Dorn Investments Limited v Hoover
[2016] NZHC 1325
•17 June 2016
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2016-419-000015 [2016] NZHC 1325
BETWEEN DORN INVESTMENTS LIMITED
Plaintiff
AND
PAUL HOOVER Defendant
Hearing: 9 June 2016 Counsel:
DJ Chisholm QC for Plaintiff
DM O'Neill and S Kennedy for DefendantJudgment:
17 June 2016
JUDGMENT OF ASHER J
This judgment was delivered by me on Friday, 17 June 2016 at 4.30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Claymore Partners Ltd, Auckland.
DJ Chisholm QC, Auckland. Cooney Law, Cambridge.
DM O’Neill, Hamilton.
DORN INVESTMENTS LTD v HOOVER [2016] NZHC 1325 [17 June 2016]
Introduction
[1] The plaintiff, Dorn Investments Ltd, applies for an interim injunction restraining the defendant, Paul Hoover, from breaching a restraint of trade clause.
[2] Dorn Investments Ltd (Dorn Investments) is a franchisee of Green Acres Franchise Group Ltd (Green Acres) and has an exclusive licence to operate the Green Acres Lawnmowing and Garden Care Services in a mapped territory which approximately corresponds to the Waikato region. Dorn Investments has sub- franchised approximately 14 independent sub-franchises in that Waikato territory, providing lawn and gardening services to approximately 1,500 customers. The sub- franchisees are called contractors.
[3] The defendant Paul Hoover is approximately 60 years old and has a background as a rigger and truck driver. He has some medical issues, and lives in Te Awamutu, in a home owned by a trust he settled, in which there is approximately an equity of $60,000. His other assets are chattels and vehicles used for his business worth about $35,000.
[4] On or about 23 January 2013, he entered into a sub-franchise agreement with Dorn Investments. The agreement provided at cl 9.6 that Mr Hoover would not do anything that would prejudicially affect the goodwill of the business. At cl 16.1 it contained the following restraint of trade clause:
Non Competition In consideration for the grant of the franchise (and any prior franchises relating to the Contractor’s Business) to the Contractor by the Franchisee at the Contractor’s and Guarantor’s request, and in recognition of the resultant significant financial opportunities for the Contractor and Guarantor, the Contractor and the Guarantor will not at any time during the Term or for a period of two years following the expiration or termination of this agreement be interested in any business the same as, or similar to or in competition with the Business within New Zealand. Without limitation, the Contractor or a Guarantor will be in breach of this clause if they either individually or in conjunction with any person, as principle, agent, shareholder or otherwise, advise, lend money to, guarantee the debts or obligations of, or permit the names of the Contractor or the Guarantor (or any part of those names) to be used or employed by or associated with, any person that is engaged in or concerned with or interested in any business the same as, or similar to or in competition with the Business within New Zealand. …
[5] Mr Hoover paid $36,000 plus GST as the sub-franchisor’s fee when he signed the franchise agreement and spent approximately $38,000 on equipment. A turnover guarantee was provided of $1,800 per week inclusive of GST, being GST exclusive $1,565 per week and $81,391 net per annum. At the time of the creation of the sub-franchise, Dorn Investments provided Mr Hoover with 48 customers that had previously been serviced by other franchisees. He has since maintained approximately that number of customers. Until late last year he paid a royalty and brand levy of $270 per week.
[6] It is clear, however, that the relationship that developed between Dorn Investments and Mr Hoover was not good. An email exchange in late 2014 reveals that Mr Hoover did not think he had received a good return for his investment in the franchise. He formed the perception that the previous sub-franchisee was breaching his restraint of trade by carrying out lawnmowing in his part of the Waikato territory. Mr Hoover felt that he did not receive promised training. This is very much disputed by Dorn Investments, which says that Mr Hoover had poor internet skills and was not particularly willing to accept help.
[7] In the course of his work for the franchise Mr Hoover had been performing lawnmowing and gardening services for an entity called Spotless, that looked after the lawns and gardens of courts in the Waikato region. In September 2015 Dorn Investments became dissatisfied with the way in which Mr Hoover was carrying out the Spotless work, and took it off him and gave it to another franchisee.
[8] It seems that following this Mr Hoover made a decision to give up on the franchise and to commence trading on his own account. He did so by rebranding as the Lawn Ranger, advising his approximately 50 clients of the change. He states that he destroyed the Green Acres businesscards and signage, he never had a manual, and claims that he has not been in any way utilising the Green Acres or Dorn Investments goodwill.
[9] There was a meeting in early November 2015 between representatives of Dorn Investments and Mr Hoover to see if there was a way forward. It was unsuccessful. Dorn Investments then became aware that Mr Hoover was trading
under a new name, and on 18 November 2015 notified him that he was in breach of the sub-franchise agreement.
[10] On 14 December 2015, Dorn Investments terminated the agreement and sought an undertaking that Mr Hoover would not provide lawn and gardening services in competition with the Green Acre businesses in New Zealand.
[11] Mr Hoover provided no such confirmation, and on 23 December 2015 Dorn Investments issued these proceedings seeking an injunction and damages, as well as an interim injunction. The proceedings were not served until late January 2016. There have been delays since then, but these cannot be attributed to either of the parties.
[12] In accordance with the approach to interim injunctions established in New Zealand I first consider whether there is a serious question to be tried. I will then proceed to consider the balance of convenience and overall justice.1
Serious question to be tried
Is there a prima facie breach of the restraint of trade clause?
[13] Mr O’Neill for Mr Hoover does not contest that there is a serious question to be tried of breach. Clause 16.1 of the sub-franchise agreement prohibits an interest in any business the same as or similar to that of the franchisee. There is no doubt that in carrying out a lawnmowing business after the termination of the agreement Mr Hoover is in breach of the prohibition in this clause.
[14] In my view, there is a strong argument that the clause is on its face unreasonable in its geographic reach. The time of two years is not necessarily unreasonable, but the same cannot be said of the area (within New Zealand). A lawnmowing business carried out by one person can only accumulate goodwill in the area serviced by that person. Mr Hoover could do no possible damage to Green
Acres if he commenced trading under his own name in a town, for instance, in the
1 American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504 (HL), and Klissers Farmhouse
Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).
South Island, providing he did not use any intellectual property of the franchisor or franchisee.
[15] However, the fact that the clause is on its face unreasonable does not mean that the Court will not enforce it on an amended basis.2 There certainly would be a case for a reasonable restraint of trade clause relating to lawnmowing and gardening in the Waikato territory. Mr Hoover accepts that he carries out work throughout that territory.
[16] Thus, on the face of this case there is a serious question to be tried that
Mr Hoover is breaching the restraint of trade clause.
[17] If there was a clear case of breach of the restraint of trade clause, then not even a powerful balance of convenience argument in favour of Mr Hoover along the lines that he would lose his business if an interim injunction was granted, would stop an interim injunction being granted. A franchisor is entitled to impose reasonable restraints of trade on franchisees and expect that they will be complied with. As William Young J stated in Washworld Corporation (Leases) Ltd v Reid:3
In terms of the public interest, I see no particular general difficulty with a restraint, at least if it is properly limited. In my view, a franchisor who has gone to the difficulty and expense of developing a successful business model is entitled to protect its investment in that business model by prohibiting franchisees from exploiting it for their own advantage and in competition with the franchisor and other franchisees.
[18] It was stated by the Court of Appeal in Skids Programme Management v McNeill, in relation to arguments that franchises do not involving a high degree of expertise and there was therefore no goodwill to protect:4
It is not at all unusual for franchise systems to operate in an area which does not involve a high degree of expertise. At an interim injunction level restraint of trade clauses have been held to be enforceable in relation to video stores, car washing, and bookshops, as well as mortgage brokers and the supply and application of anti-slip products. Some of these, in particular the video and car washing businesses, cannot be said to have a high barrier to entry in terms of expertise and knowhow. It is often the application of the knowledge and materials of the franchisor that enables a franchisee to attract
2 Illegal Contracts Act 1970, s 8.
3 Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC) at 385.
4 Skids Programme Management v McNeill [2012] NZCA 314, [2013] 1 NZLR 1 at [47].
custom and achieve good levels of profitability in an area where there is a great degree of potential competition because of the low threshold to entry. By making available to franchisees methods to groom the business offered to display particular attractive features and characteristics, the franchisor enables the franchisee to achieve sales that would not otherwise be possible. In particular, in an area where no particular trade or professional skills are offered, the franchise systems, by instantly conferring these benefits enable a franchisee to gain an advantage over competitors who are starting or have started from scratch.
(footnotes omitted)
[19] Thus, I have no doubt that Green Acres and Dorn Investments was entitled to protect its goodwill by a reasonable restraint of trade clause, and that on its face the restraint of trade clause is enforceable by way of an interim injunction. If, as Mr Chisholm QC argued, Mr Hoover has no credible defence, then Dorn Investments should be entitled to interim relief (assuming a satisfactory undertaking as to damages).
[20] This was the conclusion of Lang J, who in Green Acres Franchise Group Ltd v Reube, a different situation involving Green Acres, held that it was arguable that the restraint of trade clause was enforceable against a franchisee.5 However, ultimately in that case no interim injunction was granted. One of the reasons was that it was argued in that case that the consequences of a restraint of trade clause could not apply because of the way in which that sub-franchise agreement had come to an end. The balance of convenience in that case was also against the granting of an injunction.
[21] The Reube decision and other cases are not of great help as precedents as an assessment of the strength of the plaintiff’s case, and the balance of convenience will always come down to a particular assessment of the relevant matters of fact and law.
[22] Here, a number of the reasons Mr Hoover puts forward as justifying his trading under his own name in the territory can be disposed of quickly. His argument that he did not receive adequate teaching and documentation is quite unsupported by any documentation, and is not detailed. It is not a basis for arguing that the restraint does not apply.
[23] Mr Hoover claims that he was promised a profit, as distinct from a turnover, of $1,800 per week being the “average gross weekly income” referred to in para 10.4(a) of the turnover guarantee. Certainly he did not achieve that level of profitability. He did, however, achieve something approaching that level of turnover. Mr O’Neill for Mr Hoover sought to argue that “an average gross weekly income” referred to profit and not turnover. I do not regard this as a sound argument. Income
in its dictionary definition is frequently equated to turnover, not profit.6 The
“turnover guarantee” is stated in the sub-franchise agreement to be for $1,800 per week “inclusive of GST”. The use of the phrase later in the agreement of “turnover guarantee” makes the meaning of “income” unambiguous. What is being guaranteed is the gross turnover, and not the gross profit.
[24] Other complaints made by Mr Hoover are that he does not trust Mr Dorn for various reasons, and that the royalties he has had to pay are excessive. These are very general and lack any contractual or factual basis. His claim that his predecessor was allowed to continue competing with him, but this was answered by apparently credible evidence from the contractor involved.
[25] However, his complaints in relation to the Spotless contracts on their face have more substance. I must consider whether that could be an effective defence to the claim.
The Spotless work
[26] In 2014 Green Acres obtained a contract to mow lawns and tend the gardens of courthouses. In the course of 2014 and the first half of 2015, Mr Hoover took over the courthouse work for Morrinsville, Te Kuiti, Te Awamutu and Tokoroa. This work was important to Mr Hoover. By August 2015 the Spotless contract was worth
$2,500 per month. It appears to have constituted approximately a third of his total turnover.
[27] He has annexed two of the Spotless work orders. He interprets the orders as requiring the lawns of the courthouses to be mown fortnightly or less as required,
and for general maintenance of gardens as required. In August 2015, he did not mow the courthouse lawns because in that cold month there was no grass to mow. He did not submit an invoice for that month. Mr Dorn telephoned him and on being told that he had not mown the lawns through August, Mr Dorn, accordingly to Mr Hoover, became angry. Mr Dorn telephoned Mr Hoover later in the month to tell him that a senior executive at Green Acres had determined that he was not to be given any more Spotless work and the work he had was taken off him and given to somebody else. This appears to have precipitated Mr Hoover’s decision to stop working as a franchisee, to get rid of all the trappings of the franchise, and to trade thereafter on his own as the Lawn Ranger.
[28] Mr Dorn in his affidavit asserts that while it might be true that during some winter months lawnmowing is not necessary, Mr Hoover should still have performed the maintenance services every fortnight. Spotless expected him to do so. Mr Dorn referred to various Green Acre emails through September 2015 which showed that the administration manager for Green Acres, Angelina Newman, had recorded that Spotless was not “overly happy with the sites being unattended”. She had obviously formed the view that Mr Hoover needed to be replaced.
[29] Mr O’Neill submitted that none of these matters justified taking away the Spotless work, and that this severely damaged the value of the sub-franchise. He argued that procedurally the process of removing the work from Mr Hoover was carried out unfairly to him.
[30] There is no express term in the franchise agreement requiring Dorn Investments not to take any work away from a franchisee, or to follow a certain process before any such work is taken away. However, I accept that it is seriously arguable that there could be an implied term in the franchise agreement to that effect. It would be surprising if a franchisor or sub-franchisor such as Dorn Investments, controlling the allocation of significant work as it did, could take away one-third of a contractor’s turnover without at least giving the franchisee the opportunity to rectify the complaint that was the basis for the removal.
[31] I have not had any detailed submissions on the law that might apply, and I appreciate that there is a high threshold for the implication of terms, and the complications that go with assertions akin to there being an implied term of good faith. I also accept that there appears to have been some measure of dissatisfaction on the part of Spotless at Mr Hoover’s performance more generally, and that it might well be shown that he had fallen short of what could be expected of a sub-franchisee by a considerable margin. However, on the face of it Mr Hoover was given no opportunity to address this serious complaint, and it was specific to not doing gardening over a short mid-winter period. Given that he would be paid for his attendances, it may have been easily remedied. He was not given that opportunity.
[32] Mr Chisholm submitted that it had always been open to Mr Hoover, if he felt unfairly treated over his treatment in regard to the Spotless contract, to take such an issue to mediation. Instead he had just peremptorily abandoned the franchise agreement, without notifying Dorn Investments. There is some force in that submission. Equally, however, when the issue over the Spotless contract arose, Dorn Investments did not attempt to mediate or give an opportunity to Mr Hoover to remedy the situation.
[33] These arguments lack form at the present time because there has been no statement of defence filed on behalf of Mr Hoover. However, it will be open to Mr Hoover to file a statement of defence pleading a significant breach of an implied term by Dorn Investments. There may be a defence available to Mr Hoover that Dorn Investment repudiated the contract by his actions in relation to the Spotless contract. Indeed, it may be open to Mr Hoover to still cancel the contract and to seek leave under s 9 of the Contractual Remedies Act 1979, for release of his restraint of
trade obligations. This is not a straightforward area of law.7 If the franchise
agreement is cancelled, Dorn Investments may not be able to enforce the restraint of trade clause.
[34] I conclude that Mr Hoover may be able to put forward a defence to the claim to enforce the restraint of trade clause.
7 See Pirtek (New Zealand) Ltd v Mega Fluid Solutions Ltd HC Hamilton CP5/03, 7 March 2003 at [14]; and Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [33]–[34].
Balance of convenience
[35] Little needs to be said about this. Clearly the results for Mr Hoover of granting an injunction will be severe and they will be unlikely to be able to be remedied in damages. He will have to stop his present business. His affidavit shows him to be a man of modest means, dependent on lawnmowing and gardening in the Waikato area for his income. He has health issues. If he has to close down now and wait for the two year period of the restraint to expire he is likely to lose the goodwill of at least the bulk of his customers. Thus, he faces losing his income, losing his goodwill, and will be left with plant and machinery that he will have no use for.
[36] On the other hand if Dorn Investments has to wait for a fixture for some months, clearly it will survive any damage to its network and goodwill that arises in the meantime. It received Mr Hoover’s initial upfront payment of $36,000 plus GST, and his weekly payments of $240 per week until late 2015.
[37] There will be approximately 50 customers serviced by Mr Hoover that would otherwise be available to other Dorn Investments sub-franchisees. However, there is no evidence that there is any particular person who has been designated to do that work, or that any specific person will be disadvantaged, save for Dorn Investments in that it may be deprived of franchise fees that it could obtain if it appointed another franchisee in substitution for Mr Hoover. The sums that would be involved in those lost fees would be modest, if they are anything like the sums Mr Hoover has paid.
[38] I accept that Dorn Investments wishes to be seen by other franchisees as being proactive when franchisees breach the restraint of trade. However, it will be seen as having acted quickly in issuing these proceedings. It must be recognised that Dorn Investments was and still is able to pursue this matter to an early substantive fixture. Indeed a priority fixture could be sought. There is every chance that the case could be heard this year. Mr Hoover even if he wins this round, faces the prospect that if he loses the case at the substantive hearing he will face a permanent injunction, and a damages order as well. In all the circumstances it is unlikely that any franchisee would see Dorn Investments as a soft touch where a restraint can be easily avoided, just because it is not granted an interim injunction at this hearing.
Overall justice
[39] Ultimately, if at the final hearing Dorn Investments is successful, it will obtain a permanent injunction and an award of damages. The damages will not be great for reasons that I have outlined, but should reimburse Dorn Investments. It will have made an example of Mr Hoover. It does not need relief now prior to trial. Indeed, even if it wins the final hearing a court may well conclude that Mr Hoover is doing nothing to actively damage the Green Acres goodwill by his actions, given that he is trading under his own name and not using any of the Green Acres franchise materials. Mr Hoover’s turnover is modest.
[40] If on the other hand the interim injunction sought is ordered now, but Mr Hoover ultimately wins, he will have had no employment in the lawnmowing and gardening area for some months, and will face the difficult task of trying to put a figure on the losses suffered of trying to restart a business after such a delay. His reputation in the Waikato with his former customers will be very damaged. He would have the difficult task of establishing the value of the lost business, and possibly what the value of future lost business might be. Thus on the overall balance of convenience, Mr Hoover has the strongest position.
[41] However, this balance of convenience argument would not prevail if Mr Hoover had no arguable defence to the restraint of trade claim. If no such arguable defence had been made out, I would have ordered an interim injunction because a franchisor in such a situation should be entitled to immediate protection. In fact, all but one of the defences argued for Mr Hoover are so weak that they would not have stopped an interim injunction being ordered.
[42] However, the peremptory removal of one-third of Mr Hoover’s custom in September 2015 by Dorn Investments when it took the Spotless contract away from him was, in my view, an arguable repudiation. It could lead to a situation where the restraint of trade is not enforceable.
[43] This is the factor that has tipped the balance on assessing the overall justice against the granting of an interim injunction. Mr Hoover may have a defence, and should be able to keep his business going until he has his day in court.
Result
[44] The application for an interim injunction is dismissed.
[45] The plaintiff is to pay the defendant’s costs and reasonable disbursements on
a 2B basis.
……………………………..
Asher J
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