Metcash Trading Africa (Pty) Ltd v Pauls (4861/2005) [2005] ZAFSHC 153 (8 December 2005)

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[2005] ZAFSHC 153
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Metcash Trading Africa (Pty) Ltd v Pauls (4861/2005) [2005] ZAFSHC 153 (8 December 2005)

IN THE HIGH COURT
OF SOUTH AFRICA
(ORANGE
FREE STATE PROVINCIAL DIVISION)
Case No. : 4861/2005
In
the matter between:-
METCASH
TRADING AFRICA (PTY) LTD
Applicant
and
CARL
GREGORY PAULS
Respondent
_____________________________________________________
HEARD
ON:
1
DECEMBER 2005
_____________________________________________________
JUDGMENT
BY:
KRUGER
J
_____________________________________________________
DELIVERED
ON:
8
DECEMBER 2005
_____________________________________________________
[1] Applicant
seeks to enforce a restraint of trade against respondent. The
application was brought as one of urgency on 17 November
2005. It
was postponed by agreement and an interim order was made.
[2] Respondent was
employed by Metcash Trading Ltd which applicant acquired in 2004.
From January 1999 to August 2005 the respondent
was employed by
Metcash Trading Ltd.
[3] Respondent
started as manager in training and thereafter – May 1999 to
December 1999 branch manager Thaba N’chu;
January 2000 to July 2000
branch manager Harrismith;
July 2000 to November
2001 branch manager Botshabelo;
November 2001 to April
2002 branch manager Thaba N’chu;
April 2002 to September
2004 branch manager Botshabelo;
September 2004 to August
2005 branch manager Bloemfontein.
[4] Applicant
conducts business as a wholesaler and retailer of a large range of
fast moving products in various parts of Africa and
trades throughout
the Republic of South Africa. A major part of applicant’s business
is the sale of goods on a wholesale basis
through various wholesale
stores located throughout South Africa. Three such stores that were
managed by respondent were the Botshabelo,
Bloemfontein and Thaba
N’chu wholesale stores.
[5] On 24 February 2003
the respondent signed an agreement in confidentiality and a covenant
in restraint of trade. Therein respondent
acknowledged that he had
acquired and would continue to acquire knowledge of the trade secrets
and trade connections of the applicant.
The agreement also generally
acknowledged that the applicant had protectable interests in the
restraint. Respondent was prohibited
from carrying on any
competitive activity for a period of 24 months after termination of
his employment throughout the Republic.
A “competitive activity”
includes the business of the sale by wholesale cash and/or
conventional distribution of fast moving
consumer goods. Respondent
was paid R70 000,00 as consideration for signing the restraint of
trade agreement.
[6] Applicant
says a major part of its business is the sale of goods through stores
such as the Botshabelo, Thaba N’chu and Bloemfontein
stores which
were managed by the respondent on a wholesale basis to retailers and
shops in the townships and rural areas. In weighing
up a restraint
there are two conflicting considerations.
BASSON
v CHILWAN AND OTHERS
[1993] ZASCA 61
;
1993 (3) SA 742
(A) at 767 D - I:
“
Wat die breëre
gemeenskap betref is daar twee botsende oorwegings: ooreenkomste moet
gehandhaaf word (al bevorder dit ook onproduktiwiteit);
onproduktiwiteit moet ontmoedig word (al verongeluk dit ook 'n
ooreenkoms) (vgl Sunshine Records (Pty) Ltd v Frohling and Others
1990 (4) SA 782
(A) te 794D-E). Wat die partye self betref, is 'n
verbod onredelik as dit die 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. Origens mag 'n beperking
wat
inter
partes
redelik is nietemin, vir 'n rede wat nie aan die partye eie is nie,
die openbare belang skaad. En besmoontlik ook omgekeerd.”
Four questions have to be
asked:
“
(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?”
In
KWIK
KOPY (SA) (PTY) LTD v VAN HAARLEM AND ANOTHER
1999 (1) SA 472
(W) at 484 D - E a fifth question was added:
“ ’
Gaan
die inkorting verder as wat nodig is om die belang te
beskerm?'”
[7] A contract in
restraint of trade must protect some proprietary interest of the
person who seeks to enforce it before it will be
enforced. Such
interest may take the form of trade secrets, confidential
information, goodwill or trade connections.
See
SIBEX
ENGINEERING SERVICES (PTY) LTD v VAN WYK AND ANOTHER
1991 (2) SA 482
(T) at 486 I – 488 D;
BASSON
v CHILWAN AND OTHERS
[1993] ZASCA 61
;
1993 (3) SA 742
(AD) at 769 C – I;
ARANDA
TEXTILE MILLS (PTY) LTD v HURN AND ANOTHER
2000 (4) ALL SA 183
(E) at 192 f.
[8] The covenant in
restraint is enforceable unless the respondent discharges the onus of
proving on a balance of probabilities that
it would be unreasonable
to enforce the covenant in restraint of trade that he has undertaken
in favour of the applicant, that the
applicant is not entitled to the
protection of the trade secrets identified by it or its customer
connections, or that the restraint
was wider that what was reasonably
necessary for the legitimate protection of such proprietary interests
as the applicant might enjoy.
See
SIBEX
,
supra
at 502 H – I, 503 A;
MAGNA
ALLOYS AND RESEARCH (SA) (PTY) LIMITED v ELLIS
[1984] ZASCA 116
;
1984 (4) SA 874
(A) at 893 C – E;
WALTER
McNAUGHTAN (PTY) LIMITED v SCHWARTZ AND OTHERS
2004 (3) SA 381
(C) at 388 E - F.
[9] The
time for determining when a restraint is or is not unreasonable and
therefore that the enforcement thereof would be against
public policy
is when the Court is asked to enforce the restraint.
See
RAWLINS
AND ANOTHER v CARAVANTRUCK (PTY) LTD
[1992] ZASCA 204
;
1993 (1) SA 537
(A) at 540 J – 541 I.
[10] After the respondent
left the applicant he became employed by or involved with an entity
known as Overland Cash & Carry Botshabelo
(“Overland
Botshabelo”). Overland Botshabelo operates in Botshabelo and is a
direct competitor of the applicant, and operates
in the same market
as the applicant selling goods on a wholesale basis to retailers and
shops in townships and rural areas, including
so-called spaza shops.
The respondent is thus acting in breach of the restraint of trade
agreement.
[11] The
Respondent relies on
inter
alia
the
following facts and circumstances for his view that the restraint
should not be enforced:
(i) That
the information regarding the Applicant’s prices and so called
“trade secrets and confidential information” are the
“pillars
of any business”.
(ii) That
he did not, during his employment with the Applicant, gain any
information to attract the business of the Applicant.
(iii) Selling
prices and minimum pricing are public knowledge and may be obtained
from any wholesaler or on brochures.
(iv) Senior
management was concerned with making arrangements with franchise
groups or banner groups and that the Respondent (as branch
manager)
had no influence thereon,
(v) The
Respondent was not privy to any trade secrets if same existed at all.
(vi) The
Applicant’s senior management and head-office had all relevant
dealings pertaining to trade secrets, confidential information,
etc.
(vii) No
customer of Applicant followed the Respondent to his new place of
employment.
(viii) His
main contact was with representatives who worked for agencies and not
for the suppliers.
(ix) Overland
(his new employer) has its own pricing structures, policies and
procedures. Overland has a different approach to the
business and
has been in business for approximately 15 years.
(x) Prices
frequently change.
(xi) As
supported by VISSER, the respondent denies that his employment with
Overland will result in him competing with the Applicant.
(xii) That
the balance of convenience favours him taking into consideration his
personal circumstances (
inter
alia
a father of three minor children) and the adverse economical impact
it will have on him if he be retained as prayed for by the Applicant.
(xiii) The
area of the restriction being the Republic of South Africa is too
wide, especially when taken into consideration that wholesale
businesses are to be found “in every town, every city and every
province of the Republic”.
(xiv) The
prejudice that the Respondent will suffer outweighs the “uncalculated
and unsubstantiated and unproved damages of the
Applicant”.
[12] The
main thrust of respondent’s defence is that the applicant has
failed to prove the existence of a protectable interest.
He says the
prejudice he will suffer outweighs any possible damages the applicant
relies upon.
[13]
In
regard to trade connections or trade secrets, in order to qualify as
confidential information, the information concerned must satisfy
certain requirements:
13.1 The
information must be capable of application in trade or industry, that
is, it must be useful; not be of public knowledge and
property.
13.2 The
information must be known only to a restricted number of people or a
closed circle.
13.3 The
information must be of economic value to the person seeking to
protect it.
See
TOWNSEND
PRODUCTIONS (PTY) LTD v LEECH AND OTHERS
2001 (4) SA 33
(C) at 53J – 54 B;
WALTER
McNAUGHTAN
,
supra
at 389 A.
[14] On the Respondent’s
own version at the time that he left the Applicant’s employment:-
14.1 The
Respondent had been involved in reaching budget targets.
14.2 The
Respondent had built up a relationship with representatives of
suppliers.
14.3 The
Respondent had knowledge of the prices charged by suppliers.
14.4 The
Respondent in fact had knowledge of margins albeit that same were
“dictated to us by Head Office”.
[15] Mr.
Van Rhyn, for respondent, submitted that public policy is an
acceptable criterion for unlawfulness. See
ATLAS
ORGANIC FERTILIZERS (PTY) LTD v PIKKEWYN GHWANO (PTY) LTD AND OTHERS
1981 (2) SA 173
(T) at 188 H.
One
should consider the society in which the restraint is to be enforced,
Mr. Van Rhyn says. There must be competition, in particular
in the
society in question here, being the low income society of Botshabelo.
The fact that competition is important in a low income
society is
thus, so says Mr. Van Rhyn, a factor which the Court should weigh up
in deciding whether the restraint is to be enforced.
He says the
applicant wishes to have a monopoly in Botshabelo and that is why it
is seeking to prevent the respondent from being
employed in
Botshabelo.
[16] The next point Mr.
Van Rhyn made related to the fact that applicant indicated that it
would be satisfied with a restraint only
for the three magisterial
districts of Botshabelo, Bloemfontein and Thaba N’chu. Mr. Van
Rhyn asks why is there only a protectable
interest in those three
areas and not nationwide as the contract provides for?
[17] Mr. Van Rhyn relied
on
WALTER
McNAUGHTAN (PTY) LTD v SCHWARTZ AND OTHERS
,
supra
because facts thereof were similar to the present facts especially at
388 E – H. The application was dismissed in that case because
the
information was no longer of any value because the stocks were
ordered almost a year previously and would have been disposed
of and
therefore the usefulness of the knowledge anticipated to such an
extent that the restraint did not need to be enforced (at
389 C –
D).
[18] An important facet
of this case is whether the respondent knew applicant’s mark up.
Respondent says the mark up was negotiated
by head office. Respondent
admits that he knew the prices charged to the applicant by its
suppliers. That means he also knew the
mark up. That is the pricing
structure. That is confidential information within the definition
thereof set out above. An applicant,
in seeking to enforce a
restraint of trade to which a respondent has bound himself, does not
have to show that such respondent has
in fact utilised or disclosed
information confidential to the applicant, but merely that the
respondent could do so.
See
BHT
WATER TREATMENT (PTY) LTD v LESLIE AND ANOTHER
1993 (1) SA 47
(W) at 57 H – 58 D;
[19] Despite
the respondent’s denial that Overland Botshabelo will be able to
make use of the confidential information of the applicant
within the
knowledge of the respondent, nowhere in the respondent’s answering
affidavit does he state that he will not disclose
any information in
his knowledge to Overland Botshabelo. Likewise, the affidavit of
Visser contains no averment that Overland Botshabelo
is not
interested in the prices charged by the applicant’s suppliers.
[20] I am satisfied that
applicant’s pricing structures and customer connections constitute
a protectable interest. Although it
may be true that prices
fluctuate, the very fact and nature of fluctuation are part of the
pricing structure. In this case it is
not useless information as in
the
WALTER
McNAUGHTAN
-case,
supra
.
The next question is whether the restraint should be enforced in the
circumstances.
[21] I have to weigh up
the prejudice to the parties:
Respondent worked as
applicant’s branch manager at its Bloemfontein store until 19
August 2005. He took up employment with
Overland Cash and Carry,
Botshabelo on 17 October 2005, a direct competitor of applicant
(admitted by respondent). Overland
Botshabelo was opened on 3
November 2005. Thus the respondent assisted Overland to start off
a new business in direct competition
with applicant after he left
applicant.
21.2 Respondent’s
denial of knowledge of pricing structures of applicant is given the
lie by what he says in the answering affidavit
at p. 92 at par. 42:
“
The contents hereof is only
admitted in as far as my knowledge of the prices charged to the
Applicant by its suppliers is concerned.”
Thus the applicant admits
that he was aware of the prices charged by supplies to applicant.
Obviously he was aware of the prices
at which applicant sold – any
member of the public was aware thereof. This meant that he was aware
of the mark up.
Respondent’s denial
that the R70 000,00 was paid for signing the restraint is
ingenious:
The contract itself
states the purpose of the payment:
“
9.4 Without in any way derogating
from the contents of this Agreement and in addition thereto, the
Company will pay to the Employee,
as consideration for signing this
Agreement, the aggregate sum of R70 000,00 (Seventy thousand rand);”
(b) All contracts with
the employees continued as before the take-over and section 197 of
the Labour Relations Act applied. Thus
there was no need, as
respondent would want one to believe, that the payment was made in
order to entice employees not to resign.
Their employment was secure
and the only possible reason for the payment was to obtain the
committal to the confidential information.
(c) The
restraint was signed by respondent on 24 February 2003 and the
take-over agreement took place on 24 June 2004, some 14 months
after
the restraint agreement. This illustrates the unreliability of
respondent and his distortion of facts pertinent to the restraint
when he says that the R70 000,00 was connected to the take-over.
21.4 The applicant runs a
business. It trained respondent and gave him various opportunities.
Respondent has left and assisted an
opposing company to commence
business in an area where the respondent worked (Botshabelo as branch
manager for the applicant).
21.5 Applicant
does not want to eliminate competition as Mr. Van Rhyn would want one
to believe. Applicant cannot eliminate competition.
Applicant can
only seek to enforce its legitimate interests by depriving the
opposition of an employee. It certainly does not limit
competition.
It does however limit unfair competition. It stops its opponent
using confidential information against it.
21.6 This is a selling
business. Pricing and strategy as to discounts are important
elements. The respondent worked in the field
at the place where he
is now working for a direct competitor. It must be against public
policy to permit such conduct in the face
of an agreement not to do
so, for which respondent was paid a handsome once-off consideration
of R70 000,00.
21.7 As to the possible
prejudice which respondent can suffer, he says that since he was
dismissed in August 2005 he was unable to
find any other employment
with which he was familiar. His unemployment had an adverse
economical impact on himself and his family.
He is a husband and a
father of three minor children aged 10, 5 and 2 years. He says he is
the sole breadwinner of his family and
responsible to provide daily
meals, that the responsibility rests solely upon himself. He is also
responsible for payment of a bond
in the amount of R4 300,00 and
further municipal account, rates and taxes amounting to approximately
to R1 500,00. He says it is
therefore not in the best interests of
himself and his family to continue to be unemployed. Mr. Hollander
points out that no details
are given by the respondent as to what
employment he looked for, what steps he took. This is not such a
highly specialised field
that he would not be able to find any other
employment. Furthermore the restraint sought is very limited and the
respondent would
be able to work in many other magisterial districts
in an identical business without fear of breaching the terms of the
restraint.
The fact that he is working in Botshabelo in opposition
to the applicant and can only amount to unlawful competition.
Respondent
has not been deprived of his livelihood. It is not as if
the respondent is only capable working in this field. It is not a
highly
specialised one.
[22] As to area and time,
the applicant refers to clause 6 of the restraint which provides for
severability of the restraints. The
restraints are deemed to
separate undertakings (clause 6.2) and for the benefit of the company
(clause 6.3). The Court can enforce
a restraint less than that
stipulated for. See
ROFFEY
v CATTERALL, EDWARDS & GOUDRÉ (PTY) LTD
1977 (4) SA 494
(N) at 507 A – G and
NATIONAL
CHEMSEARCH (SA) (PTY) LTD v BORROWMAN AND ANOTHER
1979 (3) SA 1092
(T) at 1114 A – B.
[23] The applicant wishes
to be reasonable towards the respondent. Although it might be
entitled in terms of the restraint agreement
to protection
countrywide, it only wishes to enforce the restraint in three
magisterial areas. Also as to the time period, the applicant
is
entitled to 24 months, but seeks only 12 months. It is claiming
lesser protection creating a lesser burden for respondent.
[24] The burden upon
respondent is one of the factors to be weighed up in determining
whether the restraint is to be enforced or not.
[25] Applicant’s
businesses range much wider than simply the wholesale business.
However, the respondent was only involved in the
wholesale arm of
applicant’s businesses and Mr. Hollander was willing to accede to
the restraint being limited to wholesale businesses.
[26] As to the costs of
17 November 2005, there is no reason why those costs should also not
follow the cause.
[27] The order I
therefore make, is the following:
1. The respondent is
interdicted and restrained, for a period of one year, from 19 August
2005 and within the magisterial districts
of Botshabelo, Bloemfontein
and Thaba N’chu, either solely or jointly or together with any
other person or entity or as agent for
any other person or entity,
whether corporate or incorporate, from directly or indirectly and
whether for reward or not:-
1.1 carrying on or
assisting financially or otherwise being engaged or concerned or
interested in any business;
1.2 being
a director or a shareholder in any company;
1.3 being
a member of a close corporation;
1.4 being
employed by or in or acting as a consultant, advisor, contractor,
representative, trustee or beneficiary of any trust or
agent of any
business;
which carries on any
wholesale business conducted by the applicant, or endeavours to carry
on any wholesale business conducted by
the applicant at 19 August
2005.
2. The respondent is to
pay the costs of this application which are to include the costs of
the hearing on 17 November 2005.
____________
KRUGER, J
On
behalf of applicant: Adv. L. Hollander
Instructed
by:
Israel
Sackstein Matsepe Inc.
BLOEMFONTEIN
On
behalf of respondent: Adv. A.J.R. van Rhyn SC
Instructed
by:
Symington
& De Kok
BLOEMFONTEIN
/sp