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[2015] ZAKZDHC 26
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Firstrand Bank Limited t/a FNB Insurance Brokers v Prithipal and Another (14495/14) [2015] ZAKZDHC 26 (6 March 2015)
IN
THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION, DURBAN
CASE
NO. 14495/14
In
the matter between:
FIRSTRAND
BANK LIMITED
t/a
FNB INSURANCE
BROKERS
.......................................................................................
Applicant
and
ANILCHUND
PRITHIPAL
........................................................................................
First
Respondent
WESTWOOD
INSURANCE BROKERS (PTY)
LTD
...........................................
Second
Respondent
JUDGMENT
THATCHER
AJ:
[1]
The applicant conducts the business of an insurance brokerage,
selling short term insurance policies to both commercial and
private
clients. In August 2008, FNB Insurance Brokers (Pty) Ltd
(“FNBIB”) acquired a business which traded as
Southern
Natal Insurance Brokers (“SNIB”). During 2010, the
applicant acquired the business of FNBIB.
[2]
The first respondent is 65 years old, having been born on 21 May
1949. In 1968, when he was approximately 20 years old,
he
commenced work in the short term insurance industry. He became
a broker in 1987 and began his own insurance brokerage
business in
1990, and in 2004 joined SNIB, at the same time joining their pension
and medical aid schemes. When FNBIB acquired
the business of
SNIB in 2008, the first respondent was still employed at the latter
and FNBIB concluded a contact with him in terms
of which he would be
employed for a period of five years at a fixed monthly salary.
That contract was concluded on 21 October
2008 and was to operate
with effect from 1 November 2008. On the 31 October 2013 the
first respondent concluded a further
employment contract as well as a
“Confidentiality and Restraint Agreement” which are
annexures “B” and
“J” respectively to the
founding affidavit. In terms of the further employment
contract, it would be “reviewed”
annually, and, contrary
to the five year employment contract concluded in 2008, provided that
the first respondent would be remunerated
on a “commission
only” basis.
[3]
Upon the expiry of the one year contract on the 31 October 2014, the
first respondent left the applicant’s employ and
on the next
day commenced employment with the second respondent which is in
competition with the applicant. In consequence
of this, the
applicant launched this application to enforce compliance with the
restraint of trade agreement, annexure “J”.
[4]
The relief sought by the applicant is couched in a form of a
rule
nisi
. However, counsel for the respondents, Mr
Pammenter
SC, in his heads of argument, contended that the application should
be treated as one for final relief, an approach with which
Mr
Phillips
SC, counsel for the applicant, at the commencement of
the hearing, agreed. That being so, I must grant the applicant
final
relief only if the facts stated by the respondents together
with the admitted facts in the applicant’s affidavits justify
such an order.
See:
BHT Water Treatment (Pty) Ltd v Leslie & Ano.
1993(1) SA
47 (W) at 55 A-F;
Walter
McNaughtan (Pty) Ltd v Schwartz & Others
2004(3)
SA 381 (C) at 387J – 388C.
[5]
In the respondents’ answering affidavits, the applicant’s
locus standi
was placed in dispute, but at the hearing the respondents’
counsel advised that the respondents accept that the applicant
does
have
locus standi
to seek to enforce the restraint of trade agreement signed by the
first respondent.
[6]
At the commencement of the hearing, Mr
Phillips
,
moved that a further affidavit on behalf of the applicant be
admitted, the purpose of which was, he submitted, to “bring
the
court up to date” with events. Mr
Pammenter
objected to the reception of this further affidavit, submitting that
a formal application was required and the court’s consent
obtained before it could be received in evidence. Mr
Pammenter
submitted that its reception at this stage was prejudicial to the
respondents because they had not had an opportunity of investigating
whether the facts contained in the affidavit were true.
Furthermore there was no indication as to whether the names of the
alleged customers which appeared in that affidavit were the
applicant’s customers before 2004, and if they were, why they
had moved their business from the applicant. Mr
Pammenter
submitted that if the applicant persisted in seeking the admission of
that affidavit into evidence, the matter should be adjourned
and the
applicant ordered to pay the wasted costs of the hearing. Mr
Phillips
then withdrew his request that the affidavit be received in evidence
and accordingly I have not had regard to it.
[7]
While the restraint of trade agreement provides that the first
respondent be prohibited for a period of 24 months from being
employed by any competitor of the applicant, the applicant from the
outset merely sought an order that the first respondent be
so
restrained for a period of 12 months from the 31 October 2014.
[8]
It is not disputed by the respondents that the first respondent’s
employment with the second respondent is in contravention
of the
restraint of trade agreement. It is common cause between the
parties that the protectable interest contended for by
the applicant
is the risk of damage to its customer connection.
[9]
The approach to the enforcement of agreements in restraint of trade
was summarised by Malan AJA (as he then was) in
Reddy v Siemens
Telecommunications (Pty) Ltd
2007(2) SA 486 (SCA) at page 493E –
498G. In summary, agreements in restraints of trade are valid,
but are unenforceable
when, and to the extent that, their enforcement
would be contrary to public policy. The learned judge quoted
with approval
the dictum in
J Louw & Co. (Pty) Ltd v Richter &
Others
1987(2) SA 237 (N) at 243 B-C where the learned judge in
that case stated as follows:
“
It
is against public policy to enforce a covenant which is unreasonable,
one which unreasonably restricts the covenantor’s
freedom to
trade or to work. Insofar as it has that effect, the covenant
will not therefore be enforced. Whether it
is indeed
unreasonable must be determined with reference to the circumstances
of the case … Account must also be taken of
… the
situation prevailing at the time enforcement is sought
.”
[10]
Malan AJA stressed the important part played by the Constitution at
page 494C to 495B:
“
[11]
All agreements including agreements in restraint of trade are subject
to constitutional rights obliging courts to consider
fundamental
constitutional values when applying … the law of contract in
accordance with the Constitution of the Republic
of South Africa,
1996. Section 8 of the Constitution is imperative. The
Bill of Rights applies to all law, also private
law, and binds,
inter
alia
, the Judiciary (section 8(1)).
Its provisions bind natural and juristic persons if, and to the
extent that, they are applicable,
taking into account the nature of
the right and the nature of any duty imposed by the right (section
8(2)). In their application
to natural and juristic persons a
court must apply … the common law to give effect to the right
when legislation does not
do so (section 8(3)(a)). … The
exercise of a right may be limited by the exercise of another person
of his own fundamental
right. To determine whether there has
been an unconstitutional limitation of a right, the purpose of the
limitation has to
be considered in conjunction with all the other
factors referred to in section 36(1). This situation may occur
when the enforceability
of agreements in restraint of trade and the
balancing or reconciling of the concurring private and public
interests are considered.
“
[11]
Malan AJA further stated the following at page 496D to 497G:
“
A
court must make a value judgment with two principal policy
considerations in mind in determining the reasonableness of a
restraint.
The first is that the public interest requires that
parties should comply with their contractual obligations, a notion
expressed
by the maximum
pacta servanda
sunt
. The second is that all persons
should in the interests of society be productive and be permitted to
engage in trade and commerce
or the professions … In applying
these two principal considerations, the particular interests must be
examined. A
restraint would be unenforceable if it prevents a
party after termination of his or her employment from partaking in
trade or commerce
without a corresponding interest of the other party
deserving of protection. Such a restraint is not in the public
interest.
Moreover,
a restraint which is reasonable as between the parties may for some
other reason be contrary to the public interest. In
Basson v
Chilwan and Others,
Nienaber J identified four questions that
should be asked when considering the reasonableness of a restraint:
(a)
Does the one party have an interest that deserves protection after
termination of the agreement? (b) If so, is that interest
threatened
by the other party? (c) In that case, does such interest weigh
qualitatively and quantitatively against the interest
of the other
party not to be economically inactive and unproductive? (d) Is there
any aspect of public policy having nothing to
do with the
relationship between the parties that requires that the restraint be
maintained or rejected? Where the interest of
the party sought to be
restrained weighs more than the interest to be protected, the
restraint is unreasonable and consequently
unenforceable. The
enquiry which is undertaken at the time of enforcement covers a wide
field and includes the nature, extent
and duration of the restraint
and factors peculiar to the parties and their respective bargaining
powers and interests
.”
Whether
the applicant has a protectable interest
[12]
The interest that the applicant seeks to protect is the risk of
damage to its customer connection. Nestadt JA in the
case of
Rawlins & Another v Caravantruck (Pty) Ltd
1993(1) SA 537
(AD) at 541 C-H stated as follows with regard to customer
connection:-
“
The
need of an employer to protect his trade connections arises where the
employee has access to customers and is in a position
to build up a
particular relationship with the customers so that when he leaves the
employer’s service he could easily induce
the customers to
follow him to a new business. … Heydon
The
Restraint of Trade Doctrine
(1971) at
108, quoting an American case, says that the ‘customer contact’
doctrine depends on the notion that ‘the
employee, by contact
with the customer, gets the customer so strongly attached to him that
when the employee quits and joins a
rival he automatically carries
the customer with him in his pocket.’
In
Morris (Herbert) Ltd v Saxelby
[1916]
1 AC 688
(HL) at 709 it was said that a relationship must be such
that the employee acquires ‘such personal knowledge of and
influence
over the customers of his employer … as would enable
him (the servant or apprentice), if competition were allowed, to take
advantage of his employer’s trade connection …’
This
statement has been applied in our Courts … Whether the
criteria referred to are satisfied is essentially a question
of fact
in each case, and in many, one of degree. Much will depend on
the duties of the employee; his personality; the frequency
and
duration of contact between him and the customers; where such contact
takes place; what knowledge he gains of their requirements
and
business; the general nature of their relationship (including whether
an attachment is formed between them, the extent to which
customers
rely on the employee and how personal their association is); how
competitive the rival businesses are; in the case of
a salesman, the
type of product being sold; and whether there is evidence that
customers were lost after the employee left
…”
.
[13]
In
Rawlins
, the former employee stated that during his
employment with his former employer, he largely dealt, not with its
existing customers,
but with his own pre-existing following or buyers
whom he later found. Nestadt JA at page 542 G-I stated as follows:
“
Does
this establish that the [former employer] did not have a proprietary
interest of the kind under consideration? It is,
of course, a
factor in [the former employee’s] favour; but not conclusively
so … Even though the persons to whom an
employee sells and
whom he canvasses were previously known to him and in this sense ‘his
customers’, he may nevertheless
during his employment, and
because of it, form an attachment to and acquire an influence over
them which he never had before.
When this occurs, what I call
the customer goodwill which is created or enhanced is at least in
part an asset of the employer.
As such it becomes a trade
connection of the employer which is capable of protection by means of
a restraint of trade clause.
The
onus being on Rawlins to prove the unreasonableness of the restraint,
it was for him to show that he never acquired any significant
personal knowledge of or influence over the persons he dealt with as
a salesman of the [former employer] over and above that which
previously existed
.”
[14]
And so to the facts of this case. At the end of October 2013,
towards the end of his five year contract, the first respondent
was
advised that he could be
re-employed, not on a fixed term basis,
but on a contract which would be reviewed annually, and which
provided that his remuneration
would change from a fixed salary to a
commission based remuneration. Notwithstanding that he signed
the “commission
only” contract on 31 October 2013, it
would appear that it came into operation from 1 August 2014. At
that time, he
was advised that the applicant’s pension and
medical fund rules did not permit him to remain as a member after he
turned
65, which was on 21 May 2014. As a result, with effect
from August 2014, the first respondent’s income was reduced by
some 40% and he was no longer a member of the applicant’s
pension fund or medical aid fund. These constituted terms
far
less favourable than he had hitherto being employed. The
applicant is probably unable to change the rules of its pension
fund
and medical aid scheme which prevented the applicant from being a
member of either after he turned 65. However it would
appear
from the papers that no attempt was made by the applicant to consider
the individual personal circumstances of the first
respondent to
ameliorate the impact not only of his no longer having a fixed salary
but also not being a member of the pension
fund or medical aid
scheme. He was simply presented with terms which the applicant
regarded as not negotiable.
[15]
It is common cause that when the five year contract was concluded in
2008 the applicant paid the first respondent R200 000,00.
Mr
Phillips
submitted that that sum was paid by the applicant for the first
respondent’s goodwill so that the first respondent’s
customers as at 2008 became those of the applicant. In support
of this he cited the case of
Grainco
(Pty) Ltd v Van der Merwe & Other
2014(5) SA 444 (WCC), where the court reiterated the principle that
the seller of a business inclusive of its goodwill is precluded
from
competing by canvassing persons who were customers of the business at
the time of the sale.
[16]
Mr
Pammenter
countered this by referring to what was stated in
the applicant’s founding affidavit which was as follows:-
“
11.
The
first respondent was considered by FNBIB and SNIB to be a valuable
part of SNIB’s business.
12.
As
such, it was important for SNIB and FNBIB that the first respondent
be retained in employment once the acquisition of SNIB had
taken
place.
13.
In
order to achieve that goal, FNBIB reached an agreement with the first
respondent in terms of which would pay to him the sum of
R200 000,00
in order to retain
him in employment
with it after the acquisition.” (my underlining)
[17]
In dealing with those paragraphs, the first respondent stated as
follows:-
“
11.
(a) FNBIB, having
acquired the business of SNIB, obviously wanted to retain the
services of the latter’s employees.
(b) Without the
services of those employees, what they had purchased would have been
valueless.
(c)
Accordingly, the employees of SNIB, or certain of them, were paid
certain amounts as an inducement to sign an agreement which
bound
them to work for FNBIB for a period of five years.”
[18]
These allegations are not dealt with by the applicant in reply and
accordingly the applicant must be taken to have admitted
them.
[19]
It would have been a relatively simple matter for the applicant to
state that the amount of R200 000,00 was paid to the
first
respondent for the latter’s goodwill. However it did not
do so. It is clear from both the founding affidavit
and the
answering affidavit that the amount was paid to the first respondent
to induce him to conclude a contract to work for FNBIB
for five
years.
[20]
It is thus not correct to describe the payment of R200 000,00 as
the purchase price of the first respondent’s goodwill.
Therefore the analogy of the restraint binding a seller of his
business, including his sale of his goodwill, from canvassing
customers
of the business at the time of the sale, is not correct and
is not evidence that the first respondent’s customers became
the applicant’s.
[21]
Mr
Phillips
submitted that the onus was on the first
respondent to show that he never acquired any significant influence
over the persons he
dealt with as a salesman for the applicant over
and above that which previously existed prior to his employment with
the applicant,
and that he had not discharged this onus.
[22]
Mr
Pammenter
submitted that the first respondent had discharged this onus. In
support of this he referred to an annexure to the first respondent’s
first answering affidavit which lists 18 names of persons whom he
describes as his customers and the dates when their relationships
with the first respondent commenced. Twelve of those
relationships are recorded as having commenced between 1990 and 1995
while the remaining six commenced between 2001 and 2004, all before
he joined SNIB in 2004. Mr
Pammenter
submitted that it can be inferred from this that these customers were
longstanding customers of the first respondent and that the
first
respondent never acquired any personal knowledge of or personal
influence over those customers over and above that which
existed
before 2004.
[23]
In the applicant’s second replying affidavit, the first
respondent’s evidence in this regard is simply dismissed
as
“implausible”. The applicant placed no evidence before
the court to rebut this evidence of the first respondent
by, for
instance, putting up evidence of the manner in which the fist
respondent and those who do the same work as the first respondent
carry on business. I have in mind the topics listed by Nestadt
JA in
Rawlins
(supra) at page 541 G-H referred to above. The applicant
provided no evidence of the contact it had made with these customers
since the first respondent’s departure in order to ascertain
the reason for their moving their business from the applicant.
At
the very least I would have thought that the applicant would have
provided evidence of its attempt to contact these customers,
and if
those attempts had not met with any success, to inform the court of
this. That the applicant appears not to have made any
attempt to
contact any of these customers is supported by the allegation by the
first respondent that no attempt has been made
by the applicant to
establish any form of relationship with those clients since his
departure. The first respondent in fact
alleges that he did not
canvass them to leave and that they had in fact signed statements
indicating that they were not solicited,
canvassed or induced or
persuaded in any way to appoint the second respondent as their
brokers, and he put up examples of two such
letters. The
applicant simply dismissed this evidence as being “improbable
in the extreme”.
[24]
Accordingly the first respondent in my view has discharged the onus
which rests upon him to prove that he never acquired any
significant
personal knowledge of or influence over the persons he dealt with as
a salesman of the applicant, over and above that
which previously
existed. Thus I find that the applicant has no interest that
deserves protection after the first respondent
left the applicant’s
employ.
Balancing
of the Parties’ Interests
[25]
If I am incorrect in this regard, I must consider whether that
protectable interest is threatened by the first respondent,
and if
that is the case, whether that interest of the applicant weighs
qualitatively and quantitatively against the first respondent
not to
be economically inactive and unproductive. I have set out
earlier in this judgment the applicant’s work experience.
It is common cause that the first respondent is capable of carrying
out the functions for which the applicant employed him.
He has
a wife of 63 years old who has never been employed and together they
have a combined retirement some R2 100 000,00.
A
living annuity purchased with this would give him a monthly income of
some R10 500,00 per month upon which he could barely
survive.
Accordingly it is imperative for him, and his wife, that he continue
in employment for as long as he is able.
[26]
In contrast, the applicant is one of the four largest banks in South
Africa. The consequence to the first respondent
of being
unemployed is,
vis a
vis
him and his
wife, far more serious than the impact would be on the applicant if
the first respondent is able to work.
[27]
Thus the interest of the applicant does not outweigh the first
respondent’s interest in not being economically active.
Public
Policy
[28]
Is there an aspect of public policy that requires that the restraint
be maintained or rejected?
[29]
The public interest requires that parties should comply with their
contractual obligations.
[30]
Mr
Pammenter
argued that public policy is dictated by the provisions of the Bill
of Rights. This is so. See
Barkhuizen
v Napier
2007(5) SA
323(CC) paragraph [29]. In this regard, Mr
Pammenter
referred to the provisions of the
Older Persons Act, No. 13 of 2006
and in particular
sections 5(2)
and
5
(3) which require
inter
alia
that older
persons be treated fairly and equitably and protected from unfair
discrimination on any ground and that in any matter
concerning an
older person an approach conducive to conciliation should be followed
and a confrontational approach avoided. In
particular he referred to
section 7(d)
which provides that older persons may not be unfairly
denied the right to participate in activities that enhance their
income-generating
capacity. The first respondent is an older
person within the meaning of that term in the
Older Persons Act and
accordingly the Act applies to him. He was able to carry out
his duties in the industry in which he had worked for over 40
years
and public policy dictates that he should not be denied the
opportunity to do so that his income generating capacity if not
enhanced, at least remains in place. The first respondent’s
age and the stage he has reached in his working life is
an important
factor in making the value judgment that the public interest requires
that people such as the first respondent should
be productive and
permitted to work.
[31]
In the particular circumstances of this case, and I refer
specifically to the personal circumstances of the respondent I have
set out above, public policy requires that the restraint should not
be enforced.
[32]
Insofar as the position of the second respondent is concerned, its
approach has been to abide the decision of the court.
In the
light of the conclusion I have reached and the order I propose to
make, it is unnecessary to deal with the position of the
second
respondent.
I
make the following order:
The
application is dismissed with costs including the costs consequent
upon the employment by the respondents of senior counsel.
_________________
Date
of Hearing : 6 March 2015
Date
of Judgment : 18 March 2015
Counsel
for Applicant: Adv. D Phillips SC
Instructed
by : Norton Rose Fulbright Attorneys
031-5825600
Counsel
for Respondents: Adv. CJ Pammenter SC
Instructed
by: Larson Falconer Hassan Parsee Inc.
031-5341600