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[2024] ZAECMKHC 49
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Braddon Mc Cleland (Pty) Ltd t/a Network Associates v Le Roux (CA61/2023) [2024] ZAECMKHC 49 (7 May 2024)
FLYNOTES:
LABOUR
– Restraint –
Penalty
–
Former
employee of appellant taking up position with competitor –
Approaching customer of appellant – Clause providing
for
penalty of 12 months’ salary – Breached agreement with
appellant – Clause constituted penalty clause
as envisaged
in section 3 of Conventional Penalties Act 15 of 1962 –
Former employee not discharging onus of establishing,
prima facie,
that penalty stipulated was out of proportion to prejudice
suffered – On appeal ordered to pay R122,100
with interest
and costs.
IN THE HIGH COURT OF
SOUTH AFRICA
EASTERN CAPE DIVISION,
MAKHANDA
NOT
REPORTABLE
Case No.: CA61/2023
In
the matter between:
BRADDON
Mc CLELAND (PTY) LTD
t/a
NETWORK
ASSOCIATES
Appellant
and
CALVIN
LE
ROUX
Respondent
JUDGMENT
EKSTEEN
J:
[1]
The appellant (Network Associates) sought to
enforce a contractual penalty for breach of contract against the
respondent, Mr le
Roux, in the Magistrate’s Court of Gqeberha.
The presiding magistrate absolved the respondent from the instance
and
ordered each party to pay their own costs, hence the appeal.
[2]
Network Associates trades in information
technology support services in Gqeberha. In January 2019 they
appointed Mr le Roux
as their customer relations manager and
concluded a written contract of employment (the agreement) with him.
Before he took
up employment Network Associates provided him with
training to equip him for his new position. Clause 11 of the
agreement
provided for the confidentiality and non-disclosure of
information. The material provisions of clause 11 provided:
‘
11.1
The employee is required to keep confidential and not to disclose any
of the company’s … client lists,
programs, marketing
and/or financial information to any person other than to persons
employed and/or authorized by the company
or associated company
(where applicable) …
11.2
The company and the employee hereby acknowledge that the confidential
information represents a substantial
monetary value to the company.
…
11.5
The employee shall not, during the employment period, or at any time
thereafter, use for his own benefit,
or for the benefit of any other
person …, any of the Company’s … confidential
information which he/she may
receive or obtain in relation to the
Company’s affairs and/or clients/customers, goods and/or
services … or to any
marketing or business technique which is
carried on or used by the Company.
…’
[3]
Pursuant to the confidentiality stipulated in
clause 11 of the agreement, clause 12 provided for restrictions to be
placed on employees
and former employees. The material portion
of clause 12.1 provides:
’
12.1
After the Employee’s employment terminated with the Company,
for whatever reason, the Employee may not, subject
to clause 12
below:
12.1.1 contact any
customer … listed in the Employer’s customer/client
listings … for whatever reason and in
particular with the view
of securing/attempting to secure such customer/client’s
business;
…
12.1.3 directly or
indirectly contact, approach, solicit, be interested in … any
of the customers/clients of the Company,
including individuals or
businesses, either alone or jointly or together with or as agent or
employee for anyone else;
12.1.4 be engaged,
interested or concerned, whether financially or in any other way or
whether directly or indirectly with any customer/client
of the
Company;
12.1.5 act as a
consultant, adviser or provide management services to any
customer/client of the Company;
…
.’
[4]
The agreement proceeded to provide that he would
pay to the company an amount equivalent to 12 months’ salary,
calculated
with reference to the salary that the employee earned from
the company at the time of the termination of his employment, in the
event of him breaching any of the provisions of clause 12.1.
[5]
In February 2021, Mr le Roux terminated his
employment with Network Associates and took up employment with
TenacIT as a sales development
consultant. At the time of his
resignation Mr le Roux earned R122 100,00 per annum. TenacIT,
like Network Associates,
trades in information technology support
services in Gqeberha. They are competitors in the same market.
On 7 April
2021, shortly after taking up employment with TenacIT, Mr
le Roux dispatched an email to Mr Gary Sim, the managing director of
RC Green and Co., a long-standing customer of Network Associates, in
an attempt to secure business with RC Green. The body
of the
email records:
‘
Good
Day Gary
I hope you are doing
well?
I thought that I would
just mention that we offer a comprehensive VoIP service which (is) as
seamless as it is affordable.
We implement and factor
Qos-Quality of Service to ensure that our clients are receiving the
best quality with the added benefit
of low call costs & service
fees.
A powerful and scalable
solution which is hosted entirely in the cloud and managed by our
highly qualified engineers to call quality
service.
I am here to resolve any
pain points or gripes you might be experiencing or simply want to
move away from Telkom. …’
[6]
Mr le Roux followed up on the email with a
subsequent telephone call to Mr Sim, and a further email, in order to
persuade him to
invest in the VoIP (voice over internet protocol)
service on behalf of TenacIT. Network Associates contended that
the original
email constituted a breach of the agreement and
accordingly that they were entitled to enforce the penalty set out
earlier.
While Mr le Roux initially denied that his conduct
constituted a breach of the agreement, before the commencement of the
trial
he conceded that he had breached the agreement. However,
he pleaded that the provisions of clause 12.1 of the agreement, to
pay an amount equivalent to 12 months’ salary, constituted a
penalty stipulation in terms of s 3 of the Conventional Penalties
Act, 15 of 1962 (the Act). He contended that the penalty
stipulation, being an amount of R122 100,00, was out of proportion
to
the prejudice that Network Associates would suffer. He argued
that they did not suffer any damages, because Mr Sim did
not purchase
the VoIP service.
[7]
The
agreement is admitted and it is common ground between the parties
that Mr le Roux breached the agreement. It was further
common
cause that clause 12.2 constituted a penalty clause as envisaged in s
3 of the Act. A penalty clause, as envisaged
in the Act, is an
alternative to a claim for damages for breach of contract, and,
accordingly, a contractant is not entitled to
claim both the penalty
and damages in respect of an act or omission which is the subject of
a penalty clause.
[1]
He
may also not claim damages instead of a penalty, unless the contract
expressly provides otherwise.
[2]
[8]
The
purpose of a penalty clause is to enable the penalty creditor to
claim the penalty without the need to prove that he has suffered
damage, or what the extent of his damage is, particularly in
circumstances where proof of the extent of damage may be
difficult.
[3]
It is
intended to deter the penalty debtor from breaching the contract and
is said to operate,
in
terrorem
.
[4]
A penalty stipulation arising from a contractual obligation is
sanctioned by the Act and is enforceable in law.
[5]
Once it is established that the penalty debtor has breached the
undertaking, the penalty creditor is entitled to the full
amount
thereof, unless it is reduced by a court, in terms of s 3 of the
Conventional Penalties Act.
[6]
[9]
The
section confers on the court an equitable jurisdiction, not merely in
the form of a discretion, but in the form of a power coupled
with a
duty.
[7]
Thus, the penalty
debtor bears the onus of proving, not only that the penalty is
disproportionate to the prejudice suffered
by the penalty creditor,
but the extent to which it is disproportionate.
[8]
Where the penalty debtor has established a prima facie case in
respect of these requirements there is a burden upon the penalty
creditor to rebut the case made. This would be particularly
important where the creditor relies on prejudice other than financial
prejudice. If, at the conclusion of the evidence, the court is
left in doubt as to whether or not the penalty is out of proportion
to the prejudice, then the penalty falls to be enforced as
agreed.
[9]
Section 3 of
the Act enjoins the court considering the prejudice to the penalty
creditor to have regard not only to his proprietary
interests, but to
every other rightful interest that would be affected by the act or
omission in question.
[10]
The evidence
[10]
As I have said, Mr le Roux was appointed by
Network Associates as its customer relationship manager. He
said that one of his
main functions was managing relationships with
customers and that he was actively involved in these relationships,
amongst others,
with Mr Gary Sim, of RC Green and Co. He had been in
contact with Mr Sim from the beginning of his employment, in 2019,
building
a customer relationship with him.
[11]
Mr le Roux acknowledged that in his capacity as
customer relationship manager he gained firsthand experience and
knowledge of the
specific needs and requirements, from a technology
information perspective, of each client. He explained that the
purpose
of gaining such detailed knowledge was to find opportunity to
follow-up and ensure that those needs and requirements were met.
He said that often a service sold to a customer would entail the
provision of a package of services across a broad spectrum of
services. Thus, it was a sales method to show to clients that
it would be more beneficial for them to buy a package of services
than an individual service that might not be as effective in
conjunction with other services which the client already has.
[12]
As adumbrated earlier, shortly after Mr le Roux
terminated his services with Network Associates he approached Mr Sim
by way of an
email. The familiarity with Mr Sim is evident from
the address on first name terms. Mr le Roux said that he knew
that
Mr Sim was under a service level agreement with Network
Associates at the time and that the VoIP service did not form part of
his
service level agreement. He contended that Network
Associates did not provide the VoIP service to their clients.
He
explained that Mr Sim declined the VoIP service and that the
sale did not materialise, hence his contention that Network
Associates
suffered no damage.
[13]
In respect of the penalty clause, Mr le Roux
acknowledged that Network Associates’ client base constitutes a
valuable asset
and he admitted that customer relationships represent
a substantial monetary value to a business. He conceded, too,
that
customer relationships constitute an interest worthy of
protection and that the disruption thereof was prejudicial, and he
confirmed
that this appreciation led to the conclusion of the penalty
clause.
[14]
On behalf of Network Associates, Mr Mc Cleland
testified. He said that Network Associates provide cloud
services, VoIP service,
anti-virus products, software licensing and
hardware. In this respect he disagreed with the contention
advanced by Mr le
Roux in respect of the VoIP service. The
magistrate perceived this dispute to lie at the heart of the matter.
He concluded:
‘
The
Plaintiff and the Defendant contradict(s) one another and I am not in
a position to decide that anyone’s version is (nor)
probable
(then) than the others. The whole issue hinges on this and
therefore I am going to grant absolution from the instance.’
(
Sic)
[15]
The
magistrate misconstrued the issue. As I have said, Mr le Roux
bore the onus to prove that the penalty provided for in
the contract
was out of proportion to the prejudice suffered by Network Associates
in consequence of his breach, and to establish
the extent to which it
should be reduced. Where a defendant bears the onus of proof
there can be no question of absolution
from the instance being
granted. If the defendant fails to discharge the onus of proof
resting upon him the proper order
would be judgment for the
plaintiff.
[11]
[16]
As I
have explained, Network Associates and TenacIT were competitors in
the market for IT support services. Customer goodwill
is an
asset of an employer which becomes a trade connection of the employer
capable of protection by way of a restraint of trade.
[12]
In
Rawlins
Nestadt
JA explained the ratio for this protection as follows:
‘
The
need of an employer to protect his trade connections arises where the
employee has access to customers and is in a position
to build up a
particular relationship with the customers so that when he leaves the
employer's service he could easily induce the
customers to follow him
to a new business (Joubert:
General
Principles of the Law of Contract
149).
Heydon:
The
Restraint of Trade Doctrine
(1971)
108, quoting an American case, says that the "customer contact"
doctrine depends on the notion that "the employee,
by contact
with the customer, gets the customer so strongly attached to him that
when the employee quits and joins a rival he automatically
carries
the customer with him in his pocket".’
[17]
The evidence in this
matter established that Mr le Roux was trained in the art of
fostering customer relationships, at the expense
of Network
Associates, before the commencement of his employment. He was
employed as the customer relationship manager with
the specific task
of developing and fostering relationships with clients. He was
actively associated with Mr Sim throughout
his period of employment
and gained an intimate knowledge of the needs and requirements of RC
Green and Co. As I have said,
the familiarity with Mr Sim is
apparent from the first email addressed to Mr Sim.
[18]
It emerged from his
own evidence that he knew that Mr Sim did not subscribe to the VoIP
service and that he could offer the VoIP
service to Mr Sim, that
would have been an alternative to that what he then had. As he,
himself, explained, services are
often sold in packages. He was
well placed to advise Mr Sim of other services more compatible to the
VoIP service, that might
be more efficient than that which he was
subscribed to with Network Associates. He had developed the
kind of relationship
envisaged by Nestadt JA in
Rawlins.
[19]
Contrary to the view
of the magistrate, I consider that it is entirely irrelevant to the
enquiry whether Network Associates offered
the VoIP system to
customers. His understanding of the needs of RC Green and Co.
and the fact that his new employer offered
a service, which Network
Associates did not, had placed him in an ideal position to solicit
customers of Network Associates to
follow him to the new employment
by offering an alternative to them, that he knew they did not have.
This constitutes a serious
intrusion into the customer relations
which Network Associates had with RC Green and Co.
[20]
After Mr Mc Cleland
had discovered the approach by Mr le Roux to RC Green and Co. a
letter was addressed to him reminding
him of his contractual
obligations to Network Associates, and enquiring whether he had
approached any customers of Network Associates
after terminating his
employment. Mr le Roux was not frank in his response, and he
denied that he had done so. Not
only was the response not true,
but, in evidence, Mr le Roux did not testify that he had not
approached any other customer of Network
Associates.
[21]
In all the
circumstances, Mr le Roux did not discharge the onus of establishing,
prima facie, that the penalty stipulated was out
of proportion to the
prejudice suffered, and the appeal must succeed.
[22]
Accordingly, the
following order is made:
1.
The appeal succeeds
and the order of the magistrate is set aside and substituted by the
following:
“
The
Defendant is ordered to pay to the Plaintiff:
(a)
R122 100,00, together with
interest thereon, calculated at the legal rate,
a
tempore morae
to
the date of payment; and
(b)
The Plaintiff’s costs
of suit.”
2.
The respondent is
ordered to pay the costs of the appeal, with the costs of counsel to
be taxed in accordance with Scale B, set
out in rule 69(7) of the
Uniform Rules of Court.
J
W EKSTEEN
JUDGE
OF THE HIGH COURT
POTGIETER
J:
I
agree.
D
O POTGIETER
JUDGE
OF THE HIGH COURT
Appearances:
For
Appellant:
Adv J Ramsay
Instructed
by:
Joubert Galpin Searle
c/o
Huxtable Attorneys
MAKHANDA
For
Respondent: No appearance
Instructed
by:
Kaplan Blumberg Attorneys
GQEBERHA
Date
Heard:
26 April 2024
Date
Delivered: 7 May 2024
[1]
Section
2 of the Conventional Penalties Act.
[2]
De
Lange v Deeb
1970
(1) SA 561
(O), confirmed in
Botha
(now Griessel) v Finanscredit (Pty) Ltd
1989
(3) SA 773
(A) at 796.
[3]
See
Van
der Merwe, Van Huyssteen, Reinecke and Lubbe: Contract:
General Principles
(4
th
ed)
at 379
.
[4]
Christie’s
Law of Contract in South Africa
(8
th
ed)
at 700.
[5]
Van
Staden v Central South African Land and Mines
1969
(4) SA 349
(W) at 351.
[6]
Section
3 provides: ‘If upon the hearing of a claim for a
penalty, it appears to the court that such penalty is out
of
proportion to the prejudice suffered by the creditor by reason of
the act or omission in respect of which the penalty was
stipulated,
the court may reduce the penalty to such extent as it may consider
equitable in the circumstances: provided
that in determining
the extent of such prejudice the court shall take into consideration
not only the creditors proprietary interests,
but every other
rightful interest which may be affected by the act or omission in
question.’
[7]
Christie
at
701 and
Van
der Merwe, Van Huyssteen et al
at
383.
[8]
Steinberg
v Lazard
2006
(5) SA 42
(SCA) at para 7.
[9]
Maiden
v David Jones (Pty) Ltd
1969
(1) SA 59
(N) at 64E-F.
[10]
Also,
Van
Staden
at
352H.
[11]
Ah
mun v Ah Pak
1974
(4) SA 317
(E) and
Jones
& Buckle: The Civil Practice of the Magistrate’s
Court in South Africa (
10
th
ed)
vol 1 at 329.
[12]
Recycling
Industries (Pty) Ltd v Mohamed and Another
1981
(3) SA 250
(SE) at 258;
Rawlins
and Another v Caravan Truck (Pty) Ltd
1990
(3) SA 537
(A);
Paragone
Business Forms (Pty) Ltd v Du Preez
1994
(1) SA 434
(SE) at 44; and
Bridgestone
Firestone Maxiprest Ltd v Taylor
[2003]
1 All SA 299
(N) 303i-304a
.