DORN INVESTMENTS LTD v HOOVER [2016] NZHC 1325

DORN INVESTMENTS LTD v HOOVER [2016] NZHC 1325 [17 June 2016]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYCIV-2016-419-000015[2016] NZHC 1325BETWEEN DORN INVESTMENTS LIMITEDPlaintiffAND PAUL HOOVERDefendantHearing: 9 June 2016Counsel: DJ Chisholm QC for PlaintiffDM O'Neill and S Kennedy for DefendantJudgment: 17 June 2016JUDGMENT OF ASHER JThis judgment was delivered by me on Friday, 17 June 2016 at 4.30 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Claymore Partners Ltd, Auckland.DJ Chisholm QC, Auckland.Cooney Law, Cambridge.DM O'Neill, Hamilton.Introduction[1] The plaintiff, Dorn Investments Ltd, applies for an interim injunctionrestraining the defendant, Paul Hoover, from breaching a restraint of trade clause.[2] Dorn Investments Ltd (Dorn Investments) is a franchisee of Green Acres Franchise Group Ltd (Green Acres) and has an exclusive licence to operate theGreen Acres Lawnmowing and Garden Care Services in a mapped territory whichapproximately corresponds to the Waikato region. Dorn Investments has sub-franchised approximately 14 independent sub-franchises in that Waikato territory,providing lawn and gardening services to approximately 1,500 customers. The sub-franchisees are called contractors.[3] The defendant Paul Hoover is approximately 60 years old and has abackground as a rigger and truck driver. He has some medical issues, and lives inTe Awamutu, in a home owned by a trust he settled, in which there is approximatelyan equity of $60,000. His other assets are chattels and vehicles used for his businessworth about $35,000.[4] On or about 23 January 2013, he entered into a sub-franchise agreement withDorn Investments. The agreement provided at cl 9.6 that Mr Hoover would not doanything that would prejudicially affect the goodwill of the business. At cl 16.1 itcontained the following restraint of trade clause:Non Competition In consideration for the grant of the franchise (and anyprior franchises relating to the Contractor's Business) to the Contractor bythe Franchisee at the Contractor's and Guarantor's request, and inrecognition of the resultant significant financial opportunities for theContractor and Guarantor, the Contractor and the Guarantor will not at anytime during the Term or for a period of two years following the expiration ortermination of this agreement be interested in any business the same as, orsimilar to or in competition with the Business within New Zealand. Withoutlimitation, the Contractor or a Guarantor will be in breach of this clause ifthey either individually or in conjunction with any person, as principle,agent, shareholder or otherwise, advise, lend money to, guarantee the debtsor obligations of, or permit the names of the Contractor or the Guarantor (orany part of those names) to be used or employed by or associated with, anyperson that is engaged in or concerned with or interested in any business thesame as, or similar to or in competition with the Business within NewZealand. [5] Mr Hoover paid $36,000 plus GST as the sub-franchisor's fee when hesigned the franchise agreement and spent approximately $38,000 on equipment. Aturnover guarantee was provided of $1,800 per week inclusive of GST, being GSTexclusive $1,565 per week and $81,391 net per annum. At the time of the creation ofthe sub-franchise, Dorn Investments provided Mr Hoover with 48 customers that hadpreviously been serviced by other franchisees. He has since maintainedapproximately that number of customers. Until late last year he paid a royalty andbrand levy of $270 per week.[6] It is clear, however, that the relationship that developed between DornInvestments and Mr Hoover was not good. An email exchange in late 2014 revealsthat Mr Hoover did not think he had received a good return for his investment in thefranchise. He formed the perception that the previous sub-franchisee was breachinghis restraint of trade by carrying out lawnmowing in his part of the Waikato territory.Mr Hoover felt that he did not receive promised training. This is very much disputedby Dorn Investments, which says that Mr Hoover had poor internet skills and wasnot particularly willing to accept help.[7] In the course of his work for the franchise Mr Hoover had been performing lawnmowing and gardening services for an entity called Spotless, that looked after the lawns and gardens of courts in the Waikato region. In September 2015 Dorn Investments became dissatisfied with the way in which Mr Hoover was carrying out the Spotless work, and took it off him and gave it to another franchisee.[8] It seems that following this Mr Hoover made a decision to give up on thefranchise and to commence trading on his own account. He did so by rebranding asthe Lawn Ranger, advising his approximately 50 clients of the change. He states thathe destroyed the Green Acres businesscards and signage, he never had a manual, andclaims that he has not been in any way utilising the Green Acres or Dorn Investmentsgoodwill.[9] There was a meeting in early November 2015 between representatives ofDorn Investments and Mr Hoover to see if there was a way forward. It wasunsuccessful. Dorn Investments then became aware that Mr Hoover was tradingunder a new name, and on 18 November 2015 notified him that he was in breach of the sub-franchise agreement.[10] On 14 December 2015, Dorn Investments terminated the agreement andsought an undertaking that Mr Hoover would not provide lawn and gardeningservices in competition with the Green Acre businesses in New Zealand.[11] Mr Hoover provided no such confirmation, and on 23 December 2015 Dorn Investments issued these proceedings seeking an injunction and damages, as well asan interim injunction. The proceedings were not served until late January 2016.There have been delays since then, but these cannot be attributed to either of theparties.[12] In accordance with the approach to interim injunctions established in New Zealand I first consider whether there is a serious question to be tried. I will then proceed to consider the balance of convenience and overall justice.1Serious question to be triedIs there a prima facie breach of the restraint of trade clause?[13] Mr O'Neill for Mr Hoover does not contest that there is a serious question tobe tried of breach. Clause 16.1 of the sub-franchise agreement prohibits an interestin any business the same as or similar to that of the franchisee. There is no doubtthat in carrying out a lawnmowing business after the termination of the agreementMr Hoover is in breach of the prohibition in this clause.[14] In my view, there is a strong argument that the clause is on its faceunreasonable in its geographic reach. The time of two years is not necessarilyunreasonable, but the same cannot be said of the area (within New Zealand). Alawnmowing business carried out by one person can only accumulate goodwill in thearea serviced by that person. Mr Hoover could do no possible damage to GreenAcres if he commenced trading under his own name in a town, for instance, in the1 American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504 (HL), and Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).South Island, providing he did not use any intellectual property of the franchisor orfranchisee.[15] However, the fact that the clause is on its face unreasonable does not meanthat the Court will not enforce it on an amended basis.2 There certainly would be acase for a reasonable restraint of trade clause relating to lawnmowing and gardeningin the Waikato territory. Mr Hoover accepts that he carries out work throughout thatterritory.[16] Thus, on the face of this case there is a serious question to be tried thatMr Hoover is breaching the restraint of trade clause.[17] If there was a clear case of breach of the restraint of trade clause, then noteven a powerful balance of convenience argument in favour of Mr Hoover along thelines that he would lose his business if an interim injunction was granted, would stopan interim injunction being granted. A franchisor is entitled to impose reasonablerestraints of trade on franchisees and expect that they will be complied with. AsWilliam Young J stated in Washworld Corporation (Leases) Ltd v Reid:3In terms of the public interest, I see no particular general difficulty with a restraint, at least if it is properly limited. In my view, a franchisor who has gone to the difficulty and expense of developing a successful business model is entitled to protect its investment in that business model by prohibiting franchisees from exploiting it for their own advantage and in competition with the franchisor and other franchisees.[18] It was stated by the Court of Appeal in Skids Programme Management v McNeill, in relation to arguments that franchises do not involving a high degree of expertise and there was therefore no goodwill to protect:4It is not at all unusual for franchise systems to operate in an area which does not involve a high degree of expertise. At an interim injunction level restraint of trade clauses have been held to be enforceable in relation to video stores, car washing, and bookshops, as well as mortgage brokers and the supply and application of anti-slip products. Some of these, in particular the video and car washing businesses, cannot be said to have a high barrier to entry in terms of expertise and knowhow. It is often the application of the knowledge and materials of the franchisor that enables a franchisee to attract2 Illegal Contracts Act 1970, s 8.3 Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC) at 385.4 Skids Programme Management v McNeill [2012] NZCA 314, [2013] 1 NZLR 1 at [47].custom and achieve good levels of profitability in an area where there is a great degree of potential competition because of the low threshold to entry. By making available to franchisees methods to groom the business offered to display particular attractive features and characteristics, the franchisor enables the franchisee to achieve sales that would not otherwise be possible. In particular, in an area where no particular trade or professional skills are offered, the franchise systems, by instantly conferring these benefits enable a franchisee to gain an advantage over competitors who are starting or have started from scratch.(footnotes omitted)[19] Thus, I have no doubt that Green Acres and Dorn Investments was entitled to protect its goodwill by a reasonable restraint of trade clause, and that on its face therestraint of trade clause is enforceable by way of an interim injunction. If, asMr Chisholm QC argued, Mr Hoover has no credible defence, then DornInvestments should be entitled to interim relief (assuming a satisfactory undertakingas to damages).[20] This was the conclusion of Lang J, who in Green Acres Franchise Group Ltd v Reube, a different situation involving Green Acres, held that it was arguable that the restraint of trade clause was enforceable against a franchisee.5 However,ultimately in that case no interim injunction was granted. One of the reasons wasthat it was argued in that case that the consequences of a restraint of trade clausecould not apply because of the way in which that sub-franchise agreement had cometo an end. The balance of convenience in that case was also against the granting ofan injunction.[21] The Reube decision and other cases are not of great help as precedents as anassessment of the strength of the plaintiff's case, and the balance of convenience willalways come down to a particular assessment of the relevant matters of fact and law.[22] Here, a number of the reasons Mr Hoover puts forward as justifying histrading under his own name in the territory can be disposed of quickly. Hisargument that he did not receive adequate teaching and documentation is quiteunsupported by any documentation, and is not detailed. It is not a basis for arguingthat the restraint does not apply.5 Green Acres Franchise Group Ltd v Reube [2014] NZHC 402 at [33].[23] Mr Hoover claims that he was promised a profit, as distinct from a turnover,of $1,800 per week being the "average gross weekly income" referred to inpara 10.4(a) of the turnover guarantee. Certainly he did not achieve that level ofprofitability. He did, however, achieve something approaching that level of turnover.Mr O'Neill for Mr Hoover sought to argue that "an average gross weekly income"referred to profit and not turnover. I do not regard this as a sound argument. Incomein its dictionary definition is frequently equated to turnover, not profit.6 The"turnover guarantee" is stated in the sub-franchise agreement to be for $1,800 perweek "inclusive of GST". The use of the phrase later in the agreement of "turnoverguarantee" makes the meaning of "income" unambiguous. What is being guaranteedis the gross turnover, and not the gross profit.[24] Other complaints made by Mr Hoover are that he does not trust Mr Dorn for various reasons, and that the royalties he has had to pay are excessive. These are very general and lack any contractual or factual basis. His claim that his predecessor was allowed to continue competing with him, but this was answered by apparentlycredible evidence from the contractor involved.[25] However, his complaints in relation to the Spotless contracts on their facehave more substance. I must consider whether that could be an effective defence tothe claim.The Spotless work[26] In 2014 Green Acres obtained a contract to mow lawns and tend the gardensof courthouses. In the course of 2014 and the first half of 2015, Mr Hoover tookover the courthouse work for Morrinsville, Te Kuiti, Te Awamutu and Tokoroa. Thiswork was important to Mr Hoover. By August 2015 the Spotless contract was worth$2,500 per month. It appears to have constituted approximately a third of his totalturnover.[27] He has annexed two of the Spotless work orders. He interprets the orders asrequiring the lawns of the courthouses to be mown fortnightly or less as required,6 See Oxford English Dictionary (2nd edition, online ed).and for general maintenance of gardens as required. In August 2015, he did not mow the courthouse lawns because in that cold month there was no grass to mow. He did not submit an invoice for that month. Mr Dorn telephoned him and on being told that he had not mown the lawns through August, Mr Dorn, accordingly to Mr Hoover, became angry. Mr Dorn telephoned Mr Hoover later in the month to tell him that a senior executive at Green Acres had determined that he was not to be given any more Spotless work and the work he had was taken off him and given to somebody else. This appears to have precipitated Mr Hoover's decision to stopworking as a franchisee, to get rid of all the trappings of the franchise, and to tradethereafter on his own as the Lawn Ranger.[28] Mr Dorn in his affidavit asserts that while it might be true that during somewinter months lawnmowing is not necessary, Mr Hoover should still have performedthe maintenance services every fortnight. Spotless expected him to do so. Mr Dornreferred to various Green Acre emails through September 2015 which showed thatthe administration manager for Green Acres, Angelina Newman, had recorded thatSpotless was not "overly happy with the sites being unattended". She had obviouslyformed the view that Mr Hoover needed to be replaced.[29] Mr O'Neill submitted that none of these matters justified taking away theSpotless work, and that this severely damaged the value of the sub-franchise. He argued that procedurally the process of removing the work from Mr Hoover was carried out unfairly to him.[30] There is no express term in the franchise agreement requiring DornInvestments not to take any work away from a franchisee, or to follow a certainprocess before any such work is taken away. However, I accept that it is seriouslyarguable that there could be an implied term in the franchise agreement to that effect.It would be surprising if a franchisor or sub-franchisor such as Dorn Investments,controlling the allocation of significant work as it did, could take away one-third of acontractor's turnover without at least giving the franchisee the opportunity to rectifythe complaint that was the basis for the removal.[31] I have not had any detailed submissions on the law that might apply, and Iappreciate that there is a high threshold for the implication of terms, and thecomplications that go with assertions akin to there being an implied term of goodfaith. I also accept that there appears to have been some measure of dissatisfactionon the part of Spotless at Mr Hoover's performance more generally, and that it mightwell be shown that he had fallen short of what could be expected of a sub-franchiseeby a considerable margin. However, on the face of it Mr Hoover was given noopportunity to address this serious complaint, and it was specific to not doinggardening over a short mid-winter period. Given that he would be paid for hisattendances, it may have been easily remedied. He was not given that opportunity.[32] Mr Chisholm submitted that it had always been open to Mr Hoover, if he feltunfairly treated over his treatment in regard to the Spotless contract, to take such anissue to mediation. Instead he had just peremptorily abandoned the franchiseagreement, without notifying Dorn Investments. There is some force in thatsubmission. Equally, however, when the issue over the Spotless contract arose, DornInvestments did not attempt to mediate or give an opportunity to Mr Hoover toremedy the situation.[33] These arguments lack form at the present time because there has been nostatement of defence filed on behalf of Mr Hoover. However, it will be open toMr Hoover to file a statement of defence pleading a significant breach of an impliedterm by Dorn Investments. There may be a defence available to Mr Hoover thatDorn Investment repudiated the contract by his actions in relation to the Spotlesscontract. Indeed, it may be open to Mr Hoover to still cancel the contract and to seekleave under s 9 of the Contractual Remedies Act 1979, for release of his restraint oftrade obligations. This is not a straightforward area of law.7 If the franchiseagreement is cancelled, Dorn Investments may not be able to enforce the restraint oftrade clause.[34] I conclude that Mr Hoover may be able to put forward a defence to the claimto enforce the restraint of trade clause.7 See Pirtek (New Zealand) Ltd v Mega Fluid Solutions Ltd HC Hamilton CP5/03, 7 March 2003 at [14]; and Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [33]–[34].Balance of convenience[35] Little needs to be said about this. Clearly the results for Mr Hoover of granting an injunction will be severe and they will be unlikely to be able to be remedied in damages. He will have to stop his present business. His affidavit showshim to be a man of modest means, dependent on lawnmowing and gardening in theWaikato area for his income. He has health issues. If he has to close down now andwait for the two year period of the restraint to expire he is likely to lose the goodwillof at least the bulk of his customers. Thus, he faces losing his income, losing hisgoodwill, and will be left with plant and machinery that he will have no use for.[36] On the other hand if Dorn Investments has to wait for a fixture for some months, clearly it will survive any damage to its network and goodwill that arises in the meantime. It received Mr Hoover's initial upfront payment of $36,000 plus GST,and his weekly payments of $240 per week until late 2015.[37] There will be approximately 50 customers serviced by Mr Hoover that wouldotherwise be available to other Dorn Investments sub-franchisees. However, thereis no evidence that there is any particular person who has been designated to do thatwork, or that any specific person will be disadvantaged, save for Dorn Investmentsin that it may be deprived of franchise fees that it could obtain if it appointed anotherfranchisee in substitution for Mr Hoover. The sums that would be involved in thoselost fees would be modest, if they are anything like the sums Mr Hoover has paid.[38] I accept that Dorn Investments wishes to be seen by other franchisees asbeing proactive when franchisees breach the restraint of trade. However, it will beseen as having acted quickly in issuing these proceedings. It must be recognised thatDorn Investments was and still is able to pursue this matter to an early substantivefixture. Indeed a priority fixture could be sought. There is every chance that thecase could be heard this year. Mr Hoover even if he wins this round, faces theprospect that if he loses the case at the substantive hearing he will face a permanentinjunction, and a damages order as well. In all the circumstances it is unlikely thatany franchisee would see Dorn Investments as a soft touch where a restraint can beeasily avoided, just because it is not granted an interim injunction at this hearing.Overall justice[39] Ultimately, if at the final hearing Dorn Investments is successful, it willobtain a permanent injunction and an award of damages. The damages will not begreat for reasons that I have outlined, but should reimburse Dorn Investments. Itwill have made an example of Mr Hoover. It does not need relief now prior to trial.Indeed, even if it wins the final hearing a court may well conclude that Mr Hoover isdoing nothing to actively damage the Green Acres goodwill by his actions, given thathe is trading under his own name and not using any of the Green Acres franchisematerials. Mr Hoover's turnover is modest.[40] If on the other hand the interim injunction sought is ordered now, butMr Hoover ultimately wins, he will have had no employment in the lawnmowingand gardening area for some months, and will face the difficult task of trying to put afigure on the losses suffered of trying to restart a business after such a delay. Hisreputation in the Waikato with his former customers will be very damaged. Hewould have the difficult task of establishing the value of the lost business, andpossibly what the value of future lost business might be. Thus on the overall balanceof convenience, Mr Hoover has the strongest position.[41] However, this balance of convenience argument would not prevail ifMr Hoover had no arguable defence to the restraint of trade claim. If no sucharguable defence had been made out, I would have ordered an interim injunctionbecause a franchisor in such a situation should be entitled to immediate protection.In fact, all but one of the defences argued for Mr Hoover are so weak that they wouldnot have stopped an interim injunction being ordered.[42] However, the peremptory removal of one-third of Mr Hoover's custom inSeptember 2015 by Dorn Investments when it took the Spotless contract away fromhim was, in my view, an arguable repudiation. It could lead to a situation where therestraint of trade is not enforceable.[43] This is the factor that has tipped the balance on assessing the overall justiceagainst the granting of an interim injunction. Mr Hoover may have a defence, andshould be able to keep his business going until he has his day in court.Result[44] The application for an interim injunction is dismissed.[45] The plaintiff is to pay the defendant's costs and reasonable disbursements ona 2B basis...Asher J