Bushetts Transport Limited v Lowes HC Wellington CIV 2011-485-131
[2011] NZHC 615
•25 February 2011
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2011-485-131
BETWEEN BUSHETTS TRANSPORT LIMITED First Plaintiff
ANDEASTERN EQUITIES INVESTMENTS LIMITED
Second Plaintiff
ANDGRAHAM ROGER LOWES AND TONY IAN LOWES
First Defendants
ANDJANIFRIE FOOT Second Defendant
ANDRODERICK JOHN PARSONS Third Defendant
ANDCHB TRANSPORT LIMITED Fourth Defendants
Hearing: 24 February 2011
Counsel: B Gustafson for First and Second Plaintiffs
K Sullivan for First Defendant
P Chisnall for Second Defendant
M Macfarlane for Third and Fourth Defendants
Judgment: 25 February 2011
JUDGMENT OF MILLER J
Introduction
[1] Before me is an application for an interim injunction. Certain orders have been made by consent, mostly affecting the first and second defendants, but the
plaintiffs now seek orders against the third and fourth defendants. The plaintiffs say
BUSHETTS TRANSPORT LIMITED v GRAHAM ROGER LOWES AND TONY IAN LOWES HC WN CIV
2011-485-131 25 February 2011
that the defendants collectively went into competition with them through the fourth defendant, using as a springboard wrongs done by the first and second defendants.
[2] The plaintiffs appear at this stage to have a strong case that wrongs have been done by the first and second defendants and the third and fourth defendants both knew it and sought to benefit from the wrongs. The question is whether in these circumstances it is in the interests of justice that the fourth defendant should be prohibited from trading pending trial; alternatively, that the second to fourth defendants not solicit custom from any of a list of the first plaintiff‟s clients.
The narrative
[3] Until 7 November 2007 the second defendants owned and operated Bushetts Transport (1994) Ltd (BTL 1994). Graham Lowes was the sole director. The firm was an established trucking business based in Waipukurau and operating from a depot which it owned there. On that date the Lowes‟ family trusts sold 50 per cent of the business to the second plaintiff, EEI. The transaction took the following form:
(a) The vendors established the first plaintiff (BTL) and agreed to transfer all of the assets of BTL 1994 to it;
(b) EEI acquired 50 per cent of the shares in BTL in consideration for
$1m, which was defined not as the purchase price but as a deposit for all of the shares;
(c) The Lowes interests were granted a put option under which they could require EEI to purchase the 50 per cent that they still held. There was a mechanism by which valuers would fix the price if the parties could not agree;
(d)The Lowes continued as employees of BTL. The parties agreed that they would work to grow the rural transport business of BTL;
(e) The Lowes entered a 10-year covenant in restraint of trade prohibiting them from being involved directly or indirectly in any similar business, whether on their own account in any other capacity, including that of consultant or employee. Nor could they directly or indirectly assist any such business.
[4] At this point I introduce the second defendant. Ms Foot was the office manager of BTL, having day to day control of its activities. She is very experienced in that role. She was also, until 3 August 2010, a director of BTL. She was not subject to any restraint of trade, but she owed the usual duties of a director and employee. She is the partner of Graham Lowes.
[5] On 4 March 2010 the vendors exercised their put option. They valued the balance payable at $1m, assuming the original payment was not a deposit but rather the purchase price for 50 per cent of the company and that the price paid established fair value for the remaining shares. A dispute arose. The valuer selected by the parties, John Hagen, eventually came down on EEI‟s side. In an opinion dated 15
November 2010 he fixed the balance payable at $183,000. The vendors did not accept this figure, but for present purposes it must be taken to be the balance outstanding. Because of the dispute it has not been paid, nor have the shares been transferred.
[6] Ms Foot resigned as a director of BTL on 3 August 2010 but remained until 5
January 2011 as office manager. The Lowes resigned as employees on 22 December
2010. It became apparent to BTL that the Lowes and Ms Foot intended to compete with BTL, taking the stance that they were justified in doing so because EEI had not been prepared to pay fair value for the business.
[7] BTL 1994 continued to own the Waipukurau depot, which BTL used but which had never been transferred to BTL. BTL moved to other premises about the end of December, and it appears that Ms Foot planned to carry on business in competition from the depot. She became a director of BTL 1994 on 1 November
2010. At about that time the Lowes transferred their shares in BTL 1994 to her and the partner of Tony Lowes.
[8] There is uncontroverted evidence that Ms Foot took steps to hire BTL staff and acquire BTL customers and sought to retain the BTL phone line and fax. Only when Peter Roebuck of EEI arrived unannounced at the depot on 23 December and insisted on it did she hand over these items. Her stance was that she owed no obligations to BTL and the Lowes no longer had anything to do with BTL 1994. She retained a copy of BTL‟s client list and a hard drive containing a copy of BTLs computer system; these items were handed to her counsel shortly before interim orders were made in February, but it is not known whether they have been copied. Only recently have BTL mobile phones been returned, minus SIM cards.
[9] There is evidence that Graham Lowes told Mr Roebuck that he was going to keep „his‟ clients and staff and that the restraints were worthless; further, that he and a CHB employee have solicited business for the fourth defendant, CHB, from a BTL client.
[10] A BTL employee, Wayne Robinson, deposes that late in November 2010
Ms Foot approached him, inviting him to join her and the third defendant, Rod Parsons, in a competing business, the fourth defendant, CHB. He deposes that Ms Foot said she and the third defendant, Rod Parsons, wanted him to help obtain BTL clients and staff. He refused.
[11] There is also evidence that while still an BTL employee Ms Foot took steps to secure finance for CHB or BTL 1994, advising a financier, UDC Finance, that she intended to capture the existing clientele. She used the financial statements of BTL to support the financing applications. CHB has acquired three trucks which were financed by UDC. They are driven by former BTL employees.
[12] CHB now operates from the Waipukurau depot, which is still owned by BTL
1994. As noted above, the Lowes no longer hold shares in BTL 1994; the company is owned by their respective partners, including Ms Foot. Graham Lowes remains a director.
[13] CHB is owned as to 50 per cent each by Ms Foot and the family trust of
Mr Parsons. It has been in existence for some time under a former name. She was a
director until 26 December 2010, when she resigned, and remains its manager. He is an agricultural contractor and rural transport operator, but until recently had not entered the livestock transport market in which BTL operates. He explains that he had not done so because he did not wish to compete with Graham Lowes, who is a good friend of his. He deposes that he went into business with Ms Foot after making inquiries of her to confirm she was not subject to any restraint of trade. She runs the CHB office. He acknowledges that CHB acquired three BTL drivers and until recently one of the trucks was in BTL livery. Further, CHB is now operating from a depot owned by the Lowes, as he puts it. He emphasises that he and CHB have no intention of using any confidential information of BTL‟s, but he does mean to compete in transporting livestock. He stresses that CHB does not need access to BTL‟s client database to do so, and that many orders are placed by stock agents or other intermediaries. If Ms Foot were to be restrained from continuing in business, he would acquire her interest and she would cease to work for the company. If necessary he would simply set up a new livestock transport business as part of his existing contracting business.
[14] Ms Foot has also sworn a brief affidavit. She emphasises that she is not subject to any restraint of trade, and she denies misusing any confidential information of BTL‟s. The hard drive and customer list were not retained by her but were left behind by the plaintiffs when they “raided” the office in December 2010, and she has nothing in her possession or power that could be remotely relevant to matters in issue in the litigation. The main point of her affidavit, she explains, is to emphasise that she has complied with the orders made to date, and she will, pending further order, agree not to solicit business from a list, which remains to be determined, of BTL‟s customers.
[15] Lastly, there is evidence that on 29 December BTL was to pick up cattle from a client. A CHB truck, in BTL livery, arrived at an earlier time and transported the animals. It is said that Ms Foot misused her knowledge of the order to divert the work to CHB.
The proceeding
[16] The statement of claim pleads that the Lowes and Ms Foot owed contractual and fiduciary duties to BTL and, in the Lowes‟ case, to EEI. It pleads breach of contract by the Lowes in what is characterised as an attempt to subvert the retraints of trade using CHB, breach of Ms Foot‟s duties to BTL qua director, interference with contractual relations (between EEI and the Lowes and BTL and Ms Foot) by the second, third and fourth defendants, dishonest assistance of Ms Foot by the first, third and fourth defendants, and breach of the Fair Trading Act through CHB passing itself off as BTL. The relief sought includes damages, but permanent injunctions are also pursued.
[17] The application for interim orders sought are:
1. That the first defendants will not without further order of the Court:
1.1. Be directly or indirectly interested, engaged or concerned in any business of a similar nature to the business carried out by first Plaintiff (the “Specified Business”), within New Zealand, whether on their own account or as a consultant to or partner, agent, employee, shareholder or director of any other person, firm, company or other body, or otherwise;
1.1.1.Directly or indirectly assist financially, any person firm, company or other body carrying on the Specified Business within New Zealand; or
1.1.2.Directly or indirectly solicit business from any person who is a customer or client of the First Plaintiff.
2.The first and second defendants will not without further order of the Court claim to have authority to bind the first plaintiff to any contract, incur any debt in the name of the first plaintiff or claim to still be directors, employees of the first plaintiff;
3.The defendants will not use the name “Bushetts” and Bushetts Transport” in any form when soliciting business and will remove the name Bushetts from any vehicle;
4.The defendants will return to the plaintiffs any property of the plaintiffs including but not limited to cellphones, fuel cards, customer lists or documentation containing details of the First Plaintiff‟s customers in either electronic or hard copy;
5. The fourth defendant cease to trade until further order of the Court;
alternatively
6.The second, third and fourth defendants will not without further order of the Court directly or indirectly solicit business from any person who is a current or has been a customer within the last 12 months of the First Plaintiff.
[18] The first four orders were granted by consent on 4 February. Those now pursued are the fifth or sixth, in the alternative. As to the sixth, the plaintiffs propose to produce a list of clients from whom the second to fourth defendants may not directly or indirectly solicit work. As to the fifth, it is said that the order is necessary to prevent the Lowes from allowing CHB to use the depot, and it would not preclude Mr Parsons from operating independently of the other defendants.
The parties’ positions
[19] For the plaintiffs, Mr Gustafson emphasised that the case is strong, and the defendants‟ conduct egregious. He highlighted undisputed evidence that Ms Foot told Mr Rosebuck of EEI that she was going into business with Mr Parsons and would take the staff and clients and keep the phone and fax, and that by the time EEI got control of BTL there would be nothing left of it. Ms Foot had a copy of the entire computer system. She used BTL‟s information to set up financing for CHB. Graham Lowes breached the restraint of trade by operating the CHB business from the Waipukurau depot of BTL 1994. The timing of the transfer of BTL 1994 shares to Ms Foot is not coincidental, and such evidence as there is suggests that CHB is not paying rent for the site. (I note that Mr Sullivan‟s instructions are that it is.) Mr Parsons knew about the restraints. He cannot give meaningful assurances that information will not be misused by CHB as he does not have an operational role; he is dependant on Ms Foot.
[20] The first and second defendants did not deny that there is a strongly arguable case against them. Mr Sullivan appeared for the first defendants to abide, but was called upon regarding CHB‟s use of the BTL 1994 depot, which is arguably in breach of the existing orders and evidence that the Lowes are supporting CHB. His stance was that he had not anticipated that such an order might be made today; the plaintiff should return with a fresh application if necessary.
[21] Mr Chisnall for Ms Foot accepted that she will not solicit business from the (to be determined) clients of BTL. She acknowledged that an order might be made against her to that end.
[22] For the third and fourth defendants, Mr MacFarlane characterised the orders sought as draconian and unjustified, however meritorious may be the plaintiff‟s complaints about the Lowes and Ms Foot. Nothing on the pleadings warrants such relief, and there is no serious question to be tried in relation to order 5. There is no evidence that CHB was party to any breach of restraints by the Lowes, or gave dishonest assistance to Ms Foot, and no evidence of interference with the contracts. It is true that CHB has gained a springboard because of Ms Foot‟s knowledge and that of the BTL drivers, but they are not subject to any restraint. He accepts that there may be a serious question to be tried over CHB soliciting BTL clients, although the case is not strong. CHB would be prepared not to approach, for a limited period, any clients who have a contractual tie to BTL. But it is not possible to stop Mr Parsons entering the market, if not through CHB then using some other vehicle, and he and Ms Foot and the former BTL drivers are quite entitled to use their knowledge of the market. Order 5 amounts to final relief, and order 6 would involve the Court in intensive supervision and lead to many disputes. It too would put CHB out of business, affecting competition, and there would be third party consequences for the employees and drivers, and for UDC as financier. It also assumes that BTL has some property in clients, but there is no evidence of that; many clients use a number of transport providers on a casual basis. Damages are an adequate remedy, and would be easily quantified by reference to the profit content of any service provided to „qualifying‟ BTL customers.
The law
[23] It is common ground that the test for an interim injunction is the interests of justice, and that the Court approaches that question by examining the strength of the case and the balance of convenience or fairness. Each case obviously must be
assessed on its merits, but there are a number in which similar issues have arisen.[1] I
[1] BDM Grange Ltd v Parker (2005) 2 NZELR 523; Argent Networks Ltd v Jones HC Auckland
CIV 2007-404-2944, 12 July 2007.
respectfully adopt what Priestley J said in BDM Grange v Parker:
[34] ... The theme running through these decisions can be broadly summarised as a marked reluctance on the part of the Courts to allow a party who in breach of an employment contract or some other fiduciary relationship to profit from that. Those authorities include Schilling v Kidd Garrett Ltd [1977] 1 NZLR 243; A M Satterthwaite & Co Ltd v Gay (1987)
1 NZELC 95,356; Bradford & Bingley plc v Holden [2002] EWHC 2445;
and Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 238.
[35] These authorities were generically described by Mr Stevens as “springboard” cases. As I understand the principle, which I accept, Courts tend to be vigilant in ensuring, where there has been a serious breach of the type I have described, that down stream benefits do not flow to a party as a result of that party‟s unlawfulness. This observation additionally applies to an assessment of damages as a remedy, it being very difficult to quantify losses which might flow from departing customers and matters of that sort.
[36] This aspect was highlighted by Nelson J in Bradford & Bingley plc:
Having made deliberate unlawful use of the plaintiff‟s property he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not. In my judgment, it is of the highest importance that the principle of Robb v Green, which let it be said is one of no more than fair and honourable dealing, should be steadfastly maintained.
That it seems to me, is entirely applicable to the facts of this case. The claimants still have the right to protect their documents, the confidential information within those documents, and to ensure, at least to all proper extent, that the defendant does not take unfair advantage from having obtained that confidential information wrongly.
The second limb of the defendant‟s response in relation to the springboard injunction, is that damages are an entirely adequate remedy. The answer to 2 NZELR BDM Grange Ltd v Parker 529 that in this case, in my judgment, is no, it would be very difficult to quantify future business from lost customers. There is, in any event, a need to prevent the misuse of the information. The claimants do not know the extent of the misuse in the past and cannot have confidence, in view of the defendant‟s lies, as to the future use of unauthorised copies of such documents. The defendant, even though his I.F.A. membership is at present suspended and he is not at the moment working for Wilson Grange, can still act on behalf of others. It is proper to make the order here, as Lord Justice Nourse said in the case of Bullivant, and it is appropriate that I do so.
[37] Looking at the same issue from a slightly different perspective is the dictum of Richmond P in Schilling v Kidd Garrett Ltd at p 248:
Argument was addressed to us on behalf of Schilling that the latter‟s visit to Sweden in February 1974 was not a real or effective cause of Husqvarna‟s eventual decision to give the agency to Schilling. I prefer to approach the question of causation somewhat differently. I have already expressed the view that Schilling was obliged, as a matter of good faith, to allow Kidd Garrett a fair opportunity to approach Husqvarna and discuss the future of the agency. In other words, Kidd Garrett were entitled to a fair chance, free from competition by Schilling, to retain the agency for themselves.
This and other authorities suggest injunctive relief might be available to permit time to salvage a commercial relationship which is in jeopardy.
[24] Nonetheless, the Court has been cautious about making orders of the kind now sought, particularly where employees or other third parties may be affected. Its willingness to intervene is likely to depend on the nature of the information being misused, the strength of the case, and the availability of alternatives. For example, in BDM Grange Priestley J did not make orders of the kind now sought, having regard to wide-ranging undertakings which had the effect of securing significant numbers of the plaintiff‟s customers, and the capacity of one of the defendants to pay damages.
Discussion
[25] I agree with Mr MacFarlane that the particular orders sought require that I focus on the position of CHB and Mr Parsons. Ms Foot is also directly affected, but she will abide the Court‟s decision on order 6.
[26] However, I do not accept Mr MacFarlane‟s contention that the case against the third and fourth defendants is weak. I preface what I have to say by recognising that care must always be taken when assessing the strength of a case before trial. I cannot avoid doing so here because the strength of the case is an important consideration. The assessment must be made on the strength of the evidence the parties have chosen to adduce at this time. As matters stand the plaintiffs‟ account is consistent with the circumstantial evidence and substantially uncontroverted by the defendants. It establishes a strongly arguable case.
[27] So far as the present applications are concerned, four points are particularly important. First, although she has ceased to be a director of CHB Ms Foot remains a
50 per cent shareholder and the office manager. Second, the inference is available that through Ms Foot the Lowes have gone into business with Mr Parsons, using her as their agent to subvert the restraint of trade. Third, it is clearly arguable, albeit by inference, that Mr Parsons knew these things. Fourth, CHB appears to have benefited both from the Lowes‟ support, in the form of the depot, and Ms Foot‟s use of confidential financial and client information of BTL‟s.
[28] I do not accept that damages are an adequate remedy. They will not be easy to quantify. The profit earned from any given client may be ascertainable without difficulty, but there clearly will be substantial questions of causation affecting almost every transaction. The capacity of CHB to pay damages is also in doubt, while Mr Parson simply deposes that his net financial worth exceeds $150,000.
Disposition
[29] During the hearing I intimated to counsel that there appeared to be a strong arguable case, and I observed that order 5 need not have the adverse third party consequences feared by Mr MacFarlane. It does not preclude Mr Parsons from entering the market independently of the first and second defendants (although he remains at risk of damages, and of restraint should he do so in a way that breaches the Lowes‟ restraints or uses any confidential BTL information). I invited counsel to consider more closely the form of relief that might be granted. Argument then focused on the merits or otherwise of orders 5 and 6.
[30] It became apparent that the attraction of order 5 rested in substantial part on Ms Foot‟s continued involvement as a CHB shareholder and manager. Mr Chisnall and Mr Macfarlane were able to instruct me that given my intimation that order 5 might be granted, Ms Foot will within 14 days transfer her shares in CHB to Mr Parsons and cease to be employed by CHB. Relief from this undertaking may be sought if 14 days is too short; I was given to understand that UDC‟s agreement may be needed. This undertaking does not preclude her from taking up employment with
some other trucking firm in the area. Nor is the undertaking permanent; it is to subsist until trial or earlier order of the Court.
[31] On that basis, I intimated that I was not prepared to make an order preventing CHB from continuing in business. There is a strongly arguable case that CHB has used BTL as a springboard, but Mr Gustafson accepted that, independently of the Lowes and Ms Foot, Mr Parsons could easily establish another corporate vehicle and continue in business, using the same trucks and drivers. Attention accordingly turned to the form of the restraining orders that might be made against CHB and the other defendants in circumstances where Ms Foot will have severed her relationship with CHB.
[32] Mr Gustafson initially sought an order that the third and fourth defendants not accept work from the top 150 clients of BTL. That would include major industry participants such as Affco and Silver Fern Farms and various intermediaries. Mr Macfarlane understandably characterised that as order 5 in another guise. It also seemed to me to go too far, in that it presupposed that BTL has some property in the clients.
[33] The alternative order sought by Mr Gustafson, and the least offensive from Mr Macfarlane‟s point of view, was an order that the second to fourth defendants not directly solicit named clients to whom BTL has provided livestock trucking services within the last 12 months. The affected clients are to be identified, with their addresses, in a list that BTL is to give the defendants by 5pm on Friday, 25 February. There will be an order accordingly, to take effect 48 hours after service of the list of affected clients. I record that Mr MacFarlane did not consent to this order. He characterised it as too sweeping and unworkable, predicting that the list will include clients for whom BTL has been only one of a number of suppliers and a secondary one at that. My answer is that given by Nelson J in Bradley & Bingford; having apparently wronged the plaintiffs, the third and fourth defendants cannot complain if the law cannot readily distinguish those clients whom they might have approached lawfully from those whom they might not.
[34] The order does not preclude the third and fourth defendants from soliciting custom through newspaper advertising that does not directly target the affected BTL clients and does not make use of the names Bushetts, Lowes, or Foot.
[35] The list of affected BTL clients is drawn from what counsel describe as the Empower list. The original list includes the details of transactions between BTL and those clients in the last 12 months. The original list is to be available for opposing counsel to inspect for verification purposes by 5pm on Friday, 25 February.
[36] There will be leave to apply generally. Without limitation:
a) Mr Macfarlane intimated that once his clients have seen the Empower list an application may be made to eliminate some clients from it on the ground that they are not BTL customers;
b) Mr Gustafson intimated that an application may be made to prevent CHB using the BTL 1994 depot at Waipukurau. Such application may be made without prejudice to any argument that by allowing CHB to use it the first defendants are breaching the orders made on 4 February.
[37] Counsel are to file a joint memorandum proposing a timetable for an early trial. If agreement on the directions cannot be reached by 2 March the Registrar is to arrange a teleconference. I record Mr Sullivan‟s advice that the Lowes intend to challenge the restraint as both too long and geographically too extensive; they maintain that they are unable to work. Steps should be taken to formulate that claim without delay.
[38] Costs are reserved.
Miller J
Solicitors:
Morrison Daly, Wellington for First and Second Plaintiffs
MacAlister Mazengarb, Wellington for Second Defendant
Sainsbury Logan & Williams, Napier for Third and Fourth Defendants
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