Devgnz Limited v The Depths LP

[2021] NZHC 3398

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2021-442-56

[2021] NZHC 3398

IN THE MATTER

of breach of Contract by the Defendant

BETWEEN

DEVGNZ LIMITED

First Plaintiff

AJIT KAUR
Second Plaintiff

SEERAT SINGH
Third Plaintiff

AND

THE DEPTHS LP

Defendant

Hearing:

7 December 2021

Appearances:

A Singh for Plaintiffs (via AVL)

S D Campbell and M L Rhodes for Defendant

Judgment:

10 December 2021

JUDGMENT OF ISAC J

[Application for interim injunction]

Introduction

[1]        The plaintiffs seek an urgent interim injunction staying termination of a contract.

[2]        The application was filed without notice to the respondent and came before Cull J on 26 November 2021. Her Honour directed service on a Pickwick basis on the defendant and convened an urgent teleconference on 26 November 2021.

DEVGNZ LIMITED v THE DEPTHS LP [2021] NZHC 3398 [10 December 2021]

[3]        As a full-day hearing was available on 7 December 2021, her Honour made an interim order staying the defendant’s notice of termination until determination of the plaintiff’s application for interim relief.1 Cull J also made timetabling directions to ready the application for hearing. Part of those orders called for an application by the defendant to rescind the interim injunction. While the parties prepared and presented their arguments before me on the basis of both applications, as I noted at the hearing it seemed to me that given Cull J’s interim order was expressed to expire following judgment on the plaintiffs’ application, there would be nothing to rescind on theissue of this judgment. So, I have proceeded on the basis that this is an application by the plaintiff to continue the interim injunction beyond 7 December.

[4]        Given the importance of the matter to all parties, and the urgent need for clarity on their respective positions, this judgment contains the pith of my reasons.

[5]        DEVGNZ Ltd (DEV), and the second and third plaintiffs, its directors, own and operate the Richmond Hell Pizza franchise under a franchise agreement from the defendant, The Depths LP (The Depths).

[6]        At the centre of the dispute is a “delivery promise time” that Hell Pizza store operators, including the plaintiffs, provide to their customers. When ordering a pizza on-line, the store (or franchisee) supplying the pizza will promise delivery within a specified time. That is because people do not like to wait for their home delivery pizza any more than they must.

[7]        DEV contends The Depths has fraudulently manipulated data about home deliveries in the Hell Pizza online portal — known as MyHellHole — as part of The Depths’ efforts to terminate the franchise agreement.

[8]        In response, The Depths says that an extensive investigation into data irregularities at the Richmond Hell’s Pizza shop leads to the clear conclusion that the third plaintiff, Mr Seerat Singh (also referred to in the evidence as Sam Singh), has altered delivery data over an extended period of time. It says he has likely done so

1      That order required the defendant to recommence access for the plaintiffs to the defendant’s franchise services, including an on-line customer ordering portal.

because there is a financial rebate payable to a franchisee who meets certain key performance indicators, including delivery time.

Background

[9]        Extensive affidavit and documentary evidence has been filed by both sides despite the short time the proceeding has been on foot. I will only summarise the key features, bearing in mind that much of the relevant background is not in dispute.

[10]      DEV purchased the existing business of Hell Pizza in Richmond on 16 January 2019 for $330,000. The franchise was renewed on 2 June 2020 until May 2025. The renewal included a payment of a renewal fee of $20,000.

[11]      By September 2020, it seems DEV began raising a number of complaints and allegations about The Depths’ conduct. Very little information has been provided about those allegations, but they seem to have involved concerns about “bullying” or sinister conduct. That led to a series of mediations, the last of which occurred on 3 August 2021. The evidence indicates that whatever the subject of the mediations were remained unresolved.

[12]Mr Singh then deposed:

Feeling offended at the unsuccessful mediation, the defendant, without our knowledge or consent remotely manipulated our promise time data in our POS [point of sale] system between January 2021 to August 2021 and raised a letter of concern dated 16 August 2021 by blaming us for altering the promise time data after the delivery has been made …

[13]Later, Ms Singh alleged:

It is our position that since the defendant was the admin of the POS system and had full remote access of the whole system including every feature in our POS System, undoubtedly if there was manipulation of the POS system, it was done by the defendant …

[14]And:

We believe that the defendant had already made a decision before 5 November 2021 to illegally terminate our franchise agreement on false grounds and only with [mala fide] intention to cause us significant financial losses, besides causing [us] humiliation, anxiety and distress.

[15]Mr Singh also refers to “an incident” on 11 October 2021 at his business where:

…a customer accompanied by one person known to the Defendant, namely “Lucky” entered the shop of the Plaintiffs and purchased [a] few items. While returning back they started behaving rowdy and starting shouting outside the store while sitting in their car. When requested to stop shouting, the two offenders came out of the car and both of them started threatening and saying “they know everyone at the head office” and threatened the plaintiff with “consequences”. The Plaintiffs became frightened and immediately informed the Police and the Police investigated the incident.

[16]      Later Mr Singh alleges that The Depths’ Chief Executive was “well known to one of the offenders”, was “a party to the incident” and:

…the incident was planned and orchestrated by the Defendant to intimidate us.

[17]      This alleged incident led to an independent complaint by the customers concerned to Hell Pizza head office about Mr Singh’s conduct on the day. It appears they were known to Mr Singh and the plaintiffs. The customers alleged that Mr Singh had approached them in the car park and threatened that if they ever returned they would be beaten. The Depths requested the CCTV footage from the plaintiffs to verify which version of events was correct. The plaintiffs refused to supply the footage, which led to a further breach notice under the franchise agreement. The plaintiffs subsequently claimed the incident occurred outside the shop and would not have been captured by the CCTV camera, and in any event the footage of the customers inside the shop had been erased.

[18]      In short, Mr Singh and the plaintiffs commenced this proceeding by accusing the defendant of fraudulently manipulating the relevant online data in order to provide false grounds to justify the defendant’s purported termination of the franchise agreement.2 They then claim that The Depths orchestrated “offenders” to go to the plaintiffs’ shop to intimidate them.

[19]      It goes without saying that these allegations are serious. If true, they would likely amount to a crime.

2      In a reply affidavit of 6 December 2021, Mr Singh makes a new allegation: The Depths has altered the data to provide a pretext on which to decline payment of marketing rebate linked to meeting delivery times. This again turns on its head The Depths’ theory that the plaintiffs’ motivation for manipulating the delivery time data was to assist it to secure the sales rebate.

[20]      The Depths denies all of this. It says, essentially, that the defendants are using attack as the best form of defence. Underlying the catastrophic breakdown of the relationship was an investigation The Depths began in mid-July 2021 about data irregularities at the Richmond Hell Pizza shop.

[21]      The Depths’ initial enquiry about the data irregularities was limited to a series of emails from one of its directors, Mr Callum Davies. One of his emails helpfully sets out the nature of the irregularity and the concern it raised for the defendant, so I set it out in full:

Hi Seerat,

Thanks for your reply, although I note that your sentence was not correct when you said:

I never made any unfounded allegations and only pointed out the facts.

Please note that nowhere did I use the word ‘unfounded’ it was you who added this word. Allegations are exactly what you have made, facts are facts and how they are interpreted is where we may differ.

I note your response below and have looked into each example you have given. Yes these are all problematic deliveries and unfortunately all stores deal with these from time to time.

It has not however answered my question of how the quoted time of the delivery does not match the due time that is on the order.

I have a more recent example for you that I hope you can help me work out what happened. Below is a ticket assigned to you on the 17 of July from a late order the night before. The customer wrote the following:

I made my order at 5.57pm, and the estimated delivery time was 7.32pm (already a long wait!). However my delivery didn’t arrive until over an hour later around 8.40pm. I called the store and was immediately put on hold before talking to anyone, though I could hear other conversations in the background. No explanation was given to me, they just said the driver was on their way and that’s it. When the food arrived, it was stone cold and the pizza didn’t even have all of the ingredients. I couldn’t even eat any of it, it was so bad. I don’t normally complain but this was a lot of money for me and it was a complete waste. I love Hells and I hope you are able to remedy this.

When I look at this order (ticket 71 on Friday the 16 July) I see that the due time is listed at 9:43, over 2 hours later than what the customer said she was quoted. The actual delivery time of 8:36pm matches when the customer said it was delivered (8:40).

The difference here is that on our system it says that the order was delivered 1 hour early.

The customer says it was delivered over 1 hour late. Was this order delivered late?

I look forward to a reply before Thursday at 5pm or earlier. Any problems please let me know.

[22]      Mr Singh’s response was to admit the order was late. This was blamed on “farmer agitation” (it coincided with a day of protests from those involved in the rural sector), and bad weather. It is fair to say, however, that Mr Singh failed to give any explanation for the real issue raised by Mr Davies, which is why the pizza had been delivered late when the on-line data revealed it had been delivered an hour before the delivery promise time.

[23]      The Depths say these responses raised further suspicions. That in turn triggered an audit of the delivery promise times  for the Richmond store between  1 July and   7 July 2021. This initial audit revealed a large amount of order update records of promised time data linked to Mr Singh’s User ID. Many of the updates were recorded as occurring towards the end of the night, often hours after the order was both due and delivered. On many occasions, the promise time recorded was so long after the order time that it would be unrealistic for the customer to have gone ahead with the order. This led to The Depths’ solicitors sending a “please explain” letter to the plaintiffs’ counsel, Mr Singh, which included as a schedule the results of its investigation. The schedule usefully demonstrates what The Depths claims this initial investigation revealed in terms of the alteration of the delivery promise time:

[24]      This sparked an extensive exchange of correspondence between the parties’ lawyers. Much of the correspondence sent on behalf of the plaintiffs contains language that is better not used in communications between members of the profession. Essentially, the plaintiffs denied any suggestion they had manipulated the data, blamed the defendant for doing so, and made various requests for further information.

[25]      Of some moment was the provision by The Depths of two expert forensic reports it had obtained. Those reports were provided by Binary Design, and Incident Response Solutions (IRS).

[26]      Binary Design undertook a wider review of data for the Richmond store between 1 April and 10 August 2021. In this period, 335 orders were manually altered from a point of service device assigned to the Richmond store. In each instance, the promised delivery time was altered to be later than the unaltered promise time. This had the effect of classifying late deliveries as on time. And the data also showed that the person altering the data had logged on to the system with Sam Singh’s (the third plaintiff’s) unique user ID.

[27]      A system wide analysis involving all Hell Pizza stores dating back to 1 January 2020 was then also undertaken. The Binary Design report revealed that the Richmond store was modifying orders at a rate at least 17 times higher than the group average.3

[28]      As the report writer for Binary Design, Matthew Renner, had worked for Hell Pizza in IT for some years before changing employment, The Depths had an entirely independent forensic computer specialist, IRS, review Binary Design’s report and determine whether it was possible to validate it. In a further affidavit, Mr Campbell McKenzie of IRS deposed that his firm closely analysed a single order considered by Binary Design. IRS concluded from this that the Binary Design report accurately reflected the raw data for the sampled record. Mr McKenzie went on to conclude:

3      The evidence indicates that there can and should be some legitimate changes to online orders. For instance, an order made online for pick-up could be changed to delivery as a result of a customer calling in to request the change. In such cases, the online data can be legitimately amended to reflect a new promise delivery time.

There are indications that the likely source of the data edits was the Richmond Hell store. The edits appear to have  been made  by the  user  with  unique  ID 8415. I understand that unique ID belongs to Mr Sam Singh.

There is no indication that any other party made the changes to the data, except for Mr Sam Singh (user ID 8415), or someone else at the store.

[29]      In a ten page letter of 5 November 2021, which attached both forensic reports and other relevant evidence, the solicitors for The Depths advised counsel for the plaintiffs that the evidence against Mr Singh was “cogent, compelling and cross- validating.” The letter went on to warn that The Depths had resolved, on a preliminary basis only, to terminate the franchise agreement on the basis that, amongst other things, the data manipulation was “fraudulent or dishonest”, which itself was a contractual condition permitting The Depths to terminate the franchise agreement immediately with written notice.

1. But before terminating, The Depths wished to afford:

…[DEV] one further opportunity to provide any alternative explanation. If your client cannot explain why the data and conclusions are incorrect, with supporting material, our client will very likely terminate.

Our client acknowledges the seriousness of the allegations and the consequences

[31]      The plaintiffs never responded to  The  Depths’ 5 November  letter.  So,  on 22 November 2021, the Depths issued a notice of termination via its solicitors. These proceedings were filed swiftly thereafter.

Relevant principles

[32]      The principles applicable to consideration of interim injunctions are well settled.4 Such applications should be determined by assessing:5

(a)whether there is a serious question to be tried;

(b)the balance of convenience; and

4      See Intellihub Ltd v Genesis Energy Ltd [2020] NZCA 344, [2020] NZCCLR 29 at [24].

5      Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142, as cited in Intellihub v Genesis Energy, above n 4, at [23]. See also NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12].

(c)where the overall justice lies.

[33]      At the interlocutory stage the Court is not required to resolve conflicts of evidence or resolve difficult questions of law requiring detailed argument and mature considerations.6

Discussion

[34]      The parties’ submissions were principally directed to the first two questions I must consider: is there a serious question to be tried, and where does the balance of convenience lie. I now turn to consider both.

Serious question to be tried?

[35]      The Depths argues DEV and the other plaintiffs have simply failed to raise a serious issue to be tried. Mr Singh’s allegations of fraud are said to be scandalous, mere assertion and are unsupported by any cogent evidence. The Depths contends that the appropriate test — a serious question to be tried — requires a plaintiff to establish that there is a tenable resolution of the issues of fact and law on which the plaintiff may be able to succeed at trial.7 The plaintiffs have failed to do so.

[36]      The Depths says that its view that the data manipulation has been carried out by the plaintiffs is corroborated by the inexplicable pattern of customer complaints for late deliveries, and the apologies and compensation provided by the plaintiffs in response — where the promise delivery time has been altered to record the delivery was made in time. It says there is no proper explanation for that anomaly in the plaintiffs’ evidence. Moreover, there are two forensic reports supporting the conclusion that the an ISP associated with the Richmond store was that through which the data manipulation occurred, and each time the person making the changes logged into the system with a pin code linked to Sam Singh’s unique user ID.

6      American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407; Villa Maria Wines Ltd v Montana Wines Ltd [1984] NZLR 4 22 (CA) at 425; Health Club Brands Ltd v Colven [2013] NZHC 428 at [9].

7     Balance Agri-Nutrients Ltd v Quin Environmentals (NZ) Ltd [2019] NZHC 490 at [32], citing

Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, above n 5, at 133.

[37]      The plaintiffs’ basic contention is that because they deny they are responsible for the data manipulation, and as the only other party with access to the system was the defendant, it follows that the accuser is actually the perpetrator. The conduct alleged against the defendant is part of a campaign to bully and victimise the plaintiffs. This has included sending “offenders” to their shop to intimidate them. Mr Singh has deposed that he did not know how to alter data in the online portal, and received no training that would have permitted him to do so.

[38]      An underlying difficulty with these serious allegations by the plaintiffs is the lack of a rational motivation for The Depths in making them. It would seem an extreme and inherently unlikely reaction to go to such lengths, including apparently committing criminal offences, simply because a franchisee had made complaints about head-office staff treatment of the franchisee.

[39]      A further and more fundamental difficulty is that the allegations are just that. There is no meaningful evidence provided by the plaintiffs to support their claims, beyond bald assertions given on oath. It is of course trite that the more serious an allegation is made, the greater the evidential burden that falls on the party making it. In this case, in contrast to the careful investigation by The Depths to support its conclusion, there is simply no proper evidential foundation to leave the Court satisfied that there is a tenable prospect the plaintiffs might be able to establish the allegations of fraud they have made against The Depths at trial.8

[40]      It is also telling, in my view, that despite repeated opportunities to provide an explanation for the accepted data manipulation, the plaintiffs failed to provide any, other than to suggest that those responsible were those at head-office with access to the system. It is striking that despite the lengthy affidavit evidence filed by Mr Singh, his explanation for the allegation of fraud against the defendant is limited to turning virtually every aspect of the The Depth’s evidence on its head.

[41]      An example of this combative approach to the litigation arises from an affidavit by a Ms Ru on behalf of The Depths. Ms Ru is the franchisee responsible for the Ferry Road Hell pizza store in Christchurch. The Depth’s investigation into data

8      See Intellihub Ltd v Genesis Energy Ltd, above n 4, at [27].

manipulation over the entire Hell Pizza group revealed an irregularity attaching tothe Ferry Road store, which was strikingly similar to that affecting the Richmond Store. When approached by head-office about what appeared to be a similar pattern of alteration of the delivery promise, Ms Ru candidly acknowledged she had altered the data, and provided an explanation of how she had worked out how to do so:

14To do this, when a delivery order seemed like it was going to be arriving late, when we dispatched the order to a delivery driver we would use the POS iPad and change the ‘promise time’ (which is the time the customer is told that they will receive their order) to a time later than when the pizza was likely to arrive. This meant that, after the delivery time was recorded by the driver upon delivery, it would appear in the system to have occurred prior to the promise time in the system.

15When I would do this, I would often call the customer beforehand to offer them something for free because the order was going to be late. If they agreed, I would then change the order. This meant the customer was satisfied but it also meant that from a reporting perspective orders were shown as being on time when they were not.

16I was often the individual who did this, but I also taught many of my managers how to use this feature too.

17This would mean that our store was more likely to achieve KPIs including the on-time delivery percentage despite the fact that orders were not being delivered on-time based on the original promise time. RLF receives a financial marketing rebate if it meets certain criteria set by the franchisor. These largely relate to performance and customer satisfaction. Included in its criteria are standards as to on- time delivery performance. The marketing rebate is a financial incentive for franchisees to perform with high standards.

18We were never trained how to do this. l was able to work it out on my own by looking at different functions and features in the system.

[42]      Mr Singh’s evidence in reply to Ms Ru’s affidavit is surprising. He says that he “dispute[s] the affidavit of Ms Ru” because she is a current franchisee, and has a potential conflict of interest. He goes on to observe that Mr Ru has made “self- incriminating” statements, and that if Ms Ru has altered the delivery time data her store ought to have been top of the franchisee leader-board for deliveries on time, but the defendant’s data in fact reveals that the Richmond franchise has been leading that category between February 2021 until July 2021. He then concludes:9

9      Original errors included in this quotation.

Despite the fact that we have consistently denied that we ever did any manipulation and still this is a disputed question, but there is another franchisee who admitted alleged manipulation of the data dishonestly and fraudulently, but still the defendant wants to permit such a franchisee to continue trading and inflict harm on its reputation. Why defendants treats two franchisees in a different manner?

[43]      While it is unnecessary and inappropriate to endeavour to determine the merits of these rival allegations, Mr Singh’s rejection of Ms Ru’s evidence seems quite extraordinary and unnecessary. It reinforces my doubts about the plaintiffs’ claims that the defendant has orchestrated the fraudulent data.

Balance of convenience?

[44]      Next, it is necessary to consider the effect of the grant of an interim injunction on the defendant, and to balance that against the effect of refusing to do so on the plaintiff. This is commonly described of as “the balance of the risk of doing an injustice”.10 It is the “guiding principle” in granting an interim injunction.11 Although the enquiry is flexible,12 the Court will commonly consider:

(a)the adequacy of damages to both parties;

(b)preservation of the status quo;

(c)relative strength of each parties’ case;

(d)the conduct of the parties; and

(e)the effect on innocent third parties.

[45]      Of these factors, those that are most relevant are the adequacy of damages, the strength of the parties’ cases, and the effect on innocent third parties.

10     Cayne v Global Natural Resources Plc [1984] 1 All ER 225 at 237; McLaughlin v McLaughlin

[2019] NZHC 2597 at [37].

11     Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 337.

12     McLaughlin v McLaughlin, above n 10, at [38].

[46]      In relation to the adequacy of damages to both parties, while the economic impact of the termination of the franchise agreement (rightly or wrongly) will be profound on DEV, damages are an adequate remedy. Indeed, very little was advanced by the plaintiffs beyond economic implications capable of quantification.

[47]      By contrast, The Depths’ says that damages will not be adequate to redress the harm it will suffer from an interim injunction. It says nothing can be awarded to it for the plaintiffs’ fraud; there will be no economic loss as a result of an injunction forcing it to continue trading with the plaintiffs. Indeed, its evidence is that it will lose money from the termination as a result of the loss of a franchisee and the income stream that provides. Rather, the continuing harm The Depths will suffer will be to its reputation and standing, and that of the Hell Pizza brand. It says the relationship between the parties is beyond repair. They both allege the other is acting fraudulently.

[48]      Overall, the evidence leaves me satisfied that the intangible harm to The Depths cannot be adequately compensated in damages. By contrast, the primary impact on the plaintiffs can be. This consideration clearly favours declining the grant of an interim injunction.

[49]      In terms of the strength of the parties’ cases, as I have noted already, the plaintiffs’ evidence has failed to demonstrate a tenable basis upon which they might be able to succeed at trial. Their case as it currently stands is, by comparison to the defendant’s, weak. Again, this factor tells against the grant of an interiminjunction.

[50]      Finally, I have considered the harm caused to innocent third parties as a result of granting, and not granting, the order sought. If I grant the interim injunction, it will expose not only the defendant but also all other franchisees to a risk of damage to their brand and business. The allegations of data manipulation by the plaintiffs, if established, are likely to strike at the integrity of the entire franchise’s on-line ordering system and the product. It carries with it the possibility that franchisees hold out unrealistic delivery time promises to secure pizza orders knowing they may not be able to fulfil them in time, but that this practice can be concealed from the franchisor by alteration of the delivery promise data.

[51]      For the plaintiffs, Mr Singh argued that four employees are likely to be laid off. Beyond that, he drew my attention to 50 gift vouchers of $20 each that had been provided by the plaintiffs to a local vaccination programme, to be supplied to people who have received their first COVID-19 vaccination. He submitted that if those vouchers are not honoured by the plaintiffs the people affected may choose not to receive their second vaccination dose. He also pointed to evidence of support by the plaintiffs of various community and charitable causes — all of which is likely to come to an end.

[52]      Overall, it is the loss of jobs for DEV’s employees which is the most serious impact on innocent third parties. But that factor alone does not outweigh the others, in my assessment. Overall, the strength of the defendant’s case, the adequacy of damages to address the plaintiffs’ losses if successful at trial, and the inadequacy of damages for the defendant, all strongly tell against an interim injunction.

Overall interests of justice?

[53]Finally, I step back and consider the overall interests of justice.

[54]      Nothing arises under this residual assessment that might shift the balance in favour of an interim injunction. A critical factor here is the impact of the parties mutual and extensive allegations of fraud against the other.

[55]      The allegations made by the plaintiffs are wide ranging and fundamentally undermining of any sustainable business relationship with the defendant. Equally, The Depths alleges, in much less emotive terms, that the plaintiffs are guilty of dishonest trade practices, and (by implication) of lying about it when confronted with the evidence.

[56]      Given all of this, it is difficult to see that the interests of justice could require forcing these two parties to continue to cooperate with each other under a franchise relationship where trust and confidence in the other are basic requirements. Indeed, if the plaintiffs genuinely believe the allegations they have made, it could be expected that they would wish to bring the relationship to an end immediately and pursue a claim for damages.

Conclusion and result

[57]      I decline to grant the plaintiffs’ application for an on-going interiminjunction. For the avoidance of doubt, the interim order of Cull J made on 26 November 2021is now at an end.

[58]      Because of the way I have approached the issue, it has been unnecessary to address The Depths’ application to rescind her Honour’s orders, or determine whether, as it contended, there had been material non-disclosure by DEV when it sought a without notice injunction against the plaintiff.

[59]Costs are reserved.

Isac J

Solicitors:

Bridge Law, Hamilton for Plaintiffs

Wynn Williams, Christchurch for Defendant