Done Rite 2017 Limited v Wright
[2018] NZHC 3194
•6 December 2018
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2018-425-000092
[2018] NZHC 3194
BETWEEN DONE RITE 2017 LIMITED
Applicant
AND
RODNEY BRYAN WRIGHT
First Respondent
AND
TONI LOUISE CHITTOCK
Second Respondent
AND
DONE-RITE CONTRACTING 2007 LIMITED
Third Respondent
AND
REES RIVER SUPPLIES LIMITED
Fourth Respondent
Hearing: 3 December 2018 via telephone conference Appearances:
M R Walker and F G Hesp for the Applicant A Hitchcock for the Respondents
Judgment:
6 December 2018
JUDGMENT OF NATION J
Background
[1] The applicant, Done Rite 2017 Ltd (Done Rite) is an earthworks contracting company. In October 2015, it purchased the business of the third respondent, Done- Rite Contracting 2007 Ltd (Done-Rite 2007) for $873,310, $682,203 of which was for tangible assets and $191,107 for intangible assets.
[2]Luke Hunter is the director of Done Rite. His wife also works in the business.
DONE RITE 2017 LTD v WRIGHT [2018] NZHC 3194 [6 December 2018]
[3] The first respondent (Mr Wright) and his partner the second respondent (Ms Chittock) are directors of Done-Rite 2007. The fourth respondent, Rees River Supplies Ltd (Rees River) carries on business as a gravel quarry. Mr Wright and Ms Chittock are also directors of Rees River.
[4] The agreement for sale and purchase (ASP) included a clause restraining Done- Rite 2007, Mr Wright and Ms Chittock from competing with Done Rite in the Queenstown Lakes District for two years following settlement of the purchase.
[5] On 26 November 2018 Done Rite filed a statement of claim in the High Court at Invercargill. Done Rite claimed Rees River, Mr Wright and Ms Chittock had continuously breached the restraint of trade clause. Done Rite sought an injunction requiring the respondents cease competing with Done Rite and from making disparaging comments about Done Rite and its directors in the marketplace.
[6] On 28 November 2018, Done Rite filed an interlocutory application for an interim injunction, an affidavit of Done Rite’s sole director Mr Hunter in support, an undertaking as to damages and a memorandum of counsel in support.
[7] Although the interlocutory application was filed without notice, this was done on a Pickwick basis.1 The documents were served on solicitors for the respondents. They filed an affidavit of Mr Wright and a memorandum of counsel dated 26 November 2018 in opposition to their interlocutory application.
[8] I convened a hearing by telephone with counsel for Done Rite and counsel for the respondents on 3 December 2018.
Discussion
[9] There is no dispute that the ASP, including the restraint clause, was drafted by the solicitors then acting for Done-Rite 2007. The agreement was in the ADLS/REINZ form for the agreement for sale and purchase of a business. In cl 7.1
1 Pickwick International Inc (GB) Ltd v Multiple Sound Distributors Ltd [1972] 1 WLR 1213.
the vendor, Done Rite and the covenantors, Mr Wright and Ms Chittock, agreed that they:
… will not within the restraint area during the restraint period in their own right or on behalf of any person or entity be directly or indirectly involved or engaged with any business or enterprise that is similar to or competes with the business being purchased.
[10]They also agreed in cl 7.2 they:
… will not within the restraint area during the restraint period solicit or entice away from the business, or attempt to do so, any person, persons or entity who were a customer or employee of the business on the settlement date.
[11] They agreed these covenants and agreements were reasonable and necessary to protect the goodwill of the business for the purchase. They also agreed at cl 7.6:
1. If there is an alleged breach of these provisions, damages may not be an adequate remedy, and in addition to a claim for damages, the purchaser may seek equitable relief, including an injunction.
2. The purchaser may assign the benefit of these obligations, in whole or in part.
3. No failure to enforce any restriction in this clause will be deemed a waiver of that right or affect any other provision.
The contract
[12] The contract was settled on 13 November 2017. The restraint period stipulated in the contract was two years following settlement of the purchase. The restraint area was defined in the contract as being the Queenstown Lakes District.
[13] In his affidavit, Mr Hunter referred to the minutes of a meeting between Mr Wright, Ms Chittock, Mr Hunter and his wife of 8 April 2018. The minutes recorded Done-Rite 2007 acknowledging they had invoiced Done Rite clients accidentally and Done-Rite 2007 agreeing to issue a blanket communication to clients ensuring they were aware of the business changing hands and to eliminate any confusion going forward. The minutes were sent to Done-Rite 2007. Ms Chittock acknowledged receiving them. She raised a couple of issues but did not object to the matters just referred.
[14] Mr Hunter referred to an assertion made by Ms Chittock that the website, domain names and street site-wise accreditations of Done-Rite 2007 were not part of the sale.
[15] On 11 June 2018, solicitors for Done Rite sent a letter to Mr Wright and Ms Chittock. The letter complained of their failure to make their documentation for the website for the business and the domain name available to Done Rite, and asserted this was in breach of the obligation in the ASP to transfer “intangible assets” to the purchaser. The solicitors also complained that Ms Chittock was in breach of the restraint provisions in contacting Done Rite customers in an attempt to set up her own landscape and gardening business in the Glenorchy region and referred to the basis for that complaint.
[16] On 4 October 2018, Mr Hunter emailed a letter to Mr Wright referring to Mr Wright having met with a client to discuss potential work on 26 September 2018. In his letter, Mr Hunter alleged Mr Wright’s conduct had been in breach of the restraint of trade clause of the ASP and said the clause remained in place until 30 November 2019.
[17] The solicitors for Done-Rite 2007 wrote to the solicitors for Done Rite on 5 November 2018. They referred to previous correspondence Done-Rite 2007 had received alleging breaches of the restraint of trade. The solicitors wrote:
While our client denies this allegation, it is our view that a breach of an essential term of the ASP has made the restraint of trade contained in the ASP manifestly unjust and therefore unenforceable.
[18] The solicitors then argued that Done-Rite 2007 had agreed to “the extensive restraint of trade contained in the ASP” only because during the negotiation of the ASP Done Rite agreed to provide the respondents with either employment or contracting work for a period of at least two years after settlement of the ASP. The solicitor suggested the restraint of trade was excessive and that, if it was enforced, Done-Rite 2007 would look to recover damages for breach of the alleged essential term. The solicitors then suggested the restraint clause be renegotiated.
[19] On 6 November 2018, the solicitors for Done Rite obtained information from the Otago Regional Council (ORC) in response to a query as to work carried out by Mr Wright, Ms Chittock or any entity associated with them over the previous 12 month period, including but not limited to all “creek clearing works” and earthworks in the Wakatipu region. In response, the ORC advised of work that had been carried out by Rees River on 24 September 2018, 5 October 2018 and 16 October 2018.
[20] On 8 November 2018, the solicitors for Done Rite responded to the letter from the respondents’ solicitor of 5 November 2018. They rejected the assertions made for Done-Rite 2007. The letter referred to Mr Hunter witnessing Mr Wright working at Lot 10, Waiuna Reserve on 6 November 2018 for Central Southland Excavating, a direct competitor of Done Rite.
[21] In his affidavit Mr Hunter refers to various difficulties that arose in the relationship between himself, Mr Wright and Ms Chittock after settlement of the ASP. He complains that Mr Wright did not introduce him to key clients as they had discussed, the withholding of payments that had been made in error to Done-Rite 2007’s account rather than the correct account for Done Rite, Ms Chittock deciding not to carry on with landscaping work which she was doing to assist Done Rite and refusing to help train a new employee.
[22] Mr Wright’s affidavit was sworn on 15 November 2018 and so is not in response to Mr Hunter’s affidavit. In that affidavit, he says that, in the negotiations leading up to the agreement, he and Ms Chittock wanted to work for another couple of years and:
It was agreed the purchasing company would provide Tony and I with either employment or contracting work for a period of at least two years after settlement of the agreement for sale and purchase. This was the basis upon which Tony and I were prepared to enter into the agreement for sale and purchase and particularly the restraint of trade.
[23] Mr Wright says that, for a time after the settlement, he and Ms Chittock worked for Done Rite on a virtually permanent basis but he had never tendered for or obtained work in competition with Done Rite. He said the work relationship between
himself, Mr Hunter and Ms Chittock was fine up until May 2018 but from that time on became more and more strained. He gave reasons for that.
[24] I note that, in this affidavit, consistent with Mr Hunter’s affidavit, Mr Wright says that during negotiations he made it very clear to Mr Hunter that he and Ms Chittock wanted to step back from the business. He acknowledges that the claimed agreement over whether to guarantee them with employment for two years was not set out in the agreement. Although he claims the arrangement was clearly understood and agreed to, he “just didn’t think it was something that needed to be added into the agreement for sale and purchase”. He acknowledges that, for reasons he referred to as justification, Ms Chittock refused to work for Done Rite after June 2018.
[25] Mr Wright set out how he came to be working at Lot 10, Wyuna Reserve for Central Southland Excavating. He said that he was told by Central Southland Excavating that they had the contract and offered him some work for an hourly rate as a machine operator. Although he said he did not see this as being a breach of the restraint provisions, he also justified his actions by referring to his allegation that Done Rite had very clearly terminated the arrangement he had with them over continuing employment.
[26] Mr Wright said he had an agreement with Mr Hunter that, if Done Rite did not have work for him using the Cat 320 excavator, he was free to work for other people using that machine on the basis those people would pay Done Rite a lease figure for the machine. He annexed Mr Hunter’s letter of 4 October 2018 in which Mr Hunter made it clear they would not be employing him as a contractor again. I note that it was in this letter Mr Hunter referred to the way he had understood Mr Wright had met with a client to discuss potential work.
[27] In his memorandum for the respondents opposing the application, Mr Hitchcock submitted the respondents had ample arguable defences to the applicant’s claims. He referred to the length of the vendor assistance period at one year after settlement as being lengthy, unusual and onerous. He suggested the length “fits” with Mr Wright’s assertion that it was agreed Mr Wright and Ms Chittock would work in the Done Rite business for two years following settlement.
[28] Mr Hitchcock also referred to Mr Wright’s assertion in his affidavit that Mr Hunter had agreed he could use the Cat 320 excavator to work for other people provided he was not competing with Done Rite.
[29] Mr Hitchcock said the fundamental difference between the parties was that Mr Wright was stating he had never solicited any work at the expense of Done Rite and the problems have now arisen because the relationship between the parties has broken down. There may be some merit in that submission. I note that, in Mr Hunter’s letter to Mr Wright of 4 October 2018, he concluded by saying Mr Wright was not to contact “any of Done Rite’s clients directly or indirectly” and if they contacted Mr Wright they were to be referred to Mr Hunter. That could have been consistent with there having been an agreement that Mr Wright would be free to do certain work with the excavator for other people.
[30] That excavator is however on hire to Done Rite with an option to purchase, so use of that excavator is, presumably, under the control of Done Rite. With the breakdown in the relationship between the parties, Done Rite is seeking to enforce rights which they had under the contract. The restraint clauses in the contract prohibited Done-Rite 2007, Mr Wright and Ms Chittock from being involved or engaged with any business similar to or that competes with Done Rite’s business. The ASP said that a failure to enforce the restraint would not be deemed a waiver of that right or affect any other provision.
[31] In his memorandum and before me, Mr Hitchcock confirmed the respondents are not arguing that the restraint provisions were unreasonably wide.
[32] On the evidence before me, it would be premature for me to decide that, because of the alleged variation of contract, or because of collateral agreements, Done Rite can no longer seek to assert the rights they appear to have under the contract.
[33] The evidence before me by way of the affidavits from Mr Hunter and Mr Wright satisfies me there is at least a prima facie case that Mr Wright and Ms Chittock have sought business on their own account in breach of the restraint provisions in the ASP and that they intend to continue doing so, although claiming
that they are now legally free to do so. There is thus a serious question to be tried. The claim is not frivolous or vexatious.
[34] The respondents claim they should not be bound by the restraint provisions because Done Rite is in breach of an oral agreement or representation that Mr Wright and Ms Chittock would be employed in the business for two years after settlement. There is a real conflict in the evidence as to whether they ever received such an assurance. It is significant that there was no reference to such an agreement in the ASP prepared by the respondents’ own solicitors. It is also significant that the agreement required them to provide assistance for a specified period of just one year.
[35] In considering the balance of convenience, I do not consider this is a situation where ultimately it would be possible for Done Rite to obtain an adequate remedy for the breaches they allege through an award of damages. Because the respondents still have the name Done-Rite Contracting 2007 available for them, there is at least the potential for confusion in trade. The parties are operating in a relatively confined area with a small and modest market. If the respondents were to be competing for business, there is the potential for them to cause a loss of goodwill, not just through work they obtain at the expense of Done Rite but also through damage they might do to the standing of Done Rite and its key personnel in ways that would not be readily measurable. Damages could well be difficult to estimate and inadequate. It is a situation where Done Rite’s goodwill may be affected and not only by direct loss of business. Damages may not be an adequate remedy because Done Rite will be losing the advantage of the freedom from competition it bargained for.
[36] I have regard to the relative circumstances of the parties. With the ASP, the respondents received a capital sum consistent with their acknowledged wish to step back from business. They receive a continuing fund from gravel supply, excavator and roller and digger hire agreements. In contrast, Mr Hunter and his wife have made a significant investment and assumed considerable risk in purchasing the business.
[37] On the information currently available and having heard from counsel for the parties, I am satisfied the overall justice of the situation entitles Done Rite to the injunction it seeks.
[38]I accordingly make orders:
(a) prohibiting the respondents from directly or indirectly being involved or engaged with any business or enterprise which is similar to or competes with the applicant’s business in the Queenstown Lakes District; and
(b) prohibiting the respondents from soliciting or enticing away, or attempting to do so, any person or entity that is a client or employee of the applicant within the Queenstown Lakes District.
These orders are made until the further order of the Court following the determination of the substantive proceedings.
[39] I have not made an order in terms of paragraph 1(b)(i) of the application. Through that part of the order, the applicant was seeking to obtain an order restraining the respondents from making disparaging or damaging comments about the applicant and its director. Mr Walker, for the applicant, confirmed that the applicant was no longer seeking such an order.
[40] Despite this, if the respondents were to engage in such conduct, it could be evidence of their breaching both the injunction which has been granted and the restraint clauses in the contract. With all parties living and working within a relatively small community it would be beneficial for all parties to conduct themselves in a manner which recognises the rights and obligations they assumed under the agreements they entered into.
[41]Costs on this application are reserved.
Solicitors:
Todd & Walker, Queenstown AWS Legal, Invercargill.
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