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IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 24764/2017

Not reportable: NO

Of interest to other judges: YES

Revised.

26/7/2017

In the matter between:

LEAD LAUNDRY AND CATERING (PTY) LTD	Applicant
and
CHETTY, PERAGALATHEN	First Respondent
MEGA-MELVILLE EQUIPMENT GROUP AFRICA CC	Second Respondent

JUDGMENT

 

SPILG, J:

INTRODUCTION

1. This is a restraint of trade application brought by Lead Laundry and Catering (Pty) Ltd (“LLC”) on urgency for final relief against Mr Chetty to interdict him until 1 March 2018 from competing or having an interest of whatsoever nature in any entity which carries on business either in direct or indirect competition with that of LLC within South Africa or which deals in any service which is the same or substantially similar to that dealt with by LLC.

The applicant also seeks an order that Chetty terminates his employment contract with Melville-Equipment Group Africa CC, which is the second respondent. Costs are also sought.

Only Chetty opposes the application.

2. Chetty did not dispute urgency but contended that there was not a protectable interest and that in any event the restraint was overbroad.

3. Chetty was initially employed by LLC in its domestic appliance section (this appears to have been in October 2005) and on 1 July 2007 was moved to what LLC refers to as “the highly skilled industrial laundry equipment side as a service technician”.   Chetty would perform his work on the premises of LLC’s clients. A written contract of employment was concluded on that date which included a separately signed restraint agreement containing provisions in the same terms that LLC wishes the court order to be cast. The restraint was to endure for a period of twelve months after termination of the employment agreement.

4. LLC avers that during the course of Chetty’s employment it actively trained him in the electrical and mechanical skills required to install, service, maintain and repair laundry and dry cleaning equipment supplied by the applicant, including the industrial and commercial “on premise” laundry equipment.  Chetty disputed that the category of equipment he serviced included industrial.

Although absent from this description of his functions, it was averred elsewhere that Chetty “was exposed to and encouraged to learn a number of the applicant’s trade secrets, including business methodology, client lists, pricing, equipment schematics and manuals, parts lists, diagnostics and fault finding and troubleshooting” and that access to this knowledge  was in documentary form and imparted in order to service the applicant’s customers’ industrial laundry equipment. This allegation appears to have been made in order to meet the challenge that in fact was raised by Chetty that he was entitled to confine to memory and take with him such knowledge. LLC added that this knowledge cannot be memorised as it is far too detailed and is specific to the equipment, some of which is exceedingly complex and can cost as much as R10 million.

5. The applicant then contended for protectable interests in the form of customer connections and confidential information which included, what was referred to in argument as the applicant’s business methodology. Chetty readily agreed to a restraint in relation to customer connections as he and the company he works for does not compete with the applicant for the same customers or clients but disputes that the applicant has the protectable interest against him in relation to the confidential information it contends for.

 

CONFIDENTIAL INFORMATION INCLUDING BUSINESS METHODOLOGY

6. Although Chetty in his answering affidavit admits that the second respondent competes in the same market as the applicant, he contends that he does not deal with clients and is undergoing training which will last a year. At the outset that is not the test. It is sufficient in restraint cases if it is shown that he could do so. See   Reddy v Siemens Telecommunications (Pty) Ltd 2007(2) SA 486 (SCA) at para 2.

7. Moreover Adv Morison was able to demonstrate contradictions and clearly untenable statements made by Chetty which demonstrated inter alia that he had been untruthful in explaining to LLC his reasons for terminating his employment and also in regard to issues raised by him in his answering affidavit. I will assume in the applicant’s favour that this assists it on the Plascon-Evans[1] test. This would then require Chetty to rely on the LLC’s case to demonstrate that there is no protectable interest in relation to its alleged confidential information including business methodology.  In this regards, and as will be demonstrated, the applicant’s papers cannot claim to be immune from criticism either.

8. In Reddy the Supreme Court of Appeal at paras 16 and 17 identified the questions that must be asked when considering the reasonableness of a restraint. The first four are those identified by Nienaber JA in Basson v Chilwan and others [1993] ZASCA 61; 1993 (3) SA 742 (A) at 767G-H and the fifth is the one added by Wunch J in Kwik Kopy (SA) (Pty) Ltd v Van Haarlem and Another    1999 (1) SA 472 (W) at 484E which Malan AJA (at the time) identified as giving expression to the limitation provision in s 36(1) of the Constitution. The questions are:

a. Does the one party have an interest that deserves protection after termination of the agreement?

b. If so, is that interest threatened by the other party?

c. In that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?

d. Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?

e. Does the restraint go further  than necessary to protect the interest

Malan AJA also noted at para 16 that in terms of Basson where “the interest of the party sought to be restrained weighs more than the interest to be protected, the restraint is unreasonable and consequently unenforceable. The enquiry which is undertaken at the time of enforcement covers a wide field and includes the nature, extent and duration of the restraint and factors peculiar to the parties and their respective bargaining powers and interests.” And added at para 17 that: “The value judgment required by Basson necessarily requires determining whether the restraint or limitation is 'reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom'.

9. I am prepared to answer the first question in favour of the applicant albeit that some of the confidential information in the form of technical know-how on commercial and industrial laundry equipment and business methodology may be that attaching to the manufacturer of products and that business methodology appears to cover more than technical systems and applications but the integrated business structure which seems a more amorphous concept that may have no intrinsic uniqueness and to which Chetty is unlikely to have been privy to in any meaningful degree.

10. The next issue is in my view the Achilles heel of the applicant’s case even if one accepts that there is an onus on Chetty and not just an evidential burden. [2] 

11. The applicant in its heads referred to the confidential information as consisting of technical know-how on commercial and industrial laundry equipment. During argument this was developed to include business methodology which embraced the scientific specifications of laundry output for LLC’s customers which are

“exacting and essential for the success of those customer’s business, be they hospitals or hotels … (emphasis added)

To attain this consistency high quality, laundry output on a large scale (for three hundred beds and more) on a daily basis (seven days a week) is not as simple as loading a machine as one might in a domestic environment. The principles of industrial and commercial laundry, time temperature, mechanical action and detergent effects have to be understood by the technicians, the microprocessors in the machines have to be programmed correctly and the installation and maintenance effected in a highly skilled fashion.

Skills of this nature vest in the applicant’s technicians, such as the first respondent, by virtue of the investment made by the applicant in these employees. The reason why the applicant developed and engaged the first respondent’s skills  and customer connection as it did was to secure, via repeated service and maintenance attention from the applicant via the first respondent, the goodwill of its customers and the likelihood of repeat business that comes from happy customers, in other words he keeps the pipeline for the new business orders that would come from those customers for the new laundry machines on a long term (five to ten year) business cycle.”

12. The applicant described Chetty as an “account executive’”, being the applicant’s point of contact with its customers and those within the customer organisation who are influential on, or actually make, the decisions to buy new commercial and industrial laundry equipment and he, as is the case of the applicant’s other technicians, built up and maintained vital relationships with the applicant’s customers on behalf of the applicant so that it could develop, maintain and grow its goodwill over time. In argument Adv Morison referred to Chetty as being part of a seamless link.

13. At a gross salary of R17 571 per month describing Chetty as an account executive is an exaggeration. More so considering that Chetty’s job description in terms of the applicant’s own documents is that of a service technician. He was one of over 40 technicians and his salary scale was effectively in the lower part of the middle band of technicians. Nowhere does the applicant contend that each technician was allocated to a specific client or would only service a particular type of equipment for a client. It therefore appears that technicians would operate interchangeably with no technician, at least at Chetty’s level, being exclusively allocated to a specific client.

14. The description of Chetty’s job functioning is not the only serious overstatement. The applicant also sought to stress the extensive training that Chetty underwent to demonstrate inter alia that his knowledge was derived from the sensitive information imparted during such specialised training. At best they were sporadic or were provided by the manufacturer itself or were imparted on site at the client (which would then have been specific to the client’s needs and because of the undertaking is not relevant). Aside from an instance in 2013 of on-site training over 5 days  and an afternoon’s troubleshooting /maintenance training in 2014 conducted by a distributor of Speed Queen laundry equipment the applicant could only produce evidence of a series of training some ten years ago in 2007.

15. The applicant relies heavily on Reddy in consideration for being under a restraint. One gets the distinct impression when regard is had to the un-redacted pay slip and formula adopted to determine the value of the restraint that they are moulded to assist the applicant to tick the Reddy boxes. Without knowing what the market rate is for a technician at Chetty’s level excluding such a sterilisation payment I am not prepared to give it any weight, either way. It will be treated for present purposes as a neutral factor.

16. What is more telling is the lengthy passages which try to explain what is it that Chetty acquired while employed by the applicant and, if so acquired, why he is not entitled to take it with him because it has not become part of the employee’s own knowledge and skill- bearing in mind that in some instances the knowledge was imparted by the manufacturer with whom LLC did not have an exclusive distributorship relationship. [3]

17. Once Chetty has no difficulty in accepting a restraint from dealing directly or indirectly with existing clients of the applicant then, whichever way one wishes to look at the case made out by the applicant,  it comes down to trying to elevate a person whose job is that of a service technician to some integral cog in a wheel whose acquired knowledge relates to the specifications of a product or a process involved in servicing and maintaining the equipment which he can utilise in a way that threatens the applicant either because it may result in him being able to encourage a potential client of the applicant , which it has not been able to hitherto secure business from despite its 70-80% penetration in the industry over a lengthy period of time, to purchase the same machinery that is distributed by the applicant from the second respondent by reason of such knowledge or to purchase a different equipment because he is able to identify flaws in the applicant’s product. This case cannot be equated with the facts in Reddy , the extent of his inside confidential knowledge and the threat he posed to it.

18. In my view the necessary prerequisite for the first scenario is that the applicant is not a manufacturer of the equipment; and therein lies the rub since the information on its optimal utilisation will be that of the manufacturer and not of one of a number of distributors where, as the applicant’s case reveals, the needs of each client (who by reason of the admission, during the unexpired portion of the restraint, cannot be an existing client of the applicant) is unique.

19. The second scenario similarly cannot invade a protectable interest of the applicant’s since not only is the equipment different but the clients requirement would be unique. At best Chetty could identify the shortcoming of the equipment. And even then it is not the applicant’s case that the knowledge and skill he acquired related to deficiencies in the equipment , but rather how it functioned to perform the task the customer acquired it for. Any shortcomings would be those discerned by Chetty applying his own skill, distilling what he observed from his reservoir of knowledge acquired over the 12 years he was at the applicant and the acquired knowledge prior to that inter alia at Daewoo and during his formative apprenticeship and training years. The restraint is capable of severability. Instead of the order reciting the restraint and then containing a limitation to customer connections it appears that the appropriate order can be cast in straightforward terms.     

20. It is therefore unnecessary to deal with any other aspects.[4]

 

THE PAYMENT FORTHE RESTRAINT CLAUSE

21. While I appreciate that the employee of the applicant may have derived a benefit from the way in which his or her package was structured to include the restraint payment it has been used in an attempt to bring the employee within the type of case where a payment is made in consideration for which labour is sterilised.

22. My concern is that the potential advantage to the employee was not the true reason for the clause but rather to use it as a means of indenturing the employee in a manner which offends the basic constitutional precepts mentioned by Malan AJA in Reddy. That however can only be established by reference to the type of package persons performing similar work receive without such a restraint payment clause. Nonetheless the payment of a monthly amount in respect of the restraint while the person is employed appears unconscionable when it is trite that during the course of employment there is a common law fiduciary duty owed by the employee not to divulge confidential information or attempt to filch customers in any form.

The  monthly amount taken out of the salary and attributed to the payment made by the applicant to the employee for agreeing to be restrained is oppressive because it is linked to a repayment on breach provision. This in turn lacks rationality or any  justification save for the twin purpose of  bolstering evidence to support upholding the restraint by reason of an agreed quid pro quo and to be applied in terrorem since the employee is obliged to pay it back if he breaches the restraint: Accordingly the longer an employee remains with the applicant the more beholden and indentured the person becomes; and less inclined to obtain employment in the industry irrespective of the actual working conditions and remuneration.

23. I am concerned that these clauses, as with those one finds in certain lease and credit sales agreements, were drawn by attorneys whose accepted duty to act in their client’s best interests may appear to override a greater duty imposed to act within the framework of their professional code and not bring their profession into disrepute . Just as accounting firms are increasingly coming under scrutiny for failing to perform their professional obligations, so too attorneys are not immune. I am unaware of which attorney, if any, may have been responsible for devising the offensive terms contained in the memorandum agreement and according no aspersions are intended to be cast on any particular firm.

24. However I believe that the issue of the threshold beyond which an attorney may go when drafting a contract requires consideration by the attorney’s professional body where it is evident that there is unequal bargaining power, abuse and overreaching to a degree that overtly and unconscionably impacts on the constitutional rights of individuals.

By reason of what is said in the para 23 the clauses appear to be devised by someone who would have assumed as a starting point that employees were unlikely to afford the costs of lawyers, let alone be willing to jeopardise their employment by refusing to sign it. In saying this I have regard to the offensive nature of its provisions which, having regard to its objective and the basic legal rights they strip away without properly informing the employee. I also have regard to the imposition of what constitutes a forfeiture and penalty in their truest sense, if the restraint is breached in any respect, amounting to over 20% per month of the employees net after tax salary earned throughout his or her period of employment at the applicant. It would also mean that the employee’s actual salary was not as identified in the signed permanent contract of employment agreement. I accordingly request the Registrar to refer the agreements in question to the Law Society of the Northern Provinces for consideration as to whether it is a matter affecting the professional integrity of the drafter of the clauses in the several documents headed memorandum of agreement (annexures FA15 to FA18 at pp64 to 71 of the indexed papers) read with both the permanent contract of employment agreement (annexure FA 12 at p 42 to 47) and the restraint agreements (annexure FA 13 to FA14  at pp48 to63). It also appears relevant that the three documents identified as FA12, FA13 and FA15 which were all signed on 1 July 2007 constitute a composite agreement. [5]

 

COSTS

25.  The applicant contended for two protectable interests. It had brought an application pursuant to which it obtained Chetty’s concession in regard to the one and there is no reason to believe that Chetty would not have submitted to an order not to compete with the applicant in respect of any of its existing clients or customers. However the applicant has persisted in seeking a restraint to include what it submitted was a protectable interest in its confidential information and to require him to terminate his employment with the second respondent.

26. The deprivation of continued employment is a serious inroad into an individual’s right to be gainfully employed and was a right which the applicant contended Chetty had voluntarily agreed to relinquish in terms of the restraint on the basis of freedom of contract. It was wrong. In my view the appropriate order having regard the respective parties means adopted to protect their legitimate rights both pre- and post-hearing is that each should bear its own costs.

 

ORDER

27. It is ordered that;

1. The first respondent is interdicted and restrained within South Africa until and including 1 March 2018 from soliciting, interfering with, enticing or endeavouring to entice whether directly or indirectly any  customer (which term shall include client) of the applicant in respect of any product or service, or similar product or service  that the applicant has hitherto sold, serviced or rendered (as the case may be)  to such customer or being employed by any such customer.

2. Each party is to pay its own costs

 

____________________

SPILG J

 

Date of hearing: 25 July 2017

Date of judgment: 26 July 2017

Revised: 27 July 2017

For Applicant: Adv L J Morison SC

Adv Farhana Patel

Smit Sewgoolam Inc

For First Respondent: Adv I M Lindeque

Mamba Attorneys

 

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