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[2006] ZASCA 167
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Automotive Tooling Systems (Pty) Ltd v Wilkens and Others (581/05) [2006] ZASCA 167; [2007] 4 All SA 1073 (SCA); 2007 (2) SA 271 (SCA); (2007) 28 ILJ 145 (SCA); 2006 BIP 347 (SCA) (28 September 2006)
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
Case No: 581/05
REPORTABLE
In the matter between:
AUTOMOTIVE TOOLING
SYSTEMS (PTY) LTD APPELLANT
v
SAREL JOHANNES WILKENS
1
ST
RESPONDENT
DAVID SCHALK ROTHMANN
2
ND
RESPONDENT
AMS MANUFACTURING
(PTY) LTD 3
RD
RESPONDENT
ADVANCED MARKING
SYSTEMS (PTY) LTD 4
TH
RESPONDENT
KYLE CONAN PARKER
5
TH
RESPONDENT
WYBRANDT WILLEM
COETZEE 6
TH
RESPONDENT
Coram: Farlam, Nugent,
Lewis, Maya JJA and Cachalia AJA
Heard: 16 August 2006
Delivered: 28 September
2006
Summary: Restraint
of trade covenant. ‘Independent contractor’ agreement
entered into to circumvent provisions of
Labour Relations Act 66 of
1995
construed as contract of employment – Interdict sought to
restrain ex-employees from using their skill and knowledge in
manufacturing
marking machines for competitor. Employer has no
proprietary interest in the general skills and knowledge of its
ex-employees upon
termination of an employment contract. Restraint
contrary to public policy found unenforceable.
Neutral citation: This case may be
cited as
Automotive Tooling Systems v Wilkens
[2006] SCA 128
(RSA)
_____________________________________________________________
JUDGMENT
_______________________________________________________
CACHALIA AJA
[1] This appeal concerns the
enforceability of restraint of trade and confidentiality clauses in
agreements entered into between the
first and second respondents and
the appellant. The Pretoria High Court (De Vos J) declared the
agreements as a whole to be invalid
and unenforceable. The present
appeal, with leave of the court below, is against that order.
[2] The appellant’s business, as
described in its founding affidavit, is in a specialised
technological field relating to the
design, manufacture and/or
customisation of special purpose machines and tooling. It produces
pressed tools and ‘marking machines’
used predominantly
to manufacture automotive parts. These machines comprise a ‘marking
head’ (which functions using a
laser beam, pin stamping or
scribing) and numerous other components. The first and second
respondents had been employed in the business
as tradesmen for
several years. They are skilled toolmakers.
[3] Some years into their employment,
and at the appellant’s instance, they entered into ‘Independent
Contractor agreements’
(‘service agreements’) with
the appellant. The apparent change in their status from ‘employees’
to ‘independent
contractors’ with the appellant had no
material bearing on the nature of the work they performed. The
service agreements contained
two clauses relevant to this dispute; a
restraint of trade covenant and a confidentiality clause. The clauses
prohibited the first
and second respondents from:
‘
[Having] a direct
interest as . . . employee or otherwise . . . in any business, firm
or company in competition with the company or
deal[ing] directly with
a client or prospective client of the company . . . for a period of
three years from the date of termination
of the agreement;’
and from
‘
[disclosing] any
information of any activities or processes of the company . . . such
as methods, processes, computer software or
any other information
damaging for the company or beneficial to another person to the
detriment of the company.’
[4] It was accepted in argument before
us that the outcome of the appeal depends on the enforceability of
the restraint clause. The
confidentiality clause might add colour to
the question of whether the restraint is enforceable but is not
material in itself. It
was conceded by counsel for the appellant that
if the restraint fails then the confidentiality clause is not being
breached in itself,
and conversely if the restraint succeeds no
reliance on the confidentiality clause is necessary. I shall thus
refer only to the restraint
clause.
[5] In January 2004 the first and
second respondents were promoted to the position of foreman and
assistant foreman respectively.
The following year, in May 2005, they
tendered their resignations with effect from 30 June 2005 to take up
employment with the third
respondent (‘AMS Manufacturing’).
The nature of their employment with AMS Manufacturing, says the
appellant, is in breach
of the restraint clause.
[6] The court below held the service
agreements unenforceable in their entirety because, they had been
concluded
in fraudem legis
,
to circumvent the
provisions of the Labour Relations Act 66 of 1995 (in particular
those relating to collective bargaining.)
1
The grounds for that conclusion were that they purported to create
relationships of independent contractors between the appellant
and
each of the first and second respondents whereas the substance of the
relationship was one of employment.
2
This does not appear to me to be a sound conclusion. The mere fact
that a contract is unsuccessfully designed to escape the provisions
of the law does not in itself render it unenforceable. It is
unenforceable only if the true nature of the relationship is one that
the law forbids.
3
Accepting for present purposes that the service agreements were, in
truth, contracts of employment, the law does not prohibit them,
and
the restraints are not forbidden in themselves. In those
circumstances the court below was wrong to declare the service
agreements
contracts unenforceable merely because they sought to
disguise the true relationship between the parties.
[7] The appellant’s case is
that the fourth respondent (‘Advanced Marking Systems’)
was an important client of the
appellant. It purchased marking
machines from the appellant for re-supply to its customers. The first
and second respondents did
much of the work in manufacturing these
machines. They will now, the appellant complains, do the same work
for AMS Manufacturing
that they did for the appellant in
manufacturing such machines for supply to Advanced Marking Systems.
In so doing, avers the appellant,
they would use the technological
know-how (‘know-how’) which is confidential and that was
learnt during their employment
with it. The appellant contends that
it has a proprietary interest in such know-how and consequently is
entitled to interdictory
relief in the following terms:
‘
That the First and
Second Respondents each be interdicted from taking up employment
with, or having any direct interest in, the Third
Respondent, or in
any other business, firm or company in competition with the
Applicant, in the Republic of South Africa, which employment
or
interest involves the design, manufacture or customisation of
machines for marking in the category of such machines described
in .
. . the founding affidavit.’
4
[8] At issue in this case therefore is
whether the appellant does have a proprietary interest worthy of
protection. An agreement in
restraint of trade is enforceable unless
it is unreasonable.
5
It is generally accepted that a restraint will be considered to be
unreasonable, and thus contrary to public policy, and therefore
unenforceable, if it does not protect some legally recognisable
interest of the employer but merely seeks to exclude or eliminate
competition.
6
As Nienaber JA stated in
Basson
v Chilwan
:
7
‘
Wat die partye
self betref, is ‘n verbod onredelik as dit een party verhinder
om hom, na beëindiging van hul kontraktuele
verhouding, vryelik
in die handels- en beroepswêreld te laat geld, sonder dat ‘n
beskermingswaardige belang van die ander
party na behore daardeur
gedien word. So iets is op sigself strydig met die openbare beleid.’
Nienaber JA listed four questions that
need to be asked when determining whether a restraint would be
upheld. Only the first of these,
whether there is an interest of the
one party (in this case the employer) which deserves protection once
the contract comes to an
end, is relevant in this matter.
8
Precisely what the parameters of such an interest are need not now be
decided. What is clear, however, is that the interest must
be one
that might properly be described as belonging to the employer, rather
than to the employee, and in that sense ‘proprietary
to the
employer’. The question in the present case is whether the
interest that is relied upon – the skill, expertise
and ‘know
how’ that the employees undoubtedly acquired in the techniques
for manufacturing these machines – was
one that accrued to the
employer or to the employees themselves.
The rationale for this policy was
succinctly explained by Kroon J in
Aranda
Textile Mills (Pty) Ltd v L D Hurn
9
as follows:
‘
A man’s
skills and abilities are a part of himself and he cannot ordinarily
be precluded from making use of them by a contract
in restraint of
trade. An employer who has been to the trouble and expense of
training a workman in an established field of work,
and
who has thereby provided the workman with knowledge and skills in the
public domain
,
which the workman might not otherwise have gained, has an obvious
interest in retaining the services of the workman. In the eye
of the
law, however, such an interest is not in the nature of property in
the hands of the employer. It affords the employer no proprietary
interest in the workman, his know-how or skills. Such know-how and
skills
in
the public domain
become attributes of the workman himself, do not belong in any way to
the employer and the use thereof cannot be subjected to restriction
by way of a restraint of trade provision. Such a restriction,
impinging as it would on the workman’s ability to compete
freely
and fairly in the market place, is unreasonable and contrary
to public policy.’
[9] Thus the mere fact that the first
and second respondents have taken up employment with AMS
Manufacturing, assuming that it is
in competition with the appellant,
does not in itself entitle the appellant to any relief if all they
will be doing is applying their
skills and knowledge acquired whilst
in the employ of the appellant. It is only if the restriction on
their activities serves to
protect a proprietary interest relied on
by the appellant that they would be in breach of their contractual
obligations. The interest
sought to be protected in this case, as I
understand the submission made on behalf of the appellant, is the
special knowledge of
how the components of the appellant’s
machine are put together. The crux of this matter therefore is
whether the appellant
has a proprietary interest in the ‘know-how’
that was acquired by the employees. This is a question of fact
10
and in motion proceedings the matter must be decided on the basis of:
‘
. . . those facts
averred in the applicant’s affidavits which have been admitted
by the respondent, together with the facts
alleged by the respondent
. . ..’
11
[10] In practice, the dividing line
between the use by an employee of his own skill, knowledge and
experience which he cannot be restrained
from using, and the use of
his employer’s trade secrets
12
or confidential information
13
or other interest which he may not disclose if bound by a restraint,
is notoriously difficult to define.
14
Similarly it is difficult to determine whether the process by which a
machine is built depends, in the main, for its success on the
utility
of the steps of the process or on the skill and discretion of the
operator. If the former, knowledge of the process is protectable
(provided it is sufficiently secret). If it depends on the latter for
its success, it is likely that the employer has no secret process;
he
has only a skilled employee whose skill he cannot restrain from
utilising after the termination of the employment.
15
Where the line is to be drawn is often one of degree. The dispute in
this case is about where the dividing line is to be drawn.
The Appellant’s Case
[11] I mentioned earlier that the
appellant has been in business in the field of design, manufacture
and customisation of special
purpose machines and tooling for some
thirteen years. It describes its machines as being of a complex
electro-mechanical nature,
which are used in motorcar production and
other manufacturing industries. The product in issue relates to
‘marking machines’
which are used to stamp, etch or
inscribe data (code numbers, brand names, etc) on metal or plastic
articles, mostly parts of motor
vehicles. Each machine comprises an
array of components. Thus, a ‘marking head’, the part
which effects the marking –
by way of laser beam, pin stamping
or scribing – must be mounted in a manner that allows it to
operate effectively. It must
interface with computer controllers and
the work surface upon which the parts to be marked are mounted or
‘posted’.
[12] The machine has to withstand a
dynamic range of forces whilst also catering for delicate movement.
The nature of the particular
parts to be marked, their quality, the
utility of the machine and its assimilation into a particular
production process all have
a bearing on the structure, its size and
the eventual commissioning of the plant. This, in turn, affects the
design of the machine
which is customised to meet the particular
needs of each client.
[13] The appellant states that it has
accumulated a valuable body of know-how in its field of business. It
describes the relevant
know-how as the ‘processes and
methodologies in the design, manufacture and commissioning of
customised marking machines or
equipment’. The know-how, the
appellant alleges, is not public knowledge and relates specifically
to ‘a combination of
skills and knowledge to enable the
(appellant’s) specialised machines to be designed and made’.
It is only the employees
in whom the appellant has invested ‘labour,
effort, experience and the expenditure of . . . time, skill and
money’, and
as a consequence have such skills and knowledge,
who are able to apply it practically in the ‘engineering
design, mechanics,
electrical engineering, electronics, pneumatics,
hydraulics, tool making, instrument making, computer hardware,
software and programming
and also the selection of specific available
components for specific applications as part of the (appellant’s)
customised
machines’. This know-how, says the appellant,
constitutes a proprietary interest that is capable of being protected
by a restraint.
The Respondents’ Answer
[14] The respondents deny that the
relevant know-how is confidential or specific to the appellant’s
business. They assert that
it is no more than what is commonly
available to all artisans and technicians. As such, they contend, it
constitutes part of the
first and second respondents’ stock of
general knowledge, skill and experience with which they are entitled
to earn their living
in any other business, including with AMS
Manufacturing. Moreover, say the respondents, there is nothing unique
about the processes,
methodologies, information or procedures used by
the appellant, even in regard to the special applications involved in
the customisation
of AMS’ marking machines. Any numbers of
engineering firms, they point out, are capable of doing the same work
and in fact
have been contracted by AMS to perform the same services
when their quotes were better than the appellant’s.
[15] There are, I think, a number of
difficulties that confront the appellant. First, the mere assertion
by the appellant that the
processes and methodologies in the design,
manufacture and commissioning of customised marking machines are
confidential does not
make it so. The appellant does not identify any
part of the process or method which is unique nor point to any other
reason why such
process or method is deserving of protection. There
is no indication on the papers that the first and second respondents
were placed
in possession of any formulae,
16
or designs or special methods of manufacturing relating to the
processes and methodologies
17
which, if done on a confidential basis, would have amounted to an
interest worthy of protection.
[16] Counsel for the appellant
submitted that the know-how embodied in the design of the machines is
confidential and therefore protectable.
The submission is
unpersuasive. The evidence establishes that Woest, the deponent to
the founding affidavit, personally dealt with
the conceptualisation
and design of the machine. Thereafter the designs were handed to the
plant manager for the manufacturing process.
The first and second
respondents then became involved in building the machines, rather
than in their design. The appellant had no
proprietary claim to the
skills that they developed in manufacturing the machines in
accordance with the design. There is nothing
in the papers to gainsay
the assertion by the respondents that any skilled toolmaker would be
able to undertake this task.
[17] Also unpersuasive is the
appellant’s contention that the ‘multiplicity of skills
and know-how’ referred to
earlier, required by employees such
as the first and second respondents to build these machines, makes
such skills and knowledge
protectable. The quantum, or accumulation,
of non-protectable skills and knowledge does not make them
protectable. The appellant
also does not distinguish these from the
general skills and know-how in other similar engineering processes or
methods. The appellant
attempts to explain its inability to draw the
line between its proprietary interests and the general knowledge and
skill of its employees
in its replying affidavit by stating that
because the technical nature of some of the processes and
methodologies are so integrally
related to the ‘tricks of the
trade’, it is difficult to distinguish the specific
confidential skill and knowledge from
the employees’ general
skill and knowledge. But why must the appellant’s difficulty in
this regard redound to the prejudice
of its ex-employees? The
appellant’s dilemma is not unique. As Schutz JA, in
another context, made clear in
Powernet
Services (1988) (Pty) Ltd v Government of the Republic of South
Africa
:
18
‘
Technical matter
is not always easy to make clear. But it
must
be done. Otherwise a litigant may find a modern court responding much
like the Glossators of old – who had Latin but not Greek
–
Graeca
non leguntur.
’
[18] A second and related difficulty
is that there is no evidence that the design and manufacture of
customised marking machines is
unique to the appellant. Indeed, the
evidence clearly demonstrates the opposite: that there are a number
of other specialist engineering
businesses in South Africa that are
capable of manufacturing these or similar machines.
[19] Finally, there is no evidence
that the processes and methods that were used in the instant matter
were in fact treated as confidential
by the appellant. It appears
that all employees, clients and sub-contractors freely had access to
the processes and methods of the
appellant. It was not restricted to
a limited class of employees on a confidential basis to render it
protectable.
19
As Parker, who deposed to the answering affidavit on behalf of the
third to fifth respondents pointed out, in December 2004 members
of
his family and himself were able to customise marking machines that
the appellant had undertaken to do for Advanced Marking Systems
at
the appellant’s premises. This would hardly have been possible
had the know-how been unique or confidential.
[20] In my view, the facts establish
that the know-how for which the appellant seeks protection is nothing
other than skills in manufacturing
machines albeit it that they are
specialised skills. These skills have been acquired by the first and
second respondents in the
course of developing their trade and do not
belong to the employer – they do not constitute a proprietary
interest vesting
in the employer – but accrue to the first and
second respondents as part of their general stock of skill and
knowledge which
they may not be prevented from exploiting. As such
the appellant has no proprietary interest that might legitimately be
protected.
The restraint is therefore inimical to public policy and
unenforceable.
In the result the appeal must fail.
The order I make is that the appeal is dismissed with costs.
___________
A CACHALIA
ACTING JUDGE OF APPEAL
CONCUR:
FARLAM JA
NUGENT JA
LEWIS JA
MAYA JA
1
Section 5(4) of the Labour Relations Act 66 of 1995 (LRA) provides:
‘A provision in any contract, whether entered into before
or
after the commencement of
this Act
, that directly or
indirectly contradicts or limits any provision of section 4, or this
section, is invalid, . . ..’ Section
4 guarantees employees
the right to freedom of association in order to promote the
principle of collective bargaining.
2
See s 200 A of the LRA.
3
See the discussion in
Dadoo
Ltd v Krugersdorp Municipal Council
1920 (AD) 530 at 543-548.
4
The restraint clause provides for it to be
operable for a period of three years from the date of termination of
the agreement (para
3). The interdict is sought to cover a period of
two years only.
5
Magna Alloys and Research (SA) (Pty) Ltd v
Ellis
[1984] ZASCA 116
;
1984 (4) SA 874
(SCA) 898A-B.
6
See generally John Saner
Agreements in Restraint of Trade in
South African Law
(Aug 2005) p 7-4, 7-5.
7
[1993] ZASCA 61
;
1993 (3) SA 742
(A) 767E-F.
8
See
Basson v Chilwan
at 767G-I: ‘(a) Is daar ‘n
belang van die een party wat na afloop van die ooreenkoms beskerming
verdien? (b) Word
so ‘n belang deur die ander party in
gedrang gebring? (c) Indien wel, weeg sodanige belang kwalitatief
en kwantitatief
op teen die belang van die ander party dat hy
ekonomies nie onaktief en onproduktief moet wees nie? (d) Is daar
‘n ander
faset van openbare belang wat met die verhouding
tussen die partye niks te make het nie maar wat verg dat die
beperking gehandhaaf
moet word, al dan nie? (Laasgenoemde vraag kom
nie hier ter sprake nie.) Vir sover die belang in (c) die belang in
(a) oortref,
is die beperking in die rëel onredelike en
gevolglik onafdwingbaar.’
9
[2000] 4 All SA 183
(E) para 33.
10
Rawlins v Caravantruck (Pty) Ltd
[1992] ZASCA 204
;
1993
(1) SA 537
(A) 541G.
11
See Plascon-Evans Paints Ltd v Van Riebeeck
Paints (Pty) Ltd
[1984] ZASCA 51
;
1984 (3) SA 623
(A)
at 634H-635C.
This approach is followed even when the onus to
prove any fact in issue rests on the respondent (
Ngqumba v
Staatspresident; Damons v Staatspresident; Jooste v Staatspresident
1988 (4) SA 224
(A) 262B) as in restraints of trade where the
covenantor (respondent) bears the onus to show that the restraint is
offensive to
public policy. (See
Magna Alloys and Research (SA)
(Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984 (4) SA 874
(A) 893A-B;
Basson v
Chilwan
[1993] ZASCA 61
;
1993 (3) SA 742
(A) 767A-B).
12
See for example
Northern
Office Micro Computers (Pty) Ltd v Rosenstein
1981
(4) SA 123
(C) 136B-E.
13
See for example
Coolair
Ventilator Co (SA) (Pty) Ltd v Liebenberg
1967
(1) SA 686
(W) 689.
14
See John Saner
Agreements
in Restraint of Trade in South African Law
Issue
7 (Aug 2005) p 7-14(2).
15
A E Turner
The Law
of Trade Secrets
Sweet and Maxwell
Ltd, London (1962) p 14.
16
See
Sibex Engineering Services (Pty) Ltd v Van
Wyk and Another
1991 (2) SA 482
(T)
487A-B.
17
Cf
Major Aluminium
CC v Martin Pedder
2002 BIP 242 (C)
265D-E citing
Reid Sigrist Ltd v Moss
Mechanism Ltd
(1932) 49 RPC 461.
18
1998 (2) SA 8
(SCA) 19A-B.
19
Cf
Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty)
Ltd
1981 (2) SA 173
(T) 194B-C.