Motherland Design Agency (Pty) Ltd v Whitefernfranc (Pty) Ltd and Others (J601/20) [2020] ZALCJHB 145 (31 August 2020)

IN THE LABOUR COURT OF SOUTH AFRICA, JOHANNESBURG

Not Reportable

Case no: J601/20

In the matter between:

MOTHERLAND DESIGN AGENCY (PTY) LTD

Applicant

and

WHITEFERNFRANC (PTY) LTD

First Respondent

CAROLYN WHITE

Second Respondent

FRANCOIS VAN RHEEDE

Third Respondent

BRIAN FERNS

Fourth Respondent

Heard: 15 July 2020 (Virtual hearing)

Delivered: This judgment is handed down electronically by circulation to the parties' legal representatives through email and released to the court's library. The date for hand-down is deemed to be 31 August 2020.

Summary: Shareholders of a private company, who are also employees of same, refuse to sign a written contract of employment containing a restraint of trade covenant. After resignation/dismissal from employment they establish a new private company in competition with the former employer. Court found that there is no formal restraint of trade agreement between the applicant and the individual respondents.

In the absence of a valid restraint of trade agreement between the parties, a former employee owes his former employer a duty of good faith to not use or divulge confidential information received. However, in the absence of a valid restraint of trade agreement

covering customer connections, the exploitation of such customer connections by an ex-employee in favour of a new employer is not

preventable by an interdict and a former employee is free to compete against his former employer in a free market as the latter does not enjoy any contractual power to restrain him from doing so.

JUDGMENT

MAHOSI.J

Introduction

[1] This is an application brought by the applicant in terms of which an order is sought in the following terms:

'1. Condoning non-compliance with the Rules of the Honourable Court and directing that this matter be heard as one of urgency in terms of Rule 8 and, to an extent necessary, dispensing with the forms and service provided for in the Rules of Court;

2. Interdicting and restraining the First, Second, Third and Fourth Respondents for a period of 12 months from 29 June 2020 alternatively the date of an order being given, from acting in breach of their restraint of trade covenant and/or their common law fiduciary duties and/or obligations to:

2.1. Not divulge information and or give advice in broad terms relevant to design, branding, marketing, marketing strategy, shopper programs and related, in broad and general terms to any of the Applicant's customer/s or any person who, was at the date of 29 June 2020, is or was a customer/client of the Applicant with the sole purpose of enticing these customers/clients to terminate their association with the Applicant;

2.2.

Knowingly soliciting, in unlawful competition with the Applicant a customer /or client or any person who, as at the date of 29 June 2020, is or was a customer/client of the Applicant.

2.3.

Commencing or continuing with a business for own account, with the First Respondent, entering into any partnership, accepting a position as director of any group, and accepting employment with any group, person, firm, partnership or association whatsoever that directly or indirectly, unlawfully and in breach of the Second, Third and Fourth Respondent's restraint of trade covenant and common law restraint and common law fiduciary duties towards the Applicant; competes with the business of the Applicant and / or carries on a similar business to that of the Applicant;

2.4.

Disclosing any of the Applicant's confidential information, including but not limited to its pricing structure and/or customer connections, to the First Respondent or to other any third party including but not limited to customers/ clients and or competitors of the Applicant.

2.5. The preceding paragraphs, 2, 2.1 to 2.4 being applicable to the present customers and/or customer connections of the Applicant as set out in annexure "DRMFZ" of the Founding Affidavit.'[1]

[2] The issue is whether the respondents are bound by the knowledge of the content of the unsigned restraint of trade covenant and whether their failure to sign it absolves them from their common law duties to act in good faith towards the applicant.

Background

[3] The applicant is a design, brand, marketing and advertising company called Motherland Design Agency (Pty) Ltd[2] (Motherland Design). It was founded by the third and fourth respondents, Mr. Van Rheede and Mr. Ferns, who due to their personal

financial situations made their friend, Mr. Eben Marais (Marais) the sole director of Motherland Design as at date of registration being 22 August 2017. Marais and the two respondents had equal shares in the company as per an agreement between the parties.

[4] Mr Van Rheede, deposed to the answering affidavit in which he confirmed that both Mr Ferns and himself were employees of Motherland Design and were both drawing salaries. In 2018, they were given profit sharing to the amount of R100 000.00. The sole business structure and clientele of Motherland Design emanated from Mr Van Rheede and Mr Ferns who developed the business from the bottom up and Mr Marais' contribution to Motherland was his financial and accounting acumen.

[5] To expand the business, Mr. Marais, Mr. Ferns and Mr. Van Rheede decided to approach Ms. White as she was known to be a 'rainmaker'. The main objective was to utilise her skills to generate new service offerings and importantly bring in new clients. This resulted in an offer being made to Ms. White to join them and the incentive was for her to join as a shareholder as well as an employee as she had a secure job already. She accepted the offer on the terms set out in her offer of employment.[3] Whether she was given shares in Motherland Design is not apparent from the pleadings. Therefore, it cannot be stated with certainty that she was a shareholder.

[6] Mr. Daniel Richard Muller (Muller), the director who brought the application on behalf of Motherland Design, in his founding affidavit

contends that in August 2019, he entered into an investment agreement with Motherland Design (and as an extension the respondents), the terms of which he was to invest an amount of R800 000-00 in the company through his company Black Badger (Pty) Ltd. In turn Black Badger would then become a 51% shareholder in Motherland Design. In terms of the said agreement, an initial amount of R600 000-00 was to be paid to Motherland Design, with an amount of R200 000-00 to be kept in reserve for future expansion and/or expenses. The sum of R600 000-00 was indeed paid to Motherland Design.[4]Muller became a director of Motherland Design as of 20 September 2019 and avers that he is the owner of Motherland Design.

[7] The respondents contend that Mr. Marais brought Mr. Muller in because he (Mr. Muller) was looking to invest in an existing design company. Mr. Van Rheede met with him to discuss the investment and was confident that he could bring in some work because of his business interests as well as his own brand and signage company. He goes on further to aver that he made it clear to Mr. Muller that he was just investing but the intellectual proprietary and the client information would remain the property of Motherland Design, which belonged to Mr. Marais, Mr. Ferns and himself. He states he affirmed their position in a meeting in July 2019 to which Mr. Muller agreed that the client base and intellectual property would remain theirs.

[8] The respondents allege that they agreed to allowing him to invest in their company through a new entity but at no stage was it agreed that Muller would be a shareholder of Motherland Design. In a message transmitted via Whatsapp to Mr. Marais on 18 December 2019[5], Mr. Van Rheede asks for clarification as it was the understanding, so he contends, of the respondents that this was a loan and therefore Mr. Muller would have no proprietary rights in Motherland Design.

[9] According to the respondents they understood their agreement to be that Mr. Muller was investing in Motherland Design and they would rebrand and create a separate legal entity called Motherland One Plus (One Experience) and Mr. Muller and Motherland Design would be shareholders in the new entity.

[10] Around 18 December 2019, the respondents were presented with employment contracts. They were unhappy with the restraint covenants contained therein. Further, they felt that the employment contract did not fully reflect their relationship with Motherland Design.

[11] The respondents allege that they had a meeting in early 2020 with Mr. Muller who reassured them that they had nothing to worry about and that in relation to contract of employment, it was just Mr. Marais being formalistic. However, they contend that they were also presented with the employment contracts by Lauren, the HR Personnel of Mr. Muller and refused to sign same.

Crux of the issue

[12] On a full perusal of the papers it would seem that there is a need to unpack a complicated business relationship infused with an employment relationship prior to an analysis of the facts for a decision to be made. This matter involves shareholders, a possible hostile takeover or sale of a business without the knowledge of the shareholders (which is not before this court), restraints of trade, good faith and unlawful competition. Therefore, each facet has to be broken down.

Who are the shareholders?

[13] In terms of the section 57 (1) of the Companies Act[6] a shareholder is defined as:

'the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be;'[7]

[14] Section 57 (1) of the Companies Act further states that:

'57. Interpretation and application of Part.- (1) In this Part, "shareholder" has the meaning set out in section 1, but also includes a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached.'

[15] The Court in Bells Trust v CIR[8] defined a shareholder thus:

'someone else who is entitled to all or part of the benefit of the rights of participation in profits or income attaching to the shares may also be a shareholder.'

[16] As to the rights a shareholder has in a company, the Court in In re Globe Cinema (Pty) Ltd[9] stated that:

"A shareholder has a property in his shares a property he is at liberty to dispose of, subject only to any express restriction which may be found in the articles . . . of the company."

[17] It is clear that after the 'takeover' or sale of Motherland Design the new shareholding structure within the company was[10]:

17.1 Black Badge (Pty) Ltd - 51%

17.2 Motherland Plus One (Pty) Ltd - 40 %

17.2.1 Eben Marais - 33.33%

17.2.2 Brian Ferns - 33.33%

17.2.3 Francois van Rheede - 33.33%

17.3 Creative Plus One (Pty) Ltd - 9 %

[18] Therefore in light of the above, the respondents collectively were technically 26.67% shareholders in the company Motherland Design and 66.66% shareholders in the company Motherland Plus One (Pty) Ltd (+One).[11] It would seem that the annexures support the version put forth by the Respondents that the agreement was for the two entities, being Black Badger and Motherland Design to own shares in a new entity Motherland +One, thereby allowing the respondents to retain their client information and intellectual property. It is clear from the email sent from Marais to Van Rheede that this was indeed the agreement "despite what the paperwork'' reflected.

[19] Just as orbiter, from the communication it seems as though Mr. Marais did not correct Mr. Van Rheede's understanding that +One was never registered, or if it was the papers were not made available to the Court, and that in fact Black Badger (by extension Muller) was purchasing Motherland Design, which contained the intellectual proprety and customer connections and the respondents were pushed to the new entity +One which contained nothing.

[20] It would seem from the Memorandum of lncorporation[12] (MOI) that Black Badger acquired 51% shares in Motherland Design for the round figure of R1.00.[13] The amount of R800 000.00 was to be given to Motherland Design as a loan, and once profitable the company, over a period of four years will write it off in increments of R200 000.00 per year as a credit loan. Therefore, the R800 000.00 was not the purchase price of the company. Mr. Muller, would then retain ownership as well as the R800 000.00 which, had it been the purchase price would have been shared between the three shareholders of Motherland Design being Mr. Marais, Mr. Fern and Mr. Van Rheede.

[21] However, this did not happen. As the respondents contend, they were under the impression that Motherland Design will become a part owner of a new entity, not that they would create a new entity to obtain shares in their own entity. The MOI states that the 40% shareholding of Mr. Marias, Mr. Fern and Mr. Van Rheede will be transferred to a new company that would be created within 90 days. Whether same occurred or not is unclear from the papers. In the email to Mr. Van Rheede, Mr. Marais made no mention of the sale to Black Badger and only stated that the MOI was amended to include the R800 000.00 as 'loans' to the original partners, thereby contradicting Mr. Muller's version that it was to purchase 51% equity stake in Motherland Design.

[22] Therefore in summary, Motherland Design was the original company founded by Mr. Marais, Mr. Ferns and Mr. Van Rheede. This was then sold, as seen in the MOI, to Black Badger for R1.00. Black Badger in turn was to invest in Motherland Design an amount of R800 000.00 to be repaid and/or written off over a period of 4 years as a credit loan to Motherland Design, and the respondents would then own equal shares in a new company, +One, which will have a piece of the original Motherland Design which was originally wholly

owned by the respondents.

[23] In light of the above, it is clear that the respondents, without their knowledge, sold their company to Black Badger.

What rights do the shareholders hold?

[24] In light of the above, it is clear that two of the respondents, Mr. Ferns and Mr. Van Rheede were the creatives and generated the

clientele of the company. However, the reality is that the company is a company with limited liability. Therefore, in terms of company law of South Africa, a shareholder has no automatic right to director's fee or a salary. All shareholders invest for the dividends. Therefore, they have no rights to the assets of the company and cannot claim ownership of any asset in the company.[14]

[25] In the employment context, for restraint of trade agreements, the Court in Rawlins and Another v Caravantruck (Ply) Ltd[15] found that customer connections, even if they were previously known to the employee, if the relationship was strengthened through the current employer, then those customer connections become the asset of that company. Therefore , despite the fact that Mr. Ferns and Mr. Van Rheede built the clientele and Ms. White then later brought in more clients, to an extent that those relationships were strengthened through Motherland Design, those customer connections remain the asset of Motherland Design.

[26] Therefore, even though they were in fact founders and shareholders of the company, in the end their only legal relationship to the customer were those of employees.The question is what are their rights as employees?

Shareholders as employees

[27] In the matter of Chillibush v Johnston[16] it was held that a company director who was also employed by the company was an employee of that company. The different relationships had to be governed by the relevant legislation. In other words, the directorship was to be regulated under the Companies Act[17] whereas the relationship as an employee will then be governed under the Labour Relations Act[18] (LRA). Therefore, the Court found that once a director is removed from office under the Companies Act, an automatic termination of the employment contract as a result cannot be permitted.[19]

[28] In using the principle laid out in Chillibush supra, one person may wear two hats at the same time. In the case of the respondents those were that of shareholder as well as employees.

According to the newly incorporated MOI all shareholders of Motherland Design had to be employees of the company to retain their

shares in the company. The Respondents in their answering affidavit confirm that they were employees of the company in so far as they were drawing a salary to cover their own expenses[20]

[29] Therefore, it would seem that it was common cause that the respondents were both shareholders and employees of Motherland Design. However, notwithstanding their shareholding in the company, their employment relationship with the company, in light of Chillibush, will be governed by the LRA. The LRA is only concerned with the employment relationship between the parties. As to the shareholding and customer connections, this will only be relevant in so far as it might pertain to a restraint of trade agreement and/or their fiduciary duty of good faith to their erstwhile employer.

[30] Now that it has been established that the respondents were employees of the applicant, was there a valid restraint of trade agreement between the parties.

Restraint of trade agreement

[31] From the onset it would seem that the applicant itself knew that reliance on a formal restraint of trade agreement was a non-starter. For instance the respondents categorically refused to sign the new employment contracts. They were presented with the new employment contracts containing the restraints however they did not accept the terms thereof nor did they sign them.

[32] The Labour Appeal Court in the matter of SACCAWU and Others v Mahawane Country[21] held that where an employee refuses to sign an employment contract that does not reflect the details of the terms of the employment

relationship that was initially agreed to, then the fact that that employee does not sign that contract does not amount to misconduct.

[33] Further, presenting an employee with a new written contract for signature without consultation could amount to a unilateral change in terms and conditions of employment. From the affidavits presented to Court, it would seem that there was no consultation with the respondents before they were presented with the written contracts.

[34] In the replying affidavit the applicant emphasises that they received it and were aware of same[22]. They further state that the employment contracts were under review and were therefore sent to the respondents. They do not place an alternate version before this Court as to what discussions they had with the respondents in connection with same and the reason that same was never countersigned. The only version before the Court is that of the respondents that same was not signed due to the inclusion of the restraint of trade covenants which were not part of the original employment agreement with Motherland Design.

[35] Therefore, in accordance with SACCAWU[23] one has to first enquire into what was the original terms of the employment contract that was agreed initially prior to the formal

written employment contract in order to establish whether the written contract contains the actual agreement or provisions that were not originally agreed to. In respect of White, her offer of employment was made available to the Court.[24] In terms of same all the relevant terms and conditions of employment was made known to her such as remuneration, reporting structure,

leave etc. and a provision was made that all other aspects not provided for would be governed in terms of the LRA and the Basic

Conditions of Employment Act[25] (BCEA). No mention was made of a restraint of trade clause.

[36] In respect to Mr. Ferns and Mr. Van Rheede nothing in the papers points to how they were appointed and therefore the only inference that could be drawn is that they were employed without written employment contracts. It is discernible from the papers that they were never subjected to a restraint under the employment terms and conditions with Motherland Design. It would seem that the written contracts that were given to them by Mr. Muller did not reflect the conditions that they were working under. The reason they expound for not signing the employment contracts is due to the introduction of the restraint clause that they were never bound by.

[37] Following the principle in SACCAWU the fact that the restraint was not part of their original contract, nor did they change their positions and levels in seniority and further there was no consultation as to the change in their terms and conditions of employment they were not bound by the unsigned employment contracts

introduced by Mr. Muller.

[38] The applicant argues that the respondents were aware of the restraint of trade clauses in their written contracts and are therefore bound by them, but that is the very reason they never signed those contracts. They did not want to be bound by same because it would amount to a new condition of employment. Therefore, in light of the above, there is no formal restraint of trade agreement between the applicant and the individual respondents.

[39] This then leaves the issue of good faith, which the applicant argues was owed to the applicant by the respondents as their former erstwhile employer. However, prior to dealing with the issue of the common law fiduciary duty of good faith, one has to look into the issue whether the respondents were dismissed or in fact resigned.

Parting of ways

[40] Mr. Muller contends that on 25 March 2020, due to the Covid-19 pandemic, the parties held a meeting to discuss the process to be undertaken during the lockdown. He further contends that it was discussed that the respondents were to apply for UIF during this period and the company would apply to the Temporary Employer-Employee Relief Scheme for assistance, which they received and which the respondents were receiving payment.

[41] He contends that during the nationwide lockdown Motherland continued to operate and its obligations were met. He states that the parties held a further meeting on 3 April 2020 to discuss how they were going to move forward and obtain more work.

[42] The respondents aver that during the March meeting they were advised by Mr. Muller that Motherland was not going to be operational. They contend that Mr. Muller gave and told them to fill in UIF forms. Also they witnessed Muller packing up his operations and told them that he hopes they come out on the other side. Further, they were not paid for March and when they asked Mr. Marais about it they were told he had to consult with Mr. Muller, who thereafter asked them not to badger Mr. Marais over remuneration. They were left with the impression that the business had closed, Muller had disinvested and that the respondents were on their own.

[43] It was only thereafter that the respondents decided to act upon their discussions of opening their own business and that is how they established the first respondent , Whitefernfranc (Pty) Ltd (WFF). The last meeting on 3 April 2020 was to discuss post shutdown of the business. The last remuneration they received was for April 2020 which consisted of salary and a TERS payment. Thereafter they were not paid and were left with the impression that the business was closed. It was only then they realised that the business was in effect 'sold' without their consent. They contend that when they didn't agree to be 'restrained' the relationship soured with Muller and then during lockdown they were in effect left to their own devices.

[44] Even though they believed that they were no longer employees of Motherland, they met in June 2020 to formally register the fact that they were no longer employees and in effect resigned. According to the Respondents Muller was amicable to this arrangement and even agreed to allow them to buy their laptops from Motherland as well as to take the cellphone contracts over. The value of the laptops were communicated to them as well as a way to hand over the cellphone contracts on 11 June from Muller.

[45] These two versions are mutually destructive. The applicant claims that the respondents resigned, which resignation was not accepted and therefore the respondents were called to a disciplinary enquiry. On the one hand, the respondents contend that they were in effect dismissed in March 2020. On the other hand, they contend that the parties formally parted ways amicably in June 2020 where they made it clear that they did not wish to have anything to do with Motherland and tendered their resignations nonetheless.

[46] These two versions are clearly mutually destructive. It seems as though there are these two versions and then there is the truth. There seems to be some sort of clever financial footwork in order to circumvent Mr. Ferns and Mr. Van Rheedes' personal financial problems. However, for this matter it is neither here nor there. The Court has to look at which is the more probable version looking to the evidence presented in the papers.

[47] When the respondents received instructions or orders for work from clients for Motherland Design, they do not deny that they continued to work for Motherland. If they were truly dismissed or ' left to their own devices', it begs the question as to why did they continue to invoice out to a company that was no longer operational. I understand the argument

that they had to continue servicing their clients as they had a good relationship with them[26] and they were in fact the company, but why continue to work under Motherland Design, if it was closed.

[48] According to the CIPC document of WFF, it was created in April 2020. If they had continued servicing their clients under WFF (as they intended as seen in the email in April 2020 where they were placed as an agent for Blue Code Africa[27]) and not as a parallel, it would have lead credence to the fact that Motherland Design was in fact no longer operational and they had no other option but to service their clients under a new entity. However, according to the email to Defy in May 2020, they were still marketing and invoicing under Motherland Design despite it being 'closed'.[28] It was only in June 2020 that they informed the clients that Motherland Design was still operational, but that the only difference was ownership and name change[29]. That in effect was making themselves Motherland Design.

[49] Lastly, the respondents allege that the last payment made in relation to UIF or TERS to them from Motherland Design was in April 2020. In the letter of 12 June 2020 to Muller, Van Rheede clearly states that the respondents "will not be requiring any UIF or TERS assistance through One Experience." This seems to be an odd statement to make if they were already not receiving any assistance thereby pushing them to " make their own way" .

[50] Therefore the only probable inference that could be drawn was that the respondents were still employed by Motherland Design while in the process of moving over to WFF and making sure that their clients thought that WFF was in fact Motherland Design and was not a new entity.

[51] As to the meeting of June 2020, from the email of Mr. Muller[30] it is clear that the respondents had conveyed to him that they were leaving the company and he was amicable to allowing them to leave the company. It has to be the only probable inference that could be drawn from the communication allowing them to purchase their hardware from the company as well as to transfer their cellphone contracts to another company. Therefore the respondents ceased to be employees of Motherland Design from when they conveyed to Muller that they no longer wished to be involved with the company.

[52] Now that it is established that the respondents were no longer employees of the applicant as at June 2020, did they owe a duty of good faith under the common law as they were not bound by a restraint of trade agreement?

Common law fiduciary duty of good faith

[53] Trust is an intrinsic part of the employment relationship. The common law fiduciary duty of good faith has as its origins English law where it was explained in the matter of Robb v Green[31] wherein the Court held:

'[It is a general term implied by law that the servant] shall honestly and faithfully serve his master; that he shall not abuse his confidence in matters appertaining to his service, and that he shall, by all reasonable means in his power, protect his master's interests in respect to matters confided to him in the course of his service.'

[54] Since we are now in a Constitutional dispensation, the common law has now developed to incorporate constitutional values where the law is no longer one sided towards those of the 'master' as all people are equal in the eyes of the law. However, the concept of good faith has survived in a new form.

[55] In 'The nature and scope of employees' fiduciary duties'[32], ldensohn K succinctly described fiduciary duties of an employee towards his employer as those ' of loyalty and self-denial that prohibit employees from abusing their access or power in relations to their employer's assets or affairs so to further their own or any other person's interests.'

[56] It is, without a doubt, trite that the respondents owed Motherland Design a duty of good faith while in its' employ, and their conduct

during their employment could have been used against them to prove irreparable harm had there been a formal restraint of trade

agreement[33]. However, in this matter, the question that needs to be answered is how far does this fiduciary duty go once the employment relationship has ended?

[57] In terms of section 22 of the Constitution of the Republic of South Africa, 1996, every citizen has the right to choose their trade, profession and occupation freely. Restricting an entrenched right should only be done when reasonable and justifiable. As our society is a society that values the sanctity of being bound to agreements that one enters into freely (the principle of pacta sunt servanda), the Courts have allowed a party to restrict this right through a restraint of trade agreement. However, as is in this matter, the respondents did not agree to be bound by a restraint of trade agreement, therefore to what extent can their right to be economically free be limited?

[58] The Court in Meter Systems Holdings Ltd v Venter and Another[34] stated that:

'...When the fiduciary relationship is not based on contract, it is necessary to look to the law of delict, and in particular to the principles of Aquilian liability, in order to ascertain the extent of the legal duty to respect the confidentiality of information imparted or received in confidence... '.

[59] From a full reading of the law, a former employee cannot use a former employer's confidential information that were acquired in confidence as he has a duty of good faith to not divulge same, however it is not unlawful for a former employee to use that which he normally acquired as a skill and which knowledge he has. Use of these skills and knowledge for a new employer will not amount to a breach of his fiduciary duty of good faith, as same is not confidential information. In the matter of Strike Productions (Pty) Ltd v Bon View Trading 131 (Pty) Ltd[35] the High Court held that:

'The knowledge and skills that Jacobs acquired in the course of his employment with the applicant are 'part of himself' and which he can utilise in a freemarket economy. More importantly he is not contractually bound by a restraint of trade agreement with his

ex-employer, thus the applicant, a former employer, has no monopoly over his services. To prevent him from doing so would be against

public policy. These skills are not something that the applicant 'can claim ownership' of. In Herbert Morris Ltd v Saxelby, the court held that:

"......a man's aptitudes, his skill, his dexterity ... - all these things which in sound philosophical language are not objective, but subjective - they may and they ought not to be relinquished by a servant; they are not his master's property; they are his own property; they are himself. There is no public interest which compels the rendering of those things dormant or sterile or unavailing; on the contrary, the right to use and expand his powers is advantageous to every citizen, and may be highly so for the country at large."' (Footnotes omitted)

[60] Therefore, in the absence of a restraint of trade, a former employee owes his former employer a duty of good faith to not use or divulge confidential information received. The only question that then arises is to what extent can he use the knowledge he acquired while under the employ of his former employer and what information is considered to be confidential information.

What is confidential information?

[61] Confidential information could be information of any kind. The Court in Refinery Post Production Facilities (Pty) Ltd v Lautre[36] summarised characteristics for information to be confidential for the purposes of a restraint of trade of agreement as follows:

'[29] When embarking on an enquiry into whether information is worthy of protection or in other words a protectable interest, the information relied upon by the applicant has to meet the following requirements:

29.1

It relates to and is capable of application in the trade industry;

29.2

Most of it is secret and confidential;

29.3

Objectively viewed it is of economic or business value to the plaintiff.'

[62] The Court went on to state that information would be worthy of protection if:

'exploited by a competitor this would be to the serious detriment of the business, goodwill and best interests of the applicant."

Objectively viewed this information is of economic value to the new employer as it would help it on its way in navigating the market

because he knows where he needs to reach.'[37]

[63] It is by now trite that customer connections are considered to be trade secrets and confidential information. The applicant contend that, even though it concedes that the respondents had a relationship with the customers prior to their employment with Motherland, these connections were strengthened due to their employment with Motherland. Further that, in light of the decision in Rawlins,[38]those customer connections are in effect an asset of the employer and therefore cannot be taken with the employee when they leave.[39]

[64] The respondents argue that the customers never belonged to Mr. Muller. They are correct but what they fail to understand is that the customers do belong to Motherland Design, not them nor Muller as shareholders as discussed above.

[65] This type of confidential information is a protectable interest under a formal restraint agreement. The question is whetheror not it falls under the fiduciary duty of good faith. The learned author John Saner SC in his book Agreements in Restraint of Trade in South African Law[40] stated that:

40 John Saner SC Agreements in Restraint of Trade in South African Law (LexisNexis, South Africa) at p. 7-55.

'In the absence of a restraint agreement covering customer connections, the exploitation of such customer connections by an ex-employee in favour of a new employer is not preventable by an interdict ... '

[66] The Court in Strike Productions[41] held the following which is quite apposite:

'[52] Clearly, what occurred in this matter, is that the applicant was unable to negotiate a new contract of employment, which contained a restraint of trade agreement, with Jacobs .. .

[54] ... The knowledge and skills that Jacobs acquired in the course of his employment with the applicant are 'part of himself' and which he can utilise in a freemarket economy. More importantly he is not contractually bound by a restraint of trade agreement with his ex-employer, thus the applicant, a former employer, has no monopoly over his services. To prevent him from doing so would be against public policy. These skills are not something that the applicant 'can claim ownership' of...

[56] In the absence of being contractually bound, the applicant cannot claim its pound of flesh from Jacobs. The applicant's inability to convince Jacobs to sign a restraint, was to its own detriment. Jacobs had specialised skill which his ex-employer was unable to appropriate to its benefit with a restraint. What the applicant has tried to do in this matter is to imply a restraint of trade agreement into Jacobs' contract of employment where a restraint clearly does not exist... '

[67] Had there been a restraint of trade agreement between the parties, this enquiry would be very different, however there isn't one. There is nothing stopping the respondents from canvassing for work from Motherland Design's clients. This then begs the question does this then amount to unlawful competition?

Unlawful competition

[68] As early as 1915, the Cape of Good Hope Provincial Division, in the matter of Marks v Luntz and Another[42] was faced with a similar matter where in a former employee left the employ of his erstwhile employer and opened the same business as him and held that:

'Now if this interdict is granted in these wide terms it would mean that the respondent would be restrained from ever carrying on the business of a fruit merchant on his own behalf after leaving the applicant's service. I do not think the applicant is entitled to restrain the respondent from carrying on business for himself, because it might be prejudicial to the interests of the applicant. There was no agreement between the parties that there should be such a restraint of trade. The respondent has while in applicant's service acquired the knowledge necessary to a business of a fruit merchant, but I think it is contrary to law to say that the respondent shall not make use of that knowledge after he leaves the applicant's service.'

[69] Therefore, in the absence of a restraint of trade agreement a former employee is free to compete against his former employer in a free market as the latter does not enjoy any contractual power to restrain him from doing so. The High Court in the matter of Strike Productions supra summarised the Court's decision in Premier Medical and Industrial Equipment (Ply) Ltd v Winkler and Another[43] thus :

'[51] The question, whether an employee, in the absence of a restraint of trade agreement, can use his employer's customer connection with impunity and in direct competition after the termination of his employment, appears to have been answered in Premier Medical and Industrial Equipment (Pty) Ltd v Winkler and Another .. . In this case, while the first respondent was the managing director of the applicant company, which carried on business as importers and exporters of medical suppliers, he formed and registered the second respondent company which was in direct competition with the applicant. The first respondent wrote to the applicant's suppliers persuading them to terminate their agency contract with the applicant and award it to them. The applicant applied for an order restraining the respondents from continuing their activities. The court held that there was nothing in the first respondent's contract restraining him from soliciting the customers and suppliers of the applicant. The court also held that though the first respondent's conduct had been illegal during the time when he was still employed by the applicant, for persuading the applicant's suppliers to transfer their allegiance to him, damages were an adequate remedy in the circumstances '

(Footnotes omitted)

Conclusion

[70] The respondents are shareholders in the applicant, Motherland Design, who are the rightful 'owner' of the asset customer connections. However, as shareholders, they do not have any proprietary rights over the customer connections and therefore their only rights or obligations in regards to customer connections stem from their employment relationship with Motherland Design.

[71] Their employment relationship was governed by the BCEA and LRA and did not contain a restraint of trade clause. The later written employment contracts were never countersigned as the respondents never agreed to be bound by the restraint of trade agreements. Therefore, the applicant knew the argument of a restraint of trade agreement was a non-starter and for that reason they argued the respondents' fiduciary duty of good faith.

[72] In light of the aforementioned authorities, the duty of good faith is only owed in respect of confidential information. The customer connections, being intangible, is not considered confidential information under the duty of good faith doctrine unless it is in a form of tangible customer lists. It could, therefore, not be breached if used or if customers are contacted. Further, unlawful competition doesn't arise.

[73] It follows that the applicant has not shown that they have a clear

right that is worthy of protection and therefore the matter stands to be dismissed.

Costs

[74] This is one of those matters where in-house fighting should never have graced the doors of this Court. The respondents clearly owed their erstwhile employer a duty of good faith to not undermine its business while in its employ, however the applicant should have known that its remedy lay elsewhere as there was no formal restraint of trade agreement and that which it sought to protect was customer connections, which without a formal restraint of trade agreement was pushing the boundaries at best. It is, therefore, my view that this is a case where the interests of justice and fairness will be best served by making no order as to costs.

[75] Accordingly, the following order is made:

Order

1.

The application is dismissed.

2.

There is no order as to costs.

D Mahosi

Judge of the Labour Court of South Africa

Appearances:

For the applicant: Mr Hannes Bouwer, of Cavanagh and Richards Attorneys

For the third respondent: Advocate Shahnaaz Bismilla

Instructed by:

Van Rheede Attorneys

[1] Notice of Motion at p. 1 of the Indexed and Paginated bundle.

[2] Company Registration number: 2017/377271/07. See: Windeed Company report at p. 30 of the Indexed and Paginated bundle ('the bundle').

[3] See Annexure DRMF3A on p. 39 of the bundle.

[4] See. P 95 of the indexedand paginated bundle.

[5] See: p. 200 of the bundle.

[6] No. 71 of 2008.

[7] Ibid section 1

[8] 1948 (3) SA 480 (A). See also: Secretary for Inland Revenue v Rosen 1971 1 SA 172 (A).

[9] 1946 EDL 89

[10] See: Annexure FVR 2 on p. 199 of the bundle.

[11] See Annexure FVR2 on p.199.

[12] See Annexure DRMF at p. 247 of the indexed and paginated bundle.

[13] See clause 3.1 of the MO.

[14] The great confusion: When shareholders are also directors and employees. Marthie Claassens. https://www.linkedin.com/pulse/great-confusion-when-shareholders-also-directors-marthie

[15] [1992] ZASCA 204; 1993 (1) SA 537 (A).

[16] (2010) 31 ILJ 1358 (LC).

[17] No. 71 of 2008.

[18] No. 66 of 1995, as amended.

[19] This interpretation was confirmed in SA Post Office v Mampeule (2010) 31 ILJ 2051 (LAC).

[20] See: Para 11 of the answering affidavit at p. 159 of the bundle.

[21] [2002) 1 BLLR 20 (LAC).

[22] See: Para 2.2.6 of the replying affidavit at p. 223 of the bundle; and para 4.8 of the founding affidavit at p. 11 of the bundle.

[23] supra

[24] See: Annexure DRMF3A at p. 39 of the bundle

[25] No. 75 of 1997.

[26] See: Paras 61 onwards of the replying affidavit on p. 174 of the bundle.

[27] See: DRMF5C at p. 136 of the bundle.

[28] See: DRMF5A at p. 131 of the bundle.

[29] See: DRMF5D at p. 135 of the bundle.

[30] See: FVR 5 and FVR 6 at pp. 202 to 206 of the bundle

[31] [1895] 2 Q.B. 315 CA, 320

[32] (2012) 33 ILJ 1539.

[33] See: Refinery Post Production Facilities (Pty) Ltd v Lautre (J1836/18) [2018] ZALCJHB 263 (16 August 2018).

[34] [1993] 3 All SA 574 (W).

[35] (10/21704) (2011] ZAGPJHC 1 (20 January 2011).

[36] (J1836/18) [2018] ZALCJHB 263 (16 August 2018).

[37] Ibid at para 29.

[38] Id fn 15.

[39] Id fn 34.

[40] John Saner SC Agreements in Restraint of Trade in South African Law (LexisNexis, South Africa) at p. 7-55.

[41] Id fn 33.

[42] 1915 CPD 712.

[43] 1971 (3) SA 866 (W) at p. 868 para B-C.