FORM A
FILING SHEET FOR EASTERN CAPE JUDGMENT

								ECJ NO	: 055/2004

PARTIES:	SECURICOR (SA) (PTY) LIMITED & OTHERS v LOTTER & OTHERS
		
REFERENCE NUMBERS -
•	Registrar: CA 681/2004

DATE HEARD:		8 December 2004

DATE DELIVERED: 	13 January 2005

JUDGE(S):  Froneman J, Dambuza and Hole AJJ

LEGAL REPRESENTATIVES -

Appearances:
•	for the State/Applicant(s)/Appellant(s):	Netteltons
•	for the accused/respondent(s):		Wheeldon, Rushmere & Cole

Instructing attorneys:
•	Applicant(s)/Appellant(s):	J Muller SC
					A Smalberger	
•	Respondent(s):		H Goosen SC
					JA Van der Westhuizen	

CASE INFORMATION -
•	Nature of proceedings	:	As per summary

IN THE HIGH COURT OF SOUTH AFRICA
(EASTERN CAPE DIVISION)                                               Case No. CA 681/2004
                                                                                                    Reportable.
                                                                                                    Date delivered:
In the matter between

SECURICOR (SA) (PTY) LIMITED                                    First Appellant
SECURICOR GRAY SECURITY SERVICES
(EASTERN CAPE) (PTY) LIMITED                                   Second Appellant
and 
DANIEL REYNIER LOTTER                                              First Respondent
ROWLIN ADONIS                                                                 Second Respondent
OMEGA RISK SOLUTIONS (PTY) LIMITED                 Third Respondent

Whether restraint agreement of employees of old employer transferred to new employer when business is transferred as a going concern in terms of s.197 of the Labour Relations Act 66 of 1995 – question of fact depending on particular circumstances – if transferred amounts to a combined cession and delegation; a transfer of rights and obligations – content of rights and obligations remain the same, but extent of enforcement dependent on continued fortunes of the business so transferred.

                                                      JUDGMENT

Froneman J.

[1] The issues in this appeal are whether restraint of trade agreements survived the transfer of a business under the provisions of s.197 of the Labour Relations Act, and, if so, the legal consequences of such a survival for the parties concerned. The manner in which these issues arose so crisply for decision on appeal, however, needs some explaining.

[2] The appellants launched an urgent application in the South Eastern Cape Local Division to interdict certain conduct on the part of all three the respondents. At the hearing before Ludorf J the respondents raised three points in limine which he agreed to hear and determine first. These points were: (1) that the matter was not urgent within the meaning of rule 6(12) of the Uniform Rules of Court; (2) that even on an assumption of the factual correctness of the allegations made in the founding papers (some of which the respondents disputed in their opposing papers) the appellants had failed to make out a case of restraint against the first and second respondents (“the employees”); and (3) whether the appellants had in their founding papers made out a prima facie case for relief against the third respondent (“Omega”).

Ludorf J dismissed the first and third points, but upheld the second point. He postponed the remainder of the application sine die. Leave to appeal was sought and granted against the finding on the second point only, namely whether the founding papers disclosed a cause of action for restraint orders against the employees. This appeal will thus not dispose of all the issues in the original application, a fact that needs to be kept in mind in the discussion of the legal issues later in the judgment.

[3] Although the corporate history of the appellants is complex, it is fortunately not necessary to unravel it here in any detail. For the purposes of the application before Ludorf J and thus also for this appeal the following facts were accepted as correct for determining the restraint issues.

 Both employees concluded contracts of employment with predecessors of the appellants, which for convenience and clarity I will collectively call “the old employers”. They were both appointed in managerial capacities. These contracts of employment contained a clause which obliged the employees to sign a restraint agreement with the old employers upon acceptance of the offer of employment, which each of them did. These agreements imposed specific restraints on the employees for a period of two years after the termination date of their contracts of employment. During March 2001 and May 2002 respectively the old employers’ businesses were transferred to the appellants (“the new employers”). These transfers were expressly made subject to the provisions of s.197 of the Labour Relations Act. In the early part of 2004 both employees resigned from their employment with the new employers and started working for Omega, a company doing business in direct competition with the new employers. In May 2004 the restraint proceedings were launched in the court below.

[4] In a, with respect, characteristically concise and incisive judgment Ludorf J found that the restraint agreements did not form part of the employment contracts, but were nevertheless ceded from the old employers to the new employers in the course of the transfers of the various businesses. Relying on the principle that a cession confers no more rights or obligations on the cessionary than those of the cedent, he found that what was ceded to the new employer was the right to enforce the original restraint obligations the employees had to the old employers. These obligations, he found, were not to interfere with the old employers’ customers for a period of two years after termination of the employees’ employment with the old employers. The founding papers did not distinguish these customers from those of the new employers and accordingly provided no basis upon which a valid restraint order could be made against the employees. In any event the date of termination of the employees’ employment with the old employers was that of the date of the transfers of the businesses to the new employers. The two year restraint period had already elapsed by the time the application was launched. The appellants had thus failed to make out a case for restraint relief in its founding papers.

[5] These findings were supported and elaborated upon on appeal by Mr. Goosen, who, together with Mr. Van der Westhuizen, appeared for the employees. They were attacked, mainly on the basis of what was submitted to be the proper interpretation of the provisions of s.197 of the Labour Relations Act, by Mr Muller, appearing with Mr. Smalberger, for the appellants. We are grateful for counsel for their helpful arguments. In what follows I hope to deal in substance with their respective contentions and submissions, although I will not do so point by point.

[6] It seems to me that the decisions in the cases of Botha and another v Carapax Shadeports (Pty) Ltd  (“Carapax”), National Education and Health Workers Union v University of Cape Town and others  (“Nehawu”) and Telkom Ltd and others v Blom and others  (“Telkom”) provide a coherent background of the legal principles applicable to the present matter. They are, in my respectful view, reconcilable with each other and with the provisions of s.197 of the Labour Relations Act, and do not in my view give rise to many of the alleged anomalies raised in argument.

[7] Carapax was decided before the advent of s.197 of the Labour Relations Act, but it provides a clear and sound analogous basis for determining some of the consequences of restraint agreements in transfers under s.197. The reason for this is that it deals with issues similar to those dealt with under s.197. Important amongst these is the initial determination of which assets are transferred as part of a business, when that business is sold or otherwise disposed of to a new owner. 

In Carapax it was held that ordinarily a restraint of trade agreement is entered into for the benefit of the business itself, as distinct from the personal benefit for the owner of the business. In such a case the benefit of the restraint is incidental to the business, and part of its goodwill. The owner of the business is vested with the contractual right to enforce the restraint and when he sells or disposes of the goodwill of the business the merx of the sale or disposition embraces that contractual right. The transfer of this contractual right takes place by way of cession. The cession consists of an obligatory agreement (to sell or dispose of the right) and an agreement of transfer (the delivery of the business to the new owner). The new owner then becomes entitled to enforce the contractual restraint.

What is comprised in the sale of goodwill of a business, and whether it includes the right to enforce a restraint, is however, a question of fact: “[t]here is no fixed or invariable rule by which the benefit of an agreement in restraint of trade passes to the purchaser of the goodwill of a business”. The benefit of the restraint may not form part of the goodwill of the business passed to the new owner where either the restraint conferred a purely personal benefit to the old owner, or where it would make a material difference to the employee to honour the restraint against a new owner and not against the previous owner. On the facts in Carapax the restraint was enforced against employees who terminated their employment after the transfer of a business to a new owner.

[8] When a business is now transferred either wholly or in part as ‘a going concern’ by an old employer to a new employer, the provisions of section 197 of the Labour Relations Act become applicable to the transaction. The question of what amounts to the transfer of ‘a going concern’ under s.197 concerns much the same kind of issues examined by Botha JA in Carapax. Amongst other things, “the transfer or otherwise of assets both tangible and intangible”, in the words of Ngcobo J in Nehawu, is a factor relevant to the enquiry. What needs to be transferred is “a business in operation ‘so that the business remains the same but in different hands’”. Whether this has happened is a matter of fact to be determined objectively in the light of the circumstances of each transaction. This is strikingly familiar to the dictum in Carapax that, to determine whether a restraint is transferred as part of the goodwill of a business, is a question of fact, not subject to inflexible rules (quoted in para.[7] above). Whether a restraint has thus been transferred as part of the goodwill of a business in Carapax’s terms, or as part of ‘a going concern’ under s.197 of the Labour Relations Act, therefore seems to involve the same initial question of fact.

 [9] Is it possible though, that a restraint may survive a Carapax enquiry, but not a s.197 enquiry, or the other way around? Or that the consequences of survival of the restraint may differ, depending on whether it survived by way of a Carapax cession or a s.197 transfer? Counsel for both sides submitted that it could, but for different reasons.

Mr. Goosen, for the employees, submitted that a s.197 transfer did not, in the particular circumstances of this case, assist the new employers. This was because s.197 dealt primarily with the transfer of employment contracts and the restraints in question here were separate and distinct from the employment contracts. If the restraints survived they could only do so by way of a Carapax cession and what then survived were restraint obligations in respect of the old employers’ customers, as found by Ludorf J in the court below. The termination date of employment referred to in the restraints was in any event the date when the employees stopped working for the old employers, namely when the businesses were transferred to the new employers under s.197 of the  Labour Relations Act. For the latter submission he relied on a passage in Telkom , with which I shall deal in due course.

Mr.Muller, on the other hand, countered that s.197 created a form of statutory assignment (for this he also relied on Telkom ) that went beyond the  confines of an ordinary cession as contemplated in Carapax. Although this might create anomalies for both new employer and employee, in the sense that they might in some cases end with greater or lesser rights and obligations than before the transfer,  that is the price to be paid for the balance that the section seeks to strike between the commercial interests of employers and the job security of workers. The restraints in this case became part of the rights and obligations between the employees and the new employers, which implied that their content had to be determined in respect of obligations in respect of the new employers’ customers, and the termination date of the employees’ employment had to be determined with reference to their employment with the new employers, not the old employers.

[10] Section 197 of the Labour Relations Act makes inroads on the common law principle that a contract of employment may not be transferred without the consent of the employee , but it does not in my view confer any greater or lesser reciprocal rights and obligations upon either the employee or new employer than that which existed between the employee and the old employer. In terms of Nehawu its provisions are aimed at facilitating commercial transactions on the one hand while at the same time protecting workers against unfair job losses. Its effect is “that ‘the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment’; that the rights and obligations between the old employer and the worker are transferred to the new owner; that the transfer does not interrupt the continuity of employment; and that the employment contract ‘continues with the new employer as if with the old employer’”. Put another way, its effect is not upon the content of the rights and obligations existing at the time of transfer of a business, but on the identity of the person or legal entity against whom the rights may be enforced and to whom the obligations are now owed.

Neither Carapax nor Telkom stand in the way of this construction.

[11] In the relevant paragraph of  Telkom (that both sides rely on, but for different purposes) Jones AJA reflects on the effect of the judgment of Ngcobo J in Nehawu in the following manner:
“Ngcobo J did not use the word ‘assignment’, but his description of the nature and effect of the transfer of an employment contract contemplated by the Act leaves me in no doubt that an assignment takes place. In legislating that all the rights and obligations between the old employer and each employee at the time of the transfer continue in force as if they were rights and obligations between the new employer and  each employee, and that the transfer of business does not interrupt the workers’ continuity of employment, the lawgiver makes its intention plain. In the words of Ngcobo J, the inference is irresistible that the new employer takes over the workers and is by operation of law substituted in the place of the old employer. This is what happens on assignment. In my view the further inference is also irresistible that in the course of this process the contractual relationship between the old employer and each employee, ie the employment contract between them, is brought to an end. This is a natural result of the assignment; the original employer falls out of the picture, and, as between him and the employees, the contract is extinguished.”

Two things need to be said about this passage at this stage.

The first is that Jones AJA’s use of the word ‘assignment’ to describe the effect of Ngcobo J’s judgment in Nehawu does not imply that different rights and obligations are somehow created by the statute. The word ‘assignment’ in our law is usually used to denote a transfer of both rights and obligations. Christie, The Law of Contract in South Africa in my view aptly describes it as ‘a combined cession and delegation’:

“Stepping into another’s shoes involves acquiring his rights, which can be done by cession without the debtor’s consent, and undertaking his obligations, which can be done by delegation with the creditor’s consent. Since the lesser is included in the greater it follows that the whole process of substitution cannot take place without the consent of the other party to the contract.”

What s.197 achieves is to remove the requirement of consent referred to in the italicized portion of the quotation, nothing more. It remains a cession of rights and a delegation of obligations, albeit a statutorily imposed one. The content of the rights and obligations remain the same after the cession and delegation. But they are now to be enforced by, and owed to, another. What I have referred to as a Carapax cession of a restraint, may, depending on the facts of each case, be part of the transfer process. But I fail to see how such a cession could somehow be transferred as part of the business as a going concern to the new owner without falling within the provisions of s.197.

The second aspect to be emphasized is that Jones AJA’s comment on the ending of the employment contract with the old employer was not intended to qualify the effect of a transfer of a business under s.197 as set out by Ngcobo J in Nehawu  insofar as the rights and obligations between employee and new employer was concerned. Its relevance was in a different context, namely what the effect of that ending of the employment contract with the old employer was on the rights the employees had against a third party, namely the Telkom Pension Fund. The ending of an employment contract with the old employer or owner has no further relevance once it is found as a matter of fact that the restraint, as part of the goodwill of a business disposed of as a going concern, was transferred to the new employer or owner. Carapax is an illustration of this: the employees were held to a post-termination restraint which remained operative after transfer of the business to the new employer and operated from the date of the employees’ resignation with the new employer.

[12] The legal position (consonant with Carapax, Nehawu and Telkom) is thus that, in order to determine whether a restraint agreement survives the transfer of a business under s.197 of the Labour Relations Act, it needs to be determined as a matter of fact whether the restraint formed part of the goodwill of the business and whether that goodwill formed part of the business being transferred as a going concern in terms of the section. This is an objective factual enquiry which will depend on the circumstances of each case.

If this factual enquiry establishes that the restraint formed part of the transfer of the business the employee’s obligations under the restraint are owed to the new employer and the new employer is entitled to enforce the restraint against the employee. The content of the rights so ceded and the obligations so delegated do not become greater or lesser by virtue of the provisions of s.197. What may happen is that, by virtue of the fact that these rights and obligations attach to the transferred business, their exercise and performance will be determined to some extent by the fortunes of the business after its transfer. I will deal more fully with this latter aspect in the context of the particular facts of this case, in para.[14  ] below.

[13] It remains to apply these views to the facts of this case. Again, it must be remembered that the issues in the application before Ludorf J in the court below and on appeal were, and are to be, decided on an acceptance of the correctness of the facts set out in the founding papers. In the founding papers the necessary facts relating to the employment contracts and restraint agreements of the employees with the old employers, the history of the transfer of the businesses to the new employers, the continued employment of the employees under those contracts and restraints, and their subsequent resignation and new employment with Omega are set out in detail. The essentials of those facts are set out in para [3] above and I will not repeat them. From those facts, as represented in the founding papers, there is nothing to show that the restraints did not as a matter of fact form part of the goodwill of the business that was transferred under s.197 from the old employers to the new employers. In the terms used above, the right to enforce the restraint was ceded from the old employers to the new employers, and the obligation of the employees to the old employers to adhere to the restraint was delegated to the new employers. So were the other reciprocal rights and obligations under the employment contracts.

Ceded and delegated in this manner were contracts of employment terminable on a month’s written notice, and restraints coming into operation only upon termination of the employees’ termination of employment. These restraints would then be operative for two years after the termination of employment in respect of customers whose identities were also to be determined with respect to the date of termination of employment, namely those dealt with in the year preceding the termination of the employees’employment.

At the time of the transfers under s.197 the precise extent of the rights and obligations under the restraints were not yet known simply because the employees’ employment was not discontinued until the beginning of 2004. As explained above, Telkom is no authority for the proposition that the cession and delegation of rights and obligations (including the restraints) between employees and employers under s.197 did not take place at the time of the respective transfers of the businesses. There is no third party involved here to which the old employer-employee relationship was vital, as was the case with the Telkom Pension Fund in Telkom. In short, on the founding papers there is nothing to suggest that the restraints did not attach to the business that was being transferred, but that it rather attached to the owner of the business, the old employer, at the time. In this regard I respectfully disagree with the trial court’s finding that the restraint continued operating only in respect of the old employer’s customers and that its termination had to be determined with reference to when the employees’ contractual relationship with the old employer came to an end.

[14] In para. [12] above I referred to a possible consequence that may follow upon a factual finding that a restraint attaches to the business itself and is not a benefit personal to the old owner of the business: namely that the extent of the exercise and performance of the restraint will to some extent be determined by the continued fortunes of the business.

 One of the aspects raised in the opposing papers is the reasonableness of the restraints. It may, on these contested papers, possibly be argued that the unreasonableness of the restraints, resulting from the transfer of the then relatively small existing business of the old employers to new employers forming part of a global security services group, may either justify a factual finding that at the time of the transfers the restraints were personal to the existing old employer-employee relationship, or a finding that the enforcement of the restraints at the behest of the new employers in mid-2004 would be unreasonable. I express no view on these possibilities, and wish only to emphasize that those issues did not arise on the facts upon which the matter was decided in the court below and before us on appeal. 

[15] It follows that in my view the appeal against the order made in paragraphs 2(a), 2(b) and 3(b) in the court below should succeed. There was some argument on behalf of the second respondent that any further order against him has become academic because the appellants only sought an order for a period that has by now already elapsed and that this was sufficient reason to dismiss the appeal as far as he was concerned in terms of s.21A(1) of the Supreme Court Act. At the time the application was launched, however, the order sought was not academic. The respondents chose to raise the point in limine which deprived the appellants of the relief they were entitled to at that stage and necessitated further proceedings. The section confers a discretion on the court of appeal and in my view the circumstances of the present matter are such that the appeal should also be upheld against the second respondent and that costs should follow the result. Whether to proceed against the second respondent at the postponed hearing on the remaining issues is, however, another matter.

[16] The following order is made:
A. The appeal is allowed and paragraphs 2(a), 2(b) and 3(b) of the order in the court     below is substituted with the following:

“ 2. The Respondents’ point in limine in relation to the relief sought against the First and Second   
 Respondents, is dismissed;
  3(b). The Respondents are ordered, jointly and severally, to pay the Applicants’ costs of the hearing on 29 and 30 July 2004, such costs to include the costs of two counsel.” ;

B. The first and second respondents are ordered, jointly and severally, to pay the costs of the appeal, such costs to include the costs of two counsel.

J.C.Froneman
Judge of the High Court.

I agree.

N.C.Dambuza
Acting Judge of the High Court.

I agree.

P.Hole 
Acting Judge of the High Court.