Christensen v Gordon
[2021] NZHC 490
•15 March 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-710
[2021] NZHC 490
BETWEEN TONY CHRISTENSEN and ROSALIND
MARY CHRISTENSEN as trustees of the CHRISTENSEN FAMILY TRUST TWO
First plaintiffsAND
WOODY ROBERT PURDOM, LEANNE GILLIAN RUBY CLOUGH and PROFESSIONAL TRUSTEE SERVICES
2019 LIMITED, as trustees of the PURDOM FAMILY TRUST
Second plaintiffs
AND
TIMOTHY PAUL GORDON
First defendant
AND
ALUMINATE SOLUTIONS LIMITED
Second defendant
AND
ANGELA GORDON
Third defendant
Hearing: 30 November 2020 - 2 December 2020 Appearances:
P Amaranathan for the plaintiffs S P Maloney for the defendants
Judgment:
15 March 2021
Reissued:
16 March 2021
JUDGMENT OF PALMER J
This judgment was delivered by me on Tuesday 16 March 2021 at 10.30 am.
Pursuant to Rule 11.5 of the High Court Rules.
Counsel/Solicitors:
…………………………
Registrar/Deputy Registrar
E St John, Barrister, Auckland Mackie & Co Ltd, Auckland Rice Craig, Auckland
CHRISTENSEN v GORDON [2021] NZHC 490 [16 March 2021]
Summary
[1] Mr Tim Gordon and Mrs Angela Gordon sold shares in Trans-Space Industries Ltd (Trans-Space), to Mr Tony and Mrs Rosalind Christensen, and Mr Woody Purdom and Ms Leanne Clough. The agreement contained a restraint of trade clause, preventing the Gordons, in the next three years, from engaging in a business that is “the same or substantially similar to” Trans-Space’s business, “namely the manufacture, . . . distribution … of … partitioning systems or door systems”. Trans- Space distributes complete partitioning systems. Mr Gordon subsequently bought and runs Aluminate Solutions Ltd (ASL), which distributes components of partitioning systems and door systems, particularly aluminium extrusions that make up partition frames.
[2] The purpose of the restraint of trade clause was to prevent Mr Gordon, with his knowledge, expertise, and experience, from competing with Trans-Space in relation to partitioning systems and door systems while its new owners were in their first three years of business. There is no question that was reasonable. I consider that ASL distributes a sufficiently large proportion of a partitioning system and, on balance, a door system, that, for the purpose of the restraint clause, it effectively distributes those systems. ASL competes with Trans-Space commercially. A reasonable person would understand ASL to engage in a “substantially similar” business commercially. Mr Gordon’s operation of ASL means that he is trenching directly on Trans-Space’s business, however genuinely he believes he is not. I issue an injunction accordingly, as clarified in this re-issued version of the judgment. If the parties cannot agree on damages, there will need to be further hearing on that.
What happened?
Trans-Space
[3] In 2012, Mr Gordon, the first defendant, purchased Trans-Space. Trans-Space manufactures, imports, sells, and installs distributed partitioning systems or door systems. These systems are usually installed in office-buildings to partition space into offices – including walls, windows, and doors. They are often purchased at the
recommendation of building contractors, quantity surveyors, and architects who design fit-outs.
[4] Mr Gordon was the managing director and majority shareholder of Trans- Space. He developed relationships with customers and suppliers and developed the business and products.1 He knew the profit margin, customer base, and designs.2 He was involved in setting Trans-Space’s strategic direction. He knew Trans-Space’s products “inside out”.3 His wife, Mrs Gordon, also worked in Trans-Space as an estimator. She did pricing, estimating, and quoting, working with long-term customers and quantity surveyors.4
Sale of Trans-Space by the defendants to the plaintiffs
[5] On 27 November 2019, Mr Gordon signed a sale and purchase agreement for shares in Trans-Space with Mr and Mrs Christensen, and Mr Purdom and Ms Clough, through their respective family trusts in equal shares.5 Mrs Gordon also signed the agreement with Mr Purdom and Ms Clough as co-covenantor. Mr Purdom had worked in Trans-Space since 2003 and already owned 20 per cent of the shares. Mr Christensen worked at Trans-Space since 2017. Mr Gordon stepped down as director and Mr Purdom and Mr Christensen became the directors. Settlement occurred on 6 December 2019, according to the settlement statements, with final settlement occurring on 16 December 2019, according to Mr Gordon.6
[6] The purchase price was $1,921,000, for the shares, current account and two vehicles. Mr Gordon does not accept that was “substantial” because “it is not a large amount of money to me”.7 The sale and purchase agreement included a restraint of trade clause which stated (with emphasis added):8
7.3The Vendor and his wife, Angela Gordon, covenant that each of them will not, and will not permit, any associated party (as defined in the Income Tax Act 2007) of either of them to:
1 Notes of Evidence (NOE) 72/24–33, 73/1–17 and 75/21–29.
2 NOE 75/1–15.
3 NOE 75/28–29.
4 NOE 73/19–34 and 74/1–8.
5 Common Bundle of Documents (CBD) 449 and 462.
6 NOE 79/1–3.
7 NOE 79/13–16.
8 CBD 470.
(a)During the period of three years following the Completion Date and within New Zealand directly or indirectly carry on or be interested, engaged or concerned (whether on their own account or in partnership with or as manager, agent, director, shareholder, employee or beneficiary under a trust or in any other capacity), in any business, venture or other activity that is the same as or substantially similar to the Company’s business, namely the manufacture, importation, distribution or installation of mov[e]able walls (operable wall systems), partitioning systems or door systems either in the domestic or commercial markets within New Zealand including but not limited to the Domakaba Group of companies including Skyfold; or
(b)during the period of three years following the Completion Date, whether on their own account or for any other person, solicit, entice or endeavour to entice away any employee, officer or consultant of the Company, any customer of the Company or any employee, officer or Customer of a Related Party of the Company, or
(c)at any time disclose or use confidential information or other intellectual property rights of the Company or its Related Parties.
7.4The Vendor and the said Angela Gordon each acknowledge that:
(a)the restrictive covenants contained in clause 7.3 are reasonable and necessary and have been given to protect and maintain the goodwill and proprietary interests of the Company; and
(b)the Purchaser has entered into this Agreement in reliance of these restrictive covenants; and
(c)if a restrictive covenant is breached, monetary damages may not be sufficient compensation for the harm done to the Company and/or the Purchaser. Accordingly, if a breach is threatened, or in the opinion of the Purchaser a breach is likely, urgent equitable relief may be sought.
[7] The plaintiffs’ lawyers included the restraint of trade clause at Mr Purdom’s and Mr Christensen’s request. It was agreed without amendment. Mr Gordon accepts it was reasonable for them to want a restraint of trade clause.9 I accept the evidence of Mr Christensen and Mr Purdom that the restraint of trade clause was important to them and they would not have bought the shares if Mr Gordon had not agreed to the
9 NOE 76/3–11.
restraint of trade clause. It was a deal breaker.10 All parties took legal advice in entering into the agreement.11
The defendants acquire Autex PSL amid ill-feeling
[8] After the sale of Trans-Space, Mr and Mrs Gordon went on holiday overseas over December 2019 and January 2020. On their return, at the invitation of Mr Christensen and Mr Purdom, they both worked for Trans-Space, providing continuity in their areas of responsibility. Their son, Mr Joshua Gordon, also worked for Trans-Space as an installer. Soon after their return, Mr Gordon looked around for new businesses to invest in.
[9] On 20 February 2020, Mr Gordon emailed Autex PSL, a subsidiary of the Autex Industries group.12 He obtained a copy of their profit and loss statement and other documents. Autex PSL was also involved with door and partitioning systems.13 It described its products as “door systems” and “partitioning systems”.14
[10] On 28 February 2020, having learnt of Mr Gordon’s interest in Autex PSL, Mr Purdom emailed him to object.15 Mr Gordon replied, saying he was unlikely to proceed and would take Mr Purdom’s views on board.16 The same day, he ceased working for Trans-Space.17 On 29 February 2020, he received Autex PSL’s profit and loss statement.18 On 6 March 2020, Mr Gordon received salary information from Autex PSL, then the fixed asset register and lease documents.19 He denies intentionally misleading Mr Purdom about his intentions to buy.20 On 10 March 2020, Mr Gordon was progressing the drafting of a Sale and Purchase agreement.
10 Brief of Woody Purdom, 27 October 2020 [Purdom] at [16]; and Brief of Evidence of Tony Christensen, 27 October 2020 [Christensen] at [22].
11 NOE 76/12–14; Purdom at [9]; and Christensen at [12].
12 CBD 599.
13 CBD 596.
14 CBD 74, 78 and 80; and Plaintiffs’ Supplementary Bundle (PSB) 108 and 109.
15 CBD 594.
16 CBD 595.
17 Gordon at [43].
18 CBD 598.
19 CBD 607, 616 and 617.
20 NOE 86/14–16.
[11] On 18 March 2020, Mr Gordon changed the name of a company he had registered to Partition Solutions Ltd (PSL). Mr Joshua Gordon continued to work for Trans-Space, on installation and CAD drawings.21 Mr Christensen’s evidence is that Mr Joshua Gordon knows a lot about the design of Trans-Space’s walls and doors.22 Mrs Gordon continued to work for Trans-Space, quoting, estimating, and dealing with quantity surveyors and architects.23 In April, she emailed Mr Gordon two invitations she received for Trans-Space to tender for work.24
[12] On 29 April 2020, Mr Gordon says he and the owners of Autex PSL signed a sale and purchase agreement.25 But no signed copy has been disclosed. Ms Amaranathan, for the plaintiffs, invites the Court to draw an adverse inference from the lack of a copy being made available. On 29 April 2020, Mr Gordon emailed Mr Purdom to say he had purchased Autex PSL.26
[13] Ill-feeling was generated. Lawyers’ letters, and then legal proceedings, ensued. Mrs Gordon was dismissed from her employment with Trans-Space and Mr Joshua Gordon left his employment with Trans-Space.27 On 22 May 2020, Mr Gordon changed his company’s name from PSL to Aluminate Solutions Ltd (ASL).28 He also removed terms such as “partitioning systems” and “door systems” from the company’s website.29 Mr Gordon is the sole director and shareholder of ASL. He, Mrs Gordon, and Joshua Gordon now work at ASL. ASL has been trading from around 1 July 2020. Mr Gordon says the sale and purchase agreement for Autex PSL became unconditional on 13 July 2020.30
21 NOE 10/15–16.
22 NOE 10/19–20.
23 NOE 10/10–12.
24 CBD 634 and 646.
25 Brief of Evidence of Timothy Gordon, 9 November 2020 [Gordon] at [57].
26 CBD 653.
27 NOE 24/16–17.
28 CBD 687.
29 NOE 102/19–22.
30 Gordon at [63].
Proceedings
[14] In these proceedings, the plaintiffs seek an account of profits, compensatory damages, and injunctions restraining Mr and Mrs Gordon along the lines of the restraint of trade clause.31
[15] On 29 June 2020, Gault J dismissed an application by the plaintiffs for an interim injunction.32 He accepted that, if the plaintiffs are successful, their loss would be relatively easy to quantify.33 On the other hand, he accepted an interim injunction may well have the effect of Mr Gordon not purchasing Autex PSL.34 He was also concerned that granting an interim injunction may effectively determine the litigation in the plaintiffs’ favour.35 He considered the balance of convenience was clearly against granting an interim injunction.36 He made orders restraining the defendants from disclosing or using confidential information from Trans-Space unless written undertakings were provided.37
[16] The trial on liability was held before me from 30 November to 2 December 2020. If breach is sustained, there will be a further hearing on the quantum of damages.
Law of restraint of trade
[17] The parties take different approaches to the interpretation of the contract here. Ms Amaranathan, for the plaintiffs, takes a purposive approach. Mr Maloney, for the defendants, takes a plain meaning approach. The issue can be complex in abstract.38 The New Zealand Courts have greater regard to the context of the parties in interpreting the meaning of a contract than they used to. The Supreme Court has stated the proper approach is “an objective one, the aim being to ascertain ‘the meaning which the document would convey to a reasonable person having all the background
31 First amended statement of claim, 21 September 2020 at [20].
32 Christensen v Gordon [2020] NZHC 1486.
33 At [37].
34 At [38].
35 At [47].
36 At [54].
37 At [58].
38 See, for example, Helen Winkelmann, Susan Glazebrook and Ellen France “Contractual Interpretation” (2020) 51 VUWLR 463.
knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’”.39 But “the text remains centrally important” as its ordinary and natural meaning, construed in the context of the contract as a whole, “will be a powerful, albeit not conclusive, indicator of what the parties meant”.40 And, “in interpreting commercial contracts the courts should have regard to their commercial purpose and to the structure of the parties’ bargain, to the extent that they can reliably be identified”, though there are “some dangers” in this approach.41
[18] Here, the parties agree the courts will hold a restraint of trade to be unenforceable except to the extent the party relying on it shows it is reasonable.42 Reasonableness is assessed at the time the restraint is entered into, taking into account all the circumstances including the consideration given. More latitude is given to restraint clauses in agreements for the sale of shares, which protect the goodwill of a purchased business.43 As the Court of Appeal said in Brown v Brown, “the freedom of a party to make [their] own bargain is well recognised”.44 Where there is equal bargaining power and equal access to advice, the Courts are reluctant to intervene by holding one term of an overall arrangement to be unreasonable.45
[19] In Telfer Electrical Nelson Ltd v Trotter, Simon France J considered an agreement restraining Mr Telfer from involvement in a business which was “the same or similar” to the relevant firm’s business, which was defined as “electrical wholesaling”.46 Simon France J held the restraint of trade was unreasonable in duration, and that the new electrical contracting business of Mr Telfer was not the same or similar to electrical wholesaling for the purposes of the restraint.47
39 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60] citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann.
40 At [63].
41 At [79].
42 Brown v Brown [1980] 1 NZLR 484 (CA) at 498–499.
43 At 488.
44 At 502.
45 Fletcher Aluminium v O’Sullivan [2001] 2 NZLR 731 (CA) at [42].
46 Telfer Electrical Nelson Ltd v Trotter [2020] NZHC 1152.
47 At [103] and [118].
Issue 1: Have the defendants breached the restraint of trade provision?
[20] At the heart of this case is whether ASL’s business falls within the definition of the restraint of trade clause in the sale of shares in Trans-Space by the defendants to the plaintiffs. I heard expert evidence on that question and I had a site visit to the premises of both companies, accompanied by counsel.
What does ASL do?
[21] Mr Smith agrees it is probable that there are only about 10 companies who specialise in commercial interior partitioning/doors.48 Mr Gordon thought it sounds right that there are only about 10 companies specialising in distributing components for interior partitions, but he could only think of six off-hand.49
[22] Autex PSL described “partitioning systems” and “door systems” amongst its products.50 Mr Purdom’s and Mr Christensen’s evidence is that that is the same or almost the same as what ASL is now supplying.51 Mr Purdom’s evidence is that ASL supplies everything needed to construct doors and partitions except for the glass, handles, and wall panels.52 To him, they are selling partitioning and door systems.53 He says their sliding door systems are almost identical.54 There is evidence of Autex PSL’s doors being specified in a tender in which Trans-Space participated.55 Like ASL, Trans-Space manufactures extrusions off-site to their specifications.56
[23] Mr Gordon’s evidence is that ASL purchases extrusions from McKechnie Aluminium Solutions Ltd, which manufactures raw aluminium,57 according to ASL’s designs and their exclusive dies to which they have the intellectual property.58 The extrusions have a specific design and shape. They can supply powder-coated
48 NOE 47/15–17.
49 NOE 81/31–32.
50 CBD 74, 78 and 80.
51 Purdom at [26] and [92]; and NOE 3/15–16 and 14/10–12.
52 Purdom at [92]; and NOE 16/1–2 and 17/24–26.
53 Purdom at [92]; and NOE 14/10–12.
54 Purdom at [94].
55 CBD 670.
56 Purdom at [89].
57 Gordon Supplementary at Annex D.
58 Gordon at [72].
extrusions by sending them out to be powder-coated.59 Sometimes, but seldom, they are further cut to customised lengths.60 ASL sells all the material physical components of partitioning systems and door systems except glazing, wall panels, and door hardware. It does not assemble the components.61 Mr Gordon says that, for the interior fitout of a commercial space, a customer could choose Trans-Space’s moveable partitioning system or ASL’s fixed partitioning system.62 ASL offers quantity surveying and CAD drafting services.63 Until a couple of weeks before trial, it advertised itself as offering site inspection and installation sign-off services but Mr Gordon says that was a misunderstanding by its marketing people.64 ASL offers installation inspection but does not offer signing-off services.65 ASL provides a back to back manufacturer’s warranty from McKechnie’s.66
[24] Mr Gordon’s evidence is that, while Trans-Space sells very specific highly specialised moveable walls and door systems, ASL sells components for their customers to make those products.67 He denies they both specialise in interior partitions and doors but acknowledges they are both in the interior fitout market.68 Mr Gordon’s evidence is that the previous information on Autex PSL’s website regarding them supplying partitioning systems was removed, after it was brought to Mr Gordon’s attention by his barristers.69 He says this was because it was incorrect and misleading. Mr Gordon’s evidence is that ASL “specialise[s] in aluminium extrusions”.70 My impression was that Mr Gordon was straining somewhat to avoid accepting that most of ASL’s products are used for partitioning systems and door systems.71 However, I accept he genuinely believes ASL and Trans-Space supply different products.
59 NOE 71/15–19.
60 NOE 71/20–33.
61 NOE 128/30–34 and 129/19–24.
62 Supplementary Brief of Timothy Gordon, 26 November 2020 [Gordon Supplementary] at [16].
63 NOE 50/27–31; and CBD 964 and 966.
64 CBD 967; and NOE 68/21–31 and 91/6–9.
65 CBD 967; and NOE 68/21–31 and 91/6–9.
66 PSB 127.
67 NOE 97/1–8.
68 NOE 97/9–13.
69 CBD 728; and NOE 103/27–35.
70 NOE 113/4.
71 NOE 112/28–31 and 113/1–10.
[25] Mr Clinton Smith is the defendants’ expert. He has given evidence in relation to cases regarding the building industry and leaky homes though not, previously, interior partitioning.72 His evidence is that ASL’s products may be used as components of interior partitioning systems and door systems. He says Trans-Space uses large, complex machinery in an extensive factory with specialised tools and designated areas for cutting, welding, assembling, and finishing products.73 By contrast, he says ASL operates from comparatively small premises and has no machinery other than a basic drop-saw and a forklift.74 These observations are consistent with my site-visit.
[26] Mr Smith says ASL is simply a supplier of components of a system, not a finished system.75 He says:76
A system is not the component parts. A system is the arrangement of those parts so that the components work together in a specific way. For example, a door by itself is not a system. It becomes a system when it is fixed on hinges onto a frame, and that frame is part of a wall.
[27]But the terminology is not precise. Mr Smith also gave evidence that:
(a)A partitioning system is “a mixture of aluminium extrusions that are a specific shape that…clip together so that it creates a useable system so that doors meet and glass gets clipped in and holds the ceiling up”.77
(b)There are four essential component parts of a partitioning system: a frame; panels, made of glass or wood, which fit into the frame; doors; and the labour involved in assembly.78
(c)A panel slots into an “aluminium system”.79
72 NOE 30/19–27.
73 Brief of Clinton Smith, 9 November 2020 [Smith] at [45]–[49].
74 Smith at [61].
75 NOE 47/26–27.
76 Supplementary Brief of Clinton Smith, 26 November 2020 [Smith Supplementary] at [18].
77 NOE 15/20–23.
78 NOE 64/2–4; and Smith at [34].
79 NOE 34/8.
(d)ASL was advertising components that can be put together to create one of the “joinery systems” ASL advertises.80
(e)Autex PSL advertised itself as supplying door systems. ASL is supplying the same thing.81 ASL is selling everything Autex PSL described as a partitioning system.82
(f)If ASL supplied all the components for a partition except for the screws, it would not be supplying a partitioning system.83 Though later, Mr Smith said “if you weren’t providing the screws I’d say, yes it’s a partitioning system”.84 A flatpack partition would still need to be constructed.85
(g)His evidence is not based on how the industry uses the terms “partition system” or “door system”.86
Submissions
[28] The defendants do not challenge the enforceability of the restraint here, in principle and subject to their affirmative defence that ASL does not compete with Trans-Space. They say the plaintiffs have simply failed to understand what it is ASL does. Counsel also helpfully agree that the issue to be decided is whether ASL manufactures or distributes door systems or partitioning systems. They disagree about the answer.
[29]Ms Amaranathan submits:
(a)There is no doubt ASL specialises in interior partitioning systems and door systems. It is ASL’s “dominant endeavour”. Comparing ASL to Bunnings or Mitre 10 is nonsensical. She points to ASL having a CAD
80 NOE 36/11–18.
81 NOE 39/12–16.
82 CBD 78; and NOE 38/8–11. See also NOE 39/1–21.
83 NOE 57/2–5.
84 NOE 57/18–19.
85 NOE 63/4–5.
86 NOE 59/24–30.
draughtsman, a quantity surveying service, a service to sign-off installation (until recently), and account managers. ASL is focussed squarely on the interior partitioning/doors industry. The defendants’ attempts to distinguish partial systems from whole systems and moveable partitions from fixed partitions are contrary to a common sense purposive approach to contractual terms. The substantial sum paid here means the restraint should be interpreted at its widest. ASL may not be doing the exact same thing as Trans-Space, but it is manufacturing and distributing door systems and/or partitioning systems to an extent that makes it substantially similar to Trans-Space. It would defy commercial common sense and the purpose and express wording of the restraint clause to allow the purchaser to manufacture or distribute door or partitioning systems as long as the panels and glazing were not included. The specialist parts of a door and partitioning system are the extrusions, made to specific shapes and designs. The extrusions are manufactured according to ASL’s designs.
(b)The defendants have pleaded an affirmative defence that ASL does not compete with Trans-Space. But the wording of the agreed restraint clause specifically provides that being involved in manufacturing or distributing door systems or partitioning would be unfair competition. The Court should not look behind that. If it does, the companies do compete in the interior partitioning industry, as evidenced by: the company’s prior name; the 6–10 companies who specialise in commercial interior partitioning/doors; the websites; reliance by both firms on architects to specify their products; evidence of Trans-Space tendering against Autex PSL products; evidence of overlap of customers; evidence of the similarity of the space-slider products; and competition between the end-products.
(c)The Gordons obtained very valuable consideration for the restraint and the plaintiffs made a major investment in the goodwill of the business. The geographic scope of the business is not an issue. Mr and Mrs Gordon were dangerous competitors to Trans-Space, with an
intimate knowledge of the company’s information and relationships. It is entirely reasonable to require them to stay out of the interior partitioning/door industry for three years.
(d)Mr Gordon was not a credible witness. He has been misleading in his actions and has concealed evidence. He was evasive under cross- examination and little weight should be placed on his evidence. Mr Smith’s evidence does not comply with the requirements of an expert witness. He does not explain the facts, assumptions, or research that were the basis for his opinion.
[30]Mr Maloney submits:
(a)Adopting a purposive interpretation is contrary to established legal principles regarding restraint clauses and contractual interpretation. The defendants have not breached the plain and clear meaning of the words used in the restraint clause.
(b)Trans-Space does not sell or distribute aluminium extrusions or component parts but only sells complete partitioning systems or door systems. Part of a system is not a complete system. Mr Smith’s expert evidence is the only evidence of what a system is in this context and is consistent with dictionary definitions and other case law.87 The plaintiffs failed to call any witness from the industry to independently confirm the allegations that ASL competes with Trans-Space in manufacturing or distributing partitioning systems or door systems. ASL’s premises are small and full of aluminium extrusions on racks. Trans-Space’s premises are a large factory with complicated machinery and a dedicated assembly area.
(c)A partitioning system is not “manufactured” until all four essential components identified by Mr Smith have been assembled and connected so that they function independently. The party who
87 Zhang v Sealegs International Ltd [2019] NZCA 389, (2019) 146 1PR 476.
assembles the system is the manufacturer. ASL does not manufacture anything at all. The restraint does not prevent them manufacturing aluminium extrusions in any event. Nor does ASL “distribute” a partitioning system, or any of its essential components. It sells and distributes only extrusions and accessories, which can be assembled into a frame by its customers but can also be used for other purposes. There is a spectrum of what defines the distribution of a partitioning system or door system. The more essential components a party sells, the closer they are to distributing a system. But, even assuming ASL supplies a framework, and doors are not part of a framework, it does not supply glass or panels or labour. ASL’s products, in the form in which they leave ASL’s control, are not what any objective person would consider to be a partitioning system or door system. Its business is not the same or substantially similar to that of Trans-Space.
(d)ASL does not compete with Trans-Space, so the plaintiffs have no legitimate interest in preventing Mr Gordon from being involved in ASL. That means the restraint clause goes beyond what is necessary and is unreasonable under s 83 of the Contract and Commercial Law Act 2017. If the Court finds the clause is wide enough to cover ASL’s current business model, the defendants submit the Court should exercise its discretion to modify the clause so it no longer does.
Is Mr Gordon breaching the restraint of trade clause by operating ASL?
[31] There are similarities and differences between the businesses of Trans-Space and ASL:
(a)Both arrange for aluminium extrusions to be manufactured off-site. Both specify the dimensions of the extrusions for manufacture. Both companies cut their extrusions to length at their premises, though Trans-Space does this as a matter of routine and ASL on more of an exceptional basis. Trans-Space undertakes cutting, welding, powder-
coating, and assembling at their premises. ASL does not, but it can arrange for powder-coating.
(b)Trans-Space supplies all the components required to construct a partition system or door system. ASL can supply most components for those systems, including quantity surveying and CAD services, but not the wall panels, door panels, glass, door handles, or other door hardware.
(c)Trans-Space’s partitioning systems are moveable – they can be moved around after installation. ASL’s partitioning systems are fixed, though its sliders are moveable.
(d)Trans-Space installs systems itself, for the purchaser. ASL does not. Builders install ASL’s products for the purchaser, though ASL inspects installations.
(e)Once installed, both products look similar and functional similarly. They are both products sold in the interior-fitout market.
(f)Mr Gordon concedes that, based on the ASL invoices presented at trial, ASL’s income came predominantly from selling components for partitioning systems and door systems.88 There is therefore overlap between the primary income areas of ASL and Trans-Space, based on that selection of invoices at least.
[32] The issue in this case depends on the scope of the restraint of trade clause in the sale and purchase agreement for shares in Trans-Space. In particular, is ASL a business that is “the same or substantially similar to” Trans-Space’s business, “namely the manufacture, … distribution … of … partitioning systems or door systems”? I accept that the words following “namely” are a more specific version of what is meant by the more general words “the same or substantially similar to”. But the more general words inform the interpretation of the more specific words, and vice versa.
88 NOE 112/28–31.
[33] In relation to the more specific wording used, there is a limit to the utility of case law that interprets the words in different contexts. But the case law is reasonably consistent in suggesting that “manufacturing” something involves producing a new or different product out of component parts.89 Here, to be “manufactured” a door system or partition system must be at least assembled. ASL does not assemble these systems. So, ASL does not manufacture door systems or partitioning systems.
[34] Does ASL distribute partitioning systems or door systems? It certainly distributes something. And what it distributes, when combined with a few more components and assembled, constitutes partitioning systems and door systems. So, what this comes down to is whether ASL distributes enough of the components of door systems or partitioning systems to effectively be distributing the systems themselves. How many components constitute a “system”?
[35] It is at this point that the more general words, and the purpose, of the restraint clause become relevant. The evidence is clear that the purpose was to prevent Mr Gordon, with his knowledge, expertise, and experience, from competing with Trans-Space in relation to partitioning systems and door systems while its new owners were in their first three years of business. Mr Gordon himself responsibly acknowledges that it was reasonable for them to want such a clause. That reasonable commercial purpose informs the meaning which this clause would convey to a reasonable person having all the background knowledge reasonably available to the contracting parties at the time of the contract. It reflects the point of protecting the goodwill of the business the plaintiffs purchased.
[36] I consider that ASL distributes a sufficiently large proportion of a partitioning system and, on balance, a door system, that, for the purpose of the restraint clause, it effectively distributes those systems. ASL competes with Trans-Space commercially. Those who want a partition or door system could buy the complete system from Trans- Space or the essential components from ASL and the rest from other sources. The products of both firms compete in the market for interior partitions, or more broadly in the interior-fitout market. The differences in ASL supplying components rather than
89 Terminals (NZ) Ltd v Comptroller of Customs [2014] 1 NZLR 121 (SC); and Wellington City Council v Attorney-General [1990] 2 NZLR 281 (CA) at 282-283.
complete systems, and fixed rather than moveable systems, do not sufficiently distinguish its business from Trans-Space’s to avoid the purpose of the restraint of trade clause. A reasonable person would understand ASL to engage in a “substantially similar” business commercially. Although, as Mr Smith says, other components are required to constitute a complete system, the frames designed for that purpose, made up of the aluminium extrusions, are the essence of the system. They are the most specialised parts of the system.
[37] Mr Gordon’s operation of ASL means that he is trenching directly on Trans- Space’s business, however genuinely he believes he is not. The clause in the contract he signed, and that Mrs Gordon signed, restrains them from doing so at law. I issue an injunction accordingly.
Issue 2: Inducing a breach of contract
[38] Alternatively, the plaintiffs allege that ASL has committed the tort of inducing a breach of contract. Ms Amaranathan submits there is a legally enforceable contract in existence, and ASL induced breach of the restraint of trade clause by manufacturing and/or distributing partitioning and door systems, knowing its conduct would breach the restraint. She submits that breach was likely to, and did, cause loss or damage to the plaintiffs. She submits the defendants have accepted that all the profits of ASL will constitute the loss, if the proceeding is successful.
[39] Mr Maloney submits this cause of action also fails on the basis that ASL’s business is not the same or substantially similar to that of Trans-Space. Alternatively, he submits that, if Mr and Mrs Gordon are bound by the restraint, that does away with the claim ASL induced them to breach the contract. A company can only act though its directors, so it cannot induce its directors to breach a contract.
[40] This cause of action adds little. As Mr Maloney submits, ASL acts through its directors. It is artificial to say that ASL induced the Gordons to breach the restraint clause. They did that themselves.
Result
[41] I find that the first and third defendants, and by extension the second defendant, have breached the restraint of trade clause. Accordingly, I issue an injunction restraining the first and third defendants, until after 6 December 2022, from:
(a)being involved either directly or indirectly in the manufacture, importation, distribution, or installation, of moveable wall systems, or partitioning systems, or door systems, within the domestic or commercial market in New Zealand; and
(b)more specifically, being involved, directly or indirectly, in the business of the second defendant.
[42] With the assistance of counsel, the plaintiffs and defendants should be able to agree on the compensation implications of that. If not, there will need to be a separate hearing on quantum.
[43] Because the parties requested to be heard further on costs, depending on the outcome but before quantum is determined, I reserve costs. I grant leave to the plaintiffs to file submissions of no more than 10 pages on costs within 10 working days of the date of this judgment, and to the defendants to file submissions of the same length within 10 working days of that.
Palmer J
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