Feng v Liu
[2017] NZHC 2479
•10 October 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-002164 [2017] NZHC 2479
BETWEEN QIN FENG
Plaintiff
AND
BENLONG LIU AND ZHANPENG SU First Defendants
MAJESTIC SL LIMITED, YONGNAN SHI and SHAOYING LI
Second Defendants
Hearing: 6 October 2017 Appearances:
A C Sorrell for Plaintiff
A Barker QC for RespondentsJudgment:
10 October 2017
JUDGMENT OF VENNING J
This judgment was delivered by me on 10 October 2017 at 3.15 pm, pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Croftfield Law Ltd, Auckland
Glaister Ennor, Auckland
Copy to: A C Sorrell, Auckland
A Barker QC, Auckland
FENG v LIU & ORS [2017] NZHC 2479 [10 October 2017]
[1] The plaintiff seeks an interim injunction against the defendants preventing them from working in or carrying out the business of making kitchen and other household commercial joinery.
[2] The plaintiff Qin Feng (Feng) and the first defendants Benlong Liu (Liu) and Zhanpeng Su (Su) were shareholders and directors in Ideal Projects Limited (Ideal), a kitchen joinery business. Mr Liu held 35 per cent and Mr Su held 30 per cent of the shares. Mr Feng held the other 35 per cent. On 19 December 2016 Messrs Su and Liu agreed to sell their shares to Mr Feng. Under the terms of the agreement dated 19 December 2016 Mr Feng paid Mr Su and Mr Liu $150,000 each. Mr Feng also indemnified Messrs Su and Liu for their personal guarantees of the premises lease and agreed to pay the balances due on two motor vehicle financing transactions totalling just over $80,000. To finance the purchase of the shareholding Mr Feng and his partner, Sherria Chen agreed that a property held in her name would be transferred to their joint names and the mortgage increased by $140,000. Ms Chen then took 40% of the shares in Ideal.
[3] The agreement contained a restraint of trade clause:
7.1In consideration for entering into this agreement, Vendor 1 and Vendor 2 hereby personally and severally covenants that they will not, and that none of their respective associated persons shall, without the prior written consent of the Purchaser, for a period of two years from the date of this agreement and for a radius of 30 kilometers either directly or indirectly carry on or in any way assist or be interested in either alone or in partnership with or as a manager, director or shareholder in any business similar to the Company. In addition Vendor 1 and Vendor 2 shall not:
(a) Order on account or as an agent of any person, canvass or solicitor or accept orders for any goods or services similar to or competing with the goods or services which have been or are in the time sold or supplied in the ordinary course of the Company, or the normal operations of the Company.
(b) Directly or indirectly or on behalf of or in conjunction with any person, solicit or entice any of the employees or contractors of the Company or any clients of the Company.
(c) Use or disclose information of a secret or confidential nature relating to the affairs of the Company.
[4] The restraint is in two parts: first it prevents Mr Liu and Mr Su and their respective associated persons from carrying on or being interested in any business similar to Ideal. Second it prevents Messrs Liu and Su from canvassing or soliciting for goods or services similar to the goods or services sold or supplied by Ideal or from soliciting employees or contractors and clients of Ideal or using or disclosing Ideal’s confidential information.
[5] In mid 2017 Mr Feng heard rumours that Messrs Liu and Su had set up in competition with Ideal. He discovered that a company Majestic SL Ltd (Majestic) had been incorporated. Yongnan Shi (Nancy), Liu’s wife, and Shaoying Li (Jessica) Mr Su’s wife, incorporated Majestic on 10 March 2017 with themselves as directors and shareholders. They had both previously worked at Ideal for just over a year before the sale of the shares to Mr Feng.
[6] Mr Feng then made further inquiries about the operation of Majestic. On the basis of those inquiries he discovered that:
(a) Mr Su had approached a machinery supplier used by Ideal to purchase
CNC Machinery for installation at Majestic’s premises.
(b)Mr Su had apparently contacted a staff member at Hafele NZ Ltd, a major supplier of furniture fittings and hardware for Ideal to organise setting up Majestic’s showroom and to talk about the purchase of materials from them;
(c) Mr Su also approached a staff member from Laminex NZ Ltd to discuss a supplier of decorative surfaces and panel products to discuss and organise payment methods between Laminex and Majestic;
(d) Mr Su also apparently contacted Industrial Air systems (NZ) Ltd to
organise installation of compressor machinery at Majestic’s premises.
[7] In addition to the contact with suppliers Mr Su also appears to have had a role
in promoting the sales of Majestic. Mr Feng’s inquiries led him to obtain a business
card which named Luke (who he believes to be Mr Su) as the sales manager of
Majestic.
[8] A Charlie Xie and his company Equi Trustee Co Ltd are and were substantial and important clients of Ideal. Charlie Xie had been contacted by Mr Su who was seeking a long-term relationship between Charlie Xie and Majestic. Mr Su told Mr Xie they had set up a new factory with latest modern machinery and a new showroom.
[9] Mr Feng has also obtained an affidavit from a Mr Tsui who was contacted by
Mr Su asking him about setting up an electricity system for the factory.
[10] Mr Xiu, a project manager, has also confirmed he was contacted by Nancy from Majestic. He says:
On 23 September 2017, Nancy from Majestic Kitchens approached me to give them the job of my own house at Whenuapai. I told them this project was already confirmed with [Ideal] and I was not intending to change my mind to another company. Then Nancy explained to me she was from [Ideal] and she would like to invite me to their factory for the company opening.
[11] That contact on 23 September 2017 was after a letter before suit had been
sent by Mr Feng and Ideal’s solicitors.
[12] The defendants’ position is recorded in their solicitor’s letter in response to the letter before suit. In that letter of 11 August the defendants advised their instructions were that:
(a) Even if valid the restraint of trade was binding only on Messrs Liu and Su.
(b)Messrs Liu and Su had been engaged by Majestic as contractors for kitchen cabinetmaking. The onus was on Mr Feng to establish the restraint of trade was reasonable and not oppressive.
(c) The purpose of the restraint when considered in the context of the sale and purchase agreement was to prevent solicitation of Ideals’ clients by Messrs Liu and Su. Majestic and Messrs Liu and Su had neither solicited Ideal’s clients nor its staff. They had not used Ideal’s confidential information.
(d)Even if there had been a breach, which was denied, no harm had been suffered by Ideal. There are over 400 kitchen cabinetmakers in Auckland.
[13] Mr Liu, Mr Su and Ms Shi and Ms Li have all filed affidavits in response. The evidence in the affidavits suggests that there was a major disagreement between Mr Feng and Messrs Liu and Su which led to the agreement in mid December 2016 that Messrs Liu and Su would sell their shares to Mr Feng.
[14] Mr Su denies being involved in setting up Majestic. He says he “did provided limited help to Nancy”, Mr Liu’s wife. He accepts he is contracted to Majestic. He says he commenced work in August 2017 doing installations, after sales service and some sales work. He accepts he has a business card with Majestic. He accepts also he sent a wechat message confirming his work as a contractor for Majestic Kitchens.
[15] Ms Li (Jessica) says the day after the December agreement was completed Mr Feng fired her. He also fired Nancy. She says in March 2017 she and Nancy decided to set up their own kitchen cabinetmaking business and that as she got further into her pregnancy during 2017 she could not work so asked Luke, Mr Su, to help Nancy, who had recently returned to work. She says Majestic has 14 or 15 contracts worth over $300,000 and that she and Ms Li have personally borrowed substantially for the business and have personal liability under the lease.
[16] Mr Liu says he’s been a kitchen cabinetmaker for 14 years. He is 40 years old and if the injunction was granted it would prevent him working for two years. He says he would not have signed the agreement if he knew it could mean this.
Principles
[17] The test for an application for interim injunction is well settled. The Court will consider:
(a) whether the plaintiff has established a serious question to be tried;
(b)balance of convenience, which requires consideration of the impact of the injunction on the parties;
(c) interests of justice overall.1
Serious question to be tried
[18] Mr Barker QC submitted that in the context of a restraint of trade there was a higher threshold on the plaintiff to establish the restraint was valid. He submitted there was a difference between protecting the goodwill of a business and preventing a person from working in the business or industry at all, the whole of business concept. He submitted the only legitimate interest that could possibly be protected by the restraint of trade in the present case was the goodwill of Ideal which could be met by the undertaking which was now offered by Messrs Liu and Su that they would they would only work for Majestic as kitchen cabinetmakers and installers and would not solicit Ideal’s clients or staff. In addition, even though they were not bound by the restraint, Ms Shi and Ms Li would also undertake not to solicit Ideals clients or staff or to use its confidential information.
[19] Finally he noted the defendants proposed to pay $25,000 to be held in their
solicitor’s bank account as security for any judgment.
[20] Mr Barker also emphasised the background to the negotiation of the contract was the very difficult relationship between the parties.
[21] That is not a complete answer. In Brown v Brown Cooke J observed that where a transaction had been forced on the parties, in effect one party buying out the
1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12].
other because unhappy differences had made cooperation impossible, there was much less freedom of contract than usual.2 Nevertheless, the Court did not strike down the restraint of trade entirely bur rather reduced its terms (20 to 12 years) and geographical cover.
[22] Further, as Mr Sorrell pointed out, the agreement records that the parties had independent legal and accounting advice before completing the agreement. It was negotiated or at least discussed over a period of up to a month, and Messrs Liu and Su were the majority shareholders in the company.
[23] Despite Mr Barker’s submissions I find there is a strong prima facie case for breach of the restraint by Messrs Liu and Su. I note that the term of two years is a relatively limited period. While the 30 kilometres radius might perhaps be adjusted by the Court, the defendants are operating within five to seven kilometers of Ideal’s premises, depending on the parties’ evidence as to distance. Having regard to the circumstances set out in a number of cases where restraints have been upheld the term of the restraint against Messrs Liu and Su is not so unreasonable as to be struck down at this preliminary stage given the consideration Mr Feng paid for control of
Ideal.3 I note that in Cambridge News Ltd v Mark Media Company Ltd even though
Asher J was troubled by a restraint of 30 kilometres as it extended beyond the relevant circulation area, on a serious question issue, the Judge chose not to resolve the reasonableness or not.4
[24] I am not prepared, at this interim injunction stage to make the distinction between the preservation of goodwill and preventing the defendants working in the business at all as Mr Barker argued for. The restraint upheld by the Court of Appeal in Brown had both features.5 It prevented one of the brothers from working in the
industry at all for the period and over a lengthy time.
2 Brown v Brown [1980] 1 NZLR 484.
3 Fletcher Aluminium Ltd v O’Sullivan [2001] 2 NZLR 731; BYOF Holdings Pty Ltd v Bencho
Ltd [2014] NZHC 1560; and Western Work Boats Ltd v Kelly [2016] NZHC 2577 at [28].
4 Cambridge News Ltd v Mark Media Company Ltd [2016] NZHC 1326.
5 Brown v Brown, above n 2.
[25] While Mr Liu says that he would not otherwise be able to work he has been paid $150,000 for his shares and Mr Su has the opportunity of work elsewhere. He has opened a restaurant.
[26] The real issue is whether the plaintiff has a seriously arguable case against Majestic and Ms Shi and Ms Li as they were not parties to the restraint of trade. Given the reference in the restraint to associated persons the clause would extend to prevent Messrs Liu and Su working for Majestic. On the evidence they have breached that condition. The issue is Majestic and Ms Shi and Ms Li’s knowledge and role in relation to the breach.
[27] This case has a number of similarities with the case of Gilford Motor Co Ltd v Horne.6 In that case Mr Horne had been employed as the plaintiff’s managing director under an agreement which included a restraint of trade clause. After he ceased employment he arranged for a company to be incorporated. The shareholders and directors were Mr Horne’s wife and an employee. The company then began soliciting the plaintiff’s customers. The English Court of Appeal granted an injunction against both Mr Horne and the company, notwithstanding the company was not a party to the restraint of trade. Lord Hanworth MR said the company was
formed as a device, a stratagem in order to mask the effective carrying on of a business of Mr Horne.
[28] As the authors of Company Law in New Zealand state the company was not a “sham” in a legal sense.7 It was genuinely incorporated and intended to have a separately led personality. Nevertheless the company was a device to enable Mr Horne to breach his restraint of trade. The plaintiff alleged a tort of inducement for breach of contract.
[29] In the present case there are a number of indicia which support a similar finding, at least for the purposes of a serious question to be tried:
6 Gilford Motor Co Ltd v Horne [1933] All ER Rep 109.
7 Peter Watts QC & Others Company Law in New Zealand (2nd ed, LexisNexis, Wellington 2016)
at 77.
· Ms Shi (Nancy) was only employed at Ideal as a sales manager from
October 2015. She had no previous experience in the business;
·Ms Li (Jessica) was only employed at Ideal for just over a year as an office administrator. Again she had no previous relevant business experience.
·Although they say they decided to start their own kitchen cabinetmaking business in March 2017, at the time their experience was limited and Jessica was pregnant. Mr Su helped them establish the business. It could not have been done without his involvement.
·They could have worked for other businesses, or for other cabinetmakers, but instead chose to establish a business and employ Messrs Liu and Su.
·It seems clear that Ms Shi and Ms Li intended to employ Messrs Liu and Su as cabinetmakers, in direct breach of the restraint clause not to assist such a business in any way.
·Significantly there is the evidence of Mr Xiu. His evidence was that on 23 September, almost two months after the letter before suit and over one month after their solicitor’s response which asserted Majestic had not solicited Ideal’s clients, Nancy was trying to convince Mr Xiu to change from Ideal to Majestic, and was prepared to use her previous connection with Ideal to do so.
[30] On present evidence there is sufficient to support a seriously arguable claim against Majestic, Ms Shi and Ms Li on the basis of inducement of breach of contract.
[31] It follows that I find the plaintiff has established a seriously arguable claim for causes of action against all defendants which would support interim injunctive relief.
Balance of convenience
[32] The next issue is the balance of convenience. As the House of Lords noted in American Cyanamid Co v Ethicon Ltd the balance of convenience only arises where there is doubt as to the adequacy of damages.8
[33] Mr Barker submitted the plaintiff may not be able to support his undertaking as to damages. However the evidence is that Mr Feng and Ms Chen own a property jointly. They borrowed an additional $140,000 on that property to pay the $300,000 paid to Messrs Liu and Su for their shares. I infer from that they found the balance
$160,000 and that the financier was satisfied there was sufficient equity and income available to support such borrowing. Further, Mr Feng holds 60 per cent of the shares in Ideal. He paid $300,000 for a 65 per cent interest. There must be some value in the shares. If it has been reduced that is arguably because of the defendants’ actions.
[34] On the other hand there is no definite evidence of the ability of the defendants to pay damages quite apart from the difficulty of the calculation of damages in a case such as this. Where it is sought to enforce a restraint of trade damages may not be an adequate remedy because the parties seeking enforcement will lose the advantage of freedom from competition.9
[35] Other relevant features to the balance of convenience are that even on the defendants’ own evidence they commenced business after a letter before suit was sent putting them on notice.
Interests of justice
[36] To the extent that the status quo is relevant Ideal had been trading without competition from Majestic. Majestic has only recently been incorporated and for the reasons given above it is arguable it was only incorporated to avoid the
consequences of the restraint of trade.
8 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL).
9 SSC & B Lintas v Murphy (1981) 1 NZCLC 95-044.
[37] Both Ms Li and Ms Shi could work elsewhere.
[38] The defendants argue that they have contracts to a value of $300,000 and have an employee who will be affected if Majestic and Ms Shi and Ms Li are injuncted. However, as noted, they have acted with knowledge of the restraint. Nancy says Majestic started operating in early August. That was after the letter before suit.
Result
[39] For those reasons I consider the balance of convenience and interests of justice support the issue of the injunction.
[40] An injunction will issue accordingly in the following terms:
(a) Enjoining the defendants and their respective associated persons until further order of this Court or agreement between the parties from directly or indirectly carrying on or in any way assisting or being interested in either alone or in partnership with or as manager, director or shareholder in any business similar to that carried on by Ideal Progress Limited (Ideal) on 19 December 2016 until 19 December
2018 within 30 kilometres of 216 Marua Road, Mount Wellington, Auckland 1051 and in addition they shall not:
(i)Order on account or as agent of any person, canvass or solicit or accept orders for any goods or services similar to or competing with the goods or services which have been or are at present sold or supplied in the ordinary course of Ideal or in the normal operations of Ideal.
(ii)Directly or indirectly on behalf of or in conjunction with any person solicit or entice any of the employees or contractors of Ideal or any clients of Ideal.
(iii)Use or disclose information of a secret or confidential nature relating to the affairs of Ideal.
Costs
[41] The parties have asked that costs be reserved to be dealt with by way of memoranda.
Leave
[42] The plaintiff is at risk of being called on pursuant to his undertaking if ultimately unsuccessful. The second defendants have contracts on hand which should be completed. It would be in the interests of all parties if a sensible compromise could be reached to enable the contracts that Majestic have on hand to be completed. That is not something the Court can order or direct at the present time. I reserve leave for the parties to seek amended orders by consent if a sensible
arrangement can be achieved to deal with those existing contracts.
Venning J
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