across the bar

Recent court cases have emphasised the importance of protecting the goodwill of a business, particularly when that business is sold as a going concern. 

The term ‘goodwill’ has proved difficult to define and is capable of different meanings, depending on the context.  However, in most instances it means the following:  ‘the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which lures or entices clients or potential clients to support a particular business.’ 

Buying a business is an exciting new chapter in any businessman’s life. It can however, quickly turn into a nightmare if the seller of that business opens up shop around the corner to compete with you. The law creates the necessary mechanism to protect the buyer in this situation and the cases below demonstrate why a Restraint of Trade Agreement is vitally important.

In RICAMA CC v Twynham, a case which came before the Eastern Cape High Court in June 2011, RICAMA CC had purchased the business of a restaurant under the name and style of ‘Bella Vita’ and a bed and breakfast business from Ms. Twynham.

A restraint of trade clause was included in the Agreement of Purchase which prohibited Ms. Twynham from directly or indirectly engaging in a business or activity similar to the business carried on by RICAMA CC, within the City of Grahamstown and Makana Municipal area for a period of three years.

Shortly after Twynham sold her business to RICAMA CC she opened up a sushi bar within a radius of 3 kilometres of “Bella Vita” restaurant.

RICAMA approached the Court in an attempt to enforce the restraint of trade. The court held that the sushi bar opened by Twynham operated as a restaurant and was therefore subject to the restraint of trade clause. The Court found further that Twynham’s conduct amounted to a breach of the restraint and an interdict was granted against Twynham.

In September 2011 another matter came before the Supreme Court of Appeal whereby the Court had to decide whether a restraint of trade was enforceable or not. In Van Der Watt and Another v Jonker and another, Mr. Jonker had established the following businesses:

1.       Agriwen (Pty)Ltd, which specialised in the sale of agricultural products to farmers and the distribution of Engen Petroleum Products in certain areas of the Free State province;

2.       Agri-petroleum which specialised in the sale and distribution of Engen Petroleum products under the Zenex brand within certain areas of the Free State namely, Bothaville, Bultfontein and Virginia; and

3.       Agri-diesel, which specialised in the sale and distribution of Engen Petroleum Products to areas of the Free Stat not serviced by Agri-petroleum.

In 2005 Jonker and Van Der Watt started a new business in Randfontein selling and distributing Sasol Petroleum Products, mostly to industrial clients (the Agri group business distributed Engen petroleum products, mostly to farms).

In terms of a written agreement concluded between Jonker and Van Der Watt it was agreed that Van Der Watt would become the sole shareholder of the company which owned the Randfontein business and Jonker would become the sole shareholder of the Agri Group.  Jonker would pay Van Der Watt R 2 million and the agreement would include a restraint of trade clause.

In terms of the restraint of trade Van Der Watt was restrained for a period of 10 years from being involved in a business entailing the trading, storage, handling, sale, marketing or distribution of fuel, oil and/or related products in the areas serviced by the Agri group i.e. those particular parts of the Free State, for a period of 10 years.

Despite the restraint of trade Van Der Watt solicited customers of the Agri Group and he traded in areas serviced by Agri group under the name of Dynamic Fuel on both the distribution and retail sides. The Court held that the purpose of the restraint was to protect the goodwill of the business and that it was enforceable. The Court held further that Van Der Watt’s conduct constituted a breach of the restraint and the interdict granted against him was upheld.