For some or other reason there seems to be a misplaced perception amongst employees in South Africa that employers cannot enforce trade restraints typically contained within employment contracts. The opposite has been proven on numerous occasions by the courts, with the latest casualties being three ex-employees of Pronto Computer Solution (Pty) Ltd and their new employer.
Mpumalanga High Court case number 2850/2022. Pronto Computer Solution (Pty) Ltd. v Glen Van der Merwe (1st Respondent), Emalangeni Technologies (Pty) Ltd. (2nd Respondent), Deon Pottas (3rd Respondent) and David Blumenthal (4th Respondent).
The First, Third and Fourth Respondents were at one stage employees of the Applicant. The First Respondent held the position of a Sales Representative. The Third and Fourth Respondents were employed as Key Accounts Managers. Their responsibilities were, inter alia, “to effectively promote and sell the company’s comprehensive range of products and service offerings; drive sales, turnover and profits and any other task necessary for the conduct of the employer’s business, as the employer may from time to time direct.”
Upon commencing their employment with the Applicant, the employee Respondents signed employment contracts that also provided for restraint of trade. The said clause provides:
a) The employee undertakes not to be engaged in any other business, in competition with the employer’s business, be it directly or indirectly, or as a shareholder, partner, member of the Close Corporation, director of a company or any other capacity, within 1 (one) year after termination of this agreement, in the area known as Mpumalanga.
b) The employee acknowledges and agrees that the aforesaid restraint is fair, reasonable and necessary for the protection of his employer, his employer’s trade name and the goodwill attached thereto.
c) Without prejudice to any other rights which the employer may have in law, the employee acknowledges that the agreed damages due to his/her employer will be an amount of R5000.00 (five thousand rand) in respect of each calendar month during which any breach of the aforesaid restraint continues, and that the employer shall be entitled to recover such amount, and any associated recovery costs, from the employee in respect of such breach.
The Third Respondent was the first to resign from the Applicant’s employ on 05 November 2021. His last working day was 19 November 2021. He disclosed to the Applicant that he will be working for the Second Respondent. He was followed by the First Respondent who resigned on 01 December 2021. His last working day was 31 December 2021. The First Respondent had been working for the Applicant since 01 May 2018. Shortly after resigning, he informed the Applicant that he also joined the Second Respondent as an employee. The Fourth Respondent resigned on 01 March 2022 with 28 March 2022 being his last day as the Applicant’s employee. He also informed the Applicant that he would be joining the Second Respondent as an employee. He and the Third Respondent had started working for the Applicant on 11 February 2021.
After he had resigned, the First Respondent attended to at least two companies that, in the past, were serviced by the Applicant. They are the Lowveld Spar and a company known as Chem Kleen. The Applicant learned of the first incident when on 08 June 2022, its employee attended to Lowveld Spar in order to offer them a quotation for a CCTV installation. While attending to this, he was informed that the First Respondent had already quoted the Lowveld Spar for the installation of the same equipment and software.
As for Chem Kleen, another employee of the Applicant provided this company with a quotation for fibre network installation. Some days later, Chem Kleen called back to inform this employee that their company did not accept the quoted offer. Chem Kleen later disclosed that this was because the Applicant’s quotation was expensive and that the First Respondent came and did the installation “efficiently and timely.”
The First Respondent explained himself by invoking his prior knowledge and relationship with these companies and/or their employees. According to him, these were his clients long before he joined the Applicant as an employee. While he does not deny that they were also served by the Applicant (through him) at the time he worked for the Applicant, his stance was that they were his clients during and before he joined the Applicant. The Second, Third and Fourth Respondents confirmed and aligned themselves with the First Respondent’s submissions.
The First Respondent further alleged that the restraint of trade clause was unreasonable because the Applicant did not have the protectable interests that it claimed, in that the clients that it wished to prevent him from approaching for business purposes were in truth his clients. The First Respondent also alleged that there was no confidential information to protect. Such information was labelled by the Applicant as:
“marketing and business strategies; pricing, inclusive of mark-ups, of its products and services which are not general and unique to a particular customer; profit margins; financial and marketing policies and philosophies of the Company; sources of supply; quality control products; discount granted by suppliers; client and supplier relationships; method of distribution; other matters which relate to the business of the Applicant and in respect of which information is not readily available in the ordinary course of business to a competitor of the Applicant; the names and contact details of existing clients and their requirements, who require additional product and/or service offerings which are offered by the Applicant and in respect of which such existing clients are, therefore, also potential clients; knowledge of the Company’s customers and business associates…”
The First Respondent alleged that the aforementioned did not constitute trade secrets, claiming that “Trade secrets are protected by patents and copyright.” He further alleged that such does not constitute confidential information stating, “In any event, the applicants have failed to prove that this information is currently in the possession of the employee Respondents, especially considering that this information resides in the CRM (Customer Relation Management), which they have no access to.”
The Second Respondent confirmed that it is in a competitive business with that of the Applicant, and that the Applicant has always been aware of this position.
The court had to determine whether the Applicant gave the employee Respondents consent to work for the Second Respondent, knowing it to be a competitor.
From the letters written by Spar, it is evident that although the author had known the First Respondent from the past, they met again through the Applicant, and they started doing CCTV solution planning and integrations at other Spar stores. There could, therefore, not be any doubt that the Spar (and a few other branches) became a client of the Applicant and that the First Respondent was their contact person at the Applicant. Likewise, Chem Kleen first requested a quote from the Applicant because it was a client thereof. The statement by the First Respondent that the Spar and Chem Kleen were actually his clients (and thereby not the Applicant’s), was not supported by the letters he attached to the answering affidavit.
The First Respondent found himself in a situation no different from the first respondent in Nampesca (SA) Products (Pty) Ltd v Zaderer at 898J-899A, when he alleged in his answering affidavit, “I was not introduced to any of Nampesca's important customers subsequent to my joining Nampesca. I introduced the customers and most of the important suppliers to Nampesca. Nampesca's customers and suppliers were customers and suppliers with whom I had close contact and a strong personal and business relationship even before Nampesca was started and even before the service contract was concluded. I deny furthermore that, during my employment with Nampesca and because of my employment with Nampesca, I formed any attachment to or acquired any influence over Nampesca's customers which I never had before.”
The court, however, held in Nampesca (SA) Products (Pty) Ltd v Zaderer as follows:
“The first respondent's approach is that the first applicant does not have any proprietary interest in the customers and suppliers introduced by him to it. That approach, in my view, is fallacious. When the first respondent introduced customers and suppliers to the first applicant, they became the latter's customers and suppliers. Although the first respondent may have had dealings with them before, his employment with the first applicant enabled him to re-establish any pre-existing relationships and further strengthen them over a period of approximately five-and-a-half years. That customer goodwill can be established or enhanced in favour of an employer over customers previously known to an employee is recognised in Rawlins and Another v Caravantruck (Pty) Ltd. It is recognised that where an employee has access to an employer's customers and is in a position to build up a particular relationship with them so that when he leaves an employer's service, he could easily influence them to follow him, there is, in principle, no reason why a restraint to protect the employer's trade connections should not be enforced.”
In the current case, Judge Ratshibvumo echoed the sentiments expressed by Nestadt, JA in Rawlins and Another v Caravantruck (Pty) Ltd 1993 (1) SA 537 (A) at 542E-H who dealt with the issue of a party’s relationship with customers 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.”
Turning to the confidential information of Pronto Computer Solution, it was common cause that the employee Respondents had access to the CRM when they worked for the Applicant and that on the CRM, information relating to clients’ contact details, their purchases, invoices, sales needs, and potential future orders based on their historical dealings was stored. This information is not readily available to everyone in the ordinary course of business. While the employee Respondents no longer had access to the CRM, the fact that the First Respondent still had the contact details of some of the Applicant’s clients was enough proof that some of the information may have been stored for use outside the CRM. There may well have been more such information stored by any of the employee Respondents and the Applicant remained at their mercy.
In New Justfun Group (Pty) Ltd v Turner (2018) 39 ILJ 2721 (LC) (14 May 2014) at paragraph 13, Van Niekerk, J held that all that an applicant needs to show is that there is secret information to which the respondent had access and which, in theory, the respondent could transmit to the new employer should he or she desire to do so. Where the ex-employer seeks to enforce against an ex-employee a protectable interest recorded in a restraint, the ex-employer does not have to show that the ex-employee has in fact utilised information confidential to it; it is sufficient to show that the ex-employee could do so.
In Experian South Africa (Pty) Ltd v Haynes and Another 2013 (1) SA 135 (GSJ) at paragraph 21, Mbha, J (as he then was) held,
“Where an applicant as employer has endeavoured to safeguard itself against the unpoliceable danger of the respondent communicating its trade secrets to, or utilising its customer connections on behalf of a rival concern after entering that rival concern's employ, by obtaining a restraint preventing the respondent from being employed by a competitor, the risk that the respondent will do so is one which the applicant does not have to run and neither is it incumbent upon the applicant to enquire into the bona fides of the respondent, and demonstrate that he is mala fide, before being allowed to enforce its contractually agreed right to restrain the respondent from entering the employ of a direct competitor.”
The employee Respondents argued that the employment contracts were unreasonable in that it took away their right to work in the field of their qualification. Judge Ratshibvumo held that this is not a fact for consideration of whether the restraint of trade is unreasonable or not. The right to work needs to be balanced with the right to enter into a contract freely and voluntarily. In New Justfun Group (Pty) Ltd v Turner (J1335/2015)  ZALCJHB 442 (25 September 2015) at paragraph 13, the court held that a party seeking to enforce a contract in restraint of trade is required only to invoke the restraint and to prove a breach of its terms. Once a restraint agreement has been invoked and a breach of the agreement proved, the onus is on the respondent to prove on a balance of probabilities that the restraint agreement is unenforceable because it is unreasonable.
In Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 486 (SCA) at paragraph 15, the Supreme Court of Appeal held that agreements in restraint of trade were valid and enforceable unless they are unreasonable and, thus, contrary to public policy, which necessarily as a consequence of their common-law validity has the effect that a party who challenges the enforceability of the agreement bears the burden of alleging and proving that it is unreasonable. The SCA referred to J Louw and Co (Pty) Ltd v Richter and Others 1987 (2) SA 237 (N) at 243B-C with approval where the following was held:
“Covenants in restraint of trade are valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably restricts the covenantor's freedom to trade or to work. Insofar as it has that effect, the covenant will not, therefore, be enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case. Such circumstances are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time enforcement is sought.”
In applying these principles to the facts, the employee Respondents would have had to compare the circumstances at the time of signing their contracts to the current developments to show what has since changed, what caused the changes, the reasons thereof and the role of the employer in those changes that render the contract enforcement unreasonable. Using this test, the Respondents have failed dismally to show that the restraint of trade contained in the employment contracts is unreasonable.
The employee Respondents were interdicted and restrained, for a period of one year, from being employed by or engaged with the Second Respondent (or any other business similar to that of the Applicant) within the Province of Mpumalanga.
The Second Respondent was interdicted and restrained from employing or being engaged with the Employee Respondents for a period of one year.
The employee Respondents were further interdicted and restrained from directly or indirectly communicating and/or divulging and/or disseminating to the Second Respondent, and/or any other person or party, any confidential information relating to the Applicant. They were also interdicted and restrained from soliciting business and/or employees from the Applicant for the Second Respondent or any other competing business. The Respondents were ordered to pay the costs of the Applicant.
This article does not constitute legal advice. For an informed opinion and/or assistance with a labour-related matter, you are encouraged to arrange a formal consultation with the author.
Written by Jan du Toit, director at Labour Guide