Republic of South Africa IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN) HERMAN ALBERT VAN DER MERWE

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1 Republic of South Africa REPORTABLE IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN) CASE No: 15638/2008 In the matter between: LOGISTA INC DANIEL COETZEE LOURENS ERASMUS OOSTHUIZEN WERNER KLEINSCHMIDT and HERMAN ALBERT VAN DER MERWE First Applicant Second Applicant Third Applicant Fourth Applicant Respondent JUDGMENT DELIVERED : 22 APRIL 2009 MOOSA, J: Introduction [1]The crucial issue in dispute in this matter revolves around the interpretation of the restraint of trade clause contained in a written agreement of sale concluded between the applicants and the respondent in terms of which the latter sold his shareholding in the first applicant to the fourth applicant. Most of the facts are common cause. The principal business of first applicant is the rendering of accounting and financial services

2 2 to its clients. The second, third and fourth applicants are shareholders and directors of the first applicant. Before the respondent sold his interest in the first applicant, he was the founding and principal member of the first applicant. All the parties are Chartered Accountants. The terms of the written agreement dated 1 November 2007 and concluded between the parties ( the Agreement ) are not disputed. Restraint of Trade [2]The restraint of trade clause in the agreement restrains the respondent from acting in competition with first applicant up to 31 December There are certain qualifications and exceptions, to the restraint of trade clause. The applicants aver that the respondent is acting contrary to the terms of the clause in several respects and has sought an interdict to prohibit the respondent from conducting business in competition with the first applicant. The respondent, on the other hand, maintains that the restraint of trade clause is qualified to such an extent that nothing remains thereof. The respondent, however, concedes that the restraint of trade clause is reasonable and enforceable. He admits that he renders accounting services to former clients of first applicant, but denies that he is violating the restraint of trade clause. The Issue [3]The issue that this court is called upon to determine is whether the respondent is contravening the restraint of trade clause and if so, are the applicants entitled to the interdict. It is common cause that the applicants are seeking a final interdict. As there are conflicting interpretations given to the impugned clause, I have to apply the canons of construction to determine the true meaning thereof. A useful point of departure is to reproduce the impugned clause. It reads as follows: 14.5 Die Verkoper onderneem om alles in sy vermoë te doen om te

3 3 verseker dat die MAATSKAPPYse kliënte deel van die MAATSKAPPYsal bly en dat hy nie in kompetisie met die MAATSKAPPY sake sal doen nie. Dit word spesifiek op rekord geplaas dat hierdie ʼn materiële term van hierdie ooreenkoms is Dit word egter bevestig dat die Verkoper steeds geregistreer sal bly as geöktrooieerde rekenmeester, maar dat hy tot en met 31 Desember 2009 nie enige ander funksies hoegenaamd sal verrig nie. Dit word spesifiek op rekord geplaas dat hierdie ʼn materiële term van hierdie ooreenkoms is Die Verkoper sal egter tot 31 Desember 2009 geregtig wees om met derde partye te konsulteer en hulle van advies te bedien, op hulle versoek Soortgelyk sal die MAATSKAPPY gewillig en geregtig wees om self of namens hulle klëente van die Verkoper se konsultasie dienste gebruik te maak, teen R1000,00 (EEN DUISEND RAND) per uur Die PARTYE bevestig dat hulle van mening is dat die volgende party vanaf die effektiewe datum eerder van die Verkoper se rekeningkundige dienste (uitgesluit sy ander funksies) gebruik sal wil maak, waartoe die MAATSKAPPY, die Koper, COETZEE en OOSTHUIZEN toestem. (A list of the parties so excluded is set out.) Die Verkoper bevestig dat die volgende partye wat nie bestaande kliënte van die MAATSKAPPY is nie, aangedui het dat hulle moontlik van die Verkoper se rekeningkundige dientste in die toekoms gebruik wil maak: (a list of the parties is set out.)

4 Met die uitsluiting van bogemelde partye bevestig die PARTYE dat sekere ander bestaande kliente van die MAATSKAPPY, moontlik in die toekoms, voor 31 Desember 2009, uit vrye wil en sonder aansporing van die verkoper en/of sy personeel, sou verkies om nie langer van die MAATSKAPPY se dienste gebruik te maak nie, maar eerder van die Verkoper se rekenkundige dienste Dit word egter as ʼn materiële term van hierdie ooreenkoms op rekord geplaas dat indien die Verkoper en/of sy personeel enigsins voor 31 Desemeber 2009 sy rekenkunde aktief sou bemark of sy of ʼn besigheid sou bedryf dat dit in kompetisie met die van die MAATSKAPPY sou wees, dan verval die vergunning om die opleidingslokaal en kantore kosteloos te gebruik. Die Verkoper sal dan genoodsaak wees om onmiddellik ʼn markwaarde huurgeld vir die gebruik daarvan en vir die 2 (TWEE) parkeerplekke verwys in klousule 14.7 hierna te betaal. Amendment to the Agreement [4]It is common cause that on 28 November 2007, the parties amended clauses 14.2 and 14.3 of the Agreement. The effect of the amendment was that the respondent would receive payment of R80 000,00 for giving up his right, in terms of the Agreement, to use the training facilities and the furnished office free of charge. It is common cause that the first applicant effected such payment. In the circumstances clause which was dependant on clause 14.2 which was repealed, became superfluous and post non scripto.

5 5 Submissions [5]Adv Marais submitted, on behalf of the applicants, that clause 14.5 is the overarching restraint of trade clause imposed on the respondent and which is described in the Agreement as a material term of the contract. He contended that it forms an integral part of the restraint of trade that the respondent shall not conduct business in competition with the first applicant and implicit therein is the understanding that he will do everything in his power to ensure that all first applicant s clients shall remain its client base. He is barred from enticing away or enlisting the first applicant s clients in competition with the first applicant or render services that is being offered by the first applicant, to them or to new clients, other than those clients and services that have been specifically excluded in the Agreement. [6]Adv Stelzner submitted, on behalf of the respondent, that clause is an introductory clause which sets out in broad outlines the undertaking by the respondent and such undertaking is qualified by a number of sub-clauses in various ways. He contended that the introductory clause should be treated as the recital and the real intention of the parties is reflected in the sub-clauses which should receive precedence over any contradiction that may be apparent in the introductory clause. He argued that the meaning of the sub-clauses is clear, whereas the introductory clause is relatively vague and the ambit of the trade restraint is determined by the sub-clauses and not by the introductory clause. Interpretation [7]The first issue I have to resolve is whether the introductory clause constitutes a recordal and recital or an integral part of the restraint of trade clause and as such

6 6 embodying rights and obligations flowing therefrom. The general principle is that recordals and recitals are regarded as subordinate to the operative parts. Should the operative part be ambiguous, then recourse can be had to the recordals and recitals to ascertain the true meaning of the operative part. (See: R H Christie on The Law of Contract in South Africa Fifth Edition at p 211 and the authorities referred to in note 306.) The context in which the introductory section appears in the particular clause does not lend itself to be a recordal or recital as we normally understand these terms. However, before determining the true nature and import of the introductory section and the accompanying sub-clauses, I want to outline the principles governing the interpretation of words and phrases in contracts. [8]The golden rule of construction is set out by Joubert, JA in the well-known judgment of Cooper s & Lybrand and Others v Bryant 1995 (3) SA 761 (A) at 767E-F as follows: According to the golden rule of interpretation the language in the document is to be given its grammatical and ordinary meaning, unless this would result in some absurdity, or some repugnance or inconsistency with the rest of the instrument. (Principal Immigration Officer v Hawabu and Another 1936 AD 26 at 31; Scottish Union & National Insurance Co Ltd v Native Recruiting Corporation Ltd 1934 AD 458 at and Kalil v Standard Bank of South Africa Ltd 1967 (4) SA 550 (A) at 556D.) Joubert, JA continued at 767H-J: The mode of construction should never be to interpret the particular word or phrase in isolation (in vacuo) by itself. See Swart en ʼn Ander v Cape

7 7 Fabrix (Pty) Ltd 1979 (1) SA 195 (A) at 202 (per Rumpff, CJ): Wat natuurlik aanvaar moet word, is dat, wanneer die betekenis van woorde in ʼn kontrak bepaal moet word, die woorde ontmoontlik uitgeknip en op ʼn skoon stuk papier geplak kan word en dan beoordeel moet word om die betekenis daarvan te bepaal. Dit is vir my vanselfsprekend dat ʼn mens na die betrokke woorde moet kyk met inagnemimg van die aard en opset van die kontrak, en ook na die samehang van die woorde in die kontrak as geheel. Further at 768A-D: The correct approach to the application of the golden rule of interpretation after having ascertained the literal meaning of the word or phrase in question is, broadly speaking, to have regard: (1) to the context in which the word or phrase is used with its interrelation to the contract as a whole, including the nature and purpose of the contract, as stated by Rumpff, CJ, supra; (2) to the background circumstances which explain the genesis and purpose of the contract and (3) to apply extrinsic evidence regarding the surrounding circumstances when the language of the document is on the face of it ambiguous, by considering previous negotiations and correspondence between the parties, subsequent conduct of the parties showing the sense in which they acted on the document, save direct evidence of their own intentions. [9]I will proceed to determine the ordinary grammatical meaning of the impugned clause

8 8 within the context in which it appears and within the scope, nature and purpose of the Agreement. The object of such exercise is to ascertain the intention of the parties as contemplated in the Agreement. It is a canon of construction that every word or phrase is intended to have some effect or be of some use and should be construed in such a way that no clause, sentence or word shall be superfluous, void, insignificant or pro non scripto, unless such construction would lead to absurdity. (Wellworths Bazaars Ltd v Chandler s Ltd and Another 1947 (2) SA 37 (A) at 43; Attorney-General, Transvaal v Additional Magistrate for Johannesburg 1924 AD 421 at 436 and Minister of Justice and Another v Breyenbach 1942 AD 175 at 183.) [10]The language in the introductory section of clause 14.5, in my view, is clear and unambiguous. It comprises two elements. The one is a restraint placed on the respondent not to do business in competition with first applicant and the other is an undertaking by the respondent that he will do everything in his power to ensure that all first applicant s clients will remain part of its client base. This, in my opinion, constitutes the general rule to which there are certain exceptions. The exceptions are set out in the sub-clauses which follow the introductory clause. The parties acknowledged that the particular clause constituted a material term of the Agreement. [11]Preambles and recitals are usually ushered in by words such as whereas, whilst, while or other qualifying statements which distinguishes them from the operative part of the phrase. In the impugned statement no such wording or qualification appears which could justify the conclusion that the introductory clause constitutes a preamble or recital. It is clear from the language and the intention of the parties as embodied in such language that the introductory section and the sub-clauses constitute an integral part of the restraint of trade clause and must be read as a whole to give true effect to

9 9 the intent of the parties with resultant rights and obligations flowing from clause I accordingly conclude that the introductory section is not a preamble or recital or recordal but the overarching operative part of the restraint of trade clause and which is amplified and/or qualified by the sub-clauses. The Ambit of the Restraint of Trade [12]The next issue that I am seized with is: what are the nature, scope and import of the restraint of trade clause and what are the consequences should the respondent fail to adhere thereto. The respondent was the father and founder of the first applicant, but because of differences in style and approach between him and the other younger members of the firm, the parties felt that it would be in the best interest of first applicant that the respondent and the other members of the firm part company. It was agreed that the respondent would sell his interest in the first applicant to the fourth applicant. It was further agreed that the respondent would concentrate his energies in training personnel and reciprocal support would be given to each other in their respective endeavours. The respondent accordingly sold his interest in first applicant to fourth applicant for the purchase price of R [13]Counsel for the respondent argued that the purchase price did not make provision for goodwill and there was no protectable interest for the applicants to safeguard. In my view such argument is misplaced. While the contract does not specifically put a figure to such goodwill, it does mention that the sale includes the goodwill. It is self evident that the causa for the restraint of trade clause was to safeguard the goodwill of the practice. In addition thereto, the applicants agreed to allow the respondent to make use of the training facilities, offices and parking bays, free of charge, but stipulated that should the respondent or his personnel actively market his accounting services or

10 10 conduct his business in such a manner that it is in competition with that of first applicant, then in that event the concession would cease and he will be required to pay market related rental for the use of such facilities. Such concession was, however, repealed by written agreement between the parties and on payment of R by the applicants to the respondent. [14]Counsel for the respondent submitted further that the only sanction that the first applicant can impose against him if he should actively market his accounting services or conduct his business in competition with first applicant, is for him to forfeit the concession granted to him in terms of clause I do not agree. In my view besides the normal remedies the first applicant can rely on in law, the respondent could also have been penalised in terms of clause However, the Contract was amended in writing by the parties and in terms of such amendment, clause 14.2 which provided for the relevant concession to the respondent was repealed together with clause 14.3 which provided for first applicant to make use of the training services provided for by the respondent. The applicants paid the respondent a financial consideration for such cancellation. The penalty clause referred to above, namely clause , was not formally repealed. However, the efficacy of clause was dependant on the existence of clause Logic dictates that with the demise of clause 14.2, clause became pro non scripto and of no force and effect. In my view such clause, by implication, was also repealed and the remedy provided for in that clause is not available to the applicants as suggested by the respondent. [15]I am satisfied that the restraint of trade embodied in clause 14.5 is clear and unambiguous. It restrains the respondent to do business in competition with first applicant and he is required to do everything in his power to ensure that first applicant s

11 11 clients remain part of its client base. This is regarded by the parties as a material term of the Contract. However the respondent is permitted to remain registered as a Chartered Accountant, but he is not permitted to perform any auditing functions whatsoever up to and including 31 December 2009 (clause ). He would be entitled to consult third parties and give them advice but at their request (clause14.5.2). First applicant is likewise entitled to make use of the consulting services of the respondent either on its own behalf or on behalf of its clients (clause ). The parties agreed that the respondent would be entitled to provide accountancy services (other than auditing functions) to certain family members, friends and acquaintances as specified (clause ). [16]The respondent confirmed that certain parties who are not clients of the first applicant indicated that they in future would possibly make use of the accountancy services of the respondent (clause ). Unlike the case in clause , there is no indication that the applicants agreed thereto. The parties also acknowledged that other existing clients of first applicant would possibly in future, before 31 December 2009, of their own volition and without being influenced thereto by the respondent or his personnel, decide no longer to make use of the accountancy services of first applicant, but to make use of the services of the respondent (clause ). There is likewise no indication that the applicants agreed thereto. It appears that the parties deliberately left these two situations open. The first situation was postulated by the respondent and the second situation was postulated by all the parties. There was no certainty in either case that the situation would in fact materialise. The only reasonable inference I can draw is that the parties agreed to address the situation as and when it arises, that is, that when the third party or the existing client approaches the respondent to render accountancy services, then he will have to obtain the prior approval or consent of the

12 12 first applicant before he can render such services to them. [17]Applying the principles of interpretation as set out above, I conclude that the respondent was firstly, not permitted to perform auditing functions for the duration of the trade restraint period, i.e. up to 31 December 2009; secondly, that, for the duration of the trade restraint period, he could consult and give advice provided it is at the instance of such consulting parties; thirdly, he could, for the duration of the trade restraint period, provide accountancy services to those parties specified in clause ; fourthly, that he could render accountancy services to those third parties mentioned in clause and existing clients of first applicant as set out in clause if the respondent is approached by them and first applicant has given its prior approval. [18]The applicants are entitled to the usual remedies for breach of the restraint of trade. One of these remedies is an interdict. The applicants would be entitled to an interdict provided the requirements for an interdict are met. This is an application for a final interdict. The requirements for a final interdict are firstly, the existence of a clear right; secondly, the infringement of such right or there is a reasonable apprehension of such infringement and thirdly, the absence of any other suitable remedy. (Setlogelo v Setlogelo 1914 AD 221 at 227 and Masuku v Minister van Justisie en Andere 1990 (1) SA 832 (A) at 840C-841C.) [19]It is clear from the circumstances that the applicants had a protectable interest to safeguard their goodwill. The Agreement specifically provided for the respondent not to do business in competition with first applicant and to do everything in his power, for the duration of the trade restraint period, to ensure that first applicant retains its client base. The restraint of trade was reasonable and necessary to protect the interests of the

13 applicants. I have found that the meaning of the terms of the trade restraint is clear and unambiguous. I accordingly find that applicants had a clear right. 13 [20]The respondent admitted in the papers that he provides accountancy services to former clients of first applicant and other clients but denies that he infringes the restraint of trade clause. He stated in his Opposing Affidavit that the restraint of trade clause has been so qualified that there is nothing left. His interpretation is misconceived. I have analysed the particular clause in depth and concluded what the respondent could do and what he could not do in terms of the restraint of trade clause. He claims further that he was advised by an attorney that should he do business in competition with first applicant, then he would merely lose the benefit of using the training facilities free of charge. The advice was unsound for two reasons. The first is that the clause providing for the use of the facilities free of charge was repealed with his concurrence and for which he received a financial consideration. The second is that the forfeiture clause was likewise, by implication, found to be repealed and was of no force or effect. I am satisfied that on the respondent s own version, he has infringed the rights of the first applicant as set out in clause 14.5 of the Contract and will continue to do so in future. [21]A claim for damages could be an alternative remedy, but I do not think that it would be an effective and practical remedy. It would be extremely difficult to prove damages. In my view a claim for damages would not be a suitable alternative remedy in the present matter. I am satisfied that the applicants have made out a case for a final interdict. [22]I agree with respondent s counsel that the order sought by the applicants is very

14 wide and lacks specificity. I am also of the opinion that the applicants have not made out a case for the relief sought in clause There is no evidence that the 14 respondent is performing audit functions. He has specifically deregistered from performing such function. [23]As far as costs are concerned, the applicants have been substantially successful and there is no reason why costs should not be awarded to them. They have asked for costs on an attorney-client scale. I am not persuaded to grant costs on such a scale. [24]In the premises the following order is made: (1) That the respondent is interdicted and restrained up to and including 31 December 2009 from: (a) doing business in competition with first applicant save and except insofar as he is permitted to do so in terms of clauses , , and and may in future be permitted to do so in terms of clauses and of the Contract in Respect of the Sale of Shareholding dated 2 November 2007; and (b) directly or indirectly enlisting the clients of first applicant (other than those referred to in clause and those referred to in clause for whom the necessary permission has been obtained), or encourage them to terminate their business relationship with the first applicant; and (2) That costs are awarded to the applicants.

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