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[2009] ZAGPPHC 171
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Vigne v Afgri Trading (Pty) Limited and Another (20123/2007) [2009] ZAGPPHC 171; 2010 (31) ILJ 347 (GNP) (26 August 2009)
IN
THE HIGH COURT OF SOUTH AFRICA
(NORTH
GAUTENG HIGH COURT, PRETORIA)
CASE
NO: 20123/2007
DATE:26/08/2009
In
the matter between:
WILLIAM
JAMES FREDERICK VIGNE
…..........................................................
Plaintiff
and
AFGRI
TRADING (PTY) LIMITED
…...............................................................
1
st
Defendant
AFGRI
OPERATIONS LIMITED
…..................................................................
2
nd
Defendant
JUDGMENT
HARTZENBERG
J
This
is a rare, if not a unique, instance of a covenant of restraint of
trade ending up in court where the employee, and not the
employer,
claims compliance with the terms thereof. The matter first came
before the court as an application in which the plaintiff
claimed
payment of the amount of R677 063,26 from the second defendant, after
his resignation of his
employment with the second defendant as a
senior trader. His claim was based upon clause 2.8 of the covenant
of restraint of trade
which he signed simultaneously with his
appointment in this position by his employer. The defendant raised a
number of defences
and by agreement between the parties the matter
was referred to trial, the notice of motion and founding affidavit to
stand as
a simple summons and the answering affidavit to stand as a
notice of intention to defend. The issues were defined in a
subsequent
declaration and a plea and counterclaim.
At the trial the parties were agreed that the factual allegations in
the initial affidavits were correct and that the court could
decide
the matter on that basis as the main issues are whether the covenant
is enforceable by the plaintiff and whether upon a
proper
interpretation of the agreement, the plaintiff is entitled to payment
of the amount, in the circumstances that prevailed
at the time of his
resignation. A final issue is whether the defendant was entitled to
cancel the agreement and thereby rid itself
of its obligation to pay
the amount.
The common cause facts are as follows: The plaintiff worked for a
company Farm Feed Services (Pty) Ltd (“Farm Feed”)
since
1990. That entity was acquired by the defendant during 2001 as a
going concern. Although the plaintiff, like the other
employees, was
officially appointed as a senior trader by the second defendant
1
during December 2001, he, in fact, only carried on with his normal
duties. He was required to sign the covenant of restraint
of
trade. He refused to do so unless the document was changed so that
there would be a
quid pro quo.
After negotiations clause 2.8
was inserted in the agreement and the area of the restraint was
limited to the Republic of South Africa.
The second defendant
maintains that at the time of the negotiations it had not made an
evaluation of the plaintiff’s position
and whether it was
necessary for it to protect itself against unlawful competition by
the plaintiff.
Relevant terms of the document bearing the title “Restraint
of Trade” and signed by the parties on 11 December2001,
were:
“
2.1.1. ’area restraint’ means the Republic of
South Africa as defined in the Constitution of the Republic of South
Africa,”
“
2.1.2. ‘fields of activity’ means any
business in which Vigne is involved in terms of his service agreement
with OTK”
“
2.1.4. ‘restraint period’ means the period of
Vigne’s employment with OTK and a period of one year after the
termination of such employment, for whatever reason;”
“
2.2. Vigne undertakes to OTK that during the restraint
period, he will not, without the prior consent in writing of OTK
directly:
2.2.1. Compete with OTK in any of the fields of activity within
the area of restraint.”
“
2.3. For the purposes of this clause, Vigne shall be
deemed to be competing with OTK if he becomes directly engaged or
interested
as proprietor, partner, shareholder,
employee
,
agent consultant or otherwise, in any company, close corporation,
trust, firm business or other undertaking which carries on
business
in
any of the fields of
activity in
the area of restraint.
”
“
2.5. This restraint of trade agreement shall come into
force on the date of signature of the service agreement and the
restraint
of trade payment referred to in clause 2.8 shall be payable
by OTK within 14days upon termination of the service agreement with
Vigne.”
“
2.6. The parties agree that this restraint undertaking
shall be capable of being undertaken by Vigne in favour of any
business
of OTK in the event of Vigne being employed by that
business.”
“
2.7. Vigne acknowledges that in the circumstances it is
fair and reasonable and necessary for the protection of the interests
of OTK that Vigne be restrained in the manner set out in this
agreement.”
“
2.8. On termination of employment, for whatever reason,
OTK will pay Vigne a lump sum equal to one year’s remuneration
(basic
salary + pension contribution + Medical Aid contribution and
all applicable allowances) within 14 days of termination of
employment.”
(
Own emphasis
)
The plaintiff gave notice of his intended resignation at the end of
March 2007, on the first of March 2007. In the letter of
resignation
he drew the attention of the second defendant to the provisions of
clause 2.8 of the Restraint of Trade agreement and
asked for payment
of the amount within 14 days from termination of the service
agreement.
The second defendant by letter, dated 14 March 2007, on the
letterhead of the first defendant replied to the letter of 1 March
2007:
“
RE: RESIGNATION AND RESTRAINT OF TRADE
We are in receipt of your letter dated 1 March 2007.
Having considered all the facts and circumstances under which the
Restraint of trade Agreement was concluded with you, the basis
upon
which your portfolio changed during the course of your employment and
the circumstances under which you signed (sic) from
the employ of the
Company, we hereby wish to confirm that the restraint provisions
contained in paragraph 2.2 of the Restraint
of Trade Agreement
between OTK (Proprietary) Limited and yourself on 11 December 2001
are hereby waived and the Company shall not,
either directly or
indirectly, be attempting to enforce the provisions of the restraint
on you.
Under the aforementioned circumstances, and in the light of the
fact that you have been released from all the provisions of your
Restraint of Trade Agreement, the Company shall not be effecting the
consideration in terms of clause 2.8 of the Restraint of Trade
agreement.”
The plaintiff insisted upon payment of the amount. On 16
July 2007 the plaintiff took up employment with a concern that trades
in grain products in Paarl, Grainco, as a trader. The second
defendant avers that that was a material breach of the restraint of
trade to work for Grainco, a merchant trading in grain commodities in
competition with the second defendant, within a year of the
termination of its service agreement with it. The allegation further
is that the second defendant was entitled to cancel the restraint
of
trade and did so on 7 February 2008.
At the time of the negotiations and the conclusion of the agreement
the plaintiff’s position entailed buying and selling
protein
rich agricultural products, such as soybeans and sunflower seeds. At
the beginning of 2004 he took over the position of
one Grobler and
became a key accounts manager. He became responsible to administer a
contract with Premier Foods for the regular
supply of wheat and white
maize. He had to acquire those commodities on the open market at
ruling prices. The relationship between
the plaintiff and the
suppliers of the commodities was, according to the second defendant,
of little commercial value. The second
defendant maintains that the
plaintiff’s position changed from trading to administrative.
As a trader he required a wide
range of skills which one could be
taught or could acquire in the course of one’s employment.
Those skills enable a trader
to predict future prices of commodities
against the background of various factors such as expected supply and
demand, fluctuation
in currencies, the gold price and other economic
data. Traders have to buy large quantities far in advance.
The second defendant maintains that at the time of his resignation
the plaintiff did not possess any confidential information
which, if
imparted to its competitors, could significantly impact on its
business. He posed no threat to the second defendant.
In the
circumstances the restraint of trade was unenforceable.
The restraint of trade imposed the following obligations on the
parties. The plaintiff undertook not to compete with the second
defendant unfairly. Unfair competition by the plaintiff spanned
quite a wide range of possibilities: Any employment that he would
enter into in the Republic of South Africa, within a year after his
resignation, would immediately come under scrutiny. He was
not
allowed to do any business in which he was involved in terms of his
employment with the second defendant. At the time that
he signed the
agreement he was in possession of information that, if imparted to
competitors, could harm the second defendant.
The second defendant
could assign the plaintiff to any position. It assigned him to a
position where he was not in possession
information that, if used by
others, could harm the second defendant. The plaintiff could at any
stage have been assigned to a
different position by the second
defendant. It was unknown to the parties precisely what functions
the plaintiff would have to
fulfil in the future. The parties did
not know what the second defendant’s assessment of the
situation would be if the plaintiff
resigned and started working for
another employer. As a
quid pro quo
for its protection or
potential protection the second defendant undertook to pay the
plaintiff a year’s income. That situation
did not change until
the plaintiff resigned from his position with the second defendant.
It is not necessary to do more than to refer to the summary of the
case law that culminated in the judgment in
Magna Alloys and
Research (SA)(Pty.) Ltd. v Ellis,
[1984] ZASCA 116
;
1984 (4) SA 874
(A) by Didcott J
in
J Louw and Co. (Pty.) Ltd. v Richter and Others,
1987 (2)
SA 237
(N) at 243B-C:
“
From the judgments that were delivered one learns the
following, all of which is now clear: Covenants in restraint of trade
are
valid. Like all other contractual stipulations, however, they
are unenforceable when, and to the extent that, their enforcement
would be contrary to public policy. It is against public policy to
enforce a covenant which is unreasonable, one which unreasonably
restricts the covenantor’s freedom to trade or work. In so far
as it has that effect, the covenant will not therefore be
enforced.
Whether it is indeed unreasonable must be determined with reference
to the circumstances of the case. Such circumstances
are not limited
to those that existed at the time when the parties entered into the
covenant. Account must also be taken of what
has happened since then
and, in particular, of the situation prevailing at the time
enforcement is sought.”
There is no doubt that the covenant was valid at the time that the
plaintiff resigned.
Pacta servanda sunt.
The effect was that
the plaintiff as covenantor was under an obligation not to compete
with the second defendant contrary to their
agreement. In exchange
for that undertaking the second defendant was obliged to pay to the
plaintiff, one year’s income.
In law there is no basis upon
which the second defendant can escape to pay the amount that it had
undertaken to pay. It was a
contract that it insisted that the
plaintiff was to enter into. If it had negotiated a bad bargain it
has only itself to blame.
Nowadays virtually all service agreements contain elaborate restraint
of trade clauses. It is probably so because
pro forma
precedents
are readily available electronically. Very often such clauses are
utterly inappropriate. Menial workers, sales personnel
and
administrative staff very often find themselves to have been
restrained from looking for better employment. Those agreements
are
negotiated for the benefit of the employers. Insofar as it is
contrary to public policy to restrict the covenantors’
freedom
to trade or work, unreasonably, those restraint agreements are not
enforceable. It does not follow that the other terms
of those
agreements are not enforceable.
The result is that I do not agree with the submission on behalf of
the respondents that the correct interpretation of the clause
2.8 of
the agreement is that once it is established that the employer cannot
enforce the agreement that it follows that the employee
(the
plaintiff) is no longer entitled to the benefit that the employer
undertook to pay to him. I also do not agree that the two
obligations are reciprocal. The position simply is that, unless the
employer undertakes to afford the employee some sort of mechanism
that will enable him to resign and to take up other employment, he
may regard himself as trapped in the employment of his employer,
for
the rest of his working life, because the employer can expose him, at
any time, to information which the employer regards as
confidential
and covered by the clause. The mechanism in this instance is the
guarantee of a year’s income. It will enable
the employee to
be in a position not to compete with the employer.
The position of the employer is different. The employer protects
himself against unfair competition by insisting that a restraint
clause be signed. If at the time when the employee resigns there is
a risk that he can harm the business of the employer, the
employer is
protected by the clause that it insisted upon, so long as the clause
is not otherwise against public policy. If on
the other hand the
employee does not pose a threat to the employer, public policy
dictates that the employee cannot be interdicted
from taking up other
employment. If the terms stipulated by the employer are so
unreasonable that public policy also dictates
that they are not
enforceable, the situation will be the same. The mere fact that the
protection that the employer bargained for
is unenforceable on
termination of the service agreement does not extinguish the
undertaking that he bound himself to.
The second respondent’s argument that the plaintiff breached
the agreement by taking up employment with Grainco, and that
it
became entitled to cancel the agreement and so released itself of its
obligation to pay, what it undertook to pay, is without
merit. The
second defendant has made it clear in the answering affidavit that
the plaintiff posed no threat to it regardless of
where he took up
employment. Its magnanimous waiver of its rights constituted no
waiver at all as it admittedly had no right that
it could enforce.
Its sounds strange in the mouth of the second defendant, whose
attitude was that the plaintiff was to go and
work, and who refused
to provide him with the year’s income, that he had expected, to
begrudge him taking up employment,
which posed no threat to it.
The
plaintiff is entitled to judgment in the amount claimed, against the
second defendant. Insofar as it was necessary for the plaintiff
to
bring an application for the joinder of the second defendant, the
second defendant has only itself to blame. It repudiated its
obligation on the letterhead of the first defendant. It cannot blame
the plaintiff for thinking that the first defendant was his
employer.
The plaintiff is entitled to all its costs against the second
defendant.
The
following order is made against the second defendant in favour of the
plaintiff:
1.
Payment of the amount of R677 063.26:
2.
Interest thereon at the rate of 15,5 per cent per annum from 15 April
2007 to date of payment.
3.
Costs of suit.
W
J HARTZENBERG
JUDGE
OF THE HIGH COURT
HEARD ON
:
5
August 2009
ON BEHALF OF THE PLAINTIFF
Counsel :
T
P KRUGER
Instructed
by :
MACROBERT INCORPORATED
ON
BEHALF OF THE 1
st
AND
2
nd
DEFENDANT
Counsel :
H
A VAN DER MERWE
Instructed
by : FLUXMANS INCORPORATED C/O GROSS PAPADOPULO & ASS
1
The plaintiff initially cited the first defendant, Afgri Trading
(Pty) Ltd, as respondent. When the first defendant denied liability
on the ground that it had no agreement with the plaintiff, but that
he was appointed by OTK Ltd, which entity thereafter changed
its
name to that of the second defendant, Afgri Operations Ltd., the
plaintiff joined the second defendant as a party. It is
now common
cause that the plaintiff was employed, at the relevant time, by the
second defendant.