PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2023] NZHC 2968

PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2023] NZHC2968 [24 October 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-001683[2023] NZHC 2968BETWEEN PROMINENT INVESTMENTS LIMITEDPlaintiffAND QUEST APARTMENT HOTELS (NZ)LIMITEDDefendantHearing: 22 September 2022Appearances: S Williams and J Alexander for the plaintiffP Murray for the defendantJudgment: 24 October 2023JUDGMENT OF ROBINSON JThis judgment was delivered by me on 24 October 2023 at 1:30 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Stewart Germann Law Office, Auckland.Fortune Manning, Auckland.SD Williams, Auckland.PC Murray, Auckland.Introduction [1]Quest's application to rescind injunction [7]Legal principles – Recission [12]Background – Recission [14]Analysis [30]Quest's strike-out applications [38]Legal principles – Strike-out [39]Strike-out - damages in excess of liability cap [43]Clauses 11.18 and 32.15 [46]Liability cap [53]Submissions [55]Analysis [67]Strike-out – franchise term renewal [71]Result [78]Introduction[1] The plaintiff (Prominent) as franchiser and the defendant (Quest) as franchiseeare parties to a franchise agreement dated 28 September 2012 (Franchise Agreement).This gave Prominent the right to operate a Quest franchise from premises in Ponsonby,Auckland, for an initial term of five years. The Franchise Agreement also entitledProminent to have three further terms of five years each provided it complied withcertain terms and conditions set out in clause 5.1 of the Franchise Agreement.[2] On 22 April 2021, Duffy J granted the plaintiff an interim injunction asfollows:1(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;[3] The injunction was conditional on at least two of Prominent'sshareholders/directors providing written personal guarantees that one or both of them(either jointly or severally) would meet Prominent's liability under the undertaking asto damages Prominent had given in support of its application for the injunctive.2 Thatcondition has been met.[4] On 27 June 2022, Quest applied for orders that the interim injunction berescinded. Quest says there has been a material change of circumstances such thatthere is no longer a serious question to be tried in term of Prominent's application foran interim injunction dated 17 September 2020; and the balance of convenience doesnot favour interim relief continuing.[5] At the same time, Quest applied for orders striking out those parts ofProminent's Amended Statement of Claim dated 25 March 2022 (ASoC) that seek:1 Prominent Investments Ltd v Quest Apartment Hotels (NZ) Ltd [2021] NZHC 862 at [29].2 At [29(b)].(a) damages in excess of the limitation of liability cap provided for inclause 29.3 of the Franchise Agreement; and(b) an order that Quest provide Prominent with duly executed franchiseterm renewal documentation for a second franchise term of five yearson the existing terms and conditions commencing from the date onwhich the franchise renewal documentation is fully executed.[6] Also on 27 June 2022, Prominent applied for orders that Quest file and serve amore explicit pleading. By memorandum filed after the hearing, counsel advised thatthis application had been settled save for Prominent's application for costs.Quest's application to rescind injunction[7] At [2]–[11] of her judgment, Duffy J set out the relevant background,summarised Prominent's claims, and identified the key issues. It is convenient to setout in full:[2] Prominent and Quest are parties to a franchise agreement dated28 September 2012 (the franchise agreement). The franchise agreementgranted Prominent the right to operate the Quest Ponsonby apartment hotelfranchise for an initial term of five years, with the option of three renewals,each for a five-year period. In order to renew the franchise agreementProminent was to provide written notice of its wish to renew within six monthsbut not less than three months before the termination date, in this case being27 September 2017. To exercise the right of renewal Prominent also had tocomply with and satisfy cl 5.1.1 – 5.1.6 of the franchise agreement. Inparticular, cl 5.1.1 required that Prominent not be in default of any of the termsor the conditions of the franchise agreement, and that it have substantiallycomplied with all of the terms and conditions of the franchise agreementduring the five year term.[3] On 13 March 2017, six months prior to the expiry of the franchiseagreement, Quest sent Prominent a letter to provide it with full notice of itscompliance issues that needed to be rectified before renewal could beconsidered. This letter also contained a requirement for Prominent to sign, nolater than 21 March 2017, a document acknowledging that Quest's approvalof the renewal depended on the rectification of the items outlined in the letterof 13 March.[4] On 30 and 31 March 2017 respectively, Prominent's two directorsexecuted the required acknowledgement and requested renewal of thefranchise agreement for a further five years. Quest did not complain that theacknowledgement was given late. An email dated 24 May 2017 from Quest'smanager, Aaron Carpenter, records a meeting between the parties at whichQuest emphasised to Prominent the need for certain actions. Prominentresponded on 25 May 2017 confirming its agreement to perform those actions.[5] However, the franchise agreement was not renewed for a further termof five years upon expiry of the first term. In such circumstances the writtenfranchise agreement provided for its continuation on a month by month basis,terminable by one month's written notice from Quest. On 31 October 2017,Quest wrote to Prominent setting out the discussions between them at ameeting on 27 October 2017. The letter advised that Quest recognised theimprovements Prominent was making to address Quest's concerns and offeredto allow their arrangement to proceed on a month by month basis with a reviewto take place in January 2018.[6] Then on 25 June 2018 Quest and Prominent entered into a Deed ofVariation under which the terms of the franchise agreement were extended to1 April 2019 to allow Prominent a further opportunity to meet the renewalrequirements. Leading up to the expiry of the extended franchise agreementterm no application for renewal was tendered by Prominent. This leftProminent in a month by month holdover arrangement, which continued into2020.[7] On 26 June 2020 Quest wrote to Prominent stating that it continued tohave no confidence that Prominent would be able to lift its standards to meetthe franchise requirements in the future. The letter also indicated that a thirdparty had offered to purchase the business for $270,970 and offered Prominenttime to negotiate directly with the third party. Subsequently, on 9 July 2020,Quest forwarded Prominent a further increased offer of $700,000 from thethird party. On 4 August 2020 Quest issued a notice of termination of thefranchise agreement.Statement of claim[8] The plaintiff claims that Quest has breached the franchise agreementby:(a) failing to provide Prominent with Quest's franchise renewaldocumentation for execution on or before 28 September 2017or at any time thereafter;(b) purporting, in letters dated 31 October 2017 and 26 June2020, to deny Prominent's right to renewal for a further five-year term and asserting that the franchise agreement wasterminable on one month's notice; and(c) purporting to issue a one-month notice of termination on 4August 2020.[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 andin breach of the contractual duty of good faith it owed to Prominent. This dutyof good faith is also alleged to have been breached by Quest when itimplemented a "termination strategy" to replace Prominent with its preferredfranchisee.Key issues[10] There are two key substantive issues. First, whether Quest was entitledto refuse to renew the franchise agreement in September 2017. If Quest hasacted wrongly this is a breach of cl 5.1 of the franchise agreement, which hasdeprived Prominent of a further five-year term that would have expired inSeptember 2022. Second, whether Quest wrongly induced Prominent to enterinto the Deed of Variation, which confined the term of the franchise agreementto 1 April 2019 after which it ran from one month to the next, bymisrepresenting to Prominent that Quest was entitled to refuse to renew thefranchise agreement for a further five years. The second issue is dependenton Prominent achieving a favourable outcome on the first issue. Absentachieving a favourable outcome on the first issue Prominent will be left in theposition where at best all it has is a monthly arrangement with Quest, whichcan be terminated by one month's notice.[11] Put shortly the proceeding is a belated attempt by Prominent (albeitwithin the limitation period) to challenge Quest's refusal to renew thefranchise agreement for a further five years. The catalyst for the proceedingwas Quest identifying a third-party replacement for Prominent and proposingto bring the monthly arrangement to an end.[8] Her Honour identified various factual disputes which could only be resolvedat trial.3 Duffy J was satisfied that, when taken at its highest, the evidence fromProminent was enough to establish that there was a serious question to be tried as towhether Quest was entitled to refuse to renew the five-year term as Prominent allegedin its first cause of action.4 Her Honour also considered that on one view of the factsQuest had purported to terminate the Franchise Agreement without good reason to doso.5 Her Honour also considered that if the injunction was not granted, Prominent wasat risk of suffering greater loss than it might recover in damages; whilst Quest facedlittle, if any, risk of irrecoverable loss should the injunction be granted.6[9] In that analysis, Duffy J took into account that the Franchise Agreementpotentially limited damages to $11,200 absent a successful challenge by Prominent tothe limitation of liability clause set out in clause 29.3 of the Franchise Agreement.7Clause 29.3 of the Franchise Agreement is set out at [53] below. Duffy J was satisfiedthat without injunctive relief an award of $11,200 damages would be "pointless forProminent".83 At [13]–[18].4 At [19].5 At [27].6 At [27].7 At [23].8 At [23].[10] On 23 April 2021 (the day after Duffy J's judgment), Quest filed amemorandum requesting "that the order at [29(a)]" of the judgment,9 "be clarified toconfirm that this order is solely in respect of the Notice of Termination dated 04 August2020, which was the subject of the proceeding".[11] Duffy J issued a Minute later that day:10[3] Quest now seeks to vary the terms of the order I made by requiring thatits terms are restricted to the Notice of Termination dated 4 August 2020. I donot consider the judgment requires any further clarification. I agree with thesubmissions from Prominent that the parties had the opportunity to be heardon the scope of the order at the hearing. The time for Quest to make itssubmissions on restricting the effect of the order was then.Legal principles – Recission[12] The Court retains an inherent jurisdiction to rescind or vary interlocutoryorders (including interlocutory injunctions) should the circumstances change such thatjustice requires a recission or a variation.11[13] Mr Murray for Quest submits there have been two material changes incircumstance that render it inappropriate to continue the interim injunction:(a) First, Quest has withdrawn its notice of termination dated 4 August2020. As such Prominent is no longer at risk of termination or sufferingloss so the interim injunction is redundant.(b) Secondly, Quest has offered to extend the franchise to 28 September2022. As such Mr Murray submits there is no longer a serious questionto be tried as to whether Quest was entitled to refuse to renew the five-year term. Quest has effectively offered Prominent the renewal itsought. Prominent declined that offer, but Mr Murray submits thatProminent cannot rely on its own refusal to agree to a renewal as aground to maintain the injunction. Mr Murray also points to evidence9 Set out at [2] above.10 Prominent Investments Ltd v Quest Apartments Hotels (NZ) Ltd HC Auckland CIV-2020-404-001683, 23 April 2021 [Minute of Duffy J].11 GP96 Ltd v F M Custodians Ltd [2019] NZHC 1183 at [82], citing Foodtown Supermarkets Ltd vTSE [1987] 2 PRNZ 545 (HC) at 546.from Quest that it has offered to engage in a process to agree a furtherfive-year renewal of the Franchise Agreement from 28 September 2022(that is, a process to grant a third term).Background – Recission[14] As Duffy J noted at [7], on 4 August 2020 Quest issued a Notice of Terminationof the Franchise Agreement. In his affidavit in support of Quest's recission and strike-out applications the Chief Executive Officer of Quest, Steven Mansfield explained thatfour factors had combined together to support Quest's original decision to terminatethe Franchise Agreement, namely:(a) the impact of Covid-19 and the stress it was likely to bring to thebusiness operations;(b) the underlying poor performance of the Quest Ponsonby franchiserelative to other franchisees even prior to the impact of Covid-19;(c) the inability of Prominent to secure additional funding to supportsustainability of trading requirements. Mr Mansfield says Questunderstood Prominent had two funding applications rejected by twoseparate banks; and(d) Quest's understanding of Prominent was either insolvent, or insolvencywas imminent.[15] Mr Mansfield says this was a unique combination of factors and that whenCovid-19 hit no other franchisee was experiencing the same combination of issuesbeing faced at Quest Ponsonby.[16] However, Mr Mansfield says that by April/May 2021 this unusual set ofcircumstances had changed dramatically. The risks associated with Covid-19 hadreduced. Prominent was trading sustainably and Quest no longer had concerns aboutits solvency. In a letter between counsel dated 31 May 2021 Quest withdrew its Noticeof Termination and agreed to extend the term of the Franchise Agreement to 28September 2022 on existing terms and condition. The letter provided:5. To clearly demonstrate that it is not pursuing a termination strategy, Questwill take the following steps:a. It will withdraw the Notice of Termination dated 4 August 2022.b. It will agree to extend the current term of the franchise agreementfrom 1 April 2019 to 2 September 2022 on the existing terms. Thisextension will be without prejudice to Quest's position that yourclient has not, and is not, meeting minimum performance standards(discussed below).6. Quest has instructed [its solicitors] to prepare a draft deed recording thesematters. Once the deed is finalised, the issue of termination will be resolved.The parties can then move to address your client's poor performance.Key issue – poor performance7. The key issue for Quest is (and always has been) your client's ongoing poorperformance in all areas of its business, including guest service standards,operational maintenance, cleanliness and business performance. Your client'songoing poor performance is having a detrimental impact on the Quest brandand on other franchisee. Quest is acutely aware of the ongoing poorperformance from the guest dissatisfaction feedback it receives on a regularbasis.8. Quest simply cannot allow your client's ongoing poor performance tocontinue. It intends to take steps to enforce the minimum performancestandards under the franchise agreement.9. To that end, Quest intends to take the following steps:a. given the issues raised by your client regarding the process toobtain the January 2020 brand audit, Quest withdraws the brandaudit.b. in consultation with your client, Quest will undertake a fresh brandaudit of your client's property on 9 and 10 June 2021. Questproposes that your client is present during the audit and has inputin the process. The brand input will be provided to your client, andyour client will be able to provide feedback and comments.10. Please confirm that your client will attend the brand audit on 9 and 10June 2021. In the meantime, Quest reserves its position.[17] In his affidavit Mr Mansfield explains that despite Quest's ongoing concernswith Prominent's underlying performance as a franchisee, as at 31 May 2021 it did notconsider those concerns were themselves a basis for Quest to terminate the franchise.[18] On 16 June 2021 Quest wrote to Prominent again raising further concernsabout its operational performance. For present purposes it is sufficient to record thatQuest considered Prominent was failing to meet minimum standards, which Prominentdisputes.[19] Quest confirmed the rescheduling of the brand audit proposed to take place on9 and 10 June 2021 would instead take place on 21 and 22 June 2021. Quest confirmedthat to meet the minimum performance standard Prominent would be required to:(a) Participate in the brand audit, including attending the inspection andproviding feedback and comment.(b) Meet to discuss specific actions to be taken to be taken to address issuesidentified with its property during the audit.(c) Complete any remedial actions within specified timeframes.[20] On 16 June 2021 Duffy J ordered that the proceeding be stayed by consent toallow the parties to attempt to settle their dispute under the mandatory disputeresolution provisions contained in the Franchise Agreement.[21] Ultimately, Quest carried out a two-day Brand Audit inspection on 28 and 29June 2021. Mr Chopra's evidence was that this involved a team of four or fivepersonnel from Quest and FURNZ inspecting each room and all common areas atQuest. Mr Chopra's evidence is that this differs from Quest's standard approach tobrand audits which usually involve a one- to two-hour inspection of common areasand a representative sample of rooms.[22] On 29 June 2021 Quest's solicitors provided Prominent with a Deed ofVariation to vary the Franchise Agreement by extending the "current term" to 29September 2022. In light of Quest's withdrawal of the Notice of Termination andagreement to vary the Franchise Agreement it asked Prominent to confirm whichmatters recorded in previous correspondence and its statement of claim remained indispute, and to provide detail of the nature of the loss claimed and quantum. Questalso foreshadowed that it might issue a notice of dispute under clause 30.3 of theFranchise Agreement once its brand audit report was completed. Quest suggested thatany matters raised in that report could form part of negotiations between the parties.In that regard Quest asked Prominent to confirm that it would negotiate in good faithand genuinely attempt to agree resolution.[23] On 20 August 2021 Quest provided Prominent with a summary of theoutcomes of the brand audit and invited Prominent's feedback. Counsel for Prominentpoints out that Quest describes the 2021 Brand Audit as "the most extensive anddetailed brand audit that Quest has ever undertaken". Quest explained: "we felt thiswas necessary given the concerns raised by you in relation to the last brand audit". Inany event, Quest sought Prominent's written feedback including requests for furtherclarification and reasons for any disagreement by 3 September 2021. Prominentconsidered that the information Quest had provided was inadequate and inconsistentwith Quest's standard brand audit process that had been agreed and followedpreviously. Prominent considered that Quest's obligations to consult required it toprovide Prominent with the entire brand audit report, without which Prominent couldnot provide feedback. By letter dated 3 September 2021 Prominent's solicitorsadvised Quest accordingly.[24] On 15 September 2021 Quest provided Prominent with further informationincluding what Prominent accepts is a full set of brand audit material. It provided atable of Quest's refurbishment requirements, and the relevant timeframes within whichQuest required these to be completed. Quest's position was that refurbishment wouldcost an estimated cost of $614,395, more than half of which would need to becompleted "one month from the date Auckland moves to an Alert Level which allowsthe work to be completed".12 Quest acknowledged that some refurbishmentobligations fell to third parties. It suggested that Prominent attend to theserefurbishments and claim the costs back from those third parties in accordance withthe terms of the arrangements between them (unless Prominent could persuade thosethird parties to complete their obligations in accordance with those arrangements).12 At this time Auckland was in Alert Level 4 as per the New Zealand Government's response to theCovid-19 pandemic.[25] On 26 November 2021 the parties attended a mediation. Unfortunately theywere unable to settle the various disputes between them. On 10 March 2022 the stayof these proceedings was lifted by consent. On 25 March 2022 Prominent filed anAmended Statement of Claim.[26] On 30 March 2022 (shortly before Duffy J's decision) Quest issued Prominentwith a notice under clause 8.7 of the Franchise Agreement requiring Prominent torefurbish the premises at its expense in accordance with the 2020 Brand Audit.[27] On 29 July 2022 Quest issued a Final Notice of Refurbishment Rectificationrequirement. In his covering email Mr Mansfield set out Quest's position concerningfinancial responsibility and communications with third parties.[28] On its face that rectification plan will take until September 2025 to complete.[29] Against this background Mr Chopra explained that Prominent did not acceptQuest's offer to extend the term of the Franchise Agreement to September 2022because that offer was without prejudice to Quest's continuing allegations thatProminent was not complying with Quest's minimum standards; and Quest wasconducting a further Brand Audit to determine what it considered Prominent'srefurbishment requirements to be. In correspondence Quest made clear that it intendedto take steps to enforce Prominent's performance standards under the FranchiseAgreement.Analysis[30] I am not satisfied that there has been a material change of circumstances suchthat the injunction should be rescinded. In my view there remains a serious issue tobe tried and the balance of convenance does not favour rescission.[31] Although Quest has formally withdrawn the Notice of Termination theunderlying dispute remains, namely, whether Quest was entitled to terminate theFranchise Agreement; and, more particularly, whether Prominent's non-performancewas such that it was disentitled to a further term from September 2017 in accordancewith clause 5.1 of the Franchise Agreement. If Prominent was entitled to a furtherterm from September 2017 it would also have been entitled to two further five-yearterms beyond that, subject to its compliance with the terms of the FranchiseAgreement.[32] Similarly, Quest's offer on 31 May 2021 to "extend the current term of theFranchise Agreement from 1 April 2019 to 28 September 2022" was without prejudiceto Quest's position that Prominent was not, as at that date, meeting minimumperformance standards. Quest remains of the view that Prominent was not entitled toa further term because it had been (and remains) in breach of its performanceobligations. Prominent disagrees. In its letter of 31 May 2021 offering to extend thecurrent term Quest made clear that it "simply cannot allow [Prominent's] ongoing poorperformance to continue", and that Quest would take steps to enforce the FranchiseAgreement. It was to that end that Quest withdrew the 2020 Brand Audit andundertook the more extensive Brand Audit in 2021.[33] Prominent disputes that it was (or is) in breach of the Franchise Agreement.On the contrary, it alleges that the steps Quest has taken to enforce the FranchiseAgreement is in breach of Quest's obligations under it (including to comply with theFranchise Association of New Zealand Incorporated (FANZ); the Code of Ethic andCode of Practice). These are issues that can only be resolved at trial.[34] As for the balance of convenience, Mr Mansfield's submission in support ofQuest's application is that since Duffy J granted the injunction the challenges ofCovid-19 have dissipated and Prominent is trading sustainably. Mr Mansfield saysthere is no longer the risk to the Quest brand that was the key driver in its decision toterminate the Franchise Agreement in August 2020. Mr Mansfield says that althoughQuest has ongoing concerns about Prominent's performance, there is a processunderway to address these matters, and in the meantime Quest does not consider thatits issues with Prominent's performance creates such a catastrophic or immediate riskof damage to Quest's brand or its business interest as to warrant termination. MrMansfield submits that while it is not Quest's priority focus to pursue the terminationof the Franchise Agreement the interim junction is unnecessary and should be lifted.[35] Quest is also concerned that the injunction creates an imbalance in thecommercial relationship between the parties. Mr Mansfield explains that the Questfranchise system is a "prescriptive business format franchise", of which a franchisor'sright to terminate is an essential part. Although termination is a measure of last resort,the risk of termination incentivises franchisees to comply with their obligations.Although Quest no longer considers Prominent's under-performance warrantstermination, Mr Mansfield expresses concern that if Prominent's non-performance isnot remedied or declines further Quest may need to consider issuing a "breach notice"to Prominent under clause 19.2 of the Franchise Agreement, non-compliance withwhich may give Quest grounds to terminate the Franchise Agreement. Quest considersit unfair that the injunction protects Prominent from any future breaches of theFranchise Agreement.[36] However, the injunction need not insulate Prominent from future breaches. Itmerely maintains the status quo, pending resolution at trial of the issues that have beenraised in this proceeding. If in the future Quest considers it has additional grounds toterminate the Franchise Agreement it may apply further. But as I have noted, that wasnot the basis upon which the current application was made.[37] For these reasons Quest's application to rescind the injunction is declined.Quest's strike-out applications[38] As noted Quest applies to strike-out those parts of Prominent's ASoC seeking:(a) damages in excess of the limitation of liability cap provided for inclause 29.3 of the Franchise Agreement; and(b) an order that Quest provide Prominent with duly executed franchiseterm renewal documentation for a second franchise term of five yearson the existing terms and conditions to commence from the date onwhich the franchise renewal documentation is fully executed.Legal principles – Strike-out[39] Under r 15.1(1) of the High Court Rules, the court may strike out all or part ofa pleading if it:(a) discloses no reasonably arguable cause of action, defence, or caseappropriate to the nature of the pleading; or(b) is likely to cause prejudice or delay; or(c) is frivolous or vexatious; or(d) is otherwise an abuse of the process of the court.[40] There is no suggestion by Quest that strike-out should be granted on the basisof the ground under r 15.1(1)(a). Only the other three grounds listed at (b)–(d) arerelevant. The Court of Appeal has explained those grounds as follows:13[89] The grounds of strike out listed in r 15.1(1)(b)–(d) concern the misuseof the court's processes. Rule 15.1(1)(b), which deals with pleadings that arelikely to cause prejudice or delay, requires an element of impropriety andabuse of the court's processes. Pleadings which can cause delay include thosethat are prolix; are scandalous and irrelevant; plead purely evidential matters;or are unintelligible. In regards to r 15.1(1)(c), a "frivolous" pleading is onewhich trifles with the court's processes, while a vexatious one contains anelement of impropriety. Rule 15.1(1)(d) – "otherwise an abuse of process ofthe court" – extends beyond the other grounds and captures all other instancesof misuse of the court's processes, such as a proceedings [sic] that has beenbrought with an improper motive or are an attempt to obtain a collateralbenefit.[41] The strike-out principles are well established and not in dispute:14(a) Pleaded facts whether or not omitted, are assumed to be true.13 Commissioner of Inland Revenue v Chesterfields Preschoolds Ltd [2013] NZCA 53, [2013] 2NZLR 679 (footnotes omitted).14 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].(b) The cause of action must be so clearly untenable that they cannotpossibly succeed. The case must be so certainly or clearly bad that itshould be precluded from going forward.(c) The jurisdiction is to be exercised sparingly and only in clear cases.(d) The jurisdiction is not excluded by the need to decide difficult questionsof law.(e) Particular care is required in areas where the law is confused ordeveloping.[42] Rule 15.1 of the High Court Rules clearly contemplates partial strike-out. It isavailable with caution where it would promote the efficient resolution of theproceeding.15Strike-out - damages in excess of liability cap[43] In its ASoC Prominent alleges five causes of action. In four causes of actionit alleges that Quest has breached the Franchise Agreement in various ways. In onecause of action it alleges Quest has breached the Fair Trading Act 1986. In its prayersfor relief for each of the four alleged breaches of the Franchise Agreement Prominentseeks (amongst other things):(a) a declaration that Quest has breached its contractual obligations of goodfaith to Prominent as set out in clause 11.18 and 32.15 of the FranchiseAgreement;(b) orders directing Quest, within five workdays of judgment, to provideProminent with duly executed franchise term renewal documentationfor a second franchise term of five years on the existing terms andconditions to commence from the date on which the franchise renewaldocumentation is fully executed; and15 CBL Insurance Ltd (in liq) v Harris [2021] NZHC 1393 at [27] and [109], citing Body Corporate360683 v Auckland Council [2017] NZHC 1785 at [31] – [37].(c) damages in amounts ranging between $14,880 and $119,250 togetherwith interest and costs.[44] In Prominent's fourth cause of action (alleging a breach by Quest of itscontractual obligations of good faith in relation to refurbishment) Prominent alsoclaims damages for the lost opportunity to sell the Quest Ponsonby franchise businessin 2020 in an amount to be quantified on the sale of the Quest Ponsonby franchise.[45] In Prominent's second cause of action it alleges a breach by Quest of s 9 ofFair Trading Act 1986 and claims, amongst other things, damages in the amount of$14,880.Clauses 11.18 and 32.15[46] Clauses 11.18 and 32.15 provide that:11.18 Parties to comply with FANZ CodesThe parties agree to comply with the FANZ Codes at all times.32.15 Standards of ConductThe parties further agree to act in an ethical, honest and lawful manner.[47] Clause 1.1.20 of the Franchise Agreement provides that "FANZ Codes" means:The Code of Practice and Ethics of the Franchise Association of New ZealandInc. and/or any other mandatory and/or voluntary codes of conduct as theFranchisor may adopt from time to time.[48] Prominent alleges (and Quest admits) that pursuant to clause 11.18 of theFranchise Agreement, Quest is required to comply with the FANZ Code of Ethics andFANZ Franchising Code of Practice in all its dealings with Prominent.16[49] Prominent alleges that the effective clause 11.8 is to incorporate (amongst otherthings) into the Franchise Agreement the ethical obligations pleaded at paragraph 2.3and the Standard of Conduct pleaded at paragraph 2.4 of its Amended Statement of16 Amended Statement of Claim [ASoC], para 4.6.Claim.17 At paragraphs 2.3 and 2.4 of its Amended Statement of Claim Prominentalleges:2.3 The FANZ Code of Ethics requires Quest (amongst other things) to:2.3.1 adopt the highest standards of competency, practice andintegrity in all matters pertaining to franchising;2.3.2 respect the confidentiality of all information, know-how andbusiness secrets concerning a franchise business with which it isinvolved; and2.3.3 act in an honourable and fair manner in all its business dealingsand in such a way as to uphold and bring credit to the good name ofthe Franchise Association of New Zealand Inc.2.4 Clause 3 of the FANZ Franchising Code of Practice requires Quest toobserve the following standard of conduct:All members shall act in an ethical, honest and lawful manner andendeavour to pursue best franchise business practice the time andplace [sic]. Franchisors and Franchisees shall in their dealings withone another avoid the following conduct where such conduct wouldcause significant detriment to either party's business:(a) conduct which is unnecessary and unreasonable in relation tothe risks to be incurred by one party.(b) conduct that is not reasonably necessary for the protection ofthe legitimate business interests of the Franchisor, Franchiseeor Franchise systems.(c) any other conduct which is in breach of the Code of Ethics orof this Code.[50] For its part Quest admits that the effect of the FANZ Code of Ethics is thatQuest as a member of FANZ will do what Prominent alleges at paragraph 2.3, butotherwise denies paragraph 2.3. It admits paragraph 2.4.[51] In each of its causes of action Prominent alleges that Quest has acted in breachof these obligations. In very broad terms, Prominent alleges Quest acted in breach ofthese obligations by:(a) terminating and failing to renew the Franchise Agreement;17 ASoC, clause 4.7.(b) requiring Prominent to execute the Deed of Variation;(c) its conduct in relation to refurbishment and Brand Audit Reports,including its direct dealings with third parties; and(d) devising and implementing a strategy to terminate Prominent'sfranchise and to replace Prominent with a preferred franchisee.[52] Quest strongly denies these allegations.Liability cap[53] In its defence, and in support of its strike-out application Quest relies on clause29.3 of the Franchise Agreement which provides that:Should the Franchisor or any agent, representative, officer or director thereofbe held to have any liability to franchisee in any way connected with thisAgreement or with the Franchise Business before, during or after the Termand whether by claim or proceedings under any statute, regulation or rule oflaw by the franchisee or any third party, the maximum amount that theFranchisor shall be liable for whether by way of damages, costs, interests,fines or otherwise shall be limited to the amount paid or payable by theFranchisee to the Franchisor as the previous month's Gross Sales Fee by theFranchisee to the Franchisor. The Gross Sales Fee is an amount calculated inaccordance with various provisions of the franchise agreement.[54] For present purposes it is accepted that the "previous month's Gross Sales Fee"payable by Prominent is $11,200. Quest says that the quantum of Prominent's claimthat exceeds that amount is frivolous, vexatious or an abuse of process.Submissions[55] Mr Murray for Quest points out that the Court of Appeal has confirmed thatthe approach to interpreting exclusion and limitation clauses is the same as that whichapplies to the interpretation of contracts generally:18[32] The approach to interpreting a limitation clause is like any othercontractual interpretation exercise. The interpretation of the contract involvesan inquiry as to what a reasonable and properly informed third party wouldconsider the parties to mean. The overall commercial context may be relevant.18 Dorchester Finance Ltd v Deloitte [2012] NZCA 226, (2012) 3 NZTR 22-012 (footnotes omitted).[33] Given the premise that an exclusion clause will enable a party toescape liability for a breach of a contractual promise, it will be assumed thata party will not have intended to limit liability unless clear and unambiguouslanguage is used. A Court will ordinarily look for clear language or necessaryimplication before concluding that the right to claim for damages isextinguished. Such an intention will not be lightly attributed. The ultimateobjective is to ascertain what the parties intended their words to mean in aparticular factual context in which the contract was made.[56] Mr Murray submits that clause 29.3 is clear and unambiguous. It uses clearlanguage to exclude any claim for damages exceeding $11,200. He submits the Courtmust therefore strike out Prominent's claim insofar as it exceeds that amount.[57] Prominent says that the limitation of liability provisions contained in clause29.3 of the Franchise Agreement are unenforceable in the present circumstances.Ms Williams for Prominent relies on the principles set out by the Supreme Court ofCanada in Tercon Contractors Ltd v British Columbia (Transportation and Highways)recognise that in certain circumstances the Courts may refuse to enforce exclusionclauses.19 Ms Williams submits that the Supreme Court of Canada's test for theenforceability of exclusion clauses requires three analytical steps:20(a) As a matter of ordinary interpretation, does the exclusion clause applyto the circumstances established in the evidence?(b) If so, was the exclusion clause unconscionable at the time the contractwas made? Ms Williams submits that this issue has to do with contractformation, not breach, and can arise from situations of unequalbargaining power between the parties such as that between Quest asfranchisor and Prominent as franchisee.(c) If the exclusion clause applies and was not unconscionable, should theCourt decline to enforce it because of an overriding public policyconcern which outweighs the very strong public interest in theenforcement of contract?19 Tercon Contractors Ltd v British Columbia (Transportation and Highways) 2010 SCC 4, [2010]1 SCR 69.20 At [121] – [123] per Binnie J (dissenting), with the majority agreeing with Binnie J's formulationof the test: see [42] – [62] (per Cromwell J).[58] Ms Williams explains that Prominent will contend at trial that Quest'slimitation of liability clause is unconscionable; or alternatively that the Court shoulddecline to enforce it on the grounds that Quest has engaged (and continues to engage)in the pleaded conduct that is so contemptuous of its expressed contractual obligationsof good faith to Prominent and reckless as to the consequences of its breaches of thoseduties as to forfeit the assistance of the Court.21 Ms Williams submits thatunconscionability involves an examination of the factual circumstances at the time ofcontract formation to ascertain whether the Court will intervene to relieve a party fromthe rigors of the common law in respect of an unconscionable bargain.22 Ms Williamssubmits that relevant factual circumstances will include: the imbalance of bargainingpower that existed between Quest and Prominent at the time of contracting; thestandard form nature of the Franchise Agreement; and whether in all of thecircumstances it was unconscionable for Quest to attempt to limit its liabilities to itsfranchisees for breaches of its contractual duties of good faith to one month's GrossSales Fee.[59] Ms Williams acknowledges that the third branch of the Tercon test is "narrowand residual", and that Prominent will need to persuade the Court that there is anoverriding public policy that outweighs the very strong interest in the enforcement ofcontracts in accordance with their terms. She confronts this squarely, explaining thatProminent's case is that Quest has engaged in the pleaded conduct that is soreprehensible that it would be contrary to the public interest to allow it to avoidliability. She submits that the enforceability of Quest's limitation of liability clauseought not to be decided in the context of an application for strike-out because itinvolves a question of law that requires an evaluation of competing policyconsiderations with reference to the full factual matrix.[60] Ms Williams also refers to the House of Lords' decision in Suisse AtlantiqueSociete D'armement Maritime SA v NV Rotterdamsche Kolen Central, a casepreceding the enactment of the Unfair Contract Terms Act 1977, in which Lord Reidsuggested that a Court might refuse to give effect to a clause if it would "lead to an21 Plas-tex Canada Ltd v Dow Chemical of Canada ltd 2004 ABCA 309, 245 DLR (4th) 650.22 Gustav & Co Ltd v Macfield Ltd [2008] 2 NZLR 725 (CA).absurdity" or "defeat the main object of the contract".23 Lord Reid also thought thismay be appropriate if it would "deprive one party's stipulation of all contractual force"and "reduce the contract to a mere declaration of intent".24[61] In response Mr Murray submits that neither the Supreme Court of Canada'sdecision in Tercon nor the House of Lords' decision in Suisse Atlantique reflect thelaw in New Zealand. He cites Brewer J's decision in McKenzie (as trustees of thePepatree Trust) v Protective Canopies Limited:25[32] Counsel also referred to authorities where foreign courts have refusedto give effect to an exclusion clause if it would "defeat the main objective ofthe contract" or "reduce the contract to a mere declaration of intent".However, New Zealand Courts have instead focused on whether exclusionclauses are clear and unambiguous. Notions of fairness or reasonableness arenot part of that inquiry.[62] In reply Ms Williams points out that Brewer J's observations were made in thecontext of a formal proof application; and that the exclusion and limitation clauseswere found not to apply for other reasons.[63] In terms of policy, Ms Williams points out that the list of examples ofpotentially unfair contract terms set out in s 46M of the Fair Trading 1986 includesterms that limit or have the effect of limiting one party's rights to sue another.26Although the Franchise Agreement is not a consumer contract or specified tradecontract to which s 46A would apply, Ms Williams submits that this demonstrates theway in which public policy concerning limitation clauses is developing in NewZealand.[64] Ms Williams also refers me to the Canadian text Canadian ContractualInterpretation Law which asserts that standard form franchise agreements whichprovide the franchisor with substantial control over the franchisee's operations are:2723 Suisse Atlantique Societe D'armement Maritime SA v NV Rotterdamsche Kolen Central [1967] 1AC 361 (HL) at 398.24 At 432.25 McKenzie (as trustees of the Pepatree Trust) v Protective Canopies Ltd [2017] NZHC 1623.26 Fair Trading Act 1986, s 46M(k).27 Geoff R Hall Canadian Contractual Interpretation Law (4th ed, LexisNexis Canada, Toronto,2020) at [8.7.1] (footnotes omitted). among the limited class of contracts for which interpretation reflects policygoals in addition to accuracy in giving effect to the parties' intentions.Franchise contracts are approached in a manner quite similar to employmentcontracts, in that the interpretive process is affected by a concern aboutinequality of power within the contractual relationship, and the result need toprotect the more vulnerable contracting party from abuse at the hands of themore powerful party.These policy concerns were at the forefront in the leading case on franchisecontracts in Canada, Shelanu Inc. v Print Three Franchising Corp., andresulted in two principles. First, every franchise contract gives rise to animplied obligation that the parties must act in good faith. Second, a limitationof liability clause within a franchise contract is interpreted with the inequalityof power as between the parties in mind, such that a court may refuse toenforce such a clause if it does not truly reflect the intentions of the weakerparty.[65] In Shelanu Inc v Print Three Franchising Corp, the Ontario Court of Appealheld:28I would also note that the agreement that we are dealing with is a franchiseagreement. A franchise agreement is a type of contract of adhesion, that is, atype of contract whose main provisions are presented on a "take it or leave itbasis". In such situations, the case for holding that an exclusion clauserepresents the intention of the signer and that the signer should be bound by itis weaker because there is usually an inherent inequality of bargaining powerbetween the parties.[66] As the authors of the Canadian Contractual Interpretation Laws observed, itis not a usual approach to a limitation of liability clause to look only to the weakerparty to determine whether the clause represents its intention. However, given thestrong policy imperative to protect franchisee "it seems likely that the third branch ofthe Tercon test might well be used in the franchise context to invalidate limitation ofliability clauses that would be found enforceable in another commercial context".29Analysis[67] I agree with Mr Murray that on its face clause 29.3 appears clear. I did notunderstand Ms Williams to suggest otherwise. Mr Murray is also correct that theCanadian authorities relied on by Ms Williams have not been applied in New Zealand.To the extent they have been considered at all this Court has observed that "notions of28 Shelanu Inc v Print Three Franchising Corp [2003] OJ No 1919, 64 OR (3d) 533 (Ont CA) at[53].29 Hall, above n 27, at [8.7.3].fairness and reasonableness" are not part of the Court's inquiry into the interpretationof exclusion clauses.30[68] However, I do not consider it appropriate at this stage to strike-out Prominent'sclaim for damages in excess of $11,200.[69] As noted above, partial strike-out is available with caution where it wouldpromote the efficient resolution of the proceeding. I am not satisfied that would bethe case here. All Prominent's causes of action and the balance of its prayers for reliefwould remain. These include Prominent's claims for declarations that in various waysQuest has breached its contractual obligations set out in clause 11.18 (to comply withthe FANZ Code of Conduct and Code of Ethics) and clause 32.15 (to act ethically,honestly and lawfully). These significant claims would remain to be resolvedregardless of whether part of Prominent's claim for damages is struck out.[70] Substantively, Prominent's case is that clause 29.3 is unenforceable inaccordance with the principles outlined in Tercon. This aspect of Prominent's case maynot be straightforward, but on balance I accept Ms Williams' submission that it shouldnot be decided in the context of a strike-out application. It involves questions of lawthat will require an evaluation of competing policy considerations in the context of a"business format franchise". Quest's evidence was that this is the most proscriptiveof the different types of Franchise Agreements. There is no suggestion thatProminent's Amended Statement of Claim does not disclose reasonable causes ofaction and in my view this aspect of Prominent's case should be determined once theCourt has heard all the contested evidence and determined the full factual matrix.Strike-out – franchise term renewal[71] In all but one of Prominent's causes of action the relief it seeks includes:An order directing Quest, within 5 working days at the date of judgment, toprovide Prominent with duly executed franchise term renewal documentationfor a second franchise term of 5 years on the existing terms and conditions tocommence from the date on which the franchise renewal documentation isfully executed.30 See the excerpt at [61] above.[72] Quest says this part of Prominent's claim is frivolous, vexatious or an abuse ofprocess and should be struck out. It says Prominent's right to any renewal is governedby the terms of the Franchise Agreement; and in any event Quest has offered to provideProminent with the renewal to which it is entitled under the Franchise Agreement,which Prominent has refused.[73] Under clause 1.1.28 of the Franchise Agreement any "Further Term" includesany period of holding over. Clause 5.2 provides:Holding OverIf the Franchisor permits the Franchisee to conduct the Franchise Businessfrom the Premises after the exploration or determination of the Terms suchoccupation will be on a month by month basis terminable by one month'swritten notice from the Franchisor and shall be on the terms and conditions ofthis Agreement.[74] Mr Murray submits that Prominent has been "holding over" since 28September 2017; and that if Prominent is entitled to a "Further Term" (which Questdenies), that term must include the period of holding over and therefore mustcommence on 28 September 2017, not the date on which the new franchise agreementis signed. As such, the relief Quest claims is not available under the FranchiseAgreement.[75] Specific performance is a discretionary remedy awarded according to equitableprinciples. It is a means by which parties are held to the bargain they entered into. Itis not for the Court to modify the agreement before ordering that it be performed.However, the Courts have recognised that in some instances the "machineryprovisions" of the contract may need to yield to the Court's directions made in orderthat the contract can be performed.31[76] As Toogood J observed in Zhang v Zhai, amending these "machineryprovisions" will often be a matter of practical necessity when disputes have meant thatthe contract can no longer be carried out according to the timetable and in the way theparties initially envisaged. On the other hand, rewriting the essential terms of the31 Zhang v Zhai [2014] NZHC 2156 at [15] – [16], citing Singh v Nazeer [1979] Ch 474 at 480 – 481per Megarry J.contract such as the purchase price would be to substitute the original contract withanother.32 Ms Williams submits that in all of the circumstances it is reasonablyarguable that the Court retains a discretion to direct that a second franchise termcommence on an alternative date. Counsel refers to the particulars of the alleged (butdisputed) breaches of the Franchise Agreement.[77] Once again, I do not consider it is appropriate at this stage to strike out this partof Prominent's claim. The Court will be much better placed to determine Prominent'sclaim for orders directing Quest to renew the franchise term once it has heard theevidence and is appraised of the full factual matrix. In the meantime I do not considerthis part of Prominent's claim to be frivolous, vexatious or an abuse of process.Result[78] Quest's applications to rescind the injunction and strike-out parts ofProminent's claim are dismissed.[79] Prominent is entitled to costs on Quest's applications to rescind the injunctionand for strike-out. And as noted at [6] above, costs in respect of Prominent'sapplication for further particulars remain at large. If the parties cannot agree thenProminent should file a memorandum of no more than five pages in length within 15working days. Quest should file a memorandum 10 working days later.____________________________Robinson J32 At [17].