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High Court of New Zealand Decisions |
Last Updated: 5 August 2016
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
CIV-2016-406-000011 [2016] NZHC 1340
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BETWEEN
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SPECIALISED STRUCTURES NEW
ZEALAND LIMITED Plaintiff
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AND
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FINDLATER CONSTRUCTION LIMITED
First Defendant
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AND
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RONALD STEVELY FINDLATER Second Defendant
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Hearing:
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16 June 2016
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Appearances:
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P B Churchman QC and C M Kenworthy for Plaintiff
T Sissons and S F Gaines for Defendants
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Judgment:
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21 June 2016
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JUDGMENT OF DUNNINGHAM J
[1] Specialised Structures New Zealand Limited (“SSNZL”) is
a building kitset provider specialising in cold rolled
steel frame portal
buildings. It has developed software to assist with the design and
construction of those buildings.
[2] Findlater Construction Limited (“FCL”)
was established by Mr Ronald Findlater in 2001.
It undertakes a wide
range of commercial building work in and around Blenheim.
[3] In 2005, FCL entered into an agreement with Kiwispan Limited to build steel sheds in the Marlborough district. However, as a result of an internal dispute within Kiwispan, the company was dissolved in 2011, and SSNZL took over part of the
Kiwispan operation under the new company branded as
SSNZL.
SPECIALISED STRUCTURES NEW ZEALAND LIMITED v FINDLATER CONSTRUCTION LIMITED [2016] NZHC 1340 [21 June 2016]
[4] SSNZL, FCL and its director, Mr Linklater, entered into a contract
which governed their relationship. It gave FCL the
exclusive licence to sell
SSNZL’s products and services in the Marlborough province and to use its
proprietary system. The
agreement contained certain obligations in restraint of
trade at the termination of that relationship.
[5] The relationship was terminated in October last year (although the
exact date is disputed), and SSNZL claims that the two
defendants are in breach
of those restraint obligations. An interim injunction is sought to enforce the
contractual restraints.
[6] There are two main concerns raised by SSNZL:
(a) it considers the defendants have been involved in building
projects, since termination, which use SSNZL’s proprietary
systems, or
which have been undertaken for a former customer of SSNZL. Those building
projects comprise:
(i) an extension for Marlborough Gold Honey Limited, its
premises in Bristol Street, Blenheim;
(ii) two steel hangars at Koromiko Airfield, near Picton, which was
built in conjunction with another competing business,
Fair Dinkum
Sheds;
(b) FCL has taken on a dealership with Fair Dinkum Sheds and SSNZL considers this is in clear breach of the restraint against FCL being involved in any business which is similar to, or competitive, or in conflict, with SSNZL’s business. Buildings which have commenced under this arrangement include the two hangars referred to above, plus
extensions to a warehouse at Liverpool Street,
Riverlands.1
1 This last building was brought to the Court’s attention via a memorandum filed subsequent to the
hearing.
[7] While initially SSNZL sought an injunction requiring the defendants
to cease their relationship with Fair Dinkum Sheds,
and to cease work on the
Marlborough Gold Honey extension building contract and the Koromiko
Airfield contracts, SSNZL has
since accepted that damages would be a sufficient
remedy for FCL’s involvement in the Marlborough Gold Honey extension
building,
taking into account there was only two weeks’ work left on the
building.
[8] As a consequence, the order sought at the close of the hearing was
as follows:
(a) an order for the defendants to forthwith cease operating as agent, independent contractor or in any other business arrangement with Fair Dinkum Sheds franchise or any other entity similar to, or competitive with, or in conflict with the plaintiff within the restraint
area during the period of restraint.2
[9] I proceed to consider the interim injunction on the basis that the
relief sought is confined to that order only.
Principles relating to interim injunctions
[10] The principles relating to interim injunctions are well understood.
I must be satisfied that:3
(a) there is a serious question to be tried in the proceeding;
and
(b) the balance of convenience favours the grant of the relief
sought.
[11] Those two questions are not, however, exhaustive. In every case the
Judge has to finally stand back and ask where the overall
justice of the case
lies.4
3 American Cyanamid v Ethicon Ltd [1975] UKHL 1; [1975] AC 396 (HL).
4 Klissers Farmhouse Bakeries Ltd and Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).
What is the agreement which the plaintiff seeks to
enforce?
[12] The relationship between SSNZL and the defendants is set out in a
comprehensive written agreement, running to some 43 pages
plus schedules and
annexures. The parties to the agreement are SSNZL as licensor, FCL as
licensee,5 and Mr Findlater, as “guarantor”.
[13] In summary, SSNZL granted a licence to FCL to operate a business
involving the design, manufacture, sale, and erection of
buildings using the
SSNZL trade name, and using SSNZL’s system, which, as Mr Findlater says,
included:
(a) a software package to design steel sheds; (b) a materials list for the steel building kitset;
(c) basic quantity surveying sheets suitable for pricing, labour and other
materials on those plans;
(d) access to the buying group for materials for the steel building kit
sets.
[14] While Mr McCrostie, the director of SSNZL, and Mr Findlater differ
on the complexity of building that the system was able
to deal with, they do not
differ on the core elements of the system set out above.
[15] Under the agreement, FCL paid a licence fee, on a monthly basis, during the term of the licence agreement. Confusingly though, the term of the agreement is expressed at Item 6 in the Schedule to be five years, with three rights of renewal for terms of five years but, under cl 4.1 of the agreement, the term is stated to begin on the commencement date, specified in the Schedule to be 13 September 2005, and end on the expiry date, specified in the Schedule to be 13 September 2025, unless
terminated earlier.
5 Although described in the agreement as “Merchant”.
[16] The critical part of the agreement for the purpose of this
application is cl 32 which sets out various restraints on FCL
(described as the
Merchant in the agreement). Specifically, SSNZL relies on cl 32.2 which
provides:
The Merchant (and the Merchant’s shareholders and directors) and the
Guarantor/s covenant with SSNZL that solely for the protection
of SSNZL in
respect of the goodwill of the System and the Group Business, the merchant and
Guarantor shall not during the Term and
for the Restraint Period, on their own
account, individually or collectively; or jointly with or as an employee,
contractor,
agent, trustee, manager, partner, consultant, or adviser to any
person, firm, association, joint venture, or corporation or as a
member of any
association:
32.2.1 directly or indirectly, whether by means of an agent, independent
contractor, trustee or any firm, corporation or trust or
other arrangement,
association or structure or otherwise in which it may be interested as director,
shareholder, beneficial owner
of shares (other than as an investor in a listed
public company in which the Merchant holds less than 1% of the issued capital),
beneficially or in any other way:
(a) be engaged, or interested, or concerned in any business
within the Territory or within the Restraint Area which
is in the reasonable
opinion of SSNZL similar to or competitive or in conflict with the
Business;
...
(c) solicit away from SSNZL, Business, or the Group Business, or from the business of any other Merchant of SSNZL any person, firm, or company who was at the time during the
12 months immediately preceding termination a customer of the Business or of SSNZL or a Merchant of SSNZL nor
divert or seek to divert any custom from SSNZL or any other
Merchant of SSNZL.
[17] The Restraint Period is identified in the Schedule as being 12
months after termination of the agreement. While
the Restraint
Area is defined as “New Zealand”, SSNZL only seeks to enforce
it within the Marlborough District
where FCL was operating.
[18] The term Group Business used in the restraint provisions is defined
in the agreement to mean:
All business involving the sale of the Products or the supply of the Services or of similar products or services which are carried on by SSNZL, including as agent for other building structure suppliers, or by any Merchants or licensees or related companies of either under the Trade Name.
[19] The parties are agreed that the restraint obligations survive the
expiry of the contract.
What breaches are alleged?
[20] Mr McCrostie, the managing director of SSNZL, filed an affidavit
explaining how the agreement with FCL was terminated
and the
circumstances which he subsequently discovered which he says give rise to a
breach of the restraint provisions.
[21] The last monthly payment under the contract was made for
the month running from 13 September to 12 October
2015. Mr McCrostie
says “SSNZL treated the licensee as terminating on 12
October 2015”,
although Mr Churchman QC pointed out that FCL only
advised that it was terminating the contract by email on 21 October
2015.
[22] As a consequence of termination being notified, there were
communications between the parties over how FCL was to relinquish
the SSNZL
software which enables its licensees to design and price buildings. Mr
Findlater says that SSNZL remotely disabled the
cloud based software immediately
following Mr Findlater’s advice to SSNZL in October that FCL would not
renew the agreement
and, from that time, FCL was unable to use SSNZL
software.
[23] While there was some concern by SSNZL that FCL would not
allow a software engineer to go through FCL’s computer
to ensure all
SSNZL’s computer software was deleted, I am satisfied, having read the
affidavit evidence of Mr Wells, an IT
systems engineer, that all of the SSNZL
proprietary software has been removed from FCL’s computer system. There
is therefore
no practicable risk that FCL can continue to access or use
SSNZL’s software, in breach of the restraint of trade
provisions.
[24] The primary concern of SSNZL, however, is that it has discovered that FCL has commenced a contractual relationship with Fair Dinkum Sheds in Marlborough, which is a business that is similar to or competitive or in conflict with SSNZL’s business.
[25] Mr McCrostie says he first heard that FCL was going to assume the licence for Fair Dinkum Sheds over the 2015-2016 Christmas vacation. However, at that stage, he checked the Fair Dinkum website, and there was no indication that either of the defendants had been appointed as licensees. The first evidence SSNZL had of a relationship between FCL and Fair Dinkum Sheds was when he discovered, in March 2016, that FCL had obtained building consent for an extension to the premises of Marlborough Gold Honey Limited in Blenheim, and that the consent had been obtained using SSNZL’s plan specifications and engineering certificate. Mr McCrostie explains that the plans had been prepared and filed by FCL on
11 June 2015, while FCL was still SSNZL’s licensee.
[26] SSNZL’s lawyers immediately wrote to Mr Findlater alleging
that the use of SSNZL’s plans to obtain a building
consent after
termination of the agreement was in breach of cl 29.1.3 of the agreement which
required FCL to “cease to use
in any way whatsoever all of the
intellectual property and any other trade names, logos, devices, insignia,
procedures or methods
which are or may be associated with the Intellectual
Property or the System”, and warned of the risk that injunctive relief
might be sought.
[27] While correspondence was being exchanged over that issue, SSNZL then
discovered that FCL was in the process of building
two steel hangars
at the Koromiko Airpark development at Koromiko Airfield and those
buildings were based on Fair Dinkum
Sheds kitsets. The plan submitted for
their construction had both Findlater Construction Limited’s name on it
and Fair Dinkum
Sheds’ logo beside it. SSNZL said that proposals for the
construction of those hangars were first undertaken by FCL using
the SSNZL
system and engineers in 2014, and FCL was still communicating with
representatives of the Airpark developers in
early October 2015. FCL was
therefore in breach of the obligation not to solicit SSNZL
customers.
[28] Mr Findlater confirms that FCL has entered into a dealership with Fair Dinkum Sheds for the Marlborough region. He also confirms that “Fair Dinkum was a competitor to both Kiwispan Limited and SSNZL during the time FCL was an SSNZL licensee”. He says “the dealership was entered into after
the expiration of the SSNZL merchant agreement. The dealership provides
access to Fair Dinkum’s design software, engineering
sign-off, and
componentry for shed construction and kitsets”. He says that “save
for the Marlborough Honey project
... no plan for any of the contracts
that the company has entered into since the expiration of the merchant
agreement
carries the SSNZL branding”.
[29] In terms of the Marlborough Honey Gold Project, he explains
that in May 2015, while FCL was an SSNZL licensee,
it applied for
consent for the Marlborough Gold Honey extension. The extension was designed
using SSNZL’s design software
and FCL paid SSNZL’s nominated
engineer for that design sign off. There was, however, delay in obtaining a
resource consent
for land use, and it was not obtained until 29 January 2016.
It was at that point that FCL resubmitted the original building consent
document
and the Council then approved the building consent based on plans that carried
the SSNZL logo. As a consequence, the situation
represented a “one
off” which FCL says can be resolved by a negotiated payment.
[30] In respect of the hangars at Koromiko Airpark, SSNZL’s concern
appeared to be that FCL, working with Fair Dinkum Sheds,
had approached an
existing client of SSNZL and diverted that business away from them. The second
concern was, of course, that by
working with a competitor, Fair Dinkum Sheds,
FCL was in breach of the restraint contained in cl 32.2.1 of the
agreement.
[31] FCL accepts that in 2010, some plans for hangars at the Airpark had
been developed by an entirely unrelated company. Those
plans were sent out to
interested bidders and FCL, as an SSNZL licensee, prepared an initial costing
using the SSNZL design software.
However, nothing further occurred at that
stage as the plans were “too elaborate and expensive”. Mr
Findlater says
that in 2014 there was another invitation to consider submitting
an initial design and price and, again, FCL as licensee prepared
an initial
costing using SSNZL’s design software, but nothing further occurred as
that proposal did not proceed.
[32] Mr Findlater explains that the current project to build two hangars at the Koromiko Airpark came about through his business relationship with Mr Andrew Crawford. He says FCL has entered into contracts to construct two
individual hangars at the airfield with two purchasers. Those contracts were
entered into in November 2015. The design plans do
not utilise any part of
SSNZL’s intellectual property. The engineering work provided in support
of the application was undertaken
by Fair Dinkum Sheds’ nominated
engineers, and Fair Dinkum software has been used to design the
hangar.
[33] Mr McCrostie, however, says that Mr Crawford, who is responsible for
the Airpark development, was introduced to Mr Findlater
and FCL through
SSNZL’s connections, and, as late as early October 2015, SSNZL’s
engineers were being contacted regarding
the Koromiko Air Park. FCL is
therefore said to be in breach of cl 32.2.1(c) which prevents FCL from
soliciting away customers of
the business or of SSNZL.
[34] In any event, the fact FCL has agreed to be a dealer for Fair Dinkum
Sheds is itself said to be a breach of cl 32.2.1(a)
and SSNZL is
entitled to an interim injunction to enforce that obligation.
Should the application for an interim injunction be
stayed?
[35] The first argument raised in opposition to the application relies on
cl 41 of the agreement. That clause provides for a
dispute resolution process
and cl 41.2 states that “subject to clause 41.11, unless a party has
complied with [the dispute
resolution procedure] that party may not commence
court proceedings or arbitration relating to any dispute with any other party to
this Agreement”.
[36] Clause 41.11 provides:
Nothing contained in these provisions shall prevent a party from seeking
injunctive relief from an appropriate Court, where failure
to obtain such relief
would cause irreparable damage to the party concerned or the System.
[37] Mr Sisson submits that SSNZL has not attempted to resolve the dispute using the procedure set out in cl 41, and has failed to establish that it or the System will suffer irreparable damage if an injunction is refused. Consequently, the application should be refused and the proceeding stayed.
[38] In promoting this Mr Sisson relies on r 15.1 of the High Court Rules and the Court’s inherent jurisdiction to stay a proceeding that is an abuse of process.6 He maintains that SSNZL has produced no admissible evidence to show that if an interim injunction was refused, either it or the SSNZL system would suffer irreparable damage between the date of hearing and the end of the restraint period. All that Mr McCrostie says in his affidavit evidence is that the alleged breaches of
the restraint “have resulted in our company being materially
affected”.
[39] He also submits that there has been no attempt to show why damages
would be hard to quantify, or why an award of damages
would be insufficient to
redress any claimed damage or potential damage. He is particularly critical of
the reliance on evidence
given by Mr McCrostie that two potential
licensees have expressed reluctance to enter into an agreement with SSNZL for
the
Marlborough area because of their concern that FCL is operating in breach of
the restraint of trade provisions, and so any new licensee
“will not have
a 12 month period to establish their business without the defendant operating a
business ‘similar or competitive or in conflict with the new
business’, saying this is inadmissible hearsay evidence.
[40] I do not consider that the application for injunctive relief is an
abuse of process. The logical interpretation of cl 41.11
is that a claim of
irreparable harm is synonymous with a claim that a consequence will be
suffered which is not remediable
in damages. That is, of course, a relevant
(and at times determinative) factor in deciding whether to grant an interim
injunction.
[41] As long as the plaintiff’s application for an interim
injunction is made on the basis that harm will be suffered that
is not
remediable in damages, I do not consider there has been a breach of cl 41.11,
such as would warrant a stay. Whether that
claim can be sustained, having
regard to the evidence provided, can then be considered in weighing where the
balance of convenience
lies.
[42] I therefore go on to consider whether the grounds for injunctive
relief have been established.
6 Braid Motors Ltd v Scott (2001) 15 PRNZ 508 (HC) at [18] to [45].
Is there a serious issue to be tried?
[43] As Mr Churchman says for the plaintiff, there is no dispute about
the identity of the parties to the contract, the terms
of the contract, and the
fact that it contained a restraint of trade obligation. There was also no
dispute that the first defendant
has entered into an arrangement of some form
with a competitor of the plaintiff, as Mr Findlater acknowledges that
“Fair
Dinkum was a competitor to both Kiwispan Limited and
SSNZL during the time FCL was a SSNZL licensee”.
[44] In advancing the position that SSNZL has not established that there
is a serious issue to be tried, the defendants focused
on two
matters:
(a) FCL has complied with all of the obligations imposed on it by cl
29, which is, among other things, to relinquish all the
intellectual property of
SSNZL and not use it; and
(b) the restraint clause relied on is wider than is reasonably necessary
to
protect the plaintiff’s proprietary interest.
[45] Thus, while FCL accepts that the plaintiff has a proprietary
interest in its intellectual property, including the SSNZL
System and the
Manual, it does not accept that it is reasonably necessary, in order to
protect that interest, to exclude FCL
from the shed building market, whether in
any area, if it can compete in that market without exploiting SSNZL’s
intellectual
property.
[46] Both parties accept that restraint of trade covenants are prima
facie void and therefore unenforceable, but that where a party seeking to
enforce a provision establishes that the restriction is reasonable,
it may be
enforced.7
[47] SSNZL submits that it is the goodwill in the business and the plaintiff ’s brand that is entitled to be protected by an injunction. Clause 32.2 of the contract refers to “the protection of SSNZL in respect of the goodwill of the System and the Group Business”. To support this, Mr McCrostie gives evidence of SSNZL’s
investment in national advertising of its brand and in its website
which directs
7 Brown v Brown [1980] 1 NZLR 484 (CA).
customers to local licensees, such as FCL. As SSNZL has a considerable investment in franchising its systems and intellectual property, these are matters which are capable of supporting a restraint of trade clause. This has been recognised in decisions such as Mike Pero (NZ) v Exact Solutions Ltd, where Miller J said: “I accept that a franchisor such as Mike Pero that has established a successful business
model is entitled to protect its investment by means of restraints of
trade”.8
[48] SSNZL says that as long as it can point to a legitimate proprietary
interest that it is attempting to protect, rather than
merely seeking to
restrain competition, then this can support an enforceable restraint of
trade.9 In this case it is both the goodwill in the SSNZL brand
and the customer base FCL has established through its relationship with
SSNZL
which is sought to be protected. By upholding the restraint, the Court
will be protecting SSNZL from unfair competition
from a competitor, Fair Dinkum
Sheds.
[49] SSNZL also says that, as the restraint was entered into at the time
the contract was entered into, there is a clear consideration
for the
contract.10 Indeed cl 2.2 provides that:
... each of the restrictions contained in this agreement is
reasonably necessary for the protection of SSNZL and other
Specialised
Structures Merchants, the Group Business (when established), the System and the
Intellectual Property and the restrictions
do not unreasonably interfere with
the freedom of action of the Merchant who enters into this Agreement with the
benefit of legal
advice in full knowledge of all of its provisions; and the
Merchant acknowledges that all of the provisions are fair and reasonable
and
that in entering this Agreement the Merchant accepts no more onerous
restrictions than those to which the Merchant would
otherwise expect to have
been subjected to when entering into this agreement.
[50] While of course, that is not the end of the matter, and the Court can make its own assessment of reasonableness, this acknowledgement is a factor which should
be taken into account when assessing the reasonableness of the
restraint.
8 Mike Pero (NZ) v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [22].
9 Airgas Compressor Specialists Ltd v Bryant [1998] NZEmpC 45; [1998] 2 ERNZ 42 (EmpC).
10 Fuel Espresso Ltd v Hsieh [2007] NZCA 58, [2007] 2 NZLR 651.
[51] SSNZL also submits that a 12 month non-compete restraint is well
within the range of restraints that the Court have found
reasonable and, indeed,
no issue was taken with this.
[52] While the restraint was expressed to cover all of New Zealand, SSNZL
only seeks to enforce it in the Marlborough district
where it is trying to
appoint a new licensee. I accept that with this concession, there is nothing
unreasonable in the geographic
scope of the restraint.
[53] The defendants submit that, in part, SSNZL appears to be claiming an
interest for the skills and customer base FCL built
up during the years 2005 to
2011 when it was a licensee of Kiwispan Limited, which was a separate company,
and which is not a party
to the proceeding. At the time FCL entered into the
agreement with SSNZL it had an established client base and considerable
experience
in all aspects of residential and commercial building and property
development.
[54] While SSNZL says it is seeking to protect its goodwill, FCL argues
there was no goodwill in the sense of a client
base associated with
the System and Group Business. That goodwill belonged to FCL. However, even
if that submission was wrong,
then they say SSNZL has failed to identify the
clients it says are owned by SSNZL.
[55] FCL says that as the relationship with Fair Dinkum Sheds does not
use SSNZL’s system and other intellectual property.
It therefore says
that the injunction should be declined because there is no arguable case that a
proprietary interest of SSNZL
is damaged by the relationship.
[56] In summary, the defendants argue that as FCL no longer has access to the plaintiff’s System and Manual since associating itself with Fair Dinkum Sheds, and has never solicited the plaintiff’s clients, relying on its own client base, there is no arguable case that a protectable proprietary interest of SSNZL needs protection through an interim injunction.
Discussion
[57] This case is a little different from other franchise cases in that,
while FCL had a license to use SSNZL’s systems,
it did so under its own
name. Although the SSNZL logo appeared on building plans, and customers were
referred to FCL by SSNZL,
including through its website, FCL also undertook
construction work other than using the SSNZL system. That said, there is clear
evidence that FCL has built up a business using, first, the Kiwispan system and
then the SSNZL System, and it has been advantageous
to FCL to have access to the
SSNZL System. It has allowed FCL to expand and maintain a workforce and to
demonstrate competence in
a wider range of commercial buildings than would have
been the case without access to the System.
[58] Even though FCL’s client base cannot be said to be derived
solely from its association with SSNZL, it is at least arguable
that it has
gained clients through that association which has allowed FCL to build buildings
it otherwise could not have. It has
been a useful adjunct to FCL’s
business to have access to SSNZL’s steel building design
system.
[59] The utility of such a system is reinforced by the fact that FCL
has, on terminating its relationship with SSNZL, immediately
sought a similar
relationship with a competing business.
[60] I am therefore satisfied that there is a serious question to be
tried in respect of SSNZL having a proprietary interest to
be protected under cl
32.2.1. If licensees who have built up a business reputation and skill set,
relying at least in part on using
the SSNZL System, can then immediately use
that reputation and skill set to a competitor’s benefit, that is likely to
give
the competitor an unfair advantage, and erode SSNZL’s
goodwill.
[61] In short, I am satisfied that there is a serious question to be tried that there has been a breach of an enforceable restraint of trade, and I therefore turn to the balance of convenience.
Where does the balance of convenience lie?
[62] In determining the balance of convenience, the parties have
identified the following factors as being relevant in this case:
(a) the relative strength of each party’s case; (b) the adequacy of damages for both parties; (c) the effect on innocent third parties; and
(d) the conduct of the litigants.
[63] Mr Churchman submits that the relative strength of SSNZL’s
case is a strong factor supporting the grant of an interim
injunction in this
case, citing AMP Services (NZ) Ltd v Visser,11 where Katz J
recorded: “in my view the relative strength of the parties’ cases
is the decisive factor in this application.
As a result the balance of
convenience favours the granting of the injunction”.
[64] Mr Churchman submits that here, FCL has admitted it has commenced a
business relationship with a direct competitor of the
plaintiff, in exactly the
same kind of business, and that this is strong evidence of a breach.
[65] I accept that there is clear evidence of a breach of the restraint
in cl 32.2.1(a), and the only question is whether that
clause should be
enforced. In that regard I have found there is a serious question to be tried.
This factor favours the injunction
being granted.
[66] The next factor which Mr Churchman submits weighs in favour of the injunction being granted is that damages will not be an adequate remedy for the loss suffered by SSNZL. Mr Sisson, however, was critical of the plaintiff’s assertion that damages would not be an adequate remedy. Mr Findlater’s affidavit evidence estimated damages would be less than $100,000. As FCL was in a position to pay
those damages, he submitted that “the plaintiff has failed to
provide any evidence
11 AMP Services (NZ) Ltd v Visser [2016] NZHC 134.
regarding the quantification of damages ... [nor] submitted any other reason
why damages is not an appropriate remedy”.
[67] However, I have found that it is arguable that a restraint of one
year against working for a competing business is
reasonably required to
protect SSNZL’s goodwill and to protect it from unfair competition. The
agreement expressly records
that the restraints in cl 32.2 are “for the
protection of SSNZL in respect of the goodwill of the System and the Group
Business”.
While it may be possible to calculate damages, as Mr
Findlater does, based on profits FCL makes while working with the competing
business during the period of the restraint, that does not address the harm
which the restraint was expressly intended to prevent,
which is harm to the
goodwill of the SSNZL business.
[68] If SSNZL is unable to protect its brand from such unfair
competition, and demonstrate to its other New Zealand licensees
and potential
licensees that it can, its brand could be adversely affected in ways which
cannot obviously be quantified. While Mr
Sisson was critical of the hearsay
evidence Mr McCrostie introduced as to the concerns expressed by prospective
licensees, I do not
rely on the truth of this evidence, but on Mr
McCrostie’s own concerns in this regard and on the express terms of the
agreement.
I am satisfied that damages would not necessarily be an adequate
remedy in the circumstances.
[69] The next consideration which is relevant to the grant of an interim injunction is the effect on innocent third parties. In terms of the three building projects which are underway, which are alleged to be in breach of the restraint in cl 32, Mr Churchman properly accepted that, as the Marlborough Gold Honey project was almost finished, it would be futile to include that in the terms of any injunction. I also indicated my view that the two Koromiko Airpark projects, which have been undertaken through contracts with two individual land owners, should not be included in any injunction. To do so would adversely affect those third parties, where there was no reason to believe that they were complicit in any way in the alleged breach of the restraint. For those reasons, the balance of convenience favours excluding those three projects from the terms of any injunction.
[70] In addition, just as this decision was to be released, counsel for the defendants filed a further memorandum and draft affidavit explaining that there was a further building project undertaken using a Fair Dinkum Sheds’ design. This was an extension to an existing warehouse located at Liverpool Street in Riverlands, Marlborough. A construction contract was signed on 29 April 2016 between FCL and the trustee owners of the building and it is due for completion by
19 August 2016 in order to allow a third party lessee to occupy the building
under a lease.
[71] Counsel explains that this contract was not put before the Court
previously because it understood the plaintiff’s
case was that FCL
was exploiting SSNZL software in relation to the other identified projects.
The defendants now understand
that the real thrust of the plaintiff’s case
is its concern about the business association with Fair Dinkum Sheds, whether
it
involves use of SSNZL’s intellectual property or not.
[72] The defendants submit that, like the Koromiko hangar projects, the
trustee owners of the Liverpool Street warehouse are innocent
third parties who
entered into a contract with FCL before FCL became aware of the
plaintiff’s intention to seek injunctive
relief. There is also the added
complication that a further party would be prejudiced if the building project
was subject to the
injunction, being the lessee who is due to take possession
under the lease on 19 August 2016.
[73] In the circumstances, the defendants seek leave to file a further
affidavit of Mr Findlater, to be sworn in the form of the
accompanying draft
affidavit and request that, if an order is granted restraining the defendants,
the Liverpool Street warehouse
extension is also exempted from the
order.
[74] Given the urgency with which the Court is endeavouring to dispose of this application, I grant leave to file a further affidavit of Ronald Stevely Findlater, in the form of the draft attached to the memorandum of counsel for the first and second defendant dated 20 June 2016. Based on the information in the memorandum, I intend treating the Liverpool Street project in the same way as the other contracts which are underway. However, I will reserve leave to the plaintiff to file a response
and seek a variation of the order I make if, in its opinion, there are
circumstances which make it inappropriate to treat the Liverpool
Street project
in the same way as the other buildings which were identified at the
hearing.
[75] That leaves the position of the defendants’ relationship with
Fair Dinkum
Sheds.
[76] Curiously, the defendants have not disclosed any detail of this
relationship other than to say that FCL has entered into
a dealership with Fair
Dinkum Sheds for the Marlborough region, and that the dealership provides access
to Fair Dinkum’s design
software, engineering sign-off, and componentry
for shared construction and kit sets. Mr Frank Best, the New Zealand Manager
of
Fair Dinkum Sheds, has provided affidavit evidence. However, it is confined
to confirming that “no part of the SSNZL design
for the Koromiko hangar
proposals were used in creating the NCE design [for the two Koromiko Airpark
hangars]”. He sheds no
light on the scope of the relationship with FCL,
when it started, or what consequence there would be if an injunction was granted
preventing FCL from using Fair Dinkum Shed systems for the balance of the
restraint period. It also seems that Fair Dinkum Sheds
has not invested in
promoting FCL as a dealer as Mr McCrostie says that FCL is not shown as a dealer
on Fair Dinkum’s website.
I therefore do not consider there will be an
adverse impact on Fair Dinkum Sheds, if the restraint was enforced for the
balance
of the restraint period sufficient to affect where the balance of
convenience lies.
[77] The more important issue is whether there will be an impact on FCL’s employees. Mr Findlater says “of the 30 staff employed by FCL, approximately
20 to 30 per cent rely on the steel framing part of the company’s project for their employment. If FCL had to stop building I would have to consider whether to make six to nine staff redundant or retain them as employees without work for them to do for the next three months”. However, it is clear from Mr Findlater’s affidavit that FCL has a wide range of business activities and, as even Mr Findlater acknowledges, building steel portal frame buildings is only one component of their business. Furthermore, I have accepted that, because of the impact on third parties, any restraint imposed should not extend to the Marlborough Gold Honey building
extension, the Koromiko Airpark hangars, or the recently disclosed Riverlands
project. Thus, there will be some continuing work for
staff of FCL.
[78] Furthermore, as Mr Churchman explained, there is no objection to FCL
undertaking the construction of steel-framed buildings
which it has designed
from scratch. The plaintiff only seeks to restrain FCL from using a
competitor’s system, and giving
that competitor an unfair
advantage.
[79] In any event, the restraint only has a further three and a half
months to run. There is no evidence that employees would
be made redundant
during this time. FCL would simply have to comply with the terms of the
restraint it has contractually agreed to,
for the balance of the restraint
period. Accordingly, I do not think that considerations of adverse effects on
third parties alters
where the balance of convenience lies.
[80] Finally, as an injunction is an equitable remedy, the conduct of the
parties is relevant. In this regard SSNZL suggested
there was an “element
of subterfuge on the part of the defendants in concealing the fact that they
had, during the 12 month
restraint period, taken up the Fair Dinkum franchise
for Marlborough”. It also says there is no disentitling delay on its
part
in seeking an injunction. Any delay was a consequence of “active
concealment of the breach in relation to [FCL’s]
entry into Fair Dinkum
franchise”. As soon as SSNZL became aware of the existence of the
breaches, it raised that with the
defendants, endeavoured to negotiate a
resolution, and when that was unsuccessful, issued proceedings
promptly.
[81] I have insufficient evidence before me to confidently draw an adverse inference about the defendants’ motivations in becoming a dealer for Fair Dinkum Sheds, and decline to do so. I accept that the timeframe from when SSNZL first became aware of the breaches and raised those with the defendants, until it issued proceedings, is reasonable, and delay does not influence me in determining where the balance of convenience lies.
[82] Taking into account all the factors discussed above, I am satisfied
that the balance of convenience favours SSNZL, and the
grant of an interim
injunction it seeks for the balance of the restraint period.
Where does the overall justice of the matter lie?
[83] While my analysis of the considerations to this point favour the
grant of an interim injunction, I must still stand back
and evaluate the overall
justice of the application.
[84] I am satisfied that, when I do so, there is nothing which would
alter my initial conclusions. I accept, as the plaintiff
says, that there is
nothing clearly unreasonable about the restraint, nor that would indicate
an imbalance of bargaining
power between the parties. Instead, what has
been relied on is a commercial contract between two knowledgeable commercial
entities,
which conferred benefits on both parties. It was advantageous to FCL
to have access to a system which allowed it to build steel
portal buildings. It
initially established an ability to do this when working with Kiwispan, and then
with its successor, SSNZL.
Having gained a reputation in the market for
undertaking such work, it then chose to terminate the license with SSNZL and
immediately
took up with a company that provided a competing system for
construction of such buildings. This confirms the value of such systems
to
FCL’s business.
[85] Accordingly, I am satisfied that the contract should be
enforced in the interim, with the question of whether
there have been breaches
and, if so, what damages should follow, to be left to the hearing of the
substantive claim.
When does the restraint period end?
[86] One complicating factor arising was that it was unclear when the
agreement between SSNZL and FCL was terminated, and accordingly
when the 12
month restraint period commenced.
[87] Mr Sisson argued that the term of the contract was five years
commencing on
13 September 2010, and there was a failure to exercise the right of renewal under
cl 5 by giving a written request for the renewal to SSNZL not less than three months before the expiry date, where the agreement stated that time was strictly of the essence. If he was right, that would mean the contract terminated at the end of
12 September 2015.
[88] However, FCL made the monthly payment for the September/October 2015 period and continued to receive services under the contract for that period. I accept that in those circumstances, the parties treated the licence as running on for a further month. While formal notice of termination was not communicated until
21 October 2015, I consider, for the purpose of the interim injunction only,
that the licence should be treated as terminating on
12 October
2015.
Terms of the interim injunction
[89] Having reached the conclusion that it is appropriate to grant an
interim injunction, I make the following orders:
(a) the defendants are to forthwith cease operating as agent, independent contractor, or in any other business arrangement with Fair Dinkum Sheds franchise or any other entity similar to, or competitive with, or in conflict with the plaintiff within the Marlborough area until
12 October 2016;
(b) the above order excludes any work by the defendants in relation to:
(i) the extension to the building owned by Marlborough Gold
Honey Limited at 23 Bristol Street, Blenheim;
(ii) the construction of two hangars at Koromiko Airpark for
Messrs Burton and Anderson;
(iii) the construction of the warehouse extension at
4 Liverpool Street, Riverlands, Marlborough;
(c) Leave is reserved to the plaintiff to seek a variation or
cancellation of order b(iii) above if it considers that the Liverpool
Street
project does not fall into the same category as the other building projects
where I have held that the effects on third parties
weigh against the injunction
sought.
[90] Costs are reserved. This is a case where I see no reason to depart
from an award of 2B costs. However, if costs cannot
be agreed, memoranda may be
filed as follows:
(a) by the plaintiff within 15 working days of the date of this
decision;
(b) by the defendants within 20 working days of the date of this decision.
[91] Costs will be determined on the papers.
Solicitors:
Checketts McKay Law Limited, Alexandra
Lundons Law, Blenheim
NZLII:
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URL: http://www.nzlii.org/nz/cases/NZHC/2016/1340.html