When buying a business as a going concern, inclusive of the goodwill attached thereto, are you sufficiently protected in the agreement of sale against the former employees and/or directors stealing your clients and/or customers for a competing business?There is an implied prohibition in our law (the so-called “Trego prohibition”, which was accepted by our court of appeal in the case of A Becker & Co (Pty) Ltd v Becker & others 1981 (3) SA 406 (A)) which prohibits the seller of goodwill from canvassing existing clients of the business away from the purchaser.
The question of whether or not this implied prohibition binds anyone other than the seller in a sale transaction, was recently decided by the Supreme Court of Appeal (“SCA”) in the case of GrainCo (Pty) Ltd v Van der Merwe (case number: 20693/2014 [2016] ZASCA 42 (judgment delivered on 30 March 2016).
The first and second respondents (“the employees”) in this matter were former employees of the appellant (“GrainCo”). When GrainCo amalgamated with a different business, the employees each agreed, interalia, to a five year restraint of trade clause which prohibited them from competing with the purchaser of the business. Upon the expiry of the restraints of trade, the employees opened a competing business across the road from GrainCo (and in the process also hired staff that had previously worked for GrainCo).
GrainCo brought an application in the Western Cape High Court seeking to interdict the employees and the competing business from canvassing customers of GrainCo in an attempt to lure them to their competing business. The application was dismissed by the High Court on the basis that the employees were not the sellers of the business and thus not bound by the implied prohibition.
On appeal, the decision of the High Court was confirmed by the SCA and the application dismissed with costs.
In light of the case of GrainCo it is important to ensure that you are adequately protected vis-à-vis third parties when buying a business as a going concern by inserting the necessaries warranties into the agreement of sale on the advice of an attorney.
Gavin Meinking is currently a senior associate in the Cape Town office of C&A Friedlander Inc.
Gavin specialises in general and commercial litigation.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)