PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2021] NZHC 862

PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2021] NZHC862 [22 April 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2020-404-001683[2021] NZHC 862BETWEEN PROMINENT INVESTMENTS LIMITEDPlaintiffAND QUEST APARTMENT HOTELS (NZ)LIMITEDDefendantHearing: 27 October 2020, 11 and 13 November 2020Appearances: S D Williams and R Langdana for the PlaintiffC Pendleton for the DefendantJudgment: 22 April 2021JUDGMENT OF DUFFY JThis judgment was delivered by me on 22 April 2021 at 4:00 pm pursuant toRule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarSolicitors:Patel Nand Legal, AucklandTuner Hopkins, TakapunaIntroduction[1] The plaintiff, Prominent Investments Ltd (Prominent), seeks an interiminjunction restraining the defendant, Quest Apartment Hotels (NZ) Ltd (Quest) fromtaking steps to terminate the franchise agreement currently in place between theparties. In the event the injunction is granted the plaintiff also seeks a stay of thesubstantive proceeding to allow the parties to engage in the contractual disputeresolution process mandated by the franchise agreement.Background[2] Prominent and Quest are parties to a franchise agreement dated 28 September2012 (the franchise agreement). The franchise agreement granted Prominent the rightto operate the Quest Ponsonby apartment hotel franchise for an initial term of fiveyears, with the option of three renewals, each for a five-year period. In order to renewthe franchise agreement Prominent was to provide written notice of its wish to renewwithin six months but not less than three months before the termination date, in thiscase being 27 September 2017. To exercise the right of renewal Prominent also hadto comply with and satisfy cl 5.1.1 – 5.1.6 of the franchise agreement. In particular,cl 5.1.1 required that Prominent not be in default of any of the terms or the conditionsof the franchise agreement, and that it have substantially complied with all of the termsand conditions of the franchise agreement during the five year term.[3] On 13 March 2017, six months prior to the expiry of the franchise agreement,Quest sent Prominent a letter to provide it with full notice of its compliance issues thatneeded to be rectified before renewal could be considered. This letter also containeda requirement for Prominent to sign, no later than 21 March 2017, a documentacknowledging that Quest's approval of the renewal depended on the rectification ofthe items outlined in the letter of 13 March.[4] On 30 and 31 March 2017 respectively, Prominent's two directors executed therequired acknowledgement and requested renewal of the franchise agreement for afurther five years. Quest did not complain that the acknowledgement was given late.An email dated 24 May 2017 from Quest's manager, Aaron Carpenter, records ameeting between the parties at which Quest emphasised to Prominent the need forcertain actions. Prominent responded on 25 May 2017 confirming its agreement toperform those actions.[5] However, the franchise agreement was not renewed for a further term of fiveyears upon expiry of the first term. In such circumstances the written franchiseagreement provided for its continuation on a month by month basis, terminable by onemonth's written notice from Quest. On 31 October 2017, Quest wrote to Prominentsetting out the discussions between them at a meeting on 27 October 2017. The letteradvised that Quest recognised the improvements Prominent was making to addressQuest's concerns and offered to allow their arrangement to proceed on a month bymonth basis with a review to take place in January 2018.[6] Then on 25 June 2018 Quest and Prominent entered into a Deed of Variationunder which the terms of the franchise agreement were extended to 1 April 2019 toallow Prominent a further opportunity to meet the renewal requirements. Leading upto the expiry of the extended franchise agreement term no application for renewal wastendered by Prominent. This left Prominent in a month by month holdoverarrangement, which continued into 2020.[7] On 26 June 2020 Quest wrote to Prominent stating that it continued to have noconfidence that Prominent would be able to lift its standards to meet the franchiserequirements in the future. The letter also indicated that a third party had offered topurchase the business for $270,970 and offered Prominent time to negotiate directlywith the third party. Subsequently, on 9 July 2020, Quest forwarded Prominent afurther increased offer of $700,000 from the third party. On 4 August 2020 Questissued a notice of termination of the franchise agreement.Statement of claim[8] The plaintiff claims that Quest has breached the franchise agreement by:(a) failing to provide Prominent with Quest's franchise renewaldocumentation for execution on or before 28 September 2017 or at anytime thereafter;(b) purporting, in letters dated 31 October 2017 and 26 June 2020, to denyProminent's right to renewal for a further five-year term and assertingthat the franchise agreement was terminable on one month's notice; and(c) purporting to issue a one-month notice of termination on 4 August2020.[9] Prominent also claims that by misrepresenting that it was not entitled toexercise its right of renewal under the franchise agreement, Quest engaged inmisleading and deceptive conduct in breach of the Fair Trading Act 1986 and in breachof the contractual duty of good faith it owed to Prominent. This duty of good faith isalso alleged to have been breached by Quest when it implemented a "terminationstrategy" to replace Prominent with its preferred franchisee.Key issues[10] There are two key substantive issues. First, whether Quest was entitled torefuse to renew the franchise agreement in September 2017. If Quest has actedwrongly this is a breach of cl 5.1 of the franchise agreement, which has deprivedProminent of a further five-year term that would have expired in September 2022.Second, whether Quest wrongly induced Prominent to enter into the Deed of Variation,which confined the term of the franchise agreement to 1 April 2019 after which it ranfrom one month to the next, by misrepresenting to Prominent that Quest was entitledto refuse to renew the franchise agreement for a further five years. The second issueis dependent on Prominent achieving a favourable outcome on the first issue. Absentachieving a favourable outcome on the first issue Prominent will be left in the positionwhere at best all it has is a monthly arrangement with Quest, which can be terminatedby one month's notice.[11] Put shortly the proceeding is a belated attempt by Prominent (albeit within thelimitation period) to challenge Quest's refusal to renew the franchise agreement for afurther five years. The catalyst for the proceeding was Quest identifying a third-partyreplacement for Prominent and proposing to bring the monthly arrangement to an end.Relevant law[12] The relevant legal principles for an application for an interim injunction arewell established. These principles, as set out in Klissers Farmhouse Bakeries Ltd vHarvest Bakeries Ltd1, and reasserted in NZ Tax Refunds Ltd v Brooks Homes Ltd,dictate that the approach is threefold:2The applicant must first establish that there is a serious question to be tried or, putanother way, that the claim is not vexatious or frivolous. Next, the balance ofconvenience must be considered. This requires consideration of the impact on theparties of the granting of, and the refusal to grant, an order. Finally, an assessment ofthe overall justice of the position is required as a check.3Is there a serious question to be tried?[13] The first step involves an assessment of whether there is a serious question tobe tried. It will not be sufficient for a plaintiff to say there is a tenable cause of actionfrom a legal point of view. Rather, the plaintiff must adduce sufficiently precise factualevidence to satisfy the Court there is a real prospect of succeeding in the claim for apermanent injunction at trial.4 Ultimately, whether there is a serious question to betried is a matter for judicial evaluation.[14] Regarding the alleged breach of cl 5.1 of the franchise agreement, cl 5.1provides Prominent with a right of renewal upon written notice to Quest, however, anyrenewal is also conditional upon Prominent meeting the requirements in cl 5.1.1 –5.1.6. Clause 5.1.1 requires Prominent to not be in default of, and to have substantiallycomplied with all of the terms and conditions of the franchise agreement. Thisincludes the requirement that franchisees operate their business in accordance with thevarious manuals and guidelines issues by Quest.5 Quest contends that pursuant to thisprovision it was entitled to refuse to renew the franchise agreement on account ofProminent's failings on six key performance measures, to which it alerted Prominentin its letter of 13 March 2017. However, Prominent disputes the performance1 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (HC) at 133.2 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12].3 See, for example, Roseneath Holdings Ltd v Grieve [2004] 2 NZLR 168 (CA) at [35]–[37].4 See Ansell v New Zealand Insurance Finance Ltd HC Wellington A434/83, 30 November 1983;Re Lord Cable (dec'd) [1976] 3 All ER 417 (Ch) at 431.5 See clauses 11.2, 15.2 and 19.4.3.measures were so bad that refusal of renewal was warranted. It contents the concernsQuest had were in part due to factors beyond Prominent's control and where it hadcontrol, it was undertaking remedial action to the point where refusal to renew was notwarranted.[15] There is clearly a dispute on the evidence relevant to the first cause of actionthat cannot be resolved before trial.6 The contemporaneous documents show that wellbefore September 2017 Quest was expressing its concerns about Prominent addressingQuest's various performance measures. On the other hand, the circumstances werenot so bad that Quest had determined to end the relationship. The contemporaneousevidence shows that before September 2017 Quest was engaging with Prominent andwas willing to give Prominent opportunities to address Quest's concerns. Further,Quest accepted that some issues of concern were beyond Prominent's control. Forexample, balcony areas of some units had to be closed off for remediation. This wasa responsibility which lay with the Body Corporate responsible for the unit titlecomplex in which the apartments were situated. This circumstance was out ofProminent's control however it could have adversely affected how some guests viewedtheir experience at the Quest residence. Even after 27 September 2017 Quest cannothave been completely disenchanted with Prominent's efforts because it was preparedto give the company further time to improve even to the extent that it entered into theDeed of Variation for a one-year period.[16] What is difficult to determine from the written material is why Quest sought tomove to a monthly basis followed by the Deed of Variation. Either Quest did sobecause Prominent's poor performance truly warranted this approach. Alternatively,Quest followed this course of action because it offered a better way of managing itsrelationship with a franchisee whose performance needed improvement, but was notso poor that Quest wanted to find a new franchisee. In the second case, theperformance may not have been so bad that it warranted a refusal to renew the five-year term. A third explanation is that Prominent was making progress and Quest'slater change of stance was brought about by outside factors. The latter possibilities6 Prominent asserts many facts it relies on are not disputed by Quest. Quest rejects this and assertsthat those facts are disputed. I have treated every material factual issue as being in dispute.would arguably provide a basis for finding there was no proper basis for Quest torefuse to renew the five-year term.[17] An application for an interim injunction is not the time for the Court to resolveconflicts of evidence on affidavits.7 It is apparent from the affidavit evidence and thesubmissions for Prominent that it believes the 2017 renewal was not granted due to itsfailure to complete a range of refurbishments. The property's need of refurbishmentdates right back to 2012, when Prominent became the franchisee. Subsequently, in2014 Quest prepared a Rectification Plan to guide Prominent on which refurbishmentsought to take priority. Items were prioritised on a numbering system: items identifiedas Priority Three were to be completed prior to the time of the first renewal, andPriority Two items were to be completed during any second term if the agreement wasrenewed. Prominent says that it completed all Priority Three requirements by therequisite date. Both parties knew that the failings in the guest satisfaction measureswere a result of the rundown state of the property. Further, Prominent says that in2017 none of the key performance measures were alleged to constitute substantial non-compliance such as to endanger any opportunity for renewal.[18] Even if Prominent is correct in stating that it had carried out all the necessaryrefurbishments and the low guest satisfaction scores could be explained by the state ofthe property, there are other failings listed in the letter of 13 March 2017. Theseinclude: data entry and reporting issues; incomplete staff training; incompleteinsurance requirements; and accounting practice concerns. Each of these failingswould have influenced Quest's assessment of whether the plaintiff had substantiallycomplied with the terms and conditions of the franchise agreement. But, whether thesefailings justify Quest's refusal to renew the agreement is a different matter that cannotbe resolved at this stage.[19] I am satisfied that, when taken at its highest, the evidence from Prominent isenough to establish that there is a serious question to be tried on whether Quest was7 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 2 WLR 316 (HL) at 407 and 510.entitled to refuse to renew the five-year term (the first cause of action). This findingis enables me to proceed to the next stage of the test for granting interim relief.8The balance of convenience and overall justice[20] The second step of the analysis involves an assessment of the balance ofconvenience, which is said to be the guiding principle in an application for aninterlocutory injunction.9 In applying this guiding principle the Court must haveregard to a range of factors, including the ability of damages to adequately compensatethe plaintiff for their loss.[21] Prominent submits that its case against Quest is strong, and that refusing reliefwill likely have the effect of determining the proceeding, as it will allow Quest toterminate the franchise agreement and to contract with a new party. This in turn willleave Prominent with no business, no payment of goodwill and no means of generatingincome to pursue its claim against Quest. Moreover, Prominent submits that damageswill not be an adequate remedy because the franchise agreement limits the damages itmay claim to one month's gross revenue, which totals approximately $11,200.10Prominent says that comparatively there will be no serious injustice to Quest if aninterim injunction is granted. Ultimately, Prominent submits that there is value inpreserving the status quo, that being the position before Quest issued the notice oftermination.[22] On the other hand, Quest submits that damages are an adequate remedy as allcauses of action, if successful, are amenable to an award of damages. Quest says thatnothing in this case justifies a departure from the principle that damages can providean adequate remedy and accordingly, Prominent's application for an injunction mustfail. Further, that Prominent has underperformed for many years, which has causedQuest reputational damage. There is a real risk of this continuing if an injunction isgranted.8 The second and third causes of actions are dependent upon the success of the first cause of action.Thus a finding on whether they present any serious question to be tried adds nothing here.9 Eng Mee Yong v Letchumanan [1980] AC 331, [1979] 3 WLR 373 (PC).10 Clause 11.29 of the franchise agreement.[23] Prominent has raised a valid point in noting that if the interim injunction is notgranted then Quest will proceed to terminate the franchise agreement and replaceProminent with another franchisee. This would essentially limit Prominent's remedy,if successful, to one of damages. Because the franchise agreement potentially limitsdamages to $11,200, absent a successful challenge to that contractual limitation,Prominent would then find itself in the position where even if the Court found Questwas wrong to refuse to renew the franchise agreement for a further five years and theDeed of Variation could not deprive Prominent of this benefit, (because Quest hadwrongly induced Prominent to enter into this Deed by misrepresenting there was noright to renew for five years), all Prominent would receive in compensation for theloss of a further five-year term (with expiry in September 2022) may be around$11,200. This potential limitation on the quantum of damages means that damagesmay be an inadequate remedy in this case. Prominent has provided a valuation whichhas valued its business at over $1,000,000. The valuation excludes shareholderliabilities and is based on information provided by Raj Chopra, shareholder-director.It appears to be overly optimistic. A large part of the value is attributed to goodwill.However, even when regarded conservatively, the valuation shows how pointless anaward of around $11,200 damages would be for Prominent.[24] Prominent has relied upon AB v CD an English authority regarding theassessment of limitations on damages when it comes to granting interim injunctions.11Quest submits that AB v CD has not been applied in New Zealand. I do not considera limitation clause on the award of damages to be determinative of whether to grantthe injunction or not. But I consider it to be a relevant factor for consideration.[25] In AB v CD, Laws LJ considered a limitation on damages clause may tend tofavour the grant of an injunction to prohibit a potential breach of contract occurring inthe first place where no such breach had occurred. In essence the presentcircumstances have similarities with a threatened breach because although the allegedbreach here has already occurred the consequences that would generally follow afailure to renew the franchise agreement have not happened. The parties' relationship,for all practical purposes, has continued in much the same way that it would have done11 AB v CD [2014] EWCA Civ 229, [2015] 1 WLR 771.had the renewal been granted. The legal circumstances are vastly different but on apractical day-to-day level each has carried on as before the alleged breach. In suchcircumstances an injunction will preserve the status quo until their dispute is resolved.Prominent will be in a position where if the outcome of the proceeding is favourableit has something more valuable to sell than is presently the case. If the parties'relationship is beyond repair Prominent will nonetheless be in a better position to exitits franchise business than it otherwise would be. Alternatively, should the parties finda way to continue to work together they can do so. On the other hand, if the outcomeis unfavourable for Prominent, Quest can claim damages for any loss it may havesuffered. Given Quest's decision not to end its arrangement with Prominent inSeptember 2017 and its willingness to continue to work with Prominent until 2020, Iconsider that Quest's expressed concerns about reputational damage carry littleweight. Had its reputation been seriously at risk as a result of Prominent's allegedunderperformance, I would have expected Quest to have severed all ties withProminent well before 2020.[26] Quest has queried the undertakings as to damages provided by Prominent. Thecompany's accounts show it owes significant liabilities to its shareholders, who havetaken out loans to fund Prominent. It is a family company. The three shareholders arealso directors, they are Raj Chopra, his wife Anju Chopra and his daughter DrishtiChopra. I am satisfied that any concerns about Prominent's ability to pay damagesshould Quest suffer loss from the grant of an injunction can be satisfied by Prominent'sshareholders/directors providing personal guarantees of Prominent's liability to meetthe undertaking. They can also provide an account of their own financial worth.Accordingly, I consider that the undertaking as to damages is not a barrier to grantingan injunction. Nor do I think that an injunction will cause irrecoverable loss for Quest.Until 2020 it has been content to work with Prominent. Doing so for a while longeruntil the substantial dispute is determined is simply an extension of thosecircumstances. Provided any financial loss is adequately covered by the undertaking(which I consider to be the case if it is personally guaranteed) the balance ofconvenience lies in favour of granting an injunction.Conclusion[27] I am satisfied there is a serious question to be tried. Whilst its determinationwill hinge largely on disputed factual determinations, these cannot be made now.However, on one view of these facts Quest has purported to terminate the agreementwithout good reason for doing so. The balance of convenience favours the grant of aninjunction. If an injunction is not granted Prominent is at risk of suffering greater lossthan it may recover in damages. On the other hand, Quest faces little, if any, risk ofirrecoverable loss should an injunction be granted. Accordingly, I consider an interiminjunction should be granted.[28] Prominent also submitted that if an injunction were granted the proceedingshould be stayed and the parties engage in the dispute resolution process provided inthe franchise agreement. The parties may choose to resolve their substantive disputein this way. Whether I can order them to do so is another matter. This would hingeon the effect of the dispute resolution clause in the franchise agreement. Neither partyadequately addressed the topic of whether the dispute resolution clause still has forceand requires them to submit to that process. If it has that effect, then the proceedingshould be stayed. I consider the parties should be given the opportunity to address thisissue further before I determine it.Result[29] I make the following orders:(a) Until further order of this Court, Quest by itself and by its servants oragents or otherwise howsoever is restrained from taking any steps orprocuring or acquiring any steps to be taken to terminate the franchiseagreement between Prominent and Quest dated 28 September 2012;(b) The order in (a) above is conditional on at least two of Prominent'sshareholders/directors (Raj Chopra, Anju Chopra and Drishti Chopra)providing written personal guarantees that one or both of them (eitherjointly or severally) will meet Prominent's liability under theundertaking Prominent has given to support the injunction;(c) The parties have leave to file further submissions on the question ofwhether the substantive proceeding should be stayed and the partiesdirected to participate in the dispute resolution process provided for inthe franchise agreement. Such submissions are to be filed sequentiallyby Prominent within 15 working days of delivery of this judgment.Submissions in response by Quest within 15 working days from receiptof Prominent's submissions. Prominent to file any reply submissionswithin five working days of receipt of Quest's submissions.[30] There is to be a telephone conference at a time and date arranged by the caseofficer with the parties no later than 10 working days after the time for Prominent tofile its submissions in reply. The purpose of the telephone conference will be to reviewmatters and to make any timetable directions that may be required.[31] The parties have leave to file memoranda on costs.Duffy J