Brief Summary

Restraint of trade — Enforcement of restraint clause — Appellant, an insurance broker, contested the enforceability of a restraint clause following his departure from employment with a successor company — Appellant argued that his termination amounted to a wrongful dismissal, thus rendering the restraint inapplicable — Court held that the restraint clause was enforceable as the termination did not constitute a wrongful dismissal and the appellant was bound by the terms of the restraint agreement.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an urgent application for final interdictory relief to enforce a restraint of trade against a former employee and to prevent competition with the applicants’ insurance broking business. The matter ultimately came before the Supreme Court of Appeal on appeal and cross-appeal from the Eastern Cape Division.

The appellants were Paul Edward Puttenham Reeves (first appellant) and Reeves Insurance Brokers CC (second appellant), the latter being a close corporation formed by Reeves after leaving the respondents’ employ. The respondents were Marfield Insurance Brokers (Pty) Ltd (first respondent, referred to in the judgment as “Glenvaal”, being its former name) and Glenvaal Dewar Rand Limited (second respondent, referred to as “GDR”), the successor entity carrying on the combined insurance broking business after a corporate restructuring.

In the court of first instance (Van Rensburg J), the respondents obtained an order substantially enforcing the restraint, but with a reduced geographic area as compared with the contractually stipulated radius. Reeves and his close corporation appealed against the granting of the interdict. The respondents cross-appealed, seeking reinstatement of the wider contractual area (a radius of 350 km from East London).

The dispute concerned the enforcement of a restraint of trade contained in Reeves’s 1987 service agreement (and mirrored in a related sale-of-business agreement), and whether the restraint could be enforced despite the termination of employment occurring in circumstances amounting to a breach by the employer (specifically, dismissal without contractual notice), and whether the scope of the geographic area should be curtailed.

2. Material Facts

Prior to 1987, Reeves and his father conducted an insurance broking business in East London through a close corporation, Harold Reeves & Associates CC, in which Reeves held a 40% interest. They had established valuable client relationships and goodwill in the region. In 1987, the first respondent (then known as Glenvaal (Pty) Ltd) wished to open an East London office and purchased the close corporation’s business (including goodwill) as a going concern under a written agreement of sale dated 21 July 1987. It was common cause that Reeves and his father then entered into service agreements with Glenvaal on its usual terms.

Reeves’s service agreement (deemed to commence 1 July 1987) contained a restraint clause providing that during employment and for three years after employment ceased “for any reason whatsoever”, Reeves would not, within a 350 km radius from East London City Hall, engage or be interested in insurance broking and related competing activities. A restraint in virtually identical terms also appeared in the 1987 sale agreement.

Over time Reeves became joint manager of Glenvaal’s East London branch. In that role, he maintained and developed relationships with clients and acquired detailed knowledge of clients’ insurance needs and arrangements. Later, in 1994, Glenvaal and its holding company concluded an agreement with Dewar Rand Investments (Pty) Ltd to transfer both businesses into a new company, Glenvaal Dewar Rand Limited (GDR), which took transfer of assets and goodwill and commenced business on 1 April 1994.

It was common cause that GDR wished to employ certain staff, including Reeves. Reeves continued working in his previous position from 1 April 1994 but refused to sign a new standard service contract presented by GDR. His objections included the proposed restraint’s geographic breadth (nationwide) and the absence of agreed details on benefits. Because of his seniority, the restraint proposed for him was to be three years rather than two. After several months of unsuccessful negotiations, by 31 August 1994 he was required to leave employment.

On the papers, and for purposes of the appeal, the court accepted Reeves’s allegation (not denied in reply) that pending conclusion of a new contract, the terms of his 1987 service agreement continued in full force and effect after 1 April 1994. On that basis, the court proceeded on the footing that the three months’ notice provision in the 1987 agreement formed part of the tacit post–1 April 1994 employment arrangement. It followed that requiring Reeves to leave immediately and without notice meant the employer acted in breach of that tacit agreement.

After leaving, Reeves established a competing business through the second appellant, incorporated on 13 September 1994. It was common cause that during September 1994 Reeves persuaded approximately 32 clients of GDR (formerly clients associated with Glenvaal) to sign appointments authorising the second appellant to act for them in insurance matters.

On 3 October 1994 the respondents brought urgent proceedings for an interdict enforcing the restraint with effect from 1 September 1994. Van Rensburg J granted relief but reduced the area of operation from the contractual 350 km radius to an area including East London and extending west to the Chalumna River, north to and including Queenstown, and east to and including Umtata. The respondents’ cross-appeal challenged that limitation.

As to the geographic scope, Reeves alleged that his activity had essentially been within the greater East London area, partly into Transkei, and along the Border Corridor to Queenstown, and that a reasonable restraint should not go beyond the Chalumna River (west), Queenstown (north), and Umtata (east). This description of Reeves’s operational area was not denied by the respondents in reply. It was also common cause that Glenvaal had a separate Port Elizabeth branch which operated independently and had existed since 1970, supporting the conclusion that the contractual 350 km radius (which extended well beyond Port Elizabeth) was potentially overbroad.

3. Legal Issues

The central legal questions were whether, on the facts accepted on the papers, the restraint of trade became operative and was enforceable against Reeves after he left employment in circumstances amounting to a wrongful termination by the employer (dismissal without contractual notice), and whether public policy precluded enforcement.

A key interpretive issue was whether the contractual wording that the restraint applied for three years after Reeves “ceases to be employed … for any reason whatsoever” should be construed narrowly so as not to include a wrongful or unfair dismissal, or whether the phrase had its ordinary wide meaning.

A further issue concerned the relationship between South African law and an asserted English rule that an employer who wrongfully terminates employment cannot enforce a restraint clause in that contract. This raised a question of legal principle, including whether such a rule forms part of South African law, and if so whether it could apply where the restraint expressly contemplates operation “for any reason whatsoever”.

In addition, the court was required to determine whether, even if triggered, enforcement of the restraint would be contrary to public policy in light of the circumstances of termination. This was a question involving the application of law to fact and an evaluative judgment about reasonableness and the public interest under South African restraint-of-trade doctrine.

On cross-appeal, the court had to decide whether the court a quo properly limited the geographic extent of the restraint, and whether the area described in the interdict was impermissibly vague. Those issues involved both factual assessment (the employee’s actual sphere of activity and the employer’s protectable interests) and a discretionary assessment of reasonable scope.

4. Court’s Reasoning

The court began from the position, effectively common cause on the affidavits, that Reeves’s post–1 April 1994 employment relationship with GDR was governed by a tacit agreement continuing the 1987 service agreement’s terms pending negotiation of a new contract. Because the respondents did not deny Reeves’s allegation to that effect, the court accepted (for purposes of the appeal) that the three months’ notice term applied after 1 April 1994. On that approach, requiring Reeves to leave immediately and without notice meant GDR acted in breach of the tacit employment agreement.

The court then addressed whether the restraint was nevertheless triggered. It held that the phrase “for any reason whatsoever” was unambiguous and had its ordinary meaning. The words “ceases to be employed” were read as focusing on the termination of the employment relationship as a matter of fact, and the additional words “for any reason whatsoever” were understood as indicating that the cause or circumstances of termination were irrelevant to operation of the restraint. The court relied on prior decisions that had treated similar wording as wide enough to include unlawful termination by the employer, and rejected the appellants’ attempt to import interpretive approaches associated with exemption clauses to narrow the plain meaning in the absence of ambiguity.

The court considered the English-law proposition that wrongful dismissal automatically ends the enforceability of restrictive covenants. It found the rationale in the cited English authorities not readily reconcilable with South African principles and noted that importing a rigid rule could lead to inequitable outcomes, given that breaches by employers may vary from technical and good-faith breaches to serious misconduct. The court emphasised that an employee remains free to pursue remedies for breach (including damages), and that invalidating the restraint entirely may expose the employer to significant loss of goodwill and client connections.

While acknowledging that South African cases had, in some form, adopted the English approach, the court treated those authorities as not supporting a rule that would apply where the parties expressly agreed the restraint would operate regardless of the reason for termination. In particular, the court held that even if there were room for such a rule in South African law in the absence of an express clause, it had no application where the restraint explicitly covers cessation of employment “for any reason whatsoever”. The court therefore confined its conclusion to that narrower proposition and did not decide whether the English rule could ever apply in South African law absent such wording.

The court then dealt with the public policy argument. It distinguished between, on the one hand, fraud or wilful wrongdoing by the employer designed to secure enforcement of a restraint (for example, hiring and firing with the sole object of restraining the employee), and, on the other hand, termination involving breach without bad faith. It reasoned that where wrongful termination is fraudulent or in bad faith, a court would decline to enforce the restraint; and to the extent that contractual wording purported to confer a benefit from fraud or wilful wrongdoing, it would not be enforceable. However, the court found no basis on the papers to characterise the failure to give notice as wilful wrongdoing or bad faith.

In assessing whether enforcement would be contrary to public policy in the circumstances, the court applied the settled South African approach that restraints are generally valid and enforceable unless enforcement would be contrary to the public interest, evaluated in light of circumstances at the time of enforcement. It invoked the balancing considerations articulated in prior appellate authority: the public interest in holding parties to their bargains, and the public interest in ensuring freedom to trade and avoiding unreasonable fetters. The court also reiterated the onus: once the covenantee proves the restraint and breach, the covenantor must establish on a balance of probabilities that enforcement would be unreasonable in the circumstances.

Applying those principles, the court accepted that Reeves had worked for the business from 1987 to August 1994, held a senior position, had customer connections and knowledge, and, absent restraint, could exploit those connections—something he in fact did by securing mandates from numerous clients shortly after leaving. The restraint also served to protect the goodwill purchased by Glenvaal in 1987. The court considered it relevant that GDR had attempted over months to retain Reeves and that the conditions he objected to were applied generally. Reeves would have been aware that failure to reach agreement could end his employment. In this context, the court found that the absence of notice, while a breach, did not make enforcement of the restraint unreasonable or contrary to public policy.

On the cross-appeal about geographic scope, the court held that pointing to a single client outside the reduced area did not establish that the contractual 350 km radius was reasonable, nor that the curtailed area was unreasonable. The evidence accepted on the papers was that Reeves’s area of activity was essentially around East London and certain surrounding regions, and that this was not denied by the respondents. The court treated it as clear that at least the Port Elizabeth region had to be excluded because Glenvaal had a distinct independent branch there; the respondents’ argument effectively required carving out Port Elizabeth by reference to an arbitrary distance, which reinforced the overbreadth of the contractual radius. On that footing, the court concluded that the court a quo’s reduction of the area was justified on the evidence.

As to vagueness, the court accepted that the reduced area’s description was less precise than it could have been, but held that in the circumstances it was not so vague as to require reformulation.

5. Outcome and Relief

The Supreme Court of Appeal dismissed the appeal against the enforcement of the restraint and dismissed the cross-appeal seeking to widen the geographic scope of the interdict.

The interdict granted by the court a quo therefore stood, including the limited geographic area described in that order rather than the contractual 350 km radius.

The court ordered that both the appeal and the cross-appeal be dismissed with costs, and that the costs for each side include the costs of two counsel.

Cases Cited

Biografic (Pvt) Ltd v Wilson 1974 (2) SA 342 (R).

Commercial and Industrial Holdings (Pvt) Ltd and Another v Leigh-Smith and Others 1982 (4) SA 226 (Z).

Capecan (Pty) Ltd t/a Canon Western Cape v Van Nimwegen and Another 1988 (2) SA 454 (C).

Chubb Fire Security (Pty) Ltd v Greaves 1993 (4) SA 358 (W).

Government of the Republic of South Africa v Fibre Spinners & Weavers (Pty) Ltd 1978 (2) SA 794 (A).

Freight Bureau (Pty) Ltd v Kruger and Another 1979 (4) SA 337 (W).

Cambridge Plan AG and Another v Moore and Others 1987 (4) SA 821 (D).

Meter Systems Holdings Ltd v Venter and Another 1993 (1) SA 409 (W).

Commercial and Industrial Holdings (Pvt) Ltd and Another v Leigh-Smith and Others 1982 (4) SA 226 (Z).

Elgin Brown & Hamer (Pty) Ltd v Industrial Machinery Suppliers (Pty) Ltd 1993 (3) SA 424 (A).

General Billposting Company Ltd v Atkinson [1909] AC 118 (HL).

Measures Brothers Ltd v Measures [1910] 2 Ch 248 (CA).

S W Strange Ltd v Mann [1965] 1 All ER 1069 (Ch).

Drewtons (Pty) Ltd v Carlie 1981 (4) SA 305 (C).

Info DB Computers v Newby and Another 1996 (1) SA 105 (W).

Wells v South African Alumenite Co 1927 AD 69.

Ex parte Minister of Justice: In re Nedbank Ltd v Abstein Distributors (Pty) Ltd and Others and Donelly v Barclays National Bank Ltd 1995 (3) SA 1 (A).

Magna Alloys and Research (SA) (Pty) Ltd v Ellis [1984] ZASCA 116; 1984 (4) SA 874 (A).

Sunshine Records (Pty) Ltd v Frohling and Others 1990 (4) SA 782 (A).

Basson v Chilwan and Others [1993] ZASCA 61; 1993 (3) SA 742 (A).

CTP Ltd and Others v Argus Holdings Ltd and Another [1995] ZASCA 32; 1995 (4) SA 774 (A).

Diner v Carpet Manufacturing Company of S A Ltd 1969 (2) SA 101 (D).

Legislation Cited

Labour Relations Act 28 of 1956.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the restraint clause providing that it would operate after the employee “ceases to be employed … for any reason whatsoever” was unambiguous and encompassed termination of employment even where the employer acted wrongfully by failing to give contractual notice. The fact of wrongful termination did not, without proof of fraud or wilful wrongdoing or other circumstances rendering enforcement contrary to public policy, preclude enforcement of the restraint.

The court further held that the circumstances of Reeves’s termination—accepted as involving lack of notice—did not make enforcement of the restraint contrary to public policy, particularly given Reeves’s customer connections, his exploitation of those connections after departure, and the protectable goodwill acquired in the 1987 purchase.

On the cross-appeal, the court held that the contractual geographic area was overbroad on the evidence accepted on the affidavits and that the court a quo was justified in limiting the restraint to the reduced region described in its order. The description of the reduced area, though imprecise, was not so vague as to require alteration.

LEGAL PRINCIPLES

A restraint of trade in South African law is not treated as prima facie invalid. Its enforceability turns on whether enforcement would be contrary to public policy, assessed in light of the circumstances prevailing at the time enforcement is sought. This requires a balancing between the public interest in pacta sunt servanda (performance of contractual undertakings) and the public interest in freedom to engage in trade or profession without unreasonable fetters.

Once the party seeking enforcement proves the existence of the restraint and a breach, the burden shifts in practical terms to the party resisting enforcement to prove, on a balance of probabilities, that enforcement would be unreasonable in all the circumstances.

Where a restraint clause provides that it applies when the employee ceases employment “for any reason whatsoever”, that phrase is ordinarily construed according to its wide and plain meaning, rendering the cause of termination irrelevant to the triggering of the restraint. In the absence of ambiguity, interpretive devices aimed at limiting meaning (including restrictive constructions associated with other categories such as exemption clauses) do not apply.

Although the manner of termination (including breach by the employer) may be relevant in evaluating reasonableness and public policy at the time of enforcement, wrongful termination does not automatically negate enforceability. The weight of such conduct depends on the circumstances, and may be decisive where the employer’s conduct involves fraud or wilful wrongdoing (bad faith) aimed at securing the benefit of the restraint; in such cases, enforcement may be refused, and contractual provisions purporting to permit benefit from fraud or wilful wrongdoing are not enforceable to that extent.

In determining reasonable geographic scope, the court may limit an overbroad contractual area by reference to the evidence of the employee’s actual operational area and the employer’s legitimate protectable interests, particularly where the applicants do not dispute factual assertions relevant to that enquiry on the papers.

Reeves and Another v Marfield Insurance Brokers (Pty) Ltd and Another (12/95) [1996] ZASCA 39; 1996 (3) SA 766 (SCA); (28 March 1996)