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[2013] ZAGPPHC 312
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Itec Distribution (Pty) Ltd v Tuscan Mood 179 (Pty) Ltd and Others (27575/13) [2013] ZAGPPHC 312 (29 October 2013)
REPORTABLE
IN
THE HIGH COURT OF SOUTH AFRICA NORTH GAUTENG HIGH COURT, PRETORIA
CASE
NO: 27575/13
DATE:29/10/2013
In
the matter between:
ITEC
DISTRIBUTION (PTY)
LTD
...................................................................
APPLICANT
and
TUSCAN
MOOD 179 (PTY)
LTD
.......................................................
1st
RESPONDENT
LEON
AUGUST WILHELM
HERB
…...............................................
2nd
RESPONDENT
CHANTALL
HERB
...............................................................................
3rd
RESPONDENT
JUDGMENT
NKOSI
AJ:
[1]
The applicant seeks relief which falls within two categories:
1.1
In the first instance the applicant seeks an order to compel the 1st
respondent to allow the applicant access to the 1st respondent’s
premises (situated at 4 Pieter Street, Highveld Techno Park,
Centurion) with the objective of enabling the applicant to determine
which of the 1st respondent’s assets it wishes to purchase in
terms of an option the applicant has elected to exercise.
1.2
In the second instance the applicant seeks to enforce against the
1st, 2nd and 3rd respondents a covenant in restraint of trade.
Later
abandoned against the 3rd respondent only.
[2]
Both forms of relief originate from the terms of a dealership
agreement which had been concluded between the applicant (then
known
as Itec South Africa (Pty) Ltd) and the 1st respondent in and during
December 2004.
[3]
In terms of the dealership agreement the applicant (defined therein
as the distributor) granted to the 1st respondent (described
therein
as the dealer) the right to carry on the selling, trading in and
supply of consumables and/or spare parts for certain Itec
office
equipment and spare parts made available by the applicant.
[4]
It must be borne in mind that the applicant’s concern includes
the fact that it appears self-evident from annexure “FA6”
to the founding affidavit that the 1st respondent (guided by the 2nd
and 3rd respondents) is intent on diverting the existing customer
base which the applicant seeks to acquire into an entirely new
company. In the event that the diversion takes place it will, with
respect, be an impossible task for the applicant to recover it.
[5]
In the relevant letter (dated 17 April 2013) the 3rd respondent says
the following:
“
I
do understand that you no longer want to deal with Itec, Tuscan Mood
(the 1st respondent) (who traded as Itec Tswane) or anyone
who was
involved in the whole Itec debacle, but we have formed an entirely
separate new Company, that is a fully fledged Konica
Minolta dealer.
with no ties to Itec at all. ”
[6]
The following paragraph proposes that the client (USN) effectively
cancel its existing agreements and take up new agreements.
[7]
In their answering affidavits the respondents present the rather
startling proposition that, although the aforesaid words were
used:
"...
it is in fact not true that we have formed an entirely new company.
Those words were used in relation to the fact that
the 1st Respondent
now trades under the Konica Minolta brand”.
[8]
The denial by the respondents is not borne out by the contents of
annexure “FA6” quoted above which make it clear
that the
2nd and 3rd respondents sought to move the customer base into what
they described to be “an entirely separate new
Company”.
[9]
In the event that the respondents are permitted to unlawfully
appropriate the customer base the applicant will be left without
recourse. The business that the applicant seeks to acquire from the
first respondent will have a substantially reduced value and
it will
be an extraordinarily difficult task for the applicant to pursue its
rights against the unidentified new company.
[10]
In the unreported judgment of Bottom Line Solutions (Pty) Ltd v FPT
Group (Pty) Ltd
[2011 ZAWCHC 454
(16 September 2011) Gamble J said
the following:
“
[50]
The applicant’s election to hold the respondent to the main
agreement is a right which is only available to the applicant
to
exercise. The respondent does not enjoy the right to choose to pay
damages instead of being required to render specific performance.
[51]
In such circumstances I am of the view that a Court will give serious
consideration to a party’s election to claim specific
performance which is after all the primary remedy available to a
contracting party. It will refuse same if to do so would cause
the
other party undue hardship. On the other hand a Court will more
readily grant an interdict if an applicant indeed does not
have an
alternative or adequate claim for damages”.
[11]
In the current matter the parties negotiated for and contracted on
the basis that, on termination of the dealership agreement,
the
applicant would acquire the option to purchase the consumer and
service base previously managed by the 1st respondent. In addition,
and given that the applicant was to purchase a range of assets which
included the 1st respondent’s goodwill, the parties
agreed that
neither the 1st respondent nor its directors or shareholders would
compete with the application in relation to that
customer base or
business after the sale. The very purpose of those contractual terms
was to preclude a situation in which the
1st, 2nd and 3rd
respondents, by competing with the applicant, would erode the very
customer base that the applicant was to purchase
at an agreed price.
[12]
In the context of the interests that the applicant seeks to protect
in this application, relevant guidance can be derived from
the
judgment of Mr Acting Justice Rossouw in the original urgent
application at par [41] where His Lordship said the following:
"Furthermore,
if regard is had to the agreement as a whole, it is dear that the
intention of the parties was that upon cancellation
of the agreement
Tuscan (the 1st respondent) would cease all business activities in
order to preserve the goodwill of the business
with a view to placing
Itec (the applicant) in a position from where it could take an
informed decision as to whether it should
exercise its option to
purchase, without the goodwill being contaminated with any on-going
activities. ” (Emphasis added).
THE DEEMED PURCHASE
[13]
In terms of clause 19 of the dealership agreement, the applicant was,
in certain circumstances, granted an option to purchase
the assets of
the first respondent’s business. The mechanism recording the
manner in which that option is to be exercised
is set out in clause
31 of the agreement.
[14]
Clause 28.4 of the dealership agreement provides the following:
In
the event of the DISTRIBUTOR electing to cancel his Agreement as
provided for in clause 28.2 above. and without prejudice to
any other
remedies which the DISTRIBUTOR may have in terms of this Agreement
and/or in terms of law, the DEALER shall be deemed
to have granted to
the DISTRIBUTOR an option to purchase the ASSETS of the BUSINESS or a
portion of such assets at the category
3 price, and on the terms and
conditions, stipulated in annexure 4 hereto’’.
[6]
The applicant avers that by notice dated 5 November 2012 it advised
the 1st respondent of the latter’s breaches of clauses
11.1 and
22.1 of the dealership agreement, the primary complaint being the 1st
respondent’s failure to comply with good corporate
governance
by not having made payment of amounts due to the South African
Revenue Service.
[7]
In the light of those breaches the applicant invoked the provisions
of clause 28 of the dealership agreement and cancelled that
agreement. In addition the applicant notified the 1st respondent of
its election to exercise its option to purchase the service
base “and
any other of your assets that we may identify the details of which
other assets we will notify you once so identified”.
[8]
The 1st respondent was pertinently advised that the letter
constituted notice in terms of clause 31.3 of the dealership
agreement
to the effect that there would be a purchase by the
applicant of still-to-be-identified assets at the category 3 price
specified
in annexure 4 to the dealership agreement.
[9]
The 1st respondent’s attorneys replied on 18 December 2012. In
that response those attorneys denied any breach on the
part of the
1st respondent and contended that the applicant’s attempt to
cancel the dealership agreement amounted to a repudiation
thereof
which the 1st respondent had accepted with immediate effect. In
addition, the letter contains the following paragraph:
“
You
are thus informed that you are not entitled to access our client’s
premises and/or to take access into possession any
of our client's
Service Agreements comprising the Service Base and/or any other
assets”.
[19]
In its opposition to the relief sought in this context the 1st
respondent presents various versions:
19.1
it contends, in the first instance, that the applicant has already
elected to acquire the entirety of the 1st respondent’s
customer service base and all aspects thereof as a consequence of
which no access to those assets is required;
19.2
by launching the current application, the applicant has purportedly
repudiated the deemed sale agreement which repudiation
has been
accepted by the first respondent as a consequence of which there is
no longer any sale of assets;
19.3
by failing to pay the deemed purchase price the applicant has sought
to “destroy the 1st respondent’ and does not
come to
Court with clean hands.
[20]
The propositions advanced by the 1st respondent as recorded above
are, it is respectfully submitted, both fanciful and factually
inaccurate. It was made abundantly clear to the 1st respondent in the
applicant’s letter of 5 November 2012 that the option
that the
applicant elected to exercise was one which still required the
applicant to identify the assets it wished to acquire.
The relief
that the applicant seeks in terms set out in paragraphs 2, 3 and 4 of
its notice of motion are justified by the express
provisions of the
dealership agreement. No purchase price can be determined until such
time as the applicant is placed in a position
to determine which
assets it wants to purchase.
[21]
It is self-evident from the contents of the respondents’
answering affidavit that they do not intend to grant to the
applicant
the access that it requires and do not intend to comply with the
express terms of the dealership agreement.
[22]
In those circumstances the applicant is entitled to the orders that
it seeks.
THE RESTRAINT PROVISIONS
[23]
The relevant restraint provisions are contained in paragraph 27 of
the dealership agreement and are quoted in full in the founding
affidavit.
[24]
The period of the restraint is for eighteen months. The restraint
applies to those areas identified on annexure “X”
to the
notice of motion.
[25]
The respondents acknowledged in the restraint that its terms were
fair and reasonable and were necessary to protect the applicant’s
proprietary interests.
[26]
The question of the onus in relation to restraint provisions was
settled in Magna Alloys and Research SA (Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984 (4) SA
874
(A) at 893 C-E amd 898 C-D.
[27]
The applicant does not bear an onus of proving that the restraint is
reasonable. The party that alleges that the restraint
is
unenforceable bears the onus of proving the enforcement of the
restraint provisions would be contrary to public policy.
[28]
In Basson v Chilwan and Others 1993 (3) S/4 742 (A) at 775-771 the
following was said:
“
The
incidence of the onus in case concerning the enforceability of a
contractual provision in restraint of trade does not appear
to me in
principle to entail any greater or more significant consequences that
in any other civil case in general. The effect of
it in practical
terms is this: the convenantor seeking to enforce the restraint need
do no more that to invoke the provisions of
the contract to prove the
breach. The convenantor seeking to avert enforcement is required to
prove on a preponderance of probability
that in all circumstances of
the particular case it will be unreasonable to enforce the restraint;
if the Court is unable to make
up its mind on the point, the
restraint will be enforced. The convenantor is burdened with the onus
because public policy requires
that people should be bound by their
contractual undertakings”.
[29]
In the circumstances, having proved the contract and its
enforceability in the hands of the applicant, and having the
respondents’
breach of the restraint and undertakings (not
challenged on the affidavits), the onus rests on the respondents to
demonstrate that
the restraint undertakings are unenforceable.
[30]
In addition, there is an onus on the respondents to prove that the
applicant has no proprietary interest worthy of protection.
[31]
The applicant has admittedly discharged the onus that rests upon it,
it has proved the existence of a covenant in restraint
of trade which
is, at the very least, enforceable against both the 1st and 2nd
respondents. That covenant precludes the respondents
from competing
with the applicant in respect of the business and/or goodwill
purchased by the applicant from the 1st respondent.
[32]
The 1st and 2nd respondents are admittedly in breach of the
provisions of the restraint covenant. That much is evident from
the
correspondence addressed on behalf of the 1st respondent on 17 April
2013.
[33]
In addition, the respondents admit in their answering affidavits that
the 1st respondent continues to do business in the same
manner as it
had prior to the applicant’s cancellation of the
distributorship agreement. Despite falsely denying that the
contents
of annexures “FA5” and “FA6” to the founding
affidavit reflect an intention to continue trading
in a different
name, the respondents confirm the unlawful competition and the breach
of the restraint provisions by stating: In
fact, the 1st respondent
continues to trade as before”.
[34]
That trade amounts in large part to an attempt on the part of the
respondents to solicit the very clients forming the customer
base
that the applicant has purchased from the 1st respondent.
[35]
The respondents raise two primary defences to the enforcement of the
restraint provisions:
35.1
the 3rd respondent denies that she is a party to that agreement and,
in the circumstances, denies having furnished an restraint
in favour
of the applicant. This serves no further purpose as 3rd respondent is
left out of the litigation;
35.2
the applicant has no proprietary interest worthy of protection as it
does not compete directly with the first respondent;
35.3
allied to the challenge to the applicant’s proprietary interest
is an argument that a proprietary interest is an argument
that a
proprietary can only exist in the event that the information sought
to be protected is confidential in nature.
[36]It
is submitted that none of the aforegoing "defences” has
any merit:
36.1
the parties to the agreement were the applicant and the 1st
respondent;
36.2
the “DIRECTORS” are defined to mean “the directors
specified in clause 1.5 of the agreement ...or their lawful
successors in terms of the provisions of this agreement;
36.3
in addition, shareholders are defined in clause 3.1.9 of the
agreement to be the shareholders at the time of the conclusion
of the
agreement of their lawful successors in title:
36.4
in terms of clause 27.1 of the agreement (the restraint provision)
that provision is furnished by the 1st respondent and all
directors
and shareholders, jointly and severally;
36.5
in any event, and at best for the respondents, that so-called defence
is available only to the 3rd respondent and does not
excuse either
the 1st or 2nd respondents from the restraint provisions;
36.6
there is no numerous clauses of protectable interests. In Super Safes
(Pty) Ltd v Voulgarides
1975 (2) SA 783
(W) at 785 Nicholas J put the
position as follows:
“
A
bare covenant not to compete cannot be upheld. A restraint against
competition must, if it is so be valid, serve some interest
of the
person in whose favour it was inserted - the purchaser of a business,
for example, who requires protection against the erosion
of its
goodwill by the competition of the seller ”;
36.7
it is respectfully submitted that the unlawful competition in which
the respondents continue to engage with the applicant in
respect of
the purchased business falls squarely within the type of protectable
interest defined by Nicolas J as aforesaid;
36.8
it is expressly recorded in Annexure “4” to the
dealership agreement that the assets sold include the goodwill;
36.9
the applicant has expressed its concern that the 2nd and 3rd
respondents intend to compete with the applicant in respect of
the
existing Itec consumer base (purchased by the applicant) from the 1st
respondent) through the medium of a newly incorporated
company. That
process, it is stated, constitutes a deliberate attempt to avoid the
express provisions of the covenant in restraint
of trade and is
unlawful.
[37]
The harm that the applicant seeks to avoid is expressed to be the
continued interference by the respondents in the Itec customer
base
by attempting to solicit that base for themselves. The result of that
continued interference may very well be the election
on the part of
the customers to sever all ties or relationships with the Itec Group
(including the applicant) and to contract,
instead, with an
alternative office supplier.
[38]
The respondents do not deny in their answering affidavits that they
continue to solicit the purchased customer base. Instead
they
obfuscate and contend that any loss that the applicant stands to
suffer is in consequence of its own actions by having written
threatening letters to the customer base.
[39]
It has already been held by Mr Acting Justice Rossouw in the original
urgent application that the applicant did not act unlawfully
in
seeking to protect the Itec customer base which it is deemed to have
purchased from the 1st respondent. In the circumstances
the denials
by the respondents of the applicant’s fear of substantial
financial harm are entirely unfounded.
[40] WEIGHING OF EVIDENCE &
ARGUMENTS:
40.1
respondent does not deny that there was an agreement to sell Itec
products or to do business in these products. To start selling
different products in competition with the applicant is a breach of
the restraint of this. Applicant is entitled to a protection
against
respondent’s conduct;
40.2
respondents submits the applicant should have done in the
circumstances was the move for an order for specific performance
so
that the 1st respondent transfers the contracts that have purportedly
being purchased with the cancellation notice and the distribution
agreement;
40.3
it is further submitted, on behalf of the respondents that the
applicant is attempting to close down the 1st respondent completely
from doing business. It is further submitted that the customers that
the 1st respondent obtained, and to which it sells a different
brand
of machinery in with whom contracts where entered into after 5
November 2012, can in this manner whatsoever be construed
as being
part of the “business” that the applicant had purportedly
purchased in terms of the distribution agreement;
40.4
the above submission justify applicant’s request for the access
of the customer data base which is not an unreasonable
request.
It
is not denied that the applicant made an election to purchase the
service base and relied on the provisions of the distribution
agreement to deem a sale, as already having been concluded and that
they were now the owners of the service base;
40.5
1st respondent further submits that in the light of what has been
quoted from the letter of cancellation of 5 November 2012,
it is
clear that the applicant vat exercise its option and in fact stated
categorically that a deemed sale has been constituted.
Such an option
having been exercised there is now no need or room for further
inspection to take place. It is not clear if 1st
respondent gave the
applicant full access to the data base to enable it to exercise its
option in full;
40.6
it was submitted that the applicant has failed to make out a case for
the relief sought of which I disagree. I am of the view
that relevant
guidance can be derived from the judgment of Rossouw AJ:
“furthermore, if regard is had to the agreement as
a whole, it
is clear that the intention of the parties was that upon cancellation
of the agreement, Tuscan would cease all business
activities in order
to preserve the good will of the business with a view to placing Itec
(the applicant) in a position from where
it could take an informed
decision as to whether it should exercise its option to purchase,
without the goodwill being contaminated
with any on-going
activities”;
40.7
this can only be frustrated by the respondent’s refusal to
abide by the agreement ex post facto. The respondents cannot,
at this
stage, claim not to be bound by the dealership agreement by denying
the breach of the agreement, by continuing to service
the same
customer base obtained during the existence of the dealership
agreement and by continuing to trade with the same customer
base on
other equipment before dealing with the original breach to its
finality and start trading on other equipment from then;
40.8
it is further worsening the process by the attempt or actual removal
of the customer base in contravention of the restraint
of trade. This
also placed a duty to the 1st respondent to prove that the restraint
of trade is or was unreasonable, against public
policy and therefore
unenforceable. This was not demonstrated by the 1st respondent's
submissions;
40.9
it was the 1st respondent’s further submission that the
applicant had not yet elected the option to buy and therefore
could
not have been a goodwill to protect. They have not taken the whole
business which had to happen within 90 days after exercising
the
option to buy and the question that follows is how could it happen if
access is denied?
40.10
it was further submitted that applicant could apply for a declaratory
or institute or damages claim as an alternative and
not a restraint
of trade as there was no protectable interest following the fact that
the 1st respondents was trading on different
brand or office
equipment. If applicant has to do an inspection then there is no
goodwill to protect. No offer to buy any customer
base or equipment
was made by the applicant. The respondent produced a document
purported to be from an auditor to show that 1st
respondent was not
technically insolvent. The 1st respondent cannot choose which legal
recourse could the applicant take to enforce
its rights;
40.11
counter arguments were that the 1st and 2nd respondents owed an
amount of R904 239.00 which remains unpaid to date. The statement
purported to be from an auditor was not an audited statement nor it
be supported by an affidavit to its accuracy. The respondents
have
been obstructive if not outright refusal to give applicant access to
inspect the records. The offer to purchase could not
happen if access
to do inspection was refused.
[41] OBSERVATION FROM SUBMISSIONS:
41.1
what is notable, is that 1st and 2nd respondent have not settled the
outstanding debt due to the applicant in the amount or
R904 239.00
and this was not denied;
41.2
technical denials of liability do not extinguish the debt;
41.3
the distribution agreement is not challenged or declared void or
unenforceable;
41.4
all parties to the agreement remain bound by its terms;
41.5
the 1st and 2nd respondents are obstructing the effective
implementation of the applicant’s rights to be exercised fully
on cancellation of their agreement;
41.6
the restraint of trade is not found to be unreasonable given the
circumstances of the distribution arrangement. It has a business
interest to protect. Arguments that the respondents are selling
another brand are
indicative
enough that deviation from the distribution agreement had deed taken
place;
41,7
respondent is duly bound to disclose the data base of the clientele
in accordance with the distribution agreement.
[42]
The applicant was left with no option but to cancel the agreement of
which they were entitled to do so.
The
computer server in the 2nd respondent’s premises could not be
accessed and the applicant does not know anything beyond
5 November
2012 regarding the customer base or stock.
[43]
The continued preclusion of the applicant by the 1st respondent to
have access left the applicant with no option but to approach
this
court for an order compelling the 1st and 2nd respondent access to
the premises and all data kept in the computer server and
to enforce
the restraint of trade as 1st respondent had been suspected of
diverting business to new customers and/or entering into
new
contracts with the pre-existing customer base. The applicant suspects
that the pre-existing customer base might have been eroded
by now and
dismissed the assertion that they are competitors.
[44] FINDINGS FROM ALL SUBMISSIONS:
44.1
having heard both parties to this matter the court had to establish
on a balance of probabilities whether the applicant has
succeeded to
make out a case worthy of being awarded the case in its favour and
that a restraint of trade is there and is worth
of being protected;
44.2
the agreement entered into between the parties prior to its
cancellation clearly spelt the parties rights, which have not been
disputed throughout this hearing;
44.3
the applicant had tried everything in the book to protect its rights
and to enforce such but the 1st respondent made it difficult
if not
obstructive to
allow
the applicant to have full access to 2nd respondent and to do the
necessary inspection to exercise its options in full and
to have
access to the customer base in the computer server;
44.4
I am of the view that the applicant had succeeded to make out its
case and the respondent’s arguments are more obstructive
in
nature rendering the applicant unable to exercise its rights in full.
Therefore 1st and 2nd respondent’s submission are
bound not to
succeed and that the defences raised have no merits. The applicant
had no other alternative but to approach this court
for the relief
sought and the 1st and 2nd respondent have to be stopped from being
obstructive and to trade against the restraint
of trade.
[45]
Consequent upon the above the following order is made:
1.
The applicant’s case succeeds in accordance with the orders
prayed for in the Notice of Motion.
2.
The 1st and 2nd respondents are ordered to pay the costs of this
application jointly and severally each paying the other to be
absolved.
VRSN
NKOSI
ACTING
JUDGE OF THE HIGH COURT
COUNSEL
FOR APPLICANT: ADV. ARG MUNDELL SC
COUNSEL
FOR RESPONDENT: ADV. RIPP SC
DATE
OF HEARING: 10 OCTOBER 2013
DATE
OF JUDGMENT: 28 OCTOBER 2013