Brief Summary

Restraint of trade — Enforcement of covenant — Applicant sought to interdict respondents from engaging in competitive business post-termination of employment — Respondents contested validity of restraint on grounds of public policy and lack of protectable interests — Court held that the restraint was enforceable as it served to protect the applicant's legitimate business interests, including confidential information and customer connections, and that the respondents failed to prove that enforcement would be contrary to public policy.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an application for final interdictory relief to enforce a contractual covenant in restraint of trade following the termination of employment.

The applicant was Freepak BK (CK 93/21467/23), a business trading in packaging materials. The respondents were Mr Pierre Jean Duraan (first respondent) and Ms Joan Margaret Duraan (second respondent), who were married to each other and had both been long-serving employees of the applicant at its Kimberley branch.

The matter came before the High Court of South Africa, Northern Cape Division, Kimberley, as a motion application decided on the papers. The court recorded that although there were some disputes of fact, none were material and the application could be disposed of on the affidavits as they stood.

The general subject-matter of the dispute was whether the restraint-of-trade clause contained in the respondents’ written employment contracts was valid and enforceable in the circumstances, and if so, whether enforcement should be limited in scope and duration to what was reasonable and consistent with public policy.

2. Material Facts

The applicant conducted a business selling packaging materials in both wholesale and retail quantities. Although based in Bloemfontein, it traded throughout the Northern Cape, the Free State, and parts of Gauteng, and had built a substantial client base since about 1993, including approximately 500 permanent clients. The business supplied packaging products to commercial customers such as dairy companies, abattoirs, supermarkets, liquor stores, butcheries, and bakeries, and regularly delivered to smaller towns in the Northern Cape.

The first respondent commenced employment with the applicant at the Kimberley branch in 1997, and the second respondent joined in 1998. For many years, the respondents managed the Kimberley branch and were effectively the sales representatives and “face” of that business. The court accepted, as essentially common cause, that they played a significant role in building the Kimberley operation into a successful enterprise.

On about 5 February 2004, the respondents’ employment contracts were reduced to writing and included a restraint clause (clause 34). The clause provided that, upon termination of employment for any reason, the employee would not for five years be involved in any other business selling similar products to the employer. The clause further contemplated that the employer could seek an interdict and that the employee would bear litigation costs.

On 25 February 2013, the first respondent was subjected to a disciplinary enquiry and summarily dismissed, and the second respondent resigned on the same date. The court regarded the underlying circumstances leading to dismissal as not necessary to determine in this application. It was, however, relevant that approximately a month prior to their departure there had been negotiations between the parties for the sale of the Kimberley business to the respondents, and those negotiations became deadlocked.

After termination, the respondents decided to open a business selling packaging materials similar to the applicant’s. It was not seriously disputed that the proposed business would be in direct competition with the applicant. The respondents resisted enforcement of the restraint on the basis that it was invalid and against public policy, and they also asserted that they needed to earn a living and that enforcement would exclude them from economic activity. The respondents also alleged that the restraint was being enforced due to personal animus on the part of the applicant’s managing director, but the court treated the matter as turning on the enforceability and reasonableness of the restraint, not alleged motive.

The respondents stated that they had not removed the applicant’s client list or contact list when they left. The applicant’s case on protectable interests included the respondents’ knowledge of pricing structures and discounts and, more importantly, the existence of strong customer connections created through the respondents’ longstanding personal dealings with clients. The court recorded (including by confirmation from the bar) that the respondents had in fact opened a similar business in Kimberley in May 2013.

Where disputes of fact existed, the court considered them immaterial to the dispositive questions. In particular, the court did not regard disputes concerning the detailed circumstances of dismissal as relevant to whether the restraint clause was triggered, since the clause operated upon termination “for whatever reason”.

3. Legal Issues

The central legal questions were whether the restraint-of-trade agreement was reasonable and enforceable having regard to public policy, and whether the applicant had established the requirements for a final interdict enforcing the restraint.

The dispute primarily concerned the application of legal principles to largely common-cause facts, together with evaluative judgments regarding the existence and weight of a protectable interest (confidential information and/or customer connections), the risk of harm to that interest, and the reasonableness of the restraint’s scope and duration.

A further issue concerned the extent to which a restraint clause that was arguably overbroad in its original terms could nonetheless be enforced in a limited and reasonable form consistent with precedent, where the applicant sought only narrowed relief (restricted to the Northern Cape and for a reduced period).

4. Court’s Reasoning

The court approached the matter from the premise that public policy generally favours enforcement of contracts freely concluded, while also recognising that unreasonable restraints of trade may be contrary to public policy. The court relied on established authority that a restraint must be assessed against the circumstances at the time enforcement is sought, and that the party resisting enforcement bears the onus of proving that enforcement would be unreasonable and contrary to public policy.

In applying the standard reasonableness enquiry, the court referred to the four questions formulated in restraint jurisprudence: whether the applicant had a protectable interest after termination; whether that interest was threatened; whether the applicant’s interest outweighed the respondents’ interest in being economically active; and whether any public-policy considerations external to the parties’ relationship required the restraint to be maintained or rejected. The court treated this as a fact-sensitive inquiry, including consideration of the nature, extent, and duration of the restraint.

On the asserted protectable interest of confidential information, the applicant contended that the respondents knew its pricing structures, profit margins, and discounts. The respondents disputed that they had knowledge of the applicant’s income, expenditure, or profit, and emphasised the applicant’s centralised structure in which management and accounting were performed at head office. The court referred to the criteria for information to qualify as confidential (usefulness in trade, not public knowledge, and economic value), and to the requirement that an employer who asserts confidentiality must specify the information and establish why it is confidential and protectable. On the papers, the court was not persuaded that there was compelling proof that the applicant possessed confidential information of an exclusive and protectable nature sufficient to justify restraint enforcement on that basis.

The court nevertheless found that the case turned substantially on the applicant’s protectable interest in its customer connections. It accepted that a protectable trade connection exists where an employee has had access to customers and built relationships enabling the employee to induce those customers to follow the employee to a new business. The court considered that customer connections often overlap with confidentiality concerns, but treated customer contact and relationship influence as independently protectable.

The respondents did not dispute that they had personal contact with the applicant’s clients over an extended period, that clients would regularly contact them to place orders and discuss business needs, and that they had clients’ contact details. The court regarded it as significant that the respondents were effectively the “face” of the Kimberley branch for more than a decade and that the managing director was rarely present at the branch, supporting the inference that the customer relationship was closely tied to the respondents personally. On this basis, the court concluded that the risk of harm to the applicant’s customer connection could not be discounted, particularly where the respondents intended to operate (and had in fact begun operating) a directly competing business selling similar products.

The respondents contended that enforcement would improperly restrain them from using their own skills, knowledge, and experience built through their own initiative. The court accepted the general principle that employees cannot be restrained from deploying their own skills and general experience, and that the dividing line between protectable interests and general skill is often a matter of degree. However, the court treated the decisive point as the existence of customer connections capable of exploitation in competition, rather than the mere use of general sales ability.

The respondents also raised, without substantive evidentiary development, an argument about disproportionate bargaining power at the time of contract. The court considered that the issue had not been properly ventilated and that there was a lack of evidentiary material to sustain the contention.

In relation to overbreadth, the court accepted that the restraint clause, in its original form, was extremely wide: it did not define a territory and, on its wording, could operate broadly across South Africa for five years. However, the applicant sought enforcement only within the Northern Cape, and the court relied on authority indicating that a restraint that is too broad in its terms is not necessarily wholly unenforceable where the court is asked to enforce only restraints that are reasonable and clearly spelt out or capable of being enforced within the four corners of the agreement as limited relief. The court therefore treated the enquiry as whether a limited restraint would be reasonable and consistent with public policy.

On duration, the parties proposed different alternatives. The applicant suggested that the period could be reduced to three years if necessary; the respondents proposed six months from termination. The court determined that two years from 25 February 2013 would satisfy the intended protective effect in the circumstances. It further held that limiting the restraint’s territorial operation to the Northern Cape addressed the constitutional concern about undue limitation of economic participation. The court was not persuaded that the respondents had discharged the onus of showing that enforcement, in the limited form contemplated, would be unreasonable.

Finally, the court considered the requirements for a final interdict, namely a clear right, an injury committed or reasonably apprehended, and absence of an alternative satisfactory remedy. It held that the applicant had established a clear contractual right arising from the restraint clause, and that the respondents’ decision to open a similar business demonstrated the intended breach and risk of continuing harm. The court accepted that the applicant had no satisfactory alternative remedy other than enforcement by interdict. Given the applicant’s substantial success, the court considered it appropriate that costs follow the result.

5. Outcome and Relief

The court granted the application and issued an order interdicting and restraining the first and second respondents for a period of two years with effect from 25 February 2013 from being involved in any other business selling similar products to the applicant in the Northern Cape.

The respondents were ordered to pay the costs of the application.

Cases Cited

Basson v Chilwan and Others [1993] ZASCA 61; 1993 (3) SA 742 (A)

Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A)

Barkhuizen v Napier [2007] ZACC 5; 2007 (7) BCLR 691 (CC)

Reeves and Another v Marfield Insurance Brokers CC and Another [1996] ZASCA 39; 1996 (3) SA 766 (A)

Magna Alloys and Research SA (Pty) Ltd v Ellis [1984] ZASCA 116; 1984 (4) SA 874 (A)

Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 486 (SCA)

Den Braven SA (Pty) Ltd v Pillay and Another 2008 (6) SA 229 (D)

Coolair Ventilator Co (SA) (Pty) Ltd v Liebenberg and Another 1967 (1) SA 686 (W)

Alum-Phos (Pty) Ltd v Spatz and Another [1997] 1 All SA 616 (W)

Hirt & Carter (Pty) Ltd v Mansfield and Another 2008 (3) SA 512 (D)

Mozart Ice Cream Franchises (Pty) Ltd v Davidoff and Another 2009 (3) SA 78 (C)

Rawlins and Another v Caravantruck (Pty) Ltd [1992] ZASCA 204; 1993 (1) SA 537 (A)

Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688 (HL)

Automotive Tooling Systems (Pty) Ltd v Wilkens and Others 2007 (2) SA 271 (SCA)

National Chemsearch v Borrowman 1979 (3) SA 1092 (T)

Setlogelo v Setlogelo 1914 AD 221

Legislation Cited

Constitution of the Republic of South Africa, 1996

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, although the applicant did not demonstrate compellingly on the papers that it possessed exclusive confidential information warranting protection, it did establish a protectable interest in its customer connections arising from the respondents’ longstanding and close personal dealings with clients and their role as the primary sales interface of the Kimberley branch.

The court held further that the respondents did not discharge the onus of proving that enforcement of the restraint would be contrary to public policy, particularly where enforcement was confined to a reasonable area (the Northern Cape) and a reasonable duration (two years from termination). The requirements for a final interdict were found to be satisfied, given the contractual right, the established risk of breach and harm through direct competition, and the absence of a satisfactory alternative remedy.

LEGAL PRINCIPLES

A restraint of trade is assessed against public policy, which generally requires that parties comply with contractual obligations freely undertaken, but also disfavors unreasonable restrictions on a person’s freedom to trade.

The party resisting enforcement of a restraint bears the onus of proving, on a balance of probabilities, that enforcement would be unreasonable and thus contrary to public policy once the covenantee has invoked the contract and established breach or threatened breach.

Reasonableness in restraint matters is evaluated by considering whether the enforcing party has a protectable interest, whether that interest is threatened, whether that interest outweighs the restrained party’s interest in remaining economically active, and whether there is any relevant public-policy consideration beyond the parties’ relationship that requires enforcement or rejection.

Protectable interests include, in appropriate cases, confidential information and customer connections. A customer connection may be protectable where an employee has built relationships with customers that could enable the employee, upon leaving, to induce those customers to move their business to a competitor.

A restraint clause that is overbroad in its original terms is not necessarily wholly unenforceable where the court is asked to enforce it only to the extent that it is reasonable in duration and territorial scope, consistent with binding precedent on partial enforceability.

Final interdictory relief requires proof of a clear right, an injury committed or reasonably apprehended, and the absence of an alternative satisfactory remedy.

Freepak BK v Duraan and Another (729/2013) [2013] ZANCHC 42 (18 October 2013)