MIKE PERO REAL ESTATE LIMITED v TAURANGA REALTY LIMITED [2015] NZHC 1162

MIKE PERO REAL ESTATE LIMITED v TAURANGA REALTY LIMITED [2015] NZHC 1162 [26 May2015]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2015-470-9[2015] NZHC 1162BETWEEN MIKE PERO REAL ESTATE LIMITEDPlaintiffAND TAURANGA REALTY LIMITEDFirst DefendantDARREN RICHMOND YOUNGSecond DefendantHearing: 26 May 2015 at 2:15pmAppearances: P J Woods and E E Gerring for Plaintiff (by audio-visual link)A J Bush for DefendantsJudgment: 26 May 2015ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELLSolicitors:Anthony Harper (P J Woods/E E Gerring) Christchurch, for PlaintiffBush Forbes (A J Bush) Tauranga, for Defendants[1] The plaintiff has filed an appearance under protest to jurisdiction in responseto the defendants' counterclaim. The defendants have applied to set aside theappearance. Underlying that procedural contest is an argument whether the plaintiffhas invoked the substantive jurisdiction of this court when it began this proceedingand has thereby given away its right to have differences between the parties heard inaccordance with the dispute resolution provisions of a franchise agreement.[2] The plaintiff, Mike Pero Real Estate Ltd, is based in Christchurch. It carrieson its real estate business by franchising. Tauranga Realty Ltd was established in2013. It became Mike Pero Real Estate Ltd's Tauranga franchisee under a franchiseagreement of 2 September 2013. Mr Young is director of Tauranga Realty Ltd. He isa party to the franchise agreement as covenantor of the obligations of Tauranga RealtyLtd.[3] The franchise agreement is a complex commercial agreement. In this decisionit is unnecessary to go through all of its provisions, but it is necessary to refer to some.[4] Under the agreement the franchisee was given a territory within which it couldoperate. The territory was defined as Tauranga Central, Sulphur Point, TaurangaHospital and Tauranga South. A map was attached to the agreement showing the area.The agreement also contained a restraint of trade provision to operate upon terminationof the agreement. It is in fact called a "Restraint on competition." It restricts thefranchisee and covenantors from operating in competition against the plaintifffollowing the expiration or termination of the franchise agreement. The restraint istwofold:(a) an initial period of four months during which the restraint applies to thearea within a 25 kilometre radius around the territory; and(b) a period of five years applying only within the territory.[5] For this decision another important provision is the dispute resolution clause31:31. Dispute resolution31.1 No party to this agreement shall commence any court proceedingsrelating to any dispute arising out of this agreement (including anydispute as to the validity, breach or termination of this agreement oras to any claim in tort, in equity or pursuant to any statute) unless thatparty has complied with the following paragraphs of this clause31.2 Any party who claims that a dispute has arisen under or in relation tothis agreement must give written notice to every other partyspecifying the nature of the dispute.31.3 On receipt of such notice by the other parties, the parties to thisagreement:(a) must co-operate and use their best endeavours to resolve thedispute expeditiously.(b) must, if they do not within fourteen days of the receipt of thenotice (or such further period as they may agree in writing)resolve the dispute, refer the dispute to mediation ("themediation").31.4 The mediation shall in all respects be conducted in terms of theprocedure provided by the Franchise Association of New Zealandmediation panel or if no such panel exists by the LEADR NewZealand Inc. Standard Mediation Agreement.31.5 The mediation shall be conducted in the centre in which theFranchisor is located as specified in clause 13 of schedule 1 or, at theFranchisor's approval at such other location as agreed by the parties.Should the nature of the mediation require that multiple franchiseesattend the mediation the Franchisor shall take into consideration thetravel costs to be incurred by the Franchisor and franchisee parties andmay select an alternative location which alleviates the franchisee'stravel costs. Where this results in the Franchisor incurring travelrelated costs the costs shall be shared equally between the Franchisorand franchisee parties.31.6 The mediation shall be conducted by a mediator and at a fee agreedby the parties, failing agreement between the parties, the mediatorshall be selected, and the mediator's fee shall be determined, by theChair for the time being of the Franchise Association of New Zealandmediation panel or if no such panel exits by the Chair for the timebeing of LEADR New Zealand Incorporated. The costs of themediator appointed shall be shared equally between the parties.31.7 A party who seeks urgent interlocutory relief may, by written noticeto each other party to the dispute, elect not to comply with theprovisions of clauses 31.1 to 31.5, but only to the extent of the reliefsought and for the period required to dispose of the application forsuch interlocutory relief. Except to that extent, on the disposal of theapplication the provisions of clauses 31.1 to 31.5 inclusive shall onceagain take effect.31.8 If mediation has taken place and no agreement has been reached, thenthe parties must submit the dispute to arbitration in accordance withthe Arbitration Act 1996 (excluding clause 4 and 5 of the SecondSchedule). Any party may commence the arbitration by giving awritten notice to the other(s) stating the subject matter and details ofthe dispute and that party's desire to have the dispute referred toarbitration. The arbitration will be conducted by a sole arbitrator, andthe place of arbitration will be Christchurch. If the parties cannotagree on the appointment of an arbitrator within 5 Business Days, anarbitrator will be appointed by the President for the time being of theNew Zealand Law society or his or her nominee at the request of eitherparty.[6] Mr Young found that he could not operate the franchise business sustainably.On 19 January 2015, Tauranga Realty Ltd gave 14 days' notice to Mike Pero RealEstate Ltd terminating the agreement. That was allowed under cl 25.3 of theagreement. Termination has various consequences set out in cl 26 of the franchiseagreement. The defendants might consider some of those provisions draconian, but itis not necessary for me to consider that aspect.[7] Mr Young was making arrangements to join another real estate franchise. MikePero Real Estate Ltd pointed out to Mr Young that there was a restraint of tradefollowing termination. Mike Pero Real Estate Ltd took the view that Mr Young hadbreached provisions of the franchise agreement and gave notice terminating thefranchise agreement forthwith. Clause 25.1 allows Mike Pero Real Estate Ltd to giveimmediate notice of cancellation if the franchisee has breached. The question ofbreach is in contention between the parties. Mike Pero Real Estate Ltd also gavenotice to the defendants that they would be held to the restraint of trade clausefollowing termination.[8] On 3 February 2015, Mike Pero Real Estate Ltd began this proceeding. It fileda notice of proceeding, a statement of claim, a without notice application for an interiminjunction, an undertaking as to damages in conventional form, a memorandum ofcounsel, and an affidavit in support. The application for interim injunction sought torestrain the defendants from carrying on any type of real estate business or competingagainst the plaintiff in terms of the 25 kilometre four-month restraint under thefranchise agreement. The injunction sought was to run for four months from 29January 2015. The application also sought an interim injunction restraining thedefendants from competing with the plaintiff under the second part of the restraint,within the territory for five years from 29 January 2015. The application set out anumber of grounds. Importantly it said that the order is necessary to protect theplaintiff from damage until the substantive matter can either be resolved at mediationor determined by way of arbitration.[9] The statement of claim pleads provisions of the franchise agreementextensively, including particular references to cl 31 and the provisions allowing a partyto apply for urgent interlocutory relief under cl 31.7. It recites the background factsleading the plaintiff to believe that the defendants had breached the franchiseagreement and that they were likely to breach the restraint of trade followingtermination. Paragraph 18 of the statement of claim says:18. The plaintiff is bound to invoke the dispute resolution process inclause 31 of the franchise agreement but is seeking urgent interlocutory reliefunder clause 31.7 until such a time as either agreement has been reached atmediation or the matter has been heard and determined by arbitration.[10] The cause of action against both defendants is said to be for breach of restraintof trade. The prayer for relief seeks an injunction in terms of the restraint ofcompetition in the franchise agreement with this qualification:Until such a time as the plaintiff's substantive claim against the defendant hasbeen resolved at mediation or heard and determined by way of arbitration.The statement of claim also seeks "damages to be quantified at trial".[11] Muir J directed the application to be served on Mr Young on a Pickwick basis.Toogood J heard the application on 13 February 2015. He made an order for an interiminjunction in terms of the four month 25 kilometre radius restraint on competition inthe franchise agreement. That was to run until 29 May 2015. He did not qualify hisorder expressly in terms of the prayer for relief in the statement of claim. At [5] henoted:11 Mike Pero Real Estate Ltd v Tauranga Realty Ltd [2015] NZHC 175.A statement of claim alleging breaches of the franchise agreement and seekinginjunctive relief and damages was filed by the plaintiff on 4 February 2015.On the same day, the plaintiff made an interlocutory application without noticefor interim relief seeking orders in terms by which it seeks to enforce therestraint of trade covenant pending a full hearing of the claims.At [17] he referred to the parties' intention to seek resolution through mediation orarbitration. He encouraged them to resolve questions of costs in that context.[12] Mr Young has stated that since that order he has been at pains to observe theinjunction. He has joined another real estate franchise. He has operated at Katikati –more than 25 kilometres outside the territory under the franchise agreement – and alsoat Rotorua, well outside the territory.[13] Mr Young was not represented at the hearing before Toogood J. Later, heinstructed his present solicitors. Noting that a statement of claim had been filed, theythought it prudent to file a statement of defence to prevent judgment going by defaultagainst the defendants. They filed a statement of defence together with a counterclaim.No objection was taken to the defendants filing a statement of defence. Objection wastaken, however, to the defendants' counterclaim.[14] The counterclaim alleges four causes of action against Mike Pero Real EstateLtd:(a) a claim for damages under the Contractual Remedies Act 1979currently for breach of contract;(b) a claim for misleading and deceptive conduct under the Fair TradingAct 1986;(c) a claim that the franchise agreement is an unconscionable bargain; and(d) a challenge to the validity of the restraint of trade, contending eitherthat it is unenforceable or, seeking modification of the restraint under s8 of the Illegal Contracts Act 1970.[15] For its part, after Toogood J's decision, Mike Pero Real Estate Ltd has soughtto deal with the dispute under cl 31 of the franchise agreement. First, letters were sent,in terms of cl 31, proposing to resolve the matter informally. After 14 days proposalswere made for the parties to submit the matter to mediation. Initially there was aproposal that mediation should take place, in terms of the franchise agreement, inChristchurch. Later, it was proposed that a mediation take place in Auckland. Thenames of mediators were proposed, mediators apparently approved by the FranchiseAssociation. There were no replies to that correspondence. The defendants explainedthat they did not want to accede to that lest it be thought that they were abandoningtheir rights to have matters determined in this court rather than by mediation andarbitration under the franchise agreement.[16] Essentially, the defendants say that in taking the proceeding in the form it did,Mike Pero Real Estate Ltd has gone beyond asking for interim relief in terms of cl 31.7of the franchise agreement, but has submitted the substance of the dispute to thiscourt's jurisdiction.[17] In approaching this matter, it may be helpful to draw a distinction between aproceeding in which a party seeks only interim relief and no greater relief, and one inwhich a party submits the entire differences between the parties to the final decisionof this court. I call the first kind of proceeding an auxiliary proceeding – that is, thecourt is granting relief only to assist a party in a dispute which is pending before someother court or tribunal or has still to be started. Such auxiliary relief has a long historyin equity. Nowadays we can see the auxiliary jurisdiction operating in cases where,for example, a first instance court grants relief when one party appeals and seeksinterim protection of its position. Similarly, even before the Arbitration Act 1996, thecourt would grant relief to parties to arbitration agreements to protect their positionwhile the substance of a dispute was submitted to arbitration.[18] The Arbitration Act now formally enacts such a practice. The starting point isart 5 in Schedule 1:In matters governed by this schedule, no court shall intervene except where soprovided in this schedule.[19] Article 9 is one such provision:(1) It is not incompatible with an arbitration agreement for a party torequest, before or during arbitral proceedings, from a court an interimmeasure and for a court to grant such interim measure."Interim measure" is defined in art 17:interim measure means a temporary measure (whether or not in the form ofan award) by which a party is required, at any time before an award is madein relation to a dispute, to do all or any of the following:(a) maintain or restore the status quo pending the determination of thedispute:(b) take action that would prevent, or refrain from taking action that islikely to cause, current or imminent harm or prejudice to the arbitralproceedings:(c) provide a means of preserving assets out of which a subsequent awardmay be satisfied:(d) preserve evidence that may be relevant and material to the resolutionof the dispute:(e) give security for costsArticles 17A and 17B allow arbitral tribunals to grant interim measures. Under art9(2) the High Court or District Court may give similar relief.[20] The provision for the court to grant interim relief allows parties to arbitrationagreements to obtain interim curial relief in circumstances, for example, wherearbitration has not yet started or unavoidable delays would be experienced inappointing an arbitrator and applying to an arbitrator for interim relief under arts 17Aand 17B. Article 9 therefore serves a practical purpose.[21] A question can arise whether a party seeking interim relief has gone further andsubmitted the substance of the dispute for the determination of the court. If thesubstance is placed before the court for determination, art 8 can apply. If the substanceof the court is placed before the court and the other party does not object, under art 8the court may retain jurisdiction over the subject matter of the proceeding.[22] The question here is whether Mike Pero Real Estate Ltd has gone beyondseeking only an interim measure under art 9. Clause 31.7 mirrors art 9 in recognisingthat while the parties must follow the dispute resolution procedures under cl 31, thereis the right to apply to a court for interim relief under cl 31.7.[23] The argument for the defendants is that the matters that were submitted to thecourt went beyond simply seeking interim relief. The defendants, in particular, focuson the extensive pleading in the statement of claim which is said to go beyond simplyseeking interim enforcement of a restraint of trade, and pleads other breaches of theagreement. The defendants also refer to the prayer for relief seeking damages.[24] I raised with the plaintiff the form of the proceeding. The plaintiff filed ageneral proceeding – that is, a conventional claim for common law relief with astandard statement of claim. The plaintiff could have made its position clearer if ithad filed an originating application under r 19.2 of the High Court Rules. Theproceeding would be an application for interim relief under art 9 of the first scheduleof the Arbitration Act, a matter appropriate for an originating application underr 19.2(a).[25] To the extent that the plaintiff's pleading goes beyond simply seekingenforcement of the restraint of trade and seeks damages in its statement of claim, theplaintiff has muddied the waters. However, that muddying of the waters does not meanthat it has submitted the substance of the dispute to this court for final determination.[26] The plaintiff's statement of claim and its application for an interim injunctionmake it clear that it was following the procedures under cl 31 and was seeking onlyinterim relief from the court. The decision of Heath J in Pathak v Tourism TransportLtd indicates that at least pending the grant of interim relief a party may equivocate onwhether to go to arbitration or to ask for the court to determine the merits of the matter.2In that case, a plaintiff had applied to the court for interim relief which was granted,even though the contract between the parties contained an arbitration agreement.Heath J held that if the plaintiff had stopped there, and had sought a stay of proceeding2 Pathak v Tourism Transport Ltd [2002] 3 NZLR 381 (HC).so as to go to arbitration, the arbitration agreement could have been enforced. Insteadthe plaintiff sought particulars from the defendants and made discovery. Those stepswere consistent with submitting the substance of the dispute to the High Court andwere incompatible with arbitration.[27] Applying that approach, I do not regard Mike Pero Real Estate Ltd as havingsubmitted the substance of the dispute to the determination of this court. It has doneno more than seek interim relief consistent with cl 31.7 of the franchise agreement andart 9 of Schedule 1 of the Arbitration Act. Certainly its conduct after Toogood J gavehis decision is consistent with it seeking to follow the procedures under cl 31 of thearbitration agreement. It has resisted taking any steps towards a final determinationin this court.[28] The defendants have explained their reluctance to go to mediation and to takepart in arbitration. Mr Young is not in good financial shape. His position is so badthat he has qualified for legal aid. While he can have legal aid to defend this proceedingand to pursue his counterclaim in this court, it will not extend to arbitration with theplaintiff. Mr Young fears that if he is held to the arbitration clause, he will be requiredto put up significant funds to meet the costs of the arbitrator. He notes that thearbitration clause provides for the arbitration to be held in Christchurch where theplaintiff is based, not where he is based. He fears that he will not be able to afford thecosts of arbitration. Because of his lack of resources the plaintiff may obtain an awardagainst him by default.[29] If this court had a discretion to stay proceedings to allow arbitration – as it usedto under s 5 of the Arbitration Act 1908 – those submissions might carry some weight.But the position has now changed under the Arbitration Act 1996. Clause 8 makes itclear that the court must stay a proceeding in favour of arbitration. There is nobalancing discretion. Accordingly I am not able to base my decision on thoseconsiderations raised by the defendants.[30] That means that I am required to dismiss the defendants' application: I makean order dismissing it.[31] I deal with some ancillary matters.[32] The parties had also prepared submissions on extending injunction on amendedterms after 29 May 2015 when Toogood J's order will expire. I do not have jurisdictionto deal with that question because of the limitations under s 26J(4) of the JudicatureAct 1908. I direct the Registrar to make arrangements, after consulting with theparties, for a hearing of the plaintiff's application for extending the injunction beyond29 May 2015. The parties should be prepared for a hearing at short notice, and theyshould be prepared for some flexibility. There is no certainty that the hearing will takeplace in Tauranga.[33] Toogood J reserved costs on his order. I decline to deal with that. As that alsogoes to the question of injunctive relief, costs should likewise be determined by ajustice.[34] The plaintiff asks for costs on the application. Ordinarily costs follow theevent. No order for costs can be made against Mr Young because he has a grant oflegal aid. Costs require consideration only in respect of Tauranga Realty Ltd, the firstdefendant. It does not have legal aid.[35] This matter has required a decision of the court because there was somemuddying of the waters by the plaintiff. The plaintiff could have made its case clearerif it had filed an originating application under r 19.2 of the High Court Rules withouta statement of claim. It would have been clearer, by proceeding in that manner, thatthe plaintiff was seeking only limited relief. It need not have gone into a long pleadingof other breaches by the defendants. It need not have set out any claims for damages.Then it would have been apparent that there was no basis on which the defendantscould counterclaim. To that extent, the plaintiff, by muddying the waters, has alsocontributed to the need for this application.[36] In the circumstances I order that costs lie where they fall.Associate Judge Bell