|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Court of Appeal of New Zealand |
Last Updated: 5 December 2014
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Randerson J)
Introduction
[1] For some years the first respondent (Songle) has operated a SuperValue supermarket at Pauanui on the Coromandel Peninsula under a franchise granted by the appellant (WDL).[1] On 14 July 2014, Songle agreed to sell the business for $1,280,000 to a trust of which the fourth respondents, Mr and Mrs Iggulden are trustees. Amongst other things, the sale and purchase agreement (ASP) was conditional on WDL’s consent to the purchase of the business by the Igguldens and to the transfer of the franchise agreement.
[2] The relevant clause in the ASP provided:
Clause 23 – Wholesale Distributors Ltd Approval
This agreement is conditional upon Wholesale Distributors Ltd consenting to the Purchaser as acquiring the business and the transfer of the Franchise Agreement to the Purchaser or its nominee on terms and conditions satisfactory to the Purchaser. This condition is to be fulfilled by the 15th day of September 2014. This condition is inserted for the sole benefit of the Purchaser.
[3] The franchise agreement completed in 2007 between WDL and Songle included (in cls 11.1 to 11.4) a right of first refusal in WDL’s favour if Songle wished to sell the business. These clauses also provided for Songle to give an “Offer Notice” in that event. This did not occur but it is not in dispute for present purposes that cl 11.5 nevertheless applies:
11.5 Where an Offer Notice has been given by the Franchisee and declined by WDL then the Franchisee may (subject to clause 11.4) offer its interest in the Premises to a third party if:
(a) WDL gives its written approval, such approval not to be unreasonably withheld by WDL in the case of a respectable and responsible party with the financial resources in the reasonable opinion of WDL to meet the commitments with respect to the Premises and the Business;
(b) the offer includes a term requiring the third party to give WDL a right of first refusal identical to this clause 11 (but substituting the third party’s name for the Franchisee) in the event that the third party wishes to sell, assign, sublease or otherwise dispose of the third party’s interest in any part of the Premises, the Business and the Assets;
(c) WDL is satisfied as to documentation evidencing compliance with clause 11.5(b) before such assignment, sublease or other disposition is effected.
[4] After the ASP was signed, the Igguldens travelled to Auckland for a meeting with WDL representatives on 27 August 2014. The purpose of the meeting was to discuss the purchase of the business and the transfer of the franchise agreement. There is a dispute about some of what was said during these discussions but, on WDL’s case, the Igguldens raised the possibility of a change of franchise to Four Square, a franchise operated by Foodstuffs, a direct competitor of WDL. The WDL evidence is that the Igguldens were told that a change to Four Square would not be approved. The discussions concluded on the basis that WDL would be happy to “continue down the path” with the Igguldens but they first had to sell their existing Four Square business at Buffalo Beach, Whitianga. WDL’s position is that it would be willing to consent to the transfer of the business and the franchise agreement to the Igguldens so long as the store continues to operate under the SuperValue franchise.
[5] On 12 September 2014, the Igguldens declared the ASP unconditional. In doing so, they purported to waive cl 23. On the same day, they entered a conditional agreement to sell their Buffalo Beach business for $995,000.
[6] WDL had not given their approval to the sale of the business or the transfer of the franchise agreement and it reacted swiftly when it learned of these events. Its solicitors wrote to Songle on 15 September 2014 alleging that Songle had breached the franchise agreement by agreeing to sell the business without WDL’s approval. Songle was advised that WDL reserved the right to issue proceedings to restrain the sale if the breach were not promptly remedied.
[7] WDL also sought advice from the Igguldens about their intentions. The Igguldens advised on 22 September 2014 that they did not intend to become a SuperValue franchisee.
[8] WDL then issued proceedings on 26 September 2014 against Songle, Mr and Mrs Brown, and the Igguldens. An interim injunction was sought restraining the sale of the business based on two causes of action:
(a) Against Songle it was alleged it had breached the franchise agreement by agreeing to sell the business without WDL’s approval.
(b) Against the Igguldens it was alleged they had knowingly induced Songle to breach the franchise agreement by entering the ASP and proceeding without WDL’s approval of the sale.
[9] In a judgment issued on 17 October 2014, Moore J dismissed WDL’s application for an interim injunction.[2] He noted that Songle and the Browns had not taken any active part in the proceedings and neither consented to nor opposed the application. Accordingly, the focus of the argument was on the second cause of action against the Igguldens. The Judge observed:
[37] As emerged from the argument, there does not appear to be any concerted argument that the first cause of action discloses a serious question to be tried, namely the claim that Songle and the Browns breached the franchise agreement with WDL. However, the issue in the present matter requires me to also consider whether there is a serious question to be tried in relation to the second cause of action against the Igguldens.
[10] The Judge found there was no serious question to be tried in respect of the second cause of action against the Igguldens and, in any event, the balance of convenience and overall justice favoured the Igguldens. WDL appeals against the refusal of the injunction.
[11] The Igguldens sought leave to place further evidence before this Court as to their knowledge of the terms of the franchise agreement, why they granted extensions of time to the purchasers of the Buffalo Beach business, balance of convenience issues and the fact that the sale of their Buffalo Beach store is now unconditional. Save in respect of the last issue, WDL opposed the introduction of this evidence on the ground it was not fresh or material. We are satisfied that much of the evidence is not fresh and does not add materially to the evidence before the High Court. Accordingly, the application to adduce further evidence is declined except the unopposed evidence about the status of the sale of the Buffalo Beach business and the evidence that the family has now moved to Whitianga.
Serious question to be tried
[12] There is no dispute that the well known principles in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd are to be applied.[3] The focus of the argument on appeal is markedly different from that which was adopted in the High Court. In particular, for the purposes of this appeal, Mr Chisholm QC informed the Court on behalf of WDL that no reliance is placed on the second cause of action against the Igguldens although that cause of action would still be advanced at trial.[4] Rather, Mr Chisholm submitted that all that was required was an interim injunction restraining Songle and the Browns from proceeding with the sale without WDL’s approval under the franchise agreement.
[13] In that respect, it was submitted that the Judge failed to give proper weight to the lack of opposition by Songle and the Browns to the application for an interim injunction against them. Counsel submitted there could be little dispute that there was a serious question to be tried in relation to the first cause of action and that the balance of convenience and overall justice plainly favoured the grant of an interim injunction on that cause of action alone. That would be sufficient to justify the injunction without any reliance on the second cause of action against the Igguldens.
[14] For the Igguldens, Mr Quinn accepted that cl 11.5 of the franchise agreement required WDL’s approval to the sale of the business on terms satisfactory to the Igguldens. But he submitted that the clause applied only to an offer to a third party. It was said that once an offer to sell was accepted, the offer merged in the agreement and cl 11.5 no longer applied.
[15] We do not accept that submission. We are satisfied it is clearly arguable that cl 11.5 continued to have effect until the offer to sell was perfected by the settlement of the sale of the business. To construe it otherwise would effectively deprive the clause of any real effect.
[16] There was debate in the High Court and before us about the effect of the Igguldens waiving cl 23 of the ASP. The Judge found that the wording of the clause could not be plainer. He considered it meant that the Igguldens could “opt out” by waiving the condition if they did not wish to be bound by the provisions of the franchise agreement.
[17] Mr Chisholm accepted that the Igguldens could waive cl 23 but the real question is what effect the waiver had on the requirement for WDL’s approval under the franchise agreement.[5] We are satisfied that the waiver could not and did not affect Songle’s obligation to obtain WDL’s approval to the sale. By waiving the clause, the Igguldens took the risk that Songle would not be able to perform the ASP if WDL did not approve the sale.
[18] The absence of any opposition by Songle or the Browns to the interim injunction was a matter to which the Judge does not appear to have given any significant weight. No doubt this was because of the way the argument was presented to him but we are satisfied there is a seriously arguable issue that Songle breached the franchise agreement by offering to sell the business to the Igguldens without obtaining WDL’s approval under cl 11.5. Further, there is a seriously arguable question that by proceeding to settle the sale without WDL’s approval, Songle would similarly breach the franchise agreement.
Balance of convenience
Adequacy of damages for WDL if the injunction were refused
[19] The Judge first considered the adequacy of damages for WDL if the interim injunction were refused but WDL later succeeded in its claim. In that respect, there was evidence that WDL stood to lose approximately $45,000 per annum in franchise fees. Although the remaining term of the franchise agreement was only three years, WDL’s evidence was that this would likely have been successively renewed given that Songle’s lease was available for a further 19 years if all available rights of renewal were exercised.
[20] Although WDL accepted that the loss of franchise fees may not be particularly difficult to quantify, it was submitted that the same could not be said of the loss of goodwill associated with the SuperValue brand. It is common ground that there is only one supermarket at Pauanui which is a popular destination for holidaymakers, particularly in the summer months. It is also accepted that there is room for only one supermarket in the township. According to WDL’s evidence, the loss of goodwill would be difficult to quantify. The Judge’s view was any loss of goodwill would be minimal given that WDL has some 59 SuperValue stores throughout New Zealand.
[21] But Mr Chisholm raised a further point which does not appear to have been advanced in the High Court. We consider it is an important factor in considering the balance of convenience. In terms of cl 16.4 of the franchise agreement, WDL has the option upon termination of the franchise to purchase the assets of the business from the franchisee or its successor in title. Mr Chisholm submitted that this right would be lost if Songle were not restrained from selling the business to the Igguldens. This raises the real prospect that WDL could be deprived of the franchise fees and goodwill of the business for the foreseeable future since it would be operated under the Four Square brand.
[22] We are satisfied that if this matter had been drawn to the attention of the High Court Judge, he would likely have approached his consideration of the adequacy of damages differently. Mr Chisholm’s submission on this point compels the conclusion that damages would not be an adequate remedy for WDL if the injunction were refused.
[23] If an injunction is refused but WDL is successful at trial, Songle and the Browns would become liable to pay damages to WDL. Mrs Brown has deposed that the business has secured and unsecured creditors of approximately $800,000 which would need to be met from the sale proceeds. She and her husband own two properties in Pauanui of unspecified value. It is possible there would be sufficient funds to meet a damages claim for the quantifiable losses in franchise fees but the position beyond that is unclear.
The effects on Songle if the injunction is granted
[24] If an interim injunction is granted, the sale will be unable to proceed unless WDL gives its approval. On the evidence, that would be given if the Igguldens agree to purchase under the SuperValue banner but not otherwise. Unless that occurs, Songle will have to continue to operate the business until the substantive proceedings are determined or the dispute is otherwise resolved. This will no doubt place Songle and the Browns in an unwelcome position and they may suffer some financial loss although there is an absence of direct evidence on this.
Impacts on the Igguldens if the injunction is granted
[25] For present purposes, it is accepted that any detriment to the Igguldens is to be assessed as if they are affected third parties. As noted, the sale of the Buffalo Beach business has now become unconditional although settlement is not due until 1 December 2014. In anticipation of purchasing the Pauanui business, the Igguldens have moved from Whitianga to Pauanui with their two young children. Mrs Iggulden’s mother has moved with them and has given up her employment. They say they will be placed in a very awkward position should an injunction be granted. It may be inferred that, while they will receive the equity from the Buffalo Beach business sale, they will not have the ability to earn income from the Pauanui business as anticipated. It seems this could be of the order of approximately $100,000 per annum after tax.
Ability of WDL to pay damages
[26] It is not disputed that WDL is in a position to meet any losses Songle or the Igguldens may incur if they are restrained from proceeding with the sale but ultimately succeed at trial.
Overall justice
[27] The Judge gave weight to the personal factors affecting the Igguldens, their children and Mrs Iggulden’s mother. He did not accept that the Igguldens had brought this situation on themselves. In his submissions before us, Mr Quinn went so far as to say that the Igguldens were innocent. We regret that we cannot agree with the view adopted by the Judge or Mr Quinn’s bold submission on this point.
[28] There can be little doubt that the Igguldens knew Songle required WDL’s approval to the sale even if there is some room for debate about whether and, if so, when they obtained a copy of the franchise agreement. The ASP describes the business being purchased as the “Pauanui SuperValue Supermarket”; cl 23 refers specifically to WDL’s approval to the acquisition of the business and the transfer of the franchise agreement to the Igguldens; and the very purpose of the Igguldens’ visit to WDL on 27 August 2014 was to discuss the sale and franchise issues with WDL’s representatives. On WDL’s evidence, if accepted at trial, the Igguldens were advised that a change of franchise to Four Square would not be approved.
[29] There is evidence from emails between the Igguldens and their lawyer on 27 and 28 August 2014 that the Igguldens had been discussing with Foodstuffs a change to the Four Square franchise and the financing arrangements for the purchase from as early as 20 August 2014, a week before the 27 August 2014 meeting they had with WDL. The Igguldens did not disclose that to WDL.
[30] We are satisfied that the Igguldens have proceeded with their eyes open. Despite knowing that Songle required WDL’s approval to the sale, they purported to waive cl 23 of the ASP on 12 September 2014, declared the Pauanui purchase agreement to be unconditional and, the same day, signed the agreement to sell their Buffalo Beach store. If in doing so they acted on legal advice that proves to have been incorrect, they will have a remedy against their legal advisers. And, if Songle is found to have breached its obligation under the ASP, the Igguldens may have remedies against Songle as well.
[31] Mr Quinn also submitted that WDL ought to have taken the opportunity to buy the business itself under the right of first refusal under the franchise agreement. The Judge adopted that point and expressed the view that the act of franchising involves a relinquishing of control in return for commercial benefits.
[32] We do not accept these propositions. A franchisor is entitled to expect that its franchisee will comply with the terms of the franchise agreement and to seek injunctive relief if it does not. The requirement for approval of a sale by the franchisor is a usual and expected term. There is no basis to suggest that to avoid a loss of its brand a franchisor must resort to purchasing the business itself if a franchisee endeavours to sell the business without approval.
[33] There is one final point raised by Mr Quinn which relates to delay. We do not accept his submission that to have stood any chance of success, WDL’s application for an interim injunction should have been made prior to 12 September 2014. Given the state of their knowledge at that point as already discussed and the prompt action taken on behalf of WDL when it discovered what the Igguldens were intending to do, that submission cannot be sustained.
Conclusion
[34] In summary, we are satisfied the Judge erred in concluding that the balance of convenience and overall justice favoured the refusal of the injunction. Rather, we have concluded that those factors justified the grant of the injunction and the preservation of the status quo. We are not persuaded that damages would be an adequate remedy for the reasons given. While the grant of the injunction will undoubtedly result in personal difficulties for the Igguldens, we have reached the conclusion, contrary to that of the Judge, that this state of affairs is largely of their own making and could be remedied if they were to accept the offer from WDL that remains open to them.
Result
[35] The application by the fourth respondents for leave to adduce further evidence on appeal is declined except to the extent stated in [11] of this judgment.
[36] The appeal is allowed. The appellant is entitled to an interim injunction until further order of the High Court restraining the first, second and third respondents from selling the Pauanui SuperValue business to the fourth respondents other than in a manner complying with cl 11.5 of the franchise agreement between the appellant and the first, second and third respondents.
[37] The appellant is entitled to costs against the fourth respondents for a standard appeal on a Band A basis with usual disbursements.
Solicitors:
Lane Neave, Christchurch for Appellant
Robert J Rondel & Co, Auckland
for First, Second and Third Respondents
Jon Webb, Hamilton for Fourth
Respondents
[1] Songle is owned by the second and third respondents, Mr and Mrs Brown, who were also the guarantors of Songle’s obligations under the franchise agreement.
[2] Wholesale Distributors Ltd v Songle Supermarket Ltd [2014] NZHC 2548.
[3] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] NZCA 70; [1985] 2 NZLR 129 (HC).
[4] Mr Chisholm did not appear in the High Court.
[5] The impact of cl 8.3(2) of the ASP (which arguably imposed an obligation on the Igguldens to take all steps reasonably necessary to enable the condition to be fulfilled) was not the subject of argument before us in relation to the ability of the Igguldens to waive cl 23.
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2014/565.html