasonable or unjust
that it is contrary to public policy that a court
may indeed refuse
to enforce it.
[37]
The above broad principles are relevant to
a covenant in restraint of trade such as the one in the present
matter. How it must be
interpreted is the focus of the issue
discussed in the paragraphs that follow.
The
covenant in restraint of trade and its interpretation
[38]
At the very heart of the matter is clause 9
of the buy-back agreement concluded by the appellants and Mr Guest.
The contents are
repeated below:
‘
Peter
[Mr Guest] acknowledges and agrees that he is bound by a Restraint in
terms of the Association Agreement, and further confirms
and
undertakes to comply with the Restraint set out hereunder having
regard to the substantial repurchase consideration effected
to Peter
which includes consideration for goodwill and in order to protect the
proprietary interests of the Corporation [Chemex]
going forward.
Peter confirms that he has no claim to the trade name / mark
“Chemex”, which is the trade name / trademark
of the
Corporation, and which proprietary rights in the aforesaid trade name
/ marks vests in the Corporation. Peter undertakes
that for a period
of five (5) years from 31
st
July 2020 or the termination of employment with the Corporation he
will not engage or be interested in, whether directly or indirectly,
or have any financial interest in any business or undertaking
carrying on a business similar to the business which is carried on
by
the Corporation. This restraint of trade shall encompass those
municipal areas when the Corporation has carried on business
in any
manner for the immediately previous 24 (TWENTY-FOUR) month period.’
[sic]
[39]
It is apparent from the above, on the face
of it, that the potential effect of the covenant in restraint of
trade is far-reaching.
The clause in question prevents Mr Guest from
having anything to do with a business or undertaking that carries on
business ‘similar
to’ that of Chemex. It covers virtually
the entire Eastern Cape Province and endures for a period of five
years.
[40]
The
locus
classicus
for the law pertaining to the interpretation of documents remains
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[8]
,
where Wallis JA held, at paragraph [18], that
‘…
Interpretation
is the process of attributing meaning to the words used in a
document, be it legislation, some other statutory instrument,
or
contract, having regard to the context provided by reading the
particular provision or provisions in the light of the document
as a
whole and the circumstances attendant upon its coming into existence.
Whatever the nature of the document, consideration must
be given to
the language used in the light of the ordinary rules of grammar and
syntax; the context in which the provision appears;
the apparent
purpose to which it is directed and the material known to those
responsible for its production. Where more than one
meaning is
possible each possibility must be weighed in the light of all these
factors. The process is objective, not subjective.
A sensible meaning
is to be preferred to one that leads to insensible or unbusinesslike
results or undermines the apparent purpose
of the document. Judges
must be alert to, and guard against, the temptation to substitute
what they regard as reasonable, sensible
or businesslike for the
words actually used. To do so in regard to a statute or statutory
instrument is to cross the divide between
interpretation and
legislation; in a contractual context it is to make a contract for
the parties other than the one they in fact
made. The “inevitable
point of departure is the language of the provision itself”,
read in context and having regard
to the purpose of the provision and
the background to the preparation and production of the document.’
[41]
There
are, furthermore, two recent cases that deal with the subject,
decided by the Supreme Court of Appeal within a few months
of each
other. In
Capitec
Bank Holdings Limited and another v Coral Lagoon Investments 194
(Pty) Ltd and others
[9]
,
Unterhalter AJA remarked, at paragraph [51], that interpretation
begins with the text and its structure. To postulate that ‘context
is everything’ is not a license to contend for meanings
unmoored to the text and its structure. Rather, context and purpose
may be used to elucidate the text. Similarly, in
Post
Office Retirement Fund v South African Post Office SOC Ltd and
others
[10]
,
Plasket JA observed, at paragraph [57], that the interpretation of a
written document is an objective exercise and the starting
point is
the words of the document to be interpreted. These remain constant
and cannot be made to mean different things to suit
the perceived
needs of the moment.
[42]
In
the present matter, the text of the clause in question is
uncomplicated. The standard definition of ‘similar’, used
here as an adjective, is ‘of the same kind in appearance,
character, or quantity, without being identical’.
[11]
[43]
The
context of the clause is the appellants’ purchase of Mr Guest’s
member’s interest for a considerable sum of
money and the
transfer of two luxury vehicles to settle his loan account.
[12]
Furthermore, the agreement was entered into upon the departure of
Chemex’s founding member, who had established the business,
developed an extensive customer network throughout the province, and
accumulated 35 years of experience in the manufacture of cleaning
and
hygiene products.
[44]
The purpose of the clause was to protect
Chemex’s proprietary interests. To that effect, the parties
expressly recorded that
Mr Guest agreed to be bound by and to comply
with the covenant in restraint of trade, having had regard to the
‘substantial
repurchase consideration’ that was paid to
him and the need for ‘the proprietary interests of the
Corporation [Chemex]
going forward’ to be protected.
[45]
The most sensible and businesslike
interpretation to accord to the clause, mindful of text, context and
purpose, is that Mr Guest
undertook, for a specified period and for a
specified area, not to become involved or have any interest in any
business that was
similar to that of Chemex. Quite what ‘similar’
means for purposes of adjudicating the dispute, however, informs the
next issue, which will be discussed below.
Extent
to which the businesses are similar
[46]
The
appellants’ primary ground of appeal is based on the reliance
placed by the court
a
quo
on
Kelly
Group Ltd v Capazorio
[13]
,
where Kathree-Setiloane AJ held as follows, at paragraph [25]:
‘
I
am of the view that the phrase “any concern or entity which
carries on the same business or similar business or alike the
business of the COMPANY” postulates a comparison of the
applicant’s business to the respondent’s, as a composite
whole (
Capnorizas v Webber Road Mansions
(Pty) Ltd
1967 (2) SA 425
(A)).
Accordingly, because the applicant provides some of the services
which are provided by the third respondent does not mean
that the
respective businesses viewed in their entirety, are the same, similar
or alike.’
[47]
The
court
a
quo
held that, on the strength of the version presented by the
respondents,
[14]
the two
businesses were similar in nature but there were distinguishing
features that indicated that they were not in competition
with each
other.
[48]
The appellants assert that the court
a
quo
was incorrect in requiring all the
features of the two businesses to be the same or similar, pointing
out that this was not the
finding of the court in
Capnorizas
.
They refer to several cases in support of the contention that what
was required was for there to be competition in some material
respect.
[49]
In
Capnorizas
,
the erstwhile Appellate Division dealt with a situation where the
appellant carried on business as a general dealer; tea-room
keeper;
mineral-water dealer; patent-medicine dealer; restaurant keeper; and
milk purveyor, in a building owned by the respondent.
The appellant’s
lease included a term to the effect that the respondent undertook not
to let any space in the building to
a person who carried on
substantially the same business as the appellant. Subsequently, the
respondent let space to an entity,
Hazeldene Dairy, that held a
fresh-produce dealer’s license and a milk purveyor’s
license. Steyn CJ held, at 430, that
the term in question suggested a
comparison; the issue for decision was whether the business of
Hazeldene Dairy was to be compared
with the corresponding business of
the appellant or with the business conducted by him as a composite
whole. The court held that
the terms of the lease provided for the
latter.
[50]
The
appellants also refer to
Poolquip
Industries (Pty) Ltd v Griffin and another
[15]
1978 (4) SA 353
(W), where the first respondent had been the managing
director of the applicant, which had manufactured and distributed
equipment
and chemicals for the swimming pool industry. He had later
obtained employment with the second respondent, whose business
included
the manufacture and sale of chemicals, veterinary products,
anti-freeze solutions, fibre-glass products for agriculture and
swimming
pools, and swimming pool cleaning equipment. A term in the
employment contract between the applicant and the first respondent
had
restrained the latter from having an interest in a business
similar to that carried on by the former or in any business that
competed
or was likely to compete with the former. Cohen AJ held, at
361, that ‘similar’ (as used in the contract) meant a
business
that competed with the applicant’s business and not a
business that was the same in all respects. Furthermore, the court
held that ‘compete’, here, meant competition in some
material respect.
[51]
In
PE
Nightwatchman Patrol (Pty) Ltd v Blignaut
[16]
,
the applicant provided a service that entailed the guarding of
premises, using dogs; the respondent did not guard anything, he
simply provided a radio system that could be used by a guard. Stewart
J held, at 304, that it was not necessary that the respondent’s
business was exactly like that of the applicant; it was sufficient if
it was so like that of the applicant as seriously to compete
with it.
The test was not whether the respondent provided a security service
but whether he carried on a business that was similar
to or in
competition with that of the applicant. The nature of the two
businesses was decisive.
[17]
[52]
The parties appear to agree that the above
cases require a competitive overlap between the businesses being
compared. A comparison
must be made between Chemex’s business
and that of Red Alert, as a composite whole. To that effect, mere
similarity is not
sufficient; the businesses must compete in a
material respect.
[53]
The crucial distinction, argue the
respondents, is that the entities in question operate according to
different business models;
Red Alert provides personnel to render the
services related to the supply of the equipment and consumables,
Chemex does not. A
customer will prefer either one model or the
other, depending on the circumstances. This meant that the models
entailed different
pricing structures. Consequently, argue the
respondents, there is no competition. This was demonstrated by the
fact that the entities
have never been requested to submit quotations
against each other.
[54]
It
is common cause that Chemex and Red Alert compete for customers in
the same sectors, viz: food and beverages; hospitality; automotive;
healthcare; commercial and retail; educational; manufacturing; and
hygiene.
[18]
It is common cause that they supply the same products, viz: foam-soap
dispensers; hand-sanitizer dispensers; wall-mounted disposal
bins;
air-freshener units; toilet-seat sanitizers; toilet-roll holders;
urinal-drip dispensers; hand-towel rolls; folded-towel
rolls;
tidy-wipe rolls; toilet-paper; hand-soap; antibacterial hand-soap;
foam hand-soap refill sachets; hand sanitizer; and toilet-seat
sanitizer sachets. It is also common cause that they supply the same
products to customers in the same geographical areas, viz:
within the
boundaries of the Buffalo City Metropolitan Municipality and numerous
other municipalities situated throughout the Eastern
Cape Province.
[55]
The respondents have built their defence on
the platform that the business models used by the two entities are
entirely different;
the one provides personnel or a workforce with
the equipment and consumables, the other does not. The distinction,
however, appears
to be artificial. The following analogy can be
considered: company X provides pre-packaged meals to customers,
comprising an interesting
variety of snacks, main courses, desserts,
and drinks; company Y provides the same pre-packaged meals, but also
offers staff who
will heat or cook the meals where necessary and
clean up afterwards. It would be difficult to contend that company X
and company
Y are not in direct competition with each other. The only
real difference is the ‘add-on’ that company Y offers.
Customers
who require catering services would most certainly consider
either company X or company Y and would be likely to make a decision
based primarily on available budget and the contingencies of the
occasion. The analogy is applicable to the situation that confronts
the court in the present matter.
[56]
The supply of cleaning and hygiene products
constitutes Chemex’s core business. Red Alert supplies cleaning
and hygiene products
(and services) but its business extends to
security and emergency medical services, too. It is nevertheless
clear from the pleadings
that cleaning and hygiene are not
insignificant parts of its business. For example, Red Alert lists its
business divisions as follows:
electronic security and armed
response, guarding, cleaning, hygiene, and emergency medical. If Red
Alert offered cleaning and hygiene
products or services as something
incidental to its security services, then the situation might be
different, yet that is not the
evidence.
[57]
When viewing the businesses of Chemex and
Red Alert as composite wholes, it cannot be denied that they are
similar. When taking
into consideration the fact that each supplies
the same products to customers in the same sectors and geographical
areas, it cannot
be denied that they compete in material respects.
The competitive overlap between the two businesses is substantial.
[58]
At this stage, it is necessary, to consider
the remaining issue and to ascertain whether the appellants satisfied
the requirements
for a final interdict against Mr Guest, on the one
hand, and Red Alert, on the other.
Whether
the requirements for a final interdict were met
[59]
The
requirements for a final interdict are well-known and hardly need
restating: a clear right on the part of the applicant, an
injury
actually committed or reasonably apprehended, and the absence of any
other satisfactory remedy available to the applicant.
[19]
The extent to which the appellants have met the above is investigated
below.
Mr
Guest
[60]
In launching the application, the
appellants relied squarely on the covenant in restraint of trade
contained in the buy-back agreement.
The court
a
quo
held that the term was wide enough
to include the scenario where Mr Guest was employed by a competitor.
This finding does not form
part of the appeal; it has not been
challenged by either the appellants or the respondents and this court
sees no reason to interfere.
Instead, the respondents argue that Mr
Guest never breached his obligations by taking up employment with
Chemex because the businesses
of the entities are not similar, there
is no competitive overlap. This court has found otherwise.
Consequently, Mr Guest must be
deemed to have breached the restraint
in question; conversely, the appellants have a clear right to enforce
the terms thereof.
[61]
Mr Guest was a founding member of Chemex.
It is not disputed that he used his technical knowledge of and
experience in blending
chemicals to establish and grow the business.
He developed approximately 90% of the entity’s products. It is
also not disputed
that, at the time of Mr Guest’s departure,
Chemex supplied cleaning and hygiene equipment and consumables to a
wide range
of customers in different sectors and across the length
and breadth of the Eastern Cape Province. His technical and business
capabilities
would clearly have been of significant interest to Red
Alert, so much so that he and Mr Harvey explored opportunities in
late 2020,
after the appellants’ purchase of his member’s
interest and the value of his loan account, which eventually led to
his appointment, a few months later, as a business development
manager to develop the business of Red Alert’s hygiene
division.
To put it bluntly, Mr Guest knew Chemex’s business
inside and out. It would be difficult to ignore or deny the risks
that
the move posed to Chemex. If Mr Guest divulged his understanding
of the workings of the business, the composition of its products,
its
customer base, the details of contractual arrangements, its pricing
structures, and so forth, and exploited such knowledge
to the
advantage of his new employer, then considerable harm would be caused
to Chemex’s business.
[62]
The
alternative remedy of a damages claim is simply inadequate in the
circumstances. By the time that any such claim was heard,
the damage
would have been inflicted and it would be exceedingly difficult for
Chemex to recover its lost share of the market.
[20]
Moreover, it is clear from the correspondence exchanged between the
attorneys for the respective entities that any attempt at negotiating
a solution was bound to fail by reason of fundamental differences in
the interpretation of the term in question.
Red
Alert
[63]
A determination of the extent to which the
appellants have satisfied the requirements for a final interdict
against Red Alert is
not as straight-forward. There is no contractual
right that the appellants can seek to enforce against Red Alert. The
cornerstone
of their argument, rather, is that Red Alert served as a
‘vessel’ to allow Mr Guest to breach his obligations.
Importantly,
the appellants emphasize that they do not seek an
interdict based on unlawful competition, as alleged by the
respondents. In support
thereof, the appellants refer to a number of
cases that were decided in the erstwhile Witwatersrand Division.
[64]
In the unreported judgment of
Marcus
Evans (South Africa) (Pty) Ltd V Mpungose and others
(Case no. 2002/2780), the applicant was a business intelligence
organization that offered professional training by means of
conferences
and similar events. The first respondent had been in the
applicant’s employment and was bound by a covenant in restraint
of trade. She was subsequently employed by the fifth respondent.
Malan J indicated, at paragraph [12], that whether the applicant
was
entitled to relief against the fifth respondent depended on whether
the former had proved that the latter had made use of confidential
information. The court found, on the available evidence, that the
fifth respondent had indeed done so and interdicted the fifth
respondent accordingly.
[65]
Similarly,
in
South
Africa BV (Incorporated in the Netherlands) t/a Institute for
International Research v Tarita and others
[21]
,
the applicant’s business was the planning, organising and
managing of seminars, conferences, high-profile speaker events,
and
training courses. It had appointed the first and second respondents
in terms of contracts of employment that included restraints
of
trade. Upon their departure, the applicant had sought to enforce the
underlying restraints and to interdict their new employer,
the third
respondent, from competing unlawfully. Marais J held, at 171D-E/F,
that, by employing a person acting in breach of her
restraint of
trade agreement to set up conferences, the third respondent was
competing unlawfully with the applicant, in whose
favour the
restraint operated. This constituted unfair competition. The
interdict was granted.
[66]
Consequently, argue the appellants, the
above cases are authority for the proposition that interdictory
relief is available in circumstances
where a competing entity such as
Red Alert provides an ex-employee with a vessel by means of which to
breach restraint of trade
obligations.
[67]
The
appellants also refer to
IIR
South Africa BV (Incorporated in the Netherlands) t/a Institute for
International Research v Hall (aka Baghas) and another
[22]
,
where the same applicant as in the previous case had employed the
first respondent as a conference producer. Her contract of employment
included a covenant in restraint of trade. She subsequently took up
employment with the second respondent, only to be dismissed
pursuant
to disciplinary proceedings. The applicant brought an application to,
inter
alia
,
interdict the second respondent from holding a series of 14
conferences that had been organised while the first respondent had
been in its employment. The application was dismissed. On appeal, a
full bench found that it was necessary for the applicant to
demonstrate that there was an existing or threatened use of
confidential information by the second respondent. The court found
that this had not been proved and the appeal was dismissed.
[68]
The findings of the full bench are set out
below.
‘
[13.1]
The claim against the first respondent was in contract. The legal
principles applicable to this claim flow from the decision in Magna
Alloys and Research (SA) (Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984 (4) SA 874
(A).
[13.2]
The appellant’s claim against the second respondent
is in
delict. It is governed by the development of the lex Aquilia to cater
for the misuse of confidential information and trade
secrets to
advance one’s own business interests at the expense of a
competitor.
[13.3]
The fundamental differences between these two distinct causes
of
action have, on occasion, been blurred in judgments where the
applicant has, in a single application, sought relief against
the
former employee who is bound by a restraint and the alleged “unfair
competitor” who has employed the former employee.
[13.4]
What these differences amount to is the following:
[13.4.1]
Where the ex-employer seeks to enforce against his ex-employee a
protectable
interest recorded in a restraint, the ex-employer does
not have to show that the ex-employee has in fact utilized
information confidential
to it- merely that the ex-employee could do
so…
[13.4.2]
Where the ex-employer seeks to finally interdict a third party on the
ground
that it is competing unlawfully, by employing an ex-employee
who has breached a restraint, the ex-employer must prove that:
(a)
It has confidential information or trade secrets.
(b)
The third party is making use of, or is likely to make use of such
information or trade secrets
either knowingly or innocently…’
(c)
It has a real right not to be faced with unfair competition. In
deciding fairness, a court is
entitled to look at the competing
interests of the parties…
(d)
It has no other remedy.
[13.5]
The fundamental difference between the two remedies is that
in the
delictual claim it does not suffice for the ex-employer to merely
prove that the ex-employee who has protectable information
has taken
up employment with a rival, who is aware of the restraint. In
addition, what must be proved is an existing use, or threatened
use,
of such information by the third party.’
[69]
The respondents contend that the above case
cannot be used as authority to assert that Red Alert’s enabling
of Mr Guest to
breach his obligations was unlawful. They argue that
it is not adequate to assert that Red Alert merely served as a vessel
for
Mr Guest’s conduct. The appellants’ cause of action
was indeed grounded in delict and it required them to demonstrate
that Red Alert made improper use of confidential information,
knowingly or otherwise.
[70]
This
court is inclined to agree with the respondents. On the basis of the
full bench decision in
Hall
,
the appellants must present sufficient evidence of Red Alert’s
use or threatened use of confidential information. The decisions
in
both
Marcus
Evans
and
Tarita
do not assist the appellants inasmuch as there is no clear indication
that Red Alert’s employment of Mr Guest,
per
se
,
amounted to the improper use of the latter’s knowledge of
Chemex’s business. The allegations made with regard to Mr
Guest’s interaction with the Kempston Group and his possible
influence over the decision taken by the Kat Leisure Hotel Group
are
speculative at best. There are no confirmatory affidavits from
representatives of either of the companies, there is also no
documentary evidence to support the allegations. Significantly, there
is no indication that Mr Guest’s conduct was directed
by or
carried out upon the instruction of his new employer, Red Alert. At
best, the allegations amount to conjecture. In relation
to the
establishment of Chemtec, the respondents deny, vehemently, that Mr
Guest was involved or that he has any financial or other
interest in
the manufacturing entity. The appellants have not presented any
compelling evidence to persuade the court that the
usual principles
must not be applied and that the respondents’ averments must
not be accepted.
[23]
[71]
If a final interdict is granted in favour
of the appellants against Mr Guest, then he will be prevented from
engaging with, being
employed by or having any interest in Red Alert
until 30 June 2025. As the court
a quo
remarked, whether Mr Guest is interdicted from being employed by Red
Alert or whether Red Alert is interdicted from employing Mr
Guest,
the result is the same. An alternative remedy exists, obviating the
need for the appellants to obtain relief against Red
Alert itself.
Relief
and order to be granted
[72]
The
provisions of clause 9 of the buy-back agreement constitute a
covenant in restraint of trade. Mindful of the text, context and
purpose thereof, the restraint must be interpreted to mean that Mr
Guest undertook, for a specified period and for a specified
area, not
to become involved or have an interest in any business that was
similar to that of Chemex.
[24]
Such a restraint is, in principle, enforceable.
[25]
The respondents did not argue or demonstrate that the enforcement of
the restraint would be unfair, unreasonable or unduly harsh,
[26]
but focused, instead, on the assertion that it was incumbent on the
appellants to provide evidence of a competitive overlap. To
that
effect, the respondents argued that the business models of Chemex and
Red Alert, respectively, were different, such that the
entities were
not in competition with each other. As already indicated, the court
disagrees. Upon the basis of the case law to
which the parties
referred, the court is satisfied that the competitive overlap between
the entities is substantial. The court
respectfully differs from the
findings of the court
a
quo
in relation to the nature and extent of any distinguishing features.
[73]
Consequently, the court finds that the
appellants have indeed met the requirements for a final interdict
against Mr Guest. The court
does not find, however, that there is a
basis upon which to grant the same relief against Red Alert. There
is, firstly, no contractual
right that the appellants can enforce;
there is, secondly, merit in the contention that a cause of action
grounded in delict requires
the appellants to demonstrate that Red
Alert made or is likely to make improper use of confidential
information, knowingly or otherwise.
No evidence of either actual or
likely use was presented. It is, furthermore, not sufficient for the
appellants merely to allege
that Red Alert served as a vessel for Mr
Guest’s conduct.
[74]
Regarding costs, the appellants are
successful in relation to the relief sought against Mr Guest but not
against Red Alert. There
is no reason why costs should not follow the
result in both instances. These should include the costs of two
counsel, given the
complexity of the matter.
[75]
The following order is made:
(a)
the appeal with regard to the relief sought
against the first respondent is upheld;
(b)
the appeal with regard to the relief sought
against the second respondent is dismissed;
(c)
the order of the court
a
quo
is set aside and replaced with the
following:
(i)
until (and including) 30 June 2025, the
first respondent is interdicted and restrained from being engaged or
employed by or having
an interest in the second respondent or any
business or undertaking that carries on a business similar to that
carried on by the
first appellant within those municipal boundaries
where the first appellant carried on business in any manner for the
24-month
period immediately prior to 31 July 2020, viz.
·
Amahlathi Local Municipality;
·
Blue Crane Route Local Municipality;
·
Buffalo City Metropolitan Municipality;
·
Dr Beyers Naude Local Municipality;
·
Elundini Local Municipality;
·
Emalahleni Local Municipality;
·
Engcobo Local Municipality;
·
Enoch Mgijima Local Municipality;
·
Great Kei Local Municipality;
·
Intsika Yethu Local Municipality;
·
Inxuba Yethemba Local Municipality;
·
King Sabata Dalindyebo Local Municipality;
·
Kouga Local Municipality;
·
Koukamma Local Municipality;
·
Makana Local Municipality;
·
Matatiele Local Municipality;
·
Mbhashe Local Municipality;
·
Mhlontlo Local Municipality;
·
Mnquma Local Municipality;
·
Ndlambe Local Municipality;
·
Nelson Mandela Metropolitan Municipality;
·
Ngqushwa Local Municipality;
·
Ntabankulu Local Municipality;
·
Nyandeni Local Municipality;
·
Port St Johns Local Municipality;
·
Raymond Mhlaba Local Municipality;
·
Sakhisizwe Local Municipality;
·
Senqu Local Municipality;
·
Sundays River Local Municipality;
·
Umzimvubu Local Municipality;
·
Walter Sisulu Local Municipality; and
·
Winnie Madikizela-Mandela Local
Municipality;
(ii)
the first respondent is liable for and is
directed to pay the appellants’ costs, including those of two
counsel; and
(iii)
the appellants are liable for and are
directed to pay the second respondent’s costs, including those
of two counsel.
JGA LAING
JUDGE
OF THE HIGH COURT
I
agree:
D VAN ZYL
DEPUTY
JUDGE PRESIDENT OF THE HIGH COURT
I
agree:
T MALUSI
JUDGE
OF THE HIGH COURT
APPEARANCE:
For the
appellants:
Adv Pienaar SC with
Adv Mostert,
instructed by Cooper
Conroy Bell & Richards Inc, East London.
For the
respondents:
Adv Whitcutt SC with Adv De Witt,
instructed by Kirchmanns
Inc, East London.
Date of
hearing:
05 August 2022
Date
of delivery of judgment: 18 October 2022
[1]
Importantly,
this finding was not included within the ambit of the present
appeal. The appellants indicated that they appealed
against the
whole of the judgment of the court
a
quo
,
excluding paragraphs 25-29 thereof, which dealt with the
interpretation of ‘engaged’. There was no cross-appeal.
[2]
(15484/2010)
[2010] ZAGPHC JHC 139.
[3]
Van
Eeden, ‘Competition’, LAWSA (Vol 7(1), 3ed, 2019), at
253.
[4]
1984
(4) SA 874 (A).
[5]
Ibid.
[6]
2007
(5) SA 323 (CC).
[7]
2020
(5) SA 247 (CC).
[8]
2012
(4) SA 593.
[9]
(470/2020)
[2021] ZASCA 99
(09 July 2021).
[10]
(1134/2020)
[2021] ZASCA 186
(30 December 2021).
[11]
Pearsall
(ed),
The
Concise Oxford Dictionary
(10ed revised, 2001), at 1337.
[12]
The
meaning to be ascribed to ‘repurchase consideration’, as
used in clause 9, is set out in clause 2.1.17 of the
buy-back
agreement. The appellants would pay a gross amount of R 14 million,
less dividends withholding tax in the amount of
R 2,800,000,
resulting in a net amount of R 11,200,000 to be paid for the
purchase of Mr Guest’s member’s interest.
In addition,
Chemex would transfer to him, at book value, a 2014 Mercedes-Benz
ML-Class motor vehicle and a 2007 Mercedes-Benz
C-Class motor
vehicle, in full and final settlement of his loan account.
[13]
2011
JDR 0221 (GSJ).
[14]
The
court
a
quo
applied the tried and tested principles of
Plascon-Evans
Paints Ltd v Van Riebeeck Paints (Pty) Ltd
[1984] ZASCA 51
;
1984 (3) SA 623
(A) to accept the respondents’ version of the
facts (at paragraph [24] of the judgment of the court
a
quo
).
[15]
1978
(4) SA 353 (W).
[16]
1979
(2) SA 302 (SE).
[17]
The
court also referred to an Australian case,
Mays
v Roberts
1928 SASR 217
, where the word, ‘similar’, with reference
to houses, did not mean ‘exactly alike’.
[18]
The
appellants distinguish between the ‘contract cleaning and
hygiene services’ sector, in which they operate, and
the
‘hygiene’ sector, in which they contend that Red Alert
operates. The extent of the difference between the two
sectors in
question is not clear from the pleadings but nothing seems to turn
on this.
[19]
See
Setlogelo
v Setlogelo
1914 AD 221
; the principles have become settled law, as evident from
the long line of cases that have followed, including the recent
decision
of the Supreme Court of Appeal in
Hotz
and others v University of Cape Town
2017 (2) SA 485
(SCA), at 496G-H.
[20]
See
Continuous
Oxygen Suppliers (Pty) Ltd t/a Vital Aire v Meintjies and another
[2012] JOL 29152
(LC), at paragraphs [49] and [50].
[21]
2004
(4) SA 156 (W).
[22]
2004
(4) SA 174 (W)
[23]
The
principles are those laid down in
Plascon-Evans
(n 14,
supra
).
[24]
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[2012] ZASCA 13
(SCA)
,
at paragraph [18];
Capitec
Bank Holdings Limited and another v Coral Lagoon Investments 194
(Pty) Ltd and others
2022 (1) SA 100
(SCA)
,
at paragraph [51]; and
Post
Office Retirement Fund v South African Post Office SOC Ltd and
others
,
[2021] ZASCA 186
(SCA) at paragraph
[57]
.
[25]
Magna
Alloys & Research (SA) (Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984 (4) SA 874
(A)
,
at 897-8.
[26]
A
restraint of trade clause is unenforceable in such circumstances.
See
Barkhuizen
v Napier
[2007] ZACC 5
;
2007 (5) SA 323
(CC)
,
at paragraph [70], and
Beadica
231 CC and others v Trustees, Oregon Trust and others
,
Supra at paragraph [80].