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[2008] ZAWCHC 334
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Mozart Ice Cream Classic Franchises (Pty) Ltd v Davidoff and Another (2009 (3) SA 78 (C); (2009) 30 ILJ 1750 (C)) [2008] ZAWCHC 334; [2008] ZAWCHC 118 (1 December 2008)
REPORTABLE
IN
THE HIGH COURT OF SOUTH AFRICA
(CAPE
OF GOOD HOPE PROVINCIAL DIVISION)
CASE
NO
:
18784/2008
DATE
: 1
DECEMBER 2008
In
the matter between:
MOZART
ICE CREAM CLASSIC
FRANCHISES
(PTY) LIMITED
Applicant
and
DENNIS
DAVIDOFF
1
st
Respondent
TARIDOR
SIXTEEN CC 2
nd
Respondent
JUDGMENT
DAVIS,
J
Applicant
seeks to enforce a restraint of trade contained in a franchise
agreement concluded between the parties.
The restraints
which are relevant to this dispute are set out in clause 13 of
the agreement and reads thus:
"13.1
The franchisee shall not be entitled to twenty four (24) months
reckoned from the termination date, whether directly
or indirectly,
as principal, agent, sole proprietor, partner, shareholder,
director, member, trustee, beneficiary, employee,
consultant,
advisor or a financier from a representative or in any other
capacity, to be employed by or be engaged in or be interested
in or
be associated with any person or legal entity which carries on a
business which his similar to, or which competes with
or which
endeavours to compete with the franchise business within South
Africa.
13.2
The franchisee acknowledges and agrees that the restraint referred
to in sub-clause 14.1 is reasonable to the subject matter,
area and
duration and it is reasonably necessary for the protection of the
franchisor as well as the intellectual property.
13.3
The franchisee shall not at any time before or after the
determination date, whether directly or indirectly, itself or
together with any other person or entity in any capacity whatsoever,
employ or seek to employ any
person who was at that time or who
was at any time in the previous 12 (twelve) month period been
employed by the franchisor or
by any other franchisee or agent to
the franchisor, nor shall the franchisee induce or seek to induce
any such person to leave
such employment."
To
the extent that it is relevant, the words "franchise business"
means the Mozart franchise business of running a Mozart
ice cream
franchise, using the franchisor's intellectual property (clause
2.1.3).
In
brief, Clause 13 provide for two distinct restraints: clause 13.1
restricts what can broadly be termed competitive trade and
clause
13.2 which prevents of soliciting of employees of the applicant or
other franchisees.
The
applicant now comes to court for final relief.
Factual
Matrix
From
the papers it would appear that the following facts can be
accepted by this Court.
1)
The first respondent was a franchisee in terms of the franchise
agreement that was concluded with the applicant;
2)
The first respondent trades from Shop 122 N1 City Mall, Louwtjie
Rothman Street, Goodwood, Cape Town;
3)
Second
respondent is the franchisee in terms of the franchise agreement
concluded with applicant;
4)
It
trades from Shop 12A Bayside Mall, Corner Blaauwberg and West Coast
Roads, Tableview, Cape Town.
5)
Second
respondent's has traded as Bayside Mozart Express and
currently trades as the Lucky Marble.
6)
On 1 October 2008 applicant received a telefax from second
respondent in which it was expressly stated that applicant was
given
30 days notice of its intention to de-franchise from the applicant
by 31 October 2008.
7) On
22
nd
October 2008 in respect of the trading name Lucky Marble, second
respondent applied for credit facilities with L.P. Agencies
CC in
respect of a business that was being operating prior to 31 October
2008.
8) On
27 October 2008 attorneys representing the respondents addressed a
telefax to the applicant's attorneys in which the Mozart
Ice Cream
intellectual property and trademark were acknowledged and two it was
unequivocally recorded that respondents did not
believe that the
applicant was entitled to prevent them from trading as independent
businesses, competing with the applicant.
Further, it was expressly
stated that respondent shall continue trading from the same premises
but would remove all reference
to Mozart Ice Cream and its product.
9) Second
respondent has converted the Bayside premises from a Mozart
franchise and now runs this business under the sign age
of Lucky
Marble.
10)
On 23
rd
September 2008, at the same time as giving applicant on ultimatum
to make a decision about their future relationship by no later
than
30 September 2008, first respondent reiterated its decision to
pursue a new business model with immediate effect.
11)
On 31 October 2008 first respondent addressed an e-mail to other
franchisees and the applicant in which he stated that
he had
de-franchised from the applicant to its great displeasure, his
lawyers had advised applicant of his view that there was
no valid
contract and
further
the
shop would trade as the Lucky Marble and that all Mozart signs had
been removed.
Mr
Howie
who appeared on behalf of the applicant, submitted that in the
circumstances on these facts, first and second respondent were
bound
by the restraint of trade provisions which were contained in the
franchise agreement and which they had concluded with
the applicant
some years previously.
It
is important at this stage to emphasize that when this case was
launched in great haste, the cause of the application was predicated
on both the trademark and a restraint of trade provisions. The
trademark issue disappeared in argument before this Court. Applicant
now relies exclusively upon the restraint of trade provisions. Mr
Howie
submitted that the protectible interest which necessitated the
enforcement of the restraint of trade included the following:
1) Applicant's
reputation has been built over the past twenty five years in which
it has developed and perfected the creation
by virtue of advance
methods, both in relation to ingredients and processing of unique
ice cream flavours and quality.
2) Its
unique "Rand per kg" system in which the ice cream is
weighed and which in turn maximises the way the franchisee
can
control the quantity of ice cream sold and therefore maximise
profits.
3) Unique
serving spoons which were designed by the applicant with the
specific intention to ensure that the correct shape of
ice cream is
presented to the customer in a cone.
4) In
Mr
Howie's
view, what the respondents had done was to unlawfully repudiate the
franchise agreements. There has been no provision in the
agreements
entitling them to cancel the agreement unilaterally as they indeed
have done. In order to commence their own business,
they have relied
upon, the established Mozart customers, or
walk-in customers, the
familiar locality of the business, the fact that customers associate
the business at the Bayside and Goodwood
premises with the quality
product provided by the applicant and that customer loyalty and
customer inertia associated with purchasing
ice cream from a Mozart
outlet at the premises in question.
Mr
Howie
contended that the respondents have failed to advance any evidence
to establish a basis from which it could be found by that
this Court
that the enforcement of the restraint was unreasonable and that they
were not unenforceable. In brief, Mr
Howie
submitted that the applicants have shown, on the papers, that there
was a protectible interest in terms of the restraint of trade
which
is reasonable, enforceable and that the respondent should be held to
the bargain they had struck previously. He further
contended
that the urgent application had been
precipitated
by respondents' repudiating the agreements by unilaterally
"de-franchising" themselves at the end of October
2008 and
in particular by its undertaking to compete with the applicant in
the selfsame franchise premises from which they traded
under the
Mozart franchise in direct competition with the applicant.
Accordingly,
Mr
Howie
submitted that respondents had flagrantly 5 breached the restraint
of trade which binds them. Applicant was entitled to seek
urgent
interdictory relief. There was no basis for applicant simply to
content itself with seeking damages as an alternative
remedy when it
was vested with the enforceable restraint provisions in the
franchise agreements which were designed to protect
the very
nature of its own business.
Interdictory
Relief
The
test for a final interdict is trite. An applicant must establish a
15 clear right, a reasonable apprehension of immediate
harm if the
relief
sought
is not granted, and a lack of a suitable
alternative
remedy.
The availability of an alternative remedy is a factor that may be
taken into account in considering whether and to what
extent the
restraint should be enforced.
The
onus to establish a constraint is unreasonable and that it ought not
as a matter of public policy to be enforced rests clearly
on the
respondents. The applicant however bears the onus of establishing
the other requirements in order to justify the relief
sought. The
approach set out in
Plascon
Evans Paint Ltd v Van Riebeeck Paints (Pty) Ltd
1984(3) SA 623 (A) governs the way in which the Court must evaluate
the evidence in disputes of this nature.
As
noted, applicants case is that it has shown how respondents have
"ridden on the back of the Mozart trademark" in
order to
prey upon customer loyalty to start competing business of their own
in breach of the restraint of trade. Applicant
contends that such
behaviour amounts to a form of irreparable harm, having been done to
the applicant almost on a daily basis.
Furthermore, applicant
contends that there is no cogent reason as to why respondents who
are in flagrant breach of their premises
should be given the luxury
of continuing to trade.
The
question to be posed at the commencement of the evaluation
of applicant's argument is the issue of whether the restraint
of
trade in this particular case must be enforced in the manner
intended for by applicant.
Enforcement
of Restraint Clauses
It
is trite that a restraint clause designed solely to stifle
competition is generally speaking not enforceable because it is
contrary to public policy. See
Humphries
v Laser Transport Holdings Ltd
1994(4) SA 388 (C), and
Basson
v Chilwan Indaba
1993(3)
SA 742 (A) at 771. In crisp terms, a restraint of trade raises
significant questions regarding its enforceability when
examined
through the prism of public policy. In deciding whether 5 a
restraint of trade is contrary to public policy regard must
be had
to two principle considerations: firstly agreements freely concluded
should be honoured; secondly each person should be
free to enter the
business, or professional world or trading world in the manner they
deem fit. For this reason, unreasonable
10 restraint of trade
clauses are contrary to public policy. In
Sunshine
Records (Pty) Ltd v Frohling
1990(4) SA 782 (A) at 794
EM
Grosskopf, JA
summarised the position thus:
"In
determining whether a restriction on the freedom to trade
and to practice a profession is enforceable, a Court
should have
regard to two main considerations. The first is that the public
interest requires, in general, that parties should
comply with their
contractual obligations even if these are unreasonable or unfair.
The second consideration is that all persons
in the interests of
society, be permitted as far as possible to engage in commerce or
professions or, expressing this differently,
that it is detrimental
to society if an unreasonable fetter is placed on a person's freedom
of trade or to pursue a profession.
In applying these two main
considerations, the Court will obviously have regard to the
circumstances of the case before it".
An
important guideline in the evaluation process is that a restraint
should, as far as activities, area and duration is concerned
be
necessary to protect the infringed or threatened interest. 10
Furthermore, it is trite that goodwill such as trade connections
trade secrets, confidential information are recognised as
protectible interests. As to the meaning of these concepts see J,
Neethlinq:
van Heerden
-
Neethling:
Unlawful Competition
(Second
Edition) at 20.
Recently
in an impressively scholarly and thoughtful judgment
Wallis.
AJ
in
Den
Braven SA (Pty) Ltd v Pillay
[2008](3) SA 518 (D) embarked on a muscular affirmation of the
jurisprudence
of
restraint of trade set out initially in
Magna
Alloys and Research (SA) (Pty) Ltd v Ellis
1983(4) SA 874 (A). In support of the proposition that
pacta
sunt servanda
is
the animating principle in giving effect to the right of individuals
to exercise their autonomy in concluding contracts,
Wallis.
AJ
developed a defence of the principles initially set out in
Magna
Alloys
by invoking the judgment of
Ngcobo,
J
in
Barkhuizen
v Napier
2007(5) SA 323 (CC) at para 57 in support of the enforceability of
restraint provisions. See paras 28-32.
But
the learned judge of the Constitutional Court's judgment must be
read as a whole and not merely as a confirmation of the doctrine
of
pacta
sunt servanda.
In
dealing with the relationship of public policy to contractual
terms,
Ngcobo,
J
said the following;
"Ordinarily
constitutional challenges to contractual terms will give rise to the
question of whether the disputed provision
is contrary to
public policy. Public policy represents the legal convictions for
the community; it represents those values
that are held most dear by
the society. Determining the content of public policy was one
fraught with difficulties. That is
no longer the case since
the advent of our constitutional democracy, public policy is
now deeply rooted in our Constitution
and the values underlying it.
Indeed the founding principles of our Constitution make it plain:
our Constitutional democracy
is founded on, among other values, the
values of human dignity, the achievable equality and the advancement
of human rights and
freedoms and the rule of law. And the Bill of
Rights as the Constitution proclaims, "is the cornerstone"
of that democracy;
"it enshrines the rights of all people in
our country and affirms the democratic [founding] values of human
dignity, equality
and freedom.
What
public policy is and whether a term in a contract is contrary to
public policy must now be determined by reference to the
values that
underlie our constitutional democracy as given expression by the
provisions of Bill of Rights. Thus a term in a contract
that is
inimical to the values enshrined by the Constitution, is contrary to
public policy and is, therefore, unenforceable.
In
my view the proper approach to the constitutional challenges to
contractual terms is to determine whether a term challenged
is
contrary to public policy as evidenced by the constitutional values,
in particular those found in the Bill of Rights. This
approach
leaves space for the doctrine of
pacta
sunt servanda
to
operate, but at the same time allows our courts to decline to
enforce contractual terms that are in conflict with the
constitutional
values even though the parties may have consented to
them."
Paras
28-30.
Moseneke
DCJ
albeit is a minority judgment, went even further in asserting the
importance of the public policy threshold:
"Public
policy cannot be determined at the behest of the idiosyncrasies of
individual contracting parties. If it were so,
the determination of
public policy would be held ransom by the infinite variations to be
found in any set of contracting parties.
In effect, on the
subjective approach that the majority judgment favours, identical
stipulations could be good or bad in a manner
that renders whimsical
the reasonableness standard of public policy."... Trite as it
is that our constitutional values allows
individuals the dignity and
freedom to regulate their affairs, they also require that bargains,
even if freely struck, may not
steer a course inimical to public
notions of equity or fairness which are now sourced from
constitutional values."
Para
98, 104.
The
judgment in
Den
Bremen
,
fails with respect, to capture this nuanced approach by both
majority and minority.
Thus
Wallis,
AJ
concludes with the following:
"I
know of no developing system of
jurisprudence
that
does not recognise the need, subject to some exceptions such as
fraud, misrepresentation, public policy or the like, to enforce
contractual obligations. Problems that may arise from the disparate
power relationships of the parties are dealt with in a variety
of
ways and particularly by legislation. However as a general
proposition most societies regard the enforcement of contractual
obligations as having a value itself. This is hardly surprising as
recent studies in the field of economics have recognised that
economic development is closely linked to the rule of law - one of
our fundamental constitutional principles - one of the aspects
of
which is seen as manifested in free and independent Courts that
among other things enforce contractual obligations."
This
passage, more in keeping with World Bank development reports of the
1990's than our Constitutional core, with the greatest
respect to
the learned Acting Judge, mischaracterises the very core nature of
the dispute. It is not about the importance of
pacta
sunt servanda.
Manifestly
without this principle the law of contract would be subject to gross
uncertainty, judicial whim and an absence of integrity
between the
contracting parties. The core dispute concerns the balance between
the bargain, as it is phrased in the contract,
and the demands of
public policy that give content to the idea of a constitutional
community. In our country there should be
no need to remind the
legal community of the importance of power and its abuse, even when
sourced in private hands. See the mischaracterisation
of the law
fashioned by private power at para 30 of
Den
Braven
.
Private power in South Africa is also accountable to the
principles of the
Constitution.
Madala
J reminds us of this important point of our history when he wrote in
Du
Plessis v De Klerk
1996(3) SA 850 (CC) at para 163;
"Ours
is a multiracial, multi-cultural, multi-legal society in which the
ravages of apartheid disadvantage and inequality
are just
immeasurable. The extent of the oppressive measures in South Africa
was not confined to government/individual relations,
but equally to
individual/individual relations. In its effort to create a new
order, our Constitution must have been intended
to address these
oppressive and undemocratic practices at all levels. In my view our
Constitution starts at the lowest level
and attempts to read the
furthest in its endeavours to restructure the dynamics in the
previous racist society."
For
an important
jurisprudential
analysis
of the effects of this
dictum
,
the meaning and scope of transformation and in particular, the
proposition that power be rendered accountable to the Constitution.
See
Karl
Klare
(1998) 14 SAJHR 146.
The
challenge of our constitution is therefore not to reproduce
uncritically the shibboleths of the past, but to transform (as
opposed to abolish or ignore) legal concepts in the image of the
Constitution. Contract law cannot be reduced to a museum of
a past
jurisprudence.
Expressed
differently, the methodology mandated by 539(2) of the Constitution
needs to be implemented whenever a dispute such
as the present is
placed before a Court
Application
With
this particular context in mind, it is possible to summarise the key
issues which must be interrogated by the Court in the
present
dispute.
1) Is
there an interest on the part of the applicant that is deserving of
protection after the termination of a business relationship?
2) Is
that interest prejudiced by the conduct of respondents?
3) If
the interest is so prejudiced, how does that prejudice get weighed
both qualitatively and quantitively against the interest
of the
respondent to be gainfully employed and to pursue the right of the
dignity of work if the order sought is so granted?
4) Is
there any other aspect of public policy as mediated by the
Constitution and which is unrelated to the relation between the
parties that, nonetheless, requires the restraint either to be
upheld or to be struck down?
5)
Does the restraint go further than absolutely necessary to protect
the legitimate interest of the applicant that it is deserving
of
legal protection in terms of the balance of exercise which I have
outlined?
With
these questions in mind I now turn to the issue of the protectible
interest.
Protectible
Interest
To
recapitulate the protectible interest for which applicant contends
are set out in the founding affidavits follows:
(a)
the creation by virtue of advanced methods (both in relation
to ingredients and processing) of unique ice
cream
flavours and the quality thereof which has been developed and
protected by the applicant
over
the past twenty five years.
(b)
the layout of shop premises (ie store designs) which had
been affected to attract
customers.
c)
imported display freezers placed and located in
prominent positions which are uniquely shaped to house
specifically
designed ice cream tubs, thereby maintaining the
correct temperature to serve a perfect ice cream.
d)
our patented cups and cones, and
e)
unique "Rand per kg" system in which the ice cream is
weighed in turn maximising the way the franchisee can control
the
quantity of ice cream sold in relation to profits (this prevents
pilferage and maximises profits).
f)
our serving spoons which were designed with the specific intention
to ensure the correct shape to be presented in a cone making
us
unique
g)
the "Mozart" trademark associated with high quality
superior ice cream
Mr
Kember
who deposed to the founding affidavit then goes on to summarise
applicants case:
"the
most obvious problem for the applicant would be that both
established and walk-in customers would accept that the franchise
had simply undergone a name change, and would as such support the
first respondent by virtue of the previous association of the
locality of the business. This in turn will effectively close the
door on any possibility of the applicant selling any further
franchise business least of all profitably."
These
averments require analysis through the prism of the outlined
jurisprudence,
which
generally recognises two forms of proprietary interests as deserving
of protection. The first is trade or customer connections
and the
second concerns confidential information or trade secrets. See in
particular
Sibex
Engineering Services (Pty) Ltd v Van Wvk and Another
1991(2) SA 482 (T) at 502 D-F. Applicant has sought to rely on
both of these interests to justify the enforcement of the restraint
of trade.
It
is clear however, given the nature of the
Plascon
Evans
rule, that the mere
ipse
dixit
of
the applicant cannot suffice on its own to establish these
proprietary interests. As
Olivier,
AJ
noted in
Viamedia
(Pty) Ltd v Sessa
(unreported judgment of CPD: case number 8679/2008);
"Information
does not become confidential and a process or practice does
not become secret merely because Viamedia
contends that they do
or, perhaps, even if Mr Sessa subjectively believed them to be so.
It does not suffice for Viamedia to
say that it has confidential
information or trade secrets. It must set out what they are
and when and how Mr Sessa
was exposed to them. It must set
up the facts from which the conclusion could be drawn
that something is indeed
confidential or secret."
See
also
Automated
Tooling System (Pty) Ltd v Wilkens and
Others
2007(2) SA 271 (SCA) at 281 B-D. The key to the resolution of
dispute turns on an examination of these two components,
customer
connections and trade secrets.
Customer
Connections
To
recapitulate applicant's case in this regard is that "established
(presumably, meaning repeat customers to respondent's
premises) and
walk-in customers (presumably, meaning casual first time 20
customers) would accept that the franchise had undergone
a name
change. Customer connections are worthy of protection must be
something more than simple information as to the identity
of
customers, that is where, as in this case, customers who were
obtained by respondents, not by the applicant, and where neither
party, certainly not the applicant is aware of the identity of the
customers.
As
Mr
Mitchell
,
who appeared on behalf of the respondents, 5 submitted, customer
connections in the context of a protectible interest denote
a
knowledge of the needs of the customer, the way in which those needs
are fulfilled by the party seeking to enforce the restraint
and the
identify of those within the customer's organisation who are in a
position to influence a move of the 10 custom to the
person sought
to be restrained.
Sibex
Engineering Services
,
supra,
at
503A-505D.
Trade
Secrets
Most
of the averments which I have already noted, fall under this
heading. In
Walter
McNaughtan (Pty) Ltd v Schwartz and Others
2004(3)
SA 381 (C) at 388J - 389B,
Van
Reenen. J
outlined the basis of the inquiry comprehensively as follows:
"Whether
the information constitutes a trade secret is a factual
question .... For information to be confidential
it must (a) be
capable of application in trade or industry, that is it must be
useful; not be public knowledge or property; (b)
it must be known
only to a restricted number of people or a closed circle and (c) be
of economic value to the person seeking
to protect it."
As
Mr
Mitchell
emphasized, the applicant is a distributor of ice cream products to
its franchisees for the purposes of resale to the public.
There is
no suggestion on the papers that the respondents were privy to the
ingredients or processing methods of the ice cream
distributed by
the
applicant nor that they were or are a manufacturer of ice
cream products. Respondents aver that thus:
"The
applicant sells its ice cream to its franchisees. The
franchisees do not manufacture the product nor
are they privy to the
recipes for the product. The applicant does not suggest that they
are or that they can harm the applicant
by using any such
information."
This
answer is not challenged in reply. No details of the
20 uniqueness of the layout of the stores were given
by the
applicant in its founding papers nor in its reply.
However respondent answers thus:
"Apart
from the trademark there is nothing to distinguish the shop depicted
on annexure CK11from any number of other ice
cream and snack shops
in any number of urban shopping malls."
Applicant
has made much of photographs annexed to the papers, 5 being CK11,
CK12 (and perhaps further CK13). However it does not
respond to the
answer that most ice cream shops look similar to the shops depicted
in these photographs. The uniqueness of the
display freezers was
disputed on the papers. No details of the unique freezers were given
in the replying affidavits.
Mr
Mitchell
also noted that the averment reveals a fundamental ignorance of the
terms of the franchise agreement. The freezers did not belong
to the
applicant, but were sold and delivered to the respondent. The
applicant itself stipulated the right to repurchase these
items.
See Clause 15.4.2 of the contract. The cups and cones were not
being used by the respondent and applicant admits in
reply that
there is no evidence to show to the contrary. The applicant gives no
details of its so-called "unique Rand per
kg system" which
could enable the Court to consider whether this constitutes a kind
of confidential information set out
in the
Walter
McNaughtan
case,
supra
.
This
Court is therefore not able to embark upon the factual inquiries so
indicated by Mr Howie in his argument. As illustrative
of the
evidential problem. Having said that the first respondent refused to
use the "Rand per kg" system, applicant
in reply now seeks
to backtrack on this statement but fails to controvert the
allegation in the answering affidavit that the
system is only valid
5 using the costs, weights and certain prices of applicant's
products. Accordingly there is the question
as to what protected
information has been shown in the papers. Similarly, respondents
deny the applicant's
ipse
dixit
that
its serving spoons are unique. Nothing is added in reply.
As
is clear from the analysis undertaken by this Court there is a need
to weigh up the potential prejudice, if any, to the applicant,
caused by respondent's continued trading against the public
consideration the gainful employment, providing the employment 15
opportunities and competition, should be encouraged.
This
application was brought in great haste before me as the Duty Judge
dealing with urgent applications. It was heard and decided
as a
matter of urgency. While I accept that breaches of restraint of
trade have an inherent quality of urgency, this application
transmogrified, within about three days, from one for interim relief
to an application for final relief.
The
case made out by applicant which falls short of the requisite test
may have benefited from a less dramatic launching of the
proceedings. Given the conclusion to which I have come, namely that
a case has not been made out, on the
Plascon
Evans
test, to 5 show either that these exist customer connections
sufficient to justify the enforcement of the restraint or the use
of
trade secrets as that ?, there is no need to consider the further
question which may otherwise have been of importance, namely
whether
the restraint provisions apply only if the agreements are terminated
by the applicant in terms of clause 15.
I
also do not need to determine whether the applicant showed that it
terminated the agreements and that respondents' cancellation
thereof
was groundless and constituted a repudiation.
For
these reasons, the
APPLICATION
IS DISMISSED WITH COSTS.
DAVIS,
J