Van der Watt v Jonker

The first respondent, Jonker, started and operated petroleum distribution businesses (the Agri group) involving Agriwen, Agri-petroleum and Agri-diesel, primarily distributing Engen petroleum products to farmers in areas of the Free State. The first appellant, Van der Watt, worked for Jonker from 1997, becoming marketing manager and acquiring shareholdings in Agri-petroleum (30%) and Agri-diesel (21%). In 2005, Van der Watt and Jonker jointly established a separate Randfontein business selling Sasol petroleum products, primarily to industrial clients, structured through separate companies. In April 2007, the parties entered a restraint agreement to separate their businesses: the Van der Watts became sole shareholders of the Randfontein companies, while Jonker became sole shareholder in the Agri group companies, with Jonker paying the Van der Watts R2 million in cash. The agreement included reciprocal 10-year restraints of trade prohibiting the Van der Watts from operating in petroleum business in the Agri group's service areas and Jonker from operating within 80km of Randfontein. Subsequently, the Van der Watts traded in petroleum products under the trade name Dynamic Fuels in the Agri group's service areas, actively soliciting former Agri group customers in Parys, Koppies and Bothaville areas, including through marketing at a club and golf day and direct approaches to customers.

• Whether Jonker and the Agri group companies had locus standi to enforce the restraint of trade agreement
• Whether Jonker and the Agri group had a protectable interest to enforce the restraint
• Whether the 10-year restraint period was reasonable and enforceable
• Whether the sale of the business included goodwill and what legal consequences flowed from the alienation of goodwill
• Whether the appellants' conduct of soliciting former customers constituted a breach of the restraint agreement and derogation from the grant of goodwill
• Whether the second appellant (Mrs van der Watt), who was neither an employee nor shareholder, could be bound by the restraint

The appeal was dismissed with costs. The order of the Free State High Court was upheld, restraining the appellants for 10 years from being involved in business entailing trading, storage, handling, sale, marketing or distribution of fuel, oil and related products in the areas serviced by the Agri group companies, and from providing financial support or acting as consultant, adviser or agent of any person conducting such business.

The binding legal principles established are: (1) When a business is sold as a going concern, the sale necessarily includes the goodwill of that business, absent contrary agreement; (2) A vendor who has sold the goodwill of a business is prohibited from soliciting the former customers of that business, as doing so constitutes derogation from the grant and taking back what was sold; (3) General canvassing or marketing activities directed at former customers (such as at clubs or events where they gather) constitutes solicitation and is prohibited, not merely direct individual approaches; (4) A party to a restraint of trade agreement has locus standi and a protectable interest to enforce the restraint by virtue of being a contracting party, even if not the direct owner of the business entity; (5) In commercial restraint of trade agreements between parties of equal bargaining power who are fully conversant with their respective businesses' extent and potential, courts will uphold restraints as reasonable where they are reciprocal, supported by substantial consideration, and reasonably necessary to protect the legitimate interests including goodwill; (6) A signatory to a restraint agreement who receives consideration under it and whose corporate vehicle is used to conduct the prohibited business is bound by the restraint even if not an employee or shareholder of the affected business.

The Court made observations regarding the nature and components of goodwill, citing with approval Lord Macnaghten's definition in Commissioners of Inland Revenue v Muller & Co's Margarine Ltd that goodwill is "the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom." The Court also cited Harms JA's description in Caterham Car Sales that goodwill is "the totality of attributes that lure or entice clients or potential clients to support a particular business." The Court noted that goodwill is typically based on two components: locality of the business and the personality of the driving force behind the business. The Court observed that restraint of trade forms part of the goodwill of a business. While not necessary for the decision, the Court noted the well-established English law principle, now part of South African law, that "a vendor is not entitled to derogate from his grant." The Court also made passing reference to the American position in Corbin on Contracts regarding sellers' privileges and obligations when goodwill is sold without express non-compete provisions.

This case is significant in South African law for clarifying and reinforcing the relationship between restraint of trade agreements and the sale of goodwill. It establishes that: (1) when a business is sold as a going concern, goodwill is necessarily included in the sale; (2) the sale of goodwill creates an implied obligation on the vendor not to solicit former customers, independent of express restraint provisions, based on the principle that a vendor cannot derogate from their grant; (3) contracting parties to restraint agreements have locus standi and protectable interests to enforce such restraints even if not the direct owners of the business entities; (4) general canvassing at events where former customers are present constitutes solicitation equivalent to direct approaches; (5) in commercial restraints (as opposed to employment restraints) between parties of equal bargaining power who understand their businesses, courts will uphold longer restraint periods, particularly where reciprocal and supported by substantial consideration. The judgment reinforces the Becker principles in modern commercial contexts and provides important guidance on the protection of goodwill in business sales.