Enersave Products Limited (in receivership and liquidation) v Arrowsmith

[2013] NZHC 467

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-000406 [2013] NZHC 467

BETWEEN  ENERSAVE PRODUCTS LIMITED (IN RECEIVERSHIP AND LIQUIDATION) Plaintiff

ANDDAVID WILLIAM ARROWSMITH First Defendant

ANDLYNNE AVIS ARROWSMITH Second Defendant

ANDPAUL DAVID ARROWSMITH Third Defendant

ANDENERGO HEAT LIMITED Fourth Defendant

ANDDWA LIMITED Fifth Defendant

Hearing:         7 March 2013

Appearances: M B Couling and DJD van Hout for Plaintiff

D A Webb and S E Goodwin for Defendants

Judgment:      8 March 2013

ORAL JUDGMENT OF CHISHOLM J

[1]      In May 2011 the plaintiff purchased the fifth defendant’s electrical heating business (the business) for $3.2 million, of which $2.3 million comprised goodwill. Short term vendor finance of $400,000 was provided.  The plaintiff is now in receivership and liquidation.

[2]      This  proceeding  was  instituted  by  the  receiver  with  the  consent  of  the liquidator.  It seeks injunctive relief on the basis that the defendants are intending to,

or are in the process of, breaching a restraint of trade provision in the agreement for

ENERSAVE PRODUCTS LIMITED (IN RECEIVERSHIP AND LIQUIDATION) V ARROWSMITH HC CHCH CIV-2013-409-000406 [8 March 2013]

sale and purchase of the business. An interim injunction is sought and this judgment relates to that component of the proceeding.

[3]      At  the  hearing  Mr  Couling  abandoned  the  application  for  interim  relief against the second and third defendants.   They are respectively the director and shareholder of the fourth defendant.

Background

[4]      Negotiations for the purchase were conducted by David Arrowsmith, who was effectively the owner of the fifth defendant (the vendor), and Mark Gillam on behalf of the plaintiff (the purchaser).    Before negotiations began Mr Arrowsmith had prepared an information memorandum concerning the sale of the business which recorded that he would personally enter into “an appropriate restraint of trade”.

[5]      The agreement for sale and purchase included the following clauses:

14       NON-COMPETITION

14.1     No competition

The Vendor agrees for the benefit of the Purchaser that for three (3) years from  Settlement  it  will  not,  without  the  prior  written  consent  of  the Purchaser, be directly or indirectly interested, engaged or concerned in, or assist financially, any business within New Zealand or Australia which is the same as or substantially similar to or in competition with the Business as conducted  at  Settlement,  whether  on  the Vendor’s own  account  or  as  a consultant to or a partner, agent, employee, shareholder, member or director of any other persons, or in any other way whatsoever provided that David Arrowsmith may be directly or indirectly interested, engaged or concerned in, or assist financially in Next Energy Limited providing Next Energy Limited is carrying on business in the same or substantially similar manner as it was conducted at Settlement.

14.2     No soliciting

The Vendor agrees for the benefit of the Purchaser for three (3) years from Settlement it will not directly or indirectly, either on its own account or as agent, adviser, contractor or consultant for any person, solicit the services of, or  offer  employment  to,  any  person  employed  in  the  Business  in  New Zealand or Australia or any customer of the Business.

...

14.4     Restraints reasonable

The parties consider the restraints in this clause to be reasonable in all the circumstances.   However, if a court of competent jurisdiction finds any of them to be unenforceable, the parties agree to accept any modification of the area, extent or duration of the restraint concerned which the court sees fit to impose, or if it does not see fit, which may be required to make the restraint enforceable.

For present purposes the focus is on clause 14.1.

[6]      There was no clause expressly restraining Mr Arrowsmith and he was not a signatory to the agreement.  Although he is described as the vendor in clause 19, which refers to notices, it is clear when the agreement is read as a whole that the fifth defendant was the vendor of the business, not Mr Arrowsmith.

[7]      The vendor finance of $400,000 was repayable on 1 December 2011.   The purchaser defaulted and a week later the fifth defendant issued a statutory demand. Following litigation Associate Judge Osborne decided that the plaintiff should be put into liquidation, subject to the completion of the advertising.   The liquidator was appointed on 13 November 2012, a secured creditor having appointed the receiver the day before.

[8]      To go back in time, the agreement for sale and purchase included all customer and supply lists relating to the business.  One of the major suppliers of product was Energotech AB, a Swedish company, who used the business as its New Zealand distributor.   However, there were no agreements formalising this distribution arrangement.

[9]      After purchasing the business the plaintiff ran into financial difficulties which affected the plaintiff ’s relationship with Energotech.   These issues (primarily the plaintiff’s difficulty in  making payment) are recorded in an exchange of emails between Mrs Gillam (and the receiver) and Sven Pavin, the managing director of Energotech.  On 9 January 2013 Mr Pavin informed Mrs Gillam by email that his company had decided to terminate its arrangement with the plaintiff and appoint Energo   Heat   Limited   (the  fourth   defendant)   as   its   exclusive  distributor  in New Zealand, effective from 1 March 2013.

[10]     While acknowledging that Mrs Gillam had wanted to prove that she could “get the business growing again”, the email noted that there were “other people calling the shots now” (the receiver and liquidator) and that this produced an uncertainty that Energotech could not accept.   Mr Pavin said that their main focus was to “protect our business and market position” and that he was truly sorry that it had not worked out.

[11]     After receiving this email the Gillams made enquiries about the company that had been referred to in the email (the fourth defendant).  At that stage the company had not been incorporated but they established that Mr Arrowsmith had reserved the name.  Later they established that Mrs Arrowsmith was the director of the company and that the shares were held by Mr and Mrs Arrowsith’s son.

[12]     This information led Mr and Mrs Gilliam and the receiver to the view that the fourth defendant (indeed, all the defendants) was intending to breach the restraint of trade.  This view was on based on their belief that the restraint of trade also bound Mr Arrowsmith personally.

[13]     Correspondence  between  the  solicitors  followed.    The  solicitor  for  the plaintiff alleged that the defendants were breaching the restraint provisions in the agreement for sale and purchase, and called upon them to desist.   In response the solicitor for the defendants denied these allegations and informed the plaintiff that the agreement for sale and purchase had been cancelled for failure to repay the vendor finance.

[14]     This proceeding was issued on 28 February 2013.  Three causes of action are pleaded:

(a)       Breach of an express non competition clause;

(b)      Breach of an implied non competition clause; and

(c)       Rectification.

As already mentioned, the plaintiff sought injunctive relief, including an interim

injunction.

[15]   Three affidavits were filed in support of the application for an interim injunction:   an affidavit  by Grant Hollis, the receiver; and affidavits from both Mr and Mrs Gilliam.  Following the purchase of the business Mr Gillam had initially been the managing director, but, following the failure of their marriage, Mrs Gillam took over that role.

Case for the plaintiff

[16]     The plaintiff contends that the restraint of trade provision in the agreement for sale and purchase was intended to, and did, include Mr Arrowsmith personally, and that this reflected the very substantial sum paid for goodwill.  On its analysis the defendants  have  now  orchestrated  a  situation  where  they are  circumventing  the restraint provision by resuming business with Energotech via the fourth defendant. As Mr Couling put it at one stage, the defendants are attempting to “double dip”.

[17]     According to the plaintiff, this breach of the restraint of trade provision will destroy any prospect of the plaintiff recovering unless interim injunctive relief is provided by the Court.   The plaintiff company contends that it has strong future prospects  and,  with  the  protection  of  an  injunction  (and  later  a  permanent injunction), it will be well placed to take advantage of the rebuild arising from the Canterbury earthquakes. Without that protection it will fail.

The defence

[18]     These allegations are denied by the defendants.

[19]     First,  they  contend  that  the  contract  was  cancelled  and  that  in  terms  of s 8(3)(a) of the Contractual Remedies Act 1979 neither party is obliged to perform the contract.  In other words, any restraints imposed by the agreement for sale and purchase no longer apply.

[20]     Secondly, only the fifth defendant was restrained, and it is not trading.  Thus there has been no breach on its part.  Even if (which is denied) the restraint applied to the first defendant (Mr Arrowsmith) there is no link between him and the fourth defendant. Again there has been no breach.

[21]     Thirdly, the plaintiff itself is in breach of its obligations under the agreement for sale and purchase and is accordingly not entitled to relief.  Fourthly, given that Energotech has stated that it no longer intends to supply the plaintiff under any circumstances, the interim injunction sought would be pointless.  Finally, the balance of convenience favours refusal of interim relief.

[22]     Again three affidavits have been filed.  Mr and Mrs Arrowsmith have each filed an affidavit.  So also has Mr Pavin.  His affidavit is to the effect that even if the Court prevents the fourth defendant from acting as his company’s distributor in New Zealand, his company will not reinstate the distribution arrangement with the plaintiff.

[23]     Now I consider the three issues relevant to interim relief.

Is there an arguable case?

[24]     There is, of course, no question that the fifth defendant is bound by the restraint.  But that is not the pivotal issue.  It is not trading and there is no suggestion that it would be involved in the new arrangement with Energotech.   The issue is whether there is an arguable case that the first defendant (David Arrowsmith) and through him the fourth defendant (Energo Heat Limited) are restrained; and, if so, whether there is an arguable case that a breach (either current or intended) has been established.

[25]     On the evidence currently available I have no difficulty in accepting that the parties  contemplated  that  Mr Arrowsmith  personally  would  be  included  in  the restraint.  It is simply commonsense that a purchaser paying more than $2 million for goodwill would expect a shareholder, who was effectively the vendor, to enter into an  appropriate  restraint.     And,  judging  from  the  information  memorandum,

Mr Arrowsmith contemplated that he would be called upon to provide a restraint. Added to that, the proviso to clause 14.1 makes little sense unless the parties were contemplating that Mr Arrowsmith would be personally restrained.

[26]   I am also satisfied that if an arguable case can be established that Mr Arrowsmith personally was bound by the restraint of trade provision, the Court could safely infer (to the arguable case standard) that Mr Arrowsmith was breaching or intending to breach that restraint via the fourth defendant.   Again this reflects a commonsense  overview  of  the  evidence.    Mr Arrowsmith  would  be  competing directly or indirectly and he could not hide behind his family’s involvement in the fourth defendant.

[27]     But, that is not the end of the matter.  As Mr Webb noted, Mr Arrowsmith is not a party to the agreement for sale and purchase; nor is he a party to any associated document.    Under  those  circumstances,  submitted  Mr  Webb,  it  is  contrary  to principle to imply a term or to rectify the agreement for sale and purchase by introducing another party.

[28]     Mr Couling, who was taken somewhat by surprise by this point which was not expressly referred to in the notice of opposition, responded that the Court must have power to imply a term or rectify the situation that has arisen.  Understandably, in the time available he did not have any opportunity to locate any authorities that might be in point (nor had Mr Webb).

[29]     I begin by considering whether a term could be arguably implied.  While I have  not  had  the  opportunity  to  give  the  matter  the  consideration  it  probably deserves, I am satisfied that Mr Webb’s point cannot be lightly dismissed.   The traditional approach to implied terms in BP Refinery (Westernport) Pty Ltd v Shire of Hastings[1] revolves around the parties to the contract.  It is difficult to see how a third party could be introduced to the contract by way of an implied term without the third

party’s consent, which is absent here.

[1] BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] 16 ALR 363 at 376.

[30]     Possibly it could be argued that the implied term required the fifth defendant (as vendor) to procure a covenant from its principal shareholder (the first defendant) not to compete.  But even that is tenuous, and I am not sure that it would take the plaintiff very far because it is the shareholder rather than the company that is the target.   Nevertheless, I will take the cautious approach of proceeding on the basis that it might be possibly to imply a term, even though I suspect that this possibility really hangs by a thread.

[31]     I also doubt that rectification is a plausible possibility.   Rectification is an equitable doctrine which permits the Court, in appropriate circumstances, to alter the terms of a written document so that it accords with the intentions of the party or parties executing it:   see Wellington City Council v New Zealand Law Society.[2]

Unless Mr Arrowsmith’s intentions can be imputed to the fifth defendant as vendor,

which I doubt, I do not see how this doctrine could impose binding obligations on a non party who does not wish to be a party.

[2] Wellington City Council v New Zealand Law Society [1988] 2 NZLR 614 at 625 which was upheld on appeal [1990] 2 NZLR 22 (CA).

[32]     My  conclusion  is,  therefore,  that  the  plaintiff  has  major  problems  in surmounting the arguable case threshold.  Nevertheless, I will go on to consider the balance of convenience.

Balance of convenience

[33]     Several matters need to be considered:  the significance of the cancellation; the stance of Energotech; default by the plaintiff; the value of the undertaking as to damages; adequacy of damages; and the status quo.

Significance of cancellation

[34]     The defendants rely on s 8(3)(a) of the Contractual Remedies Act 1979 which provides:

8        Rules applying to cancellation

...

(3)      Subject  to  this Act,  when  a  contract  is  cancelled  the  following provisions shall apply:

(a)       so far as the contract remains unperformed at the time of the cancellation,  no  party  shall  be  obliged  or  entitled  to  perform  it further:

...

They also rely on the observation in Garratt v Ikeda[3] that this provision is essentially forward looking in the sense that it is looking to matters that the contract requires to be done in the future.

[3] Garratt v Ikeda [2002] NZLR 577 (CA) at [9].

[35]     On this basis Mr Webb submitted that to the extent that the restraint of trade clause  was  unperformed  when  the  contract  was  cancelled,  it  fell  with  the cancellation.   He contrasted that situation with clauses, such as arbitration clauses and the like, which might survive cancellation.  Mr Webb also noted that clause 13.3 of the agreement for sale and purchase, which specifies a range of remedies available to the vendor on default (including re-entry, taking possession of the business and re- selling it), is consistent with this interpretation.

[36]     In response Mr Couling submitted that (assuming the cancellation is valid, which is denied) the restraint survived the cancellation.  This is on the basis that the restraint is a secondary, not a primary, obligation.   To support of that proposition Mr Couling  referred  to  Grain  Processors  Limited  v  Bluebird  Foods  Limited,[4]

Dymocks Franchise Systems (NSW) Pty Limited v Bilgola Enterprises Limited[5]  and

Dawson and McLauchlan The Contractual Remedies Act.[6]     He responsibly acknowledged, however, that Pirtek (New Zealand) Limited v Mega Fluid Solutions Limited[7] goes the other way.

[4] Grain Processors Limited v Bluebird Foods Limited (1999) 6 NZBLC 102,879.

[5] Dymocks Franchise Systems (NSW) Pty Limited v Bilgola Enterprises Limited (1999) 8 TCLR 612

[6] Dawson and McLauchlan The Contractual Remedies Act Auckland, Sweet & Maxwell 1981 at 139.

[7] Pirtek (New Zealand) Limited v Mega Fluid Solutions Limited  HC Hamilton CP 503, 7 March 2003, Fisher J.

[37]     While I accept that there is strength in Mr Webb’s argument, I doubt that it is

a king hit.   One possibility that cannot be entirely eliminated at this interlocutory

stage is an application for relief under s 9 of the Contractual Remedies Act, particularly s 9(2)(c).   That said,  I am prepared to accept that the fact that the contract has been cancelled favours the defendants rather than the plaintiff.

Stance of Energotech

[38]     In his affidavit Mr Pavin said:

Should Energo Heat Limited be prevented from operating as our appointed New Zealand distributor this would not reverse our decision regarding Enersave.  Energotech AB would still no longer supply products to Enersave [the plaintiff].

Despite Mr Coulings argument to the contrary I must take this statement at face value.

[39]     While there might have been some manoeuvring behind the scenes between the defendants and Energotech earlier in the piece, the reality is that Energotech was not contractually bound to continue (or reinstate) the plaintiff’s appointment as its distributor.  Unfortunately for the plaintiff the Energotech business has gone.

[40]     If Energotech AB no longer supplies products to the plaintiff it would appear that a good deal of the damage that the interim injunction is designed to avoid will occur anyway.  This reflects that the evidence indicates that the Energotech products account for about 37% of the plaintiff ’s product range.   In other words, there is strength in the defendants’ argument that an interim injunction would be futile.

Default of the plaintiff

[41]     But for the plaintiff’s own default in repaying the $400,000 and complying with its obligations with the Swedish company in a timely fashion, we would probably not be here.   While it is not difficult to have sympathy for the plaintiff, those realities have to be faced.  They do not assist the plaintiff when it comes to obtaining interim relief.

[42]     This flows on from the matters that I have just mentioned.  While there are optimistic statements by the receiver and Mrs Gillam about the prospects of the company recovering, the reality is that the plaintiff is in liquidation and on its way to being wound up.  Taking into account the debt of $400,000, its liabilities appear to significantly  exceed  the  current  assets  as  at  1  February  2013  mentioned  in Mrs Gillam’s affidavit.  And that situation can only be worse with the loss of the Energotech distributorship.

[43]     This must have a direct impact on the undertaking as to damages, which is unlikely to have much value.  Given the earlier conclusions about the strength of the plaintiff’s case (when discussing whether there was an arguable case), the Court would be taking a considerable risk if it was to grant an interim injunction in the knowledge that the undertaking as to damages probably had little value.

Adequacy of damages

[44]     In contrast with the undertaking as to damages, there is no suggestion that the defendants would be unable to meet a claim for damages.  And given the situation that has developed, particularly the liquidation of the plaintiff and the loss of the Energotech distribution arrangement, it is difficult to see how damages would be an inadequate remedy for the plaintiff.

Status quo

[45]     While it is debatable what comprises a status quo, I proceed on the basis that it includes  cancellation  of agreement  for sale and purchase and  the loss  of the Energotech business.  Under those circumstances the status quo would favour refusal of an interim injunction.

Conclusions as to the balance of convenience

[46]     This consideration decisively favours refusal of an interim injunction.

[47]     Stepping  back  and  looking  at  the  matter  overall  I  come  to  the  same conclusion.   Notwithstanding my sympathy for the plaintiff’s situation, a realistic assessment is required.   That assessment confirms that at this interlocutory stage refusal of interim relief reflects the overall justice.

Outcome

[48]      The application for interim relief is dismissed.

[49]     My initial impression is that an order for costs in favour of the defendants on the 2B scale should follow but, because Mr Couling is not present today (with the Court’s permission) he ought to have an opportunity to respond.  If he wishes to do so, he can file a memorandum within a week and the defendants will have a further week to reply.  In the absence of a memorandum on behalf of the plaintiff there will be an order that the plaintiff pay the defendants’ costs on the 2B scale.

Solicitors:

Anderson Lloyd, Christchurch,  [email protected]

Lane Neave, Christchurch,  [email protected] and  [email protected]

Solicitors: