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[2013] ZAKZPHC 12
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D & E Trading (Pty) Ltd v Hilton Village Centre CC and Others (1342/13) [2013] ZAKZPHC 12 (19 March 2013)
IN THE KWAZULU-NATAL HIGH COURT,
PIETERMARITZBURG
REPUBLIC OF SOUTH AFRICA
CASE NO:
1342/13
In the matter of:
D & E TRADING (PTY) LTD (Reg. No
2000/023909/07)
..........................................
APPLICANT
AND
HILTON VILLAGE CENTRE CC (CK 2009/
084080/23)
..........................
FIRST
RESPONDENT
MAGNACORP 629 CC (CK 2011/063297/23)
......................................
SECOND
RESPONDENT
SHOPRITE CHECKERS (PTY) LTD (Reg. No
1929/001817/07)
.............
THIRD
RESPONDENT
SHOPRITE HOLDINGS LTD (Reg. No
1936/007721/06)
....................
FOURTH
RESPONDENT
JUDGMENT
Date of hearing: 21
February 2013
Judgement delivered on:
19March 2013
D.
PILLAY J
[1] The applicant and
first respondent agreed to cancel a lease on the following terms:
‘
The lessor
undertakes not to lease the premises to an opposition supermarket
group during the period of time which begins on signature
hereof and
ends on 31 July 2014
[2] This dispute turns on
the interpretation of the words ‘an opposition supermarket
group’
in the restraint
clause above. The agreement constitutes the whole agreement. Matters
extraneous to it raised in the affidavits
do not count for purposes
of interpreting the phrase.
[3] The applicant
occupied shops one and two (the premises) to trade under franchise
agreements with KwikSpar
General
Dealer/Supermarket
and Tops Liquor Store.
The leases were for four years and eleven months starting from 1
September 2009. The applicant wanted to
discontinue these businesses
prematurely due to their underperformance. The cancellation agreement
was concluded on 1 March 2011.
[4] The first respondent
re-let the premises to the second respondent effective from 1
December 2012. The second respondent conducts
the business of a
supermarket/liquor store. The applicant alleges that the first
respondent has breached the cancellation agreement.
On an urgent
basis the applicant seeks an order interdicting and restraining the
first respondent from letting and providing occupation
of the
premises to the second respondent for the purposes of conducting the
business of a supermarket as a franchisee or buying
partner of OK
Franchise Division, a division of the third respondent, Shoprite
Checkers (Pty) Ltd or the Fourth Respondent Shoprite
Holdings (Pty)
Ltd. The third and fourth respondents abide the decision of the
court.
[5]
The applicant’s director, Mr Downs, initially held the view
that the agreement precluded all competition.
In
the founding affidavit he interpreted the cancellation agreement to
preclude the first respondent from letting the premises to
anyone
conducting a supermarket business. This emerges from the following
extracts from the founding affidavit:
‘
It was
clearly understood between Mr Kershaw [representing the first
respondent] and myself that,until the expiry of the initial
period of
the leases, Shops 1 and 2 would not be occupied by another
supermarket which would trade in opposition to the SuperSpar
and its
Tops Liquor Store’
[6] The applicant
fortified this interpretation in his affidavit to mean that the first
respondent was precluded from letting the
premises
‘
to anybody
who would conduct the business of a supermarket which was a
competitor of the Super Spar business of the applicant conducted
at
the Quarry Centre.’
[7] The applicant
narrowed its initial interpretation in the
following extract to include a franchise:
‘
(It)
was
also intended to protect the applicant against competition arising
from the letting of the premises… to a competing supermarket
group, which includes a franchise supermarket business and liquor
store…’
[8] In its replying
affidavit the applicant clarifies:
‘
The
applicant does not contend that the restraint precludes the first
respondent from letting the premises to any tenant who competed
with
the applicant…
The letting of the premises by the
First Respondent to the Second Respondent,who has a franchise
agreement with the Third Respondent,
to conduct the business of a
supermarket at the premises…falls within the ambit of the
restraint.’
[9] Effectively,
the applicant now seeks to read in the words ‘or
franchise of such group’
afterthe
phrase‘an opposition supermarket group’in the restraint
clause in the
the agreement.
[10] Mr Hartzenberg SC
for the applicant acknowledged that the agreement does not preclude
all competition but only competition
from ‘an opposition
supermarket group’.
I
n addressing the court
he elaborated that the restraint was against groups of which there
were four or so in the country. That the
word ‘group’
includes the third and fourth respondents is common cause. The
applicant contends that the second respondent
is a member of the
third or fourth respondents’ group because their relationship
is determined by a franchise agreement.
If this is the case, does the
restraint prohibit a lease to a franchisee of a group?
[11] Six questions arise:
What is the current
law on restraints in
contracts? How do they apply in interpreting the restraint in this
case? Is the second respondent is a member
of an opposition
supermarket group?If yes, didMr Kershaw know this when he leased the
premises to the second respondent? Lastly,
was the matter urgent? If
so,what should the remedy be?
[12] Restraints of trade
impact on constitutionally protected rights and values. In this
instance the right of freedom of trade,
occupation and profession in
s 22 of the Constitution of the Republic of South Africa 1996
provides:
‘
Every
citizen has the right to choose their trade, occupation or profession
freely. The practice of a trade, occupation or profession
maybe
regulated by law.’
[13] The
parties alerted me to the controversy relating to the interpretation
and application of s 22 in the field of private contracts.
1
Mr
Dickson SC for the first respondent correctly pointed out that the
appellate courts have settled the issues. The position is
summarised
as followsin the headnote in
Reddy
v Siemens Telecommunications
2007
(2) SA 486
(SCA
)
:
‘…
a
restraint is enforceable unless it is shown to be unreasonable, which
places the burden of proof on the person who seeks to escape
it.
2
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 maxim
pactaservandasunt
.
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.
3
A restraint
would be unenforceable if it prevents a party after termination of
his employment from partaking in trade or commerce
without a
corresponding interest of the other party deserving of protection.’
4
[14] On the question of
onus,
the
SCA found that on the facts of
Reddy
it
did not have to decide whether
it
conflicted
with s 22 to cast the onusupon a party seeking to avoid a restraint,
to have to allege and prove that the restraint is
unreasonable,as was
done in
Magna
Alloys & Research
(
SA
)
(
Pty
)
Ltd
v Ellis
1984 (4) SA 874
(A).
5
Instead
the SCA concluded:
‘
What that
calls for is a value judgment, rather than a determination of what
facts have been proved, and the incidence of the onus
accordingly
plays no role.’
[15] About the
application of constitutional rights to restraints
Reddy
was
unequivocal in the following extract:
‘
[11] All
agreements including agreements in restraint of trade are subject to
constitutional rights obliging courts to consider
fundamental
constitutional values when applying and developing the law of
contract in accordance with the Constitutionof 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
or, if necessary, develop the common law to give effect to the right
when legislation
does not do so (section 8(3)(a)). A court may also
develop the common law to limit the right in accordance with section
36 (section
8(3)(b)). Section 39(2) requires a court when
interpreting and developing the common law to promote the spirit,
purport and
objects of the Bill of Rights.’ (footnotes omitted)
[16]
Notwithstanding
Reddy
para
11 above
Den
Braven SA (Pty)(Ltd) v Pillay and another
2008
(6) SA 229
D&CLD
relied
on by the applicant expressly disagreed with the interpretation that
s 22 has direct application to restraint of trade
agreements.
6
Although
Den
Braven
appliedpara
10 and 15 of
Reddy
it
omitted to refer to para 11 above. Instead it applied the
Constitutional Court’s (CC) majority decision of NgcoboJ
in
Barkhuizen
v Napier
[2007] ZACC 5
;
2007
(7) BCLR 691
(CC)para 23-26; 28-30; 57 regarding the horizontal
application of the Constitution in the sphere of private
contracts.
Den
Braven
concludes:
‘
Once it is
recognised that the right embodied in the first sentence of s22(1)
cannot be separated from the entitlement to regulate
by law the
practice of a trade, occupation or profession, in terms of the second
sentence it is I think apparent that the nature
of the right embodied
in s 22 and the nature of the duties imposed by the right are not
appropriate to be rendered applicable to
natural or juristic persons
in the context of contractual relationships.’(
sic
)
(footnotes omitted)
[17] Mr Dickson proffered
First National Bank of SA v Commissioner, SARS
2002 (4) SA
768CC
para 41-45, as authority for applying the Bill of Rights to
juristic persons. Although in that case the CC was interpreting the
property rights clause under s 25 of the Constitution, its general
observations about the proliferation of companies as a universal
phenomenon indispensable for the conduct of business, large and
small, is apposite. It reiterated:
‘
(D)enying
companies entitlement to property rights would “…lead to
grave disruptions and would undermine the very fabric
of our
democratic State.” It would have a disastrous impact on the
business world generally, on creditors of companies and,
more
especially, on shareholders in companies.’
[18] Woolman
et
al
7
add:
‘
Whether a
juristic person may benefit from a right in the Final Constitution is
not
an issue of application, but an issue of interpretation.’
[19] In my respectful
opinion, the SCA settled the question of horizontality in
Reddy
at para 11 above
.
In so far as the SCA did not consider s 22
from the angle of
Den Braven
para 30 then
First National
Bank
para 43-45 settles the horizontality issue. However, in so
far as
Reddy
did not consider the
Den Braven
angle
and
First National Bank
dealt with s 25, not s 22, the SCA and
CC may yet pronounce on the horizontal application of s
22specifically. If this is still
an open question then in my view
whether a provision in the Bill of Rights applies horizontally is a
matter of interpretation,
depending on the circumstances of each
case. To interpret s 22 to be of such a nature as to be inapplicable
to natural and juristic
persons, would amount to declaring private
contracts to be no-go zones for constitutional scrutiny. Post
apartheid, very little
of public and private life escapes
constitutional scrutiny.
[20] Constitutional
scrutiny is most needed in restraints in contracts.Interpreting
restraint clauses divides judicial opinion along
philosophical fault
lines as
Den Braven’s
criticism
of
Advtech
Resourcing
(Pty) Ltd t/a Communicate Personnel v Kuhn and another
2008 (2) SA 375
(C)
shows.
Advtech
para
30rejected the notion of ‘contractual autonomy as part of
freedom in forming the constitutional value of dignity’as
a
‘libertarian view of the world’.In contrast,
Den
Braven
suggests that ‘libertarianism
seems consonant with the underlying spirit of the Constitution’.
If the Constitution is a version of libertarianism
because of the freedoms it protects,a social democrat may
askrhetorically where
socio-economic rights e.g.to housing, health
and educationfall?
[21] In
Everfresh
Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd
2012
(3) BCLR 219
(CC) the CC was unanimous about developing the common
law in the field of contract.The minority put it as highly as
amounting to
a misdirection to fail to investigate‘
…
the
question whether the common law [falls]…to be developed in
accordance with the spirit, purport and objects of the
Constitution.
’
8
The majority concurred:
‘
Indeed,
it is highly desirable and in fact necessary to infuse the law of
contract with constitutional values, including values
of
ubuntu
,
which inspire much of our constitutional compact.’
9
And
‘
It
is not good enough to ask the court
a
quo
whether
the common law needs to be developed. That hypothetical question
arises in every single case involving the common law.
10
[22] These exhortations
of the CC eliminate any doubt that s 22 must be interpreted to apply
to restraints in contracts, whatever
one’s world view or
philosophical outlook.Notwithstanding the diversity of world views
ofthe members of the CC,
Everfresh
is synthesis of these
viewsdistilled throughdisciplined constitutional interpretation.To
demarcate some freedoms as libertarian,
and other substantive rights
as something else, defeats the very essence and coherence needed for
the constitutional project.Ultimately,
what counts is disciplined
constitutional interpretation.For the purposes of this case it
suffices to apply
Everfresh
,
Reddy
and
First National
Bank
to hold that the restraint is open to constitutional
scrutiny. As a restraint is a limitation on s 22, it must be
reasonable. Whether
the restraint is reasonable and not against
public policy depends on its interpretation.
[23]
On the facts of this case the applicant provided the wording of the
restraint.
11
If it
wanted to exclude franchises as lessees, then it should have
expressly included them in its wording of the restraint. The
wording
Mr Downs settled on seems to have been informed by the applicant’s
own relationship with the Spar Group Ltd.
It
describes the Spar Group as an international retail group which
operates through a network of franchised stores. The Spar Group
Ltd
leases premises and sub-lets to its franchises.
Furthermore,
MrHartzenbergconfirmed that therelationship with Spar Group Ltd is
precisely the sort of relationship the applicant
intended to restrain
when he mentioned that there were about four in the country.
Whether
this is the relationship the second respondent has with the third and
fourth respondent remains to be seen.
[24]
Natal Joint Municipal Pension Fund v
Endumeni Municipality
[2012] 2 All
SA 262
(SCA) relied on by the first respondent helpfully explains at
length:
‘
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.
12
’
(
sic
)(my
underlining)
[25] In contrast to the
more recent offering from the SCA above, the applicant relied on
Capnoriszas v Webber Road Mansions (Pty) Ltd
1967 (2) AD 425
at 430C, 434A for the proposition that the restraint must be
interpreted in the context by adopting a common sense approach to
give effect to it in order to protect the party in whose favour it
was imposed, even if that means also departing from the literal
meaning of the words where that is justified, as when the parties
intended a different meaning. This is not my understanding of
that
case in which Steyn CJ cited the following extract from
Randall
Ltd v Summers
1919 SC 396
at 406:
‘
Every case
of this sort must depend for its decision, first, on the terms of the
particular covenant that it is founded on, and
second, on the facts
and circumstances which are said to constitute a breach of that
covenant, and much assistance, therefore,
cannot be obtained from
other decided cases.’
On the facts
Capnoriszas
favouredan
interpretation of a lease that enforced a restraint. On principle it
reinforces
Endumeni Municipality
anddoes not assist the applicant.
[26]
At
its simplest, most literal interpretation, ‘group’ means
‘more than one’.
Encarta defines it as:
‘
A set of
people or things:
a
number of people sharing something in common such as an interest,
belief, or political aim;
In this context, the
meaning of ‘group’ is narrowed by ‘an opposition
supermarket’. It is not necessary
to determine the scope of the
restraint but only whether the second respondent falls within its
ambit.
[27]
With the context being corporate law, most persuasive is the
interpretation that company law attributes to the word ‘group’.
A group is a holding company linked to a subsidiary or subsidiaries
to form larger, more complex economic units. Characteristics
of the
group include independence but co-ordination and unity of the holding
and subsidiary companies. Central control of the companies
weakens
their economic independence but enables them to be managed as an
economic unit.
13
As
this was a corporate transaction concerning companies the parties
cannot avoid this meaning being attributed to the word
‘group’.
Dickinson
Holdings (Group) (Pty) Ltd
v
Du
Plessis
2008(4)
SA 214(N) fortifies my interpretation of ‘group’. The
full bench interpreted ‘group’ to mean a group
of
companies o
r
a family of companies headed by a managing director and sharing
directorships. In that case the two appellants were holding companies
with many subsidiaries. A franchise is a licence, permitor agreement
to sell a company’s products or to operate a business
that
carries that company's name. Conceptually a group is not a
franchise.
14
[28] Was the second
respondent a member of the third or fourth respondents’ group?
The second respondent’s member,Mr Daryl
Lourens,denies that it is a member of the third and fourth
respondents’ group.
The second respondentconcluded a franchise
agreement with the third respondent on 14 January 2013. The material
terms are that
the second respondent and not the third respondent
would run the business.The second respondent would decorate the store
as it
wants. A provision typical of a franchise agreement is the
buying arrangement in terms of which the second respondent buys the
third respondent’s branded goods. The second respondent also
buys from other suppliers. The franchise fee the second respondent
pays the third respondent is based on a percentage of the purchases
the second respondent makes from the third respondent and not
on the
second respondent’s turnover. Furthermore,
the
second respondent does not carry the third respondent’s
promotional material.
[29] Named‘The
Village Grocer’the second respondent’s business is
positioned as an upmarket, unique supermarket
fashioned as the Food
Lovers Market which is a mini supermarket stocking general
groceries.Unlike the applicant which is a sub-tenant
of the Spar
Group which is the principal lessee, the same arrangement does not
apply to the second respondent which holds the lease
with the first
respondent in its own name. MrLourens was not aware until he signed
the agreement with the third respondent that
the second respondent
would be a franchise. He had assumed that the second respondent would
be merely a buying partner of the third
respondent.
[30]
The second respondent admits that the opening of an opposition
supermarket group would have negative financial consequences
for the
applicant. It denies that as a lessee merely connected with an
opposition group it is in breach of the restraint. Although
the
second respondent appears as a franchisee of the third respondent on
the latter’s website and enjoys the cost and other
benefits of
the buying arrangement,I find that it is not a member of the third or
fourth respondents’ group.
[31]
The
applicant has no evidence to support its assertion that the first
respondent knew that it was leasing the premises to a supermarket
group. Mr Hartzenburgasks the court to draw this inference. As the
respondents dispute the facts he relies on, the court must accept
the
respondents’ version in this application for a final
interdict.
15
[32]
The
first respondent’s representative, Mr Kershaw disclosed the
restraint clause to MrLourens who assured Mr Kershaw that
the second
respondent was not an opposition supermarket group. Mr Kershaw knew
MrLourens who had worked for him previously. MrLourenswas
also
negotiating to operate a farm stall at Rotunda, Hilton. Initially, he
wanted the premises or some part of it to set up an
Everfresh styled
fruit and vegetable produce store. Eventually the second respondent
styled itself as The Village Grocer. It sourced
some of its
merchandise from the OK Grocer buying group.
[33] The nature of the
second respondent’s business is described as a
supermarket/liquor store in the lease agreement with
the first
respondent which they signed in October 2012. Mr Kershaw saw the
agreement dated 14 January 2013 between the second respondent
and the
third respondent on 14 February 2013, after this litigation started.
Accordingly, when the first respondent granted the
lease to the
second respondent in October 2012 Mr Kershaw was not aware of any
agreement between the second respondent and the
third respondent. As
stated above, the second respondent was also not aware in October
that it would be a franchisee of the third
respondent.
[34] The person who
designed Everfresh also designed the second respondent as the Village
Grocer. It is not styled as the first
or second respondent. From Mr
Kershaw’s observations and conversations he knew nothing of a
franchise agreement between the
second respondent on the one hand and
the third or fourth respondent on the other hand. Consequently, he
cannot be in breach of
the agreement, even if the second respondent
is a member of the third or fourth respondents’ group.
[35] If I am wrong in
these findings, the applicant is still not entitled to the relief it
seeks. It has not established a clear
right to the interdict.As for
urgency, although the parties were ready at short notice to be heard,
it was inconvenient for the
respondents and the court. Urgent
applications are an extraordinary process reserved for circumstances
when no other process can
produce an adequate remedy. The urgency in
this case was self-created.
[36] MrDowns,Mr Kershaw
and MrLourens have businesses in Hilton. Some or all of them live in
this little village.They knew each
other well enough to discuss what
business MrLourens would be conducting from the premises. MrDowns
could have asked MrLourens
personally. Instead, he watched as the
second respondent was set up. He investigated and drew his own
conclusions from his findings
without checking them out first with
MrLourens. If he had he might not have launched this application at
all or timed it better.
[37] Launching it after
the second respondent spent more than R6m to establish itself and
opened for business on 31 January 2013
results in not only the
urgency abating but also the balance of convenience shifting to
favour the respondents. Besides, the applicant
has an alternative
remedy in the form of damages arising from analleged breach of the
contract. Furthermore, any remedy the applicant
has lies against the
first respondent.
[38] In summary,
the
second respondent is not part of the second and third respondents’
group. It is not a subsidiary or member of their family
of companies,
which are public companies.
I find that the restraint does not
apply to a franchise. In any case a franchise on the terms between
the second respondent and
the third respondent does not make the
second respondent a member of the third or fourth respondents’
group. Lastly, even
if it did, the first respondent was not aware of
their relationship when it leased the premises to the second
respondent.
[39] The application is
dismissed with costs
_____________
D.Pillay J
Appearances: //
Appearances
Counsel for the Appellant
: CJ Hartzenberg SC
Instructed by : Tatham
Wilkes Inc
200 Hoosen Haffejee
Street Pietermaritzburg
Tel: 0333453501
Email:
nigel@tahamwilkes.co.za
Counsel for the First
Respondent : AJ Dickson SC,
Instructed by : 36 Hilton
Road
Hilton
C/O Austin Smith
2013
191 Pieter Maritz Street
Pietermaritzburg
Counsel for the First
Respondent : AJ Rall SC
Instructed by : Bernard
Attorneys
73 Villiers Drive
Pietermaritzburg
1
Canon
KwaZulu-Natal (Pty) Ltd t/a Canon Office Automation v Booth
2004
(1) BCLR 39
(N);
Rectron (Pty) Ltd) v Govender and another
(2006) 2 ALL SA 301
(D)
para 1-16;
Den
Braven SA (Pty)(Ltd) v Pillay and another
2008
(6) SA 229
D&CLD;
Advtech
Resourcing (Pty) Ltd t/a Communicate Personnel v Kuhn and another
2008
(2) SA 375(C)
([2007])
4 All SA 1368
2
Reddy
v Siemens
para 14
3
Reddy
v Siemens
para 15
4
Reddy
v Siemens
para 16
5
Reddy
v Siemens Telecommunications
2007 (2) SA 486
(SCA) p
ara13-14
6
Den
Braven
para 30D-E
7
Constitutional
Law of SA second edition revision 4: 2012 31-39
8
Everfresh
para
38
9
Everfresh
para71
10
Everfresh
para
79
11
Pito
v Deeb
1967 (1) SA 166
(O) at 170;
MacPhail v Janse van
Rensburg
1996 (1) SA 594
(T) at 600
12
Endumeni
Municipality
para 18
13
Cilliers
HS et al
Corporate Law
2
nd
edition
para
25.01
14
Encarta
15
Plascon-Evan
Paints(EDMS) BPK
v
Van Riebeeck Paints (PTY)Ltd
,
184 (3)
SA 623
(A)