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Selling a business with its goodwill means a seller can never come back and impact upon that goodwill

25th January 2013

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There is an issue which seems to remain a point of litigation, despite the trite principles that surround it.  The effect of a sale of a business including its goodwill was again the subject of a decision by the Supreme Court of Appeal in Gert Jakobus van der Watt and another vs Christiaan Jacobus Jonker and others (Case no. 837/2010) (“the van der Watt case”).

Goodwill is a thing very easy to describe, very difficult to define.  It is the benefit and advantage of the good name, reputation and connection of a business1.  It is the totality of attributes that lure or entice clients or potential clients to support a particular business2.  Goodwill is, simply put, the attractive force which brings in custom.

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It is firmly established in our law that, absent a restraint provision, the seller of goodwill is permitted to trade in competition with the purchaser.  However, the seller may not solicit his former customers for business or conduct his business under such a name and in such a manner as to deprive the buyer of the goodwill that he paid for.  This position was, however, seemingly overlooked by the parties in the van der Watt case, the facts of which were as follows:

The first respondent, Mr Jonker, started the business of the second, third and fourth respondents, collectively referred to as “the Agri group”.  The Agri group essentially traded in petroleum products in the Free State Province, distributing these products mainly to farmers. 

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The first appellant, Mr van der Watt, was employed by Mr Jonker and went on to become a marketing manager within the Agri Group.  Mr van der Watt later terminated his employment with the Agri-group and started a new business, selling and distributing petroleum products to industrial clients.  This business was located in Randfontein and was purchased by a company of which the shares were owned equally by Jonker and van der Watt.

The relationship turned sour and in 2007 a restraint agreement was reached between Jonker and van der Watt, separating the Randfontein and Agri group businesses.  It was agreed, inter alia, that Jonker would pay to van der Watt R2 million in cash.  In addition, the agreement contained a restraint in respect of both parties, to stay out of the other’s geographical area.

Jonker obtained relief in the court a quo in terms of the restraint agreement on the basis that van der Watt solicited customers of the Agri group and was trading in contravention of the restraint.  On appeal, counsel for van der Watt did not dispute that he was trading in the petroleum business in the affected areas.  Instead, van der Watt challenged the enforceability of the restraint on various grounds.

The appeal was decided on a basis different to the one advanced by the parties and decided on by the court a quo.  In fact, the SCA drew the parties’ attention to its decision in A Becker & Co (Pty) Ltd v Becker & others 1981 (3) SA 406 (A) (“the Becker case”) and applied the principles of that case in casu.

In the Becker case, Becker sold his business, including its goodwill.  Certain restraints of trade were set out in the agreement of sale.  Becker then, through his companies, approached his old customers in order to solicit business from them.  He did this only after the restraint period expired.  The Court of Appeal held that, while the express restraint in respect of competition had fallen away, the sale of the company’s goodwill meant that Becker was prohibited from soliciting business from his former customers.

The Court of Appeal in the Becker case agreed with and confirmed the decision in Trego v Hunt [1896] AC 7 that a seller who disposes of the goodwill of a business is not allowed thereafter to act contrary to the sale.  In a separate, concurring judgement, Van Heerden AJA analysed in detail the origin and nature of the right to goodwill in a business.  Goodwill was referred to as an incorporeal property right usually based on two components, namely the locality of the business and the personality of the driving force behind the business.  It was held that, in alienating the goodwill of a business, a seller commits himself not to perform any act that would be contrary to the granting of the right.

The van der Watt case fell squarely within the principles laid down in the Becker case and the authorities cited in that case.  The undisputed facts showed that van der Watt solicited customers of the Agri group with whom he had previously built up relationships and he actively traded in the geographical area of the Agri group.  His defence was simply that the restraint was unenforceable. 

The SCA reaffirmed the fact that a restraint of trade against a seller forms part of the goodwill of the business and held that van der Watt’s actions amounted to a trade in contravention of the alienation of the goodwill.   The appeal was upheld.

It is important to note from this judgement, and those that came before it, that acquiring the goodwill of a business entitles the purchaser to a specific restraint against competition by the seller.  The restraint forms part of the goodwill of the business.  The expiry of the restraint does not amount to an expiry of the obligation not to encroach on the goodwill of the business.

Notes:
1 The Commissioners of Inland Revenue v Muller & Co’s Margarine Ltd [1901] AC 217
2 Caterham Car Sales & Coachworks Ltd v Birkin Cars (Pty) Ltd 1998 (3) SA 938 (SCA)

Written by Werina Griffiths – Senior Associate, Trade Mark Litigation, Adams & Adams
and Kelly Thompson – Partner, Trade Mark Litigation, Adams & Adams

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