Finewood Upholstery Ltd v Vaughan
[2017] NZHC 1195
•2 June 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-633 [2017] NZHC 1195
BETWEEN FINEWOOD UPHOLSTERY LIMITED
Plaintiff
AND
FLETCHER HEYWOOD VAUGHAN Defendant
Hearing: 22 May 2017 Counsel:
ZG Kennedy and MD Toulmin for plaintiff
DM Salmon and AW McDonald for defendantJudgment:
2 June 2017
JUDGMENT OF FITZGERALD J [As to application for interim injunction]
This judgment was delivered by me on 2 June 2017 at 4 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: MinterEllisonRuddWatts, Auckland
LeeSalmonLong, Auckland
Finewood Upholstery Limited v Vaughan [2017] NZHC 1195 [2 June 2017]
Introduction
[1] The plaintiff (“Finewood”) is the manufacturing and logistics arm of a corporate group of companies involved in the research, design, manufacture and distribution of commercial furniture.
[2] The defendant (“Mr Vaughan”) is a sculptor and furniture designer who personally trades under the brand “Fletcher Systems”.
[3] In 2015, Finewood and Mr Vaughan entered into a five year (plus five-year renewal) Licensing, Manufacture and Distribution Agreement (“Agreement”). Unfortunately, within the first 18 months of the Agreement, various issues arose. Relations have soured. Ultimately, in February 2017 Mr Vaughan sent a letter purporting to terminate the Agreement. Finewood disputes that the termination is valid. It commenced these proceedings and seeks interim relief pending trial, preventing Mr Vaughan from taking any action inconsistent with the terms of the Agreement.
Factual background
[4] The parties have had a relatively lengthy relationship, doing business together since 2003. Until entering into the Agreement, Mr Vaughan prepared new product designs, which he supplied to Finewood for engineering and manufacture. Mr Vaughan would then solicit orders for his products, which Finewood manufactured for delivery direct to the client.
[5] By mid-2015, the parties decided to formalise their business relationship by entering into the Agreement. Pursuant to the Agreement, Mr Vaughan granted Finewood a licence in respect of the intellectual property in the entire catalogue of furniture and product designs of Fletcher Systems, as well as the “Fletcher Systems” brand itself (the “Licenced IP”). In return, Finewood agreed to pay Mr Vaughan a royalty (once a certain threshold of sales of products incorporating the Licenced IP had been achieved). Finewood also agreed not to develop any products, designs or intellectual property that would compete with Fletcher Systems products. The Agreement is also one of exclusivity, in that Mr Vaughan agreed that, while the
Agreement is on foot, he would not grant any licence or appoint any other third person as the manufacturer, supplier and distributor of products incorporating the Fletcher System designs.
[6] The Agreement also obliges Mr Vaughan to design at least one new product range per calendar year, and to assist in design and sales support, including attending meetings when clients request help creating new or amending existing designs. In return for this aspect of Mr Vaughan’s obligations, Finewood is to pay a consultant’s fee of $90,000 per annum. I further outline the terms of the Agreement below at [41]-[43].
[7] Unfortunately, and as noted, issues have arisen between the parties which have led to these proceedings. In addition, it appears that there has been a breakdown in the relationship between the parties, and in particular, between Mr Vaughan and the managing director of Finewood, Mr McKolskey.
[8] As also noted above, in February 2017, Mr Vaughan issued a notice purporting to terminate the Agreement. There is a significant dispute between the parties as to whether that termination is valid. In these proceedings, Finewood seeks by way of final relief an order for specific performance of Mr Vaughan’s obligations under the Agreement, or alternatively, a permanent injunction prohibiting Mr Vaughan from acting outside the Agreement in a manner contrary to its terms. Because of the exclusivity provisions in the Agreement (which apply worldwide), and the length of time the Agreement has to run, the reality is that such an order is likely to compel Mr Vaughan to continue to perform the Agreement. Finewood also seeks an inquiry into damages in respect of losses sustained by Finewood as a consequence of Mr Vaughan’s conduct.
Approach
[9] It is common ground that in order for an interim injunction to be granted in this case, Finewood must show that it has a real prospect of establishing at trial that
both: 1
(a) Mr Vaughan’s purported termination of the Agreement was unlawful and amounts to a repudiation (i.e. the merits); and
(b)Specific performance, or in the alternative, a final prohibitory injunction, would be ordered (i.e. the relief).
[10] If Finewood can establish a real prospect of success on the merits and of being granted the relief sought, I must turn to consider where the balance of convenience lies. I must then step back and consider whether the overall interests of justice are served by granting interim relief. Finally, if all matters are balanced, then it is a “counsel of prudence to take such measures as are calculated to preserve the status quo”.2
Serious question to be tried - merits
[11] A large volume of affidavit material has been filed addressing the factual issues which underpin Mr Vaughan’s purported termination of the Agreement. I am mindful, however, of the caution expressed in the authorities of inquiring into the merits of the underlying dispute, where the merits turn largely on matters of disputed fact (as in this case). The following passages from American Cyanamid Co v Ethicon Ltd are apposite: 3
In those cases where the legal rights of the parties depend upon facts that are in dispute between them, the evidence available to the Court at the hearing of the application for an interlocutory injunction is incomplete. It is given on affidavit and has not been tested by oral cross-examination. The purpose sought to be achieved by giving to the Court discretion to grant such injunctions would be stultified if the discretion were clogged by a technical rule forbidding its exercise if upon that incomplete untested evidence the Court evaluated the chances of the plaintiff’s ultimate success in the action at
50 percent or less, but permitting its exercise if the Court evaluated his chances at more than 50 percent.
1 LauritzenCool AB v Lady Navigation Inc [2005] EWCA Civ 579, [2005] 1 WLR 3686 at [6]; Akai Holdings Ltd v RSM Robson Rhodes LLP [2007] EWHC 1641 (Ch) at [52]; Deluxe Motor Services (1972) Ltd v The Education Board of the District of Wellington HC Wellington CP 38/88, 25 November 1988 at 11; Waihopai Valley Vineyard Ltd v Savvy Vineyards 3550 Ltd [2014] NZHC 1708 at [55].
2 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 406–407.
3 American Cyanamid, above n 2, at 406–407.
...
It is no part of the Court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages on the grant of an interlocutory injunction was that “it aided the Court in doing that which was its great object, viz abstaining from expressing any opinion upon the merits of the case until the hearing” (Wakefield v Duke of Buccleuch ((1865) 12 LT
628 at 629)). So unless the material available to the Court at the hearing of the application for an interlocutory injunction fails to disclose that the
plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the Court should go on to consider whether the
balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought.
[12] At the hearing, Mr Kennedy for Finewood also directed my attention to Ellis J’s decision in Focus Genetics Ltd Partnership v Soldiers Trading Ltd,4 which also involved disputed facts underlying the purported termination of a contract. In her judgment, Ellis J did not set out a detailed examination of the factual matters in dispute, but rather concluded that “[i]t is not (and in my view cannot be) in dispute that there is a serious question to be tried in the present case.”5 Her Honour went on to observe that:6
Rather, it is the adequacy of damages as an ultimate remedy for Focus and, potentially, for Soldiers, that is the central issue.
[13] Mr Kennedy urged me to take a similar approach. He submits that there is clearly a raft of factual issues in play in relation to the merits, upon which it would be extremely difficult to comment in a meaningful way at this interim stage. He submits that the detailed materials are more than sufficient to demonstrate that there is a serious issue to be tried in respect of the merits of the termination; in other words, Finewood’s claim that Mr Vaughan’s termination is invalid is clearly not
frivolous or vexatious.7
4 Focus Genetics Ltd Partnership v Soldiers Trading Ltd [2015] NZHC 2127.
5 At [26].
6 At [26].
7 American Cyanamid, above n 2, at 407.
[14] I agree with Mr Kennedy. I have carefully reviewed the affidavit materials relied on by both parties. It is clear that there are a range of significant factual and legal disputes. These include:
(a) Whether Finewood has failed to provide Mr Vaughan with appropriate recognition or credit when using images of Mr Vaughan’s products in advertising or other promotional materials;
(b)Whether Finewood has adequately progressed the manufacture of Mr Vaughan’s products, and has failed to adequately drive sales of Mr Vaughan’s designs;
(c) Whether Finewood banned Mr Vaughan from the Finewood site in late 2016;
(d)Whether Finewood is the subject of negative industry stakeholder perceptions which are having an adverse flow on effect on Mr Vaughan and Fletcher Systems’ brand;
(e) Whether Finewood has developed products which compete with the Fletcher Systems’ range and/or infringe Fletcher Systems’ intellectual property rights; and
(f) Whether, even if any of the above matters amount to a breach of the
Agreement, they give rise to a right of termination.
[15] The sharp factual disputes in particular will loom large at trial. It is quite impossible for me to make anything other than a fairly broad assessment of the merits at this stage. I am satisfied on the materials available to me that Finewood’s position is not frivolous or vexatious. I am accordingly satisfied that there is a serious question to be tried on the merits.
Serious question to be tried – relief
[16] The real contest between the parties, and the focus of argument at the hearing, was whether there is a real prospect of Finewood being granted an order of specific performance or a final prohibitory injunction at trial.
[17] The essence of the parties’ competing positions is as follows:
(a) Mr Kennedy submits that, while historically there has been some reluctance by the courts to grant specific performance of a contract for services, and in particular, a contract for personal services, that position has now softened. The authorities are also clear that, even if specific performance would not be ordered, there is no jurisdictional objection to a final prohibitory injunction being granted, restraining the defendant from acting inconsistently with the contract. That is the case even if such relief would have the practical effect of compelling performance of the contract.
(b)The Agreement in this case is not a contract for personal services in any event, or of a type that might otherwise be an unsuitable candidate for specific performance or a final prohibitory injunction. Rather, the Agreement is a commercial agreement between independent parties. Moreover, the fact the Agreement involves an individual as a party, and at least some ongoing involvement and contact between the parties, does not prevent specific performance or a final prohibitory injunction being granted.
(c) Mr Kennedy submits that the case for specific performance or a final prohibitory injunction is reinforced by the fact that damages will not be an adequate remedy for Finewood. He says that not only will the potential loss to Finewood’s business be both irreparable and difficult to quantify, he emphasises that there are exclusion and limitation of liability provisions in the Agreement which will render any damages award inadequate.
(d)Mr Salmon, for Mr Vaughan, replies that it is highly unlikely that Finewood will be granted the relief it seeks at trial. He submits that the Agreement is a contract for personal services, or sufficiently analogous to such a contract that the Court at trial is most unlikely to orders specific performance or a final prohibitory injunction. He submits that the underlying objection to granting such relief in a case like this is the very real prospect of the Court’s continued supervision of that relief. Mr Salmon says this is particularly so given the many provisions within the Agreement which require the ongoing trust, cooperation and interaction between the parties, in the context of what can only be viewed as an irretrievably broken relationship.
(e) Mr Salmon accordingly submits that in these circumstances it is highly unlikely that the Court would order even the prohibitory injunction sought by Finewood, which will either prevent Mr Vaughan from working anywhere in the world in his ongoing trade, or will “yoke” him to a party with whom he has hostile relations.
(f) Finally, Mr Salmon submits that damages are an adequate remedy for Finewood in any event. He says that while there are indeed liability exclusions and caps in the Agreement, those have been contractually agreed by Finewood, and accepted as an appropriate allocation of risk in the event of breach and a remedy sounding in damages. Mr Salmon urges me not to follow the approach adopted by the
English Court of Appeal in AB v CD,8 in which it was held that a
contractual cap on damages is a relevant factor when undertaking an inquiry as to the adequacy of damages.
Approach to specific performance – prohibitory injunctions in contracts for services
[18] Both parties referred me to a number of authorities in respect of the granting of both final and interim relief by way of injunction in cases concerning the
8 AB v CD [2014] EWCA Civ 229, [2015] 1 WLR 771.
provision of services, and personal services. I have summarised below a number of what I consider to be the more relevant of the authorities.
[19] An early authority is the decision in Lumley v Wagner.9 In that case, Ms Wagner had contracted to sing at Her Majesty’s Theatre twice a week for three months, and not elsewhere without the permission of Mr Lumley, the Theatre’s lessee. She subsequently, however, agreed with Covent Garden to sing there for a larger sum. While the contract was one for personal services, negative injunctive relief was granted. Lord St Leonards LC observed that there was no jurisdictional objection to granting the negative injunction in that case, and it was a proper case for interfering. It seems that the clear breach in that case was a crucial consideration, Lord St Leonards LC observing that the courts will not permit parties to depart from their contracts “at their pleasure”. The injunction granted restrained Ms Wagner for a period of approximately two months, and only in relation to England.
[20] In another case involving song,10 injunctive relief was refused in Page One Records v Britton.11 In that case, the contract concerned a five-year contract to manage a pop group. Injunctive relief was refused on the ground that the contract involved obligations of trust and confidence and was more akin to a joint venture.
Stamp J considered that an injunction would, in practice, force the pop group to remain idle, or to continue to employ, in a fiduciary manner, their manager and agent in respect of whom they, “for reasons good, bad or indifferent”, had lost confidence.
[21] In Evans Marshall & Co Ltd v Bertola SA,12 an interlocutory injunction was granted to preserve the status quo until trial. In granting that relief, the Court of Appeal disagreed with the Trial Judge’s view that the contract at issue in that case was likened to that of a joint venture, where confidence and cooperation between the parties is required. Sachs LJ stated:13
This is a commercial agreement between trading companies that can be implemented to the profit of both parties, if each conforms with its express and implied terms. As in a great many commercial contracts consultation
9 Lumley v Wagner (1852) 1 De GM & G 604, 42 ER 687.
10 Though of a quite different kind, this concerning the pop group “The Troggs”.
11 Page One Records v Britton [1968] 1 WLR 157 (Ch).
12 Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 (CA).
13 At 379.
between the parties as to implementation is desirable; but that does not necessarily turn them into joint ventures. But in any event, the fact that some degree of mutual co-operation or confidence is needed does not preclude the court from granting negative injunctions designed to encourage the party in breach to perform his part.
[22] Re Regent International Hotels (UK) Ltd. v. Pageguide14 concerned a long- term management contract for the Dorchester Hotel, between Regent as managers and Pageguide, a company to which Regent had sold the hotel on the basis that the existing management contract would continue (so as to apply between Regent and Pageguide). Pageguide subsequently sought to cancel the management contract and injunctive relief was granted in the negative form sought by Finewood in this case. In the Court of Appeal, the Court noted that whether there had been a breakdown in the relationship between the parties was in dispute. It went on to state:
…this action raises the further serious question, as yet unresolved by English authority, as to the extent to which a commercial arrangement of this kind between two independent companies, which does not provide for the employment of any named individuals and is part of a larger package including the sale of the hotel itself, can be properly treated as analogous to a contract of personal service.
[23] The Court of Appeal referred to Page One Records v Britton, noting that its facts were far removed from managing a hotel. The Court concluded that there was no jurisdictional objection to granting an injunction to restrain the breach of a negative covenant in an agreement which would not be ordered to be specifically performed. It said that this was so even where the commercial relationship is a long- term one and involves a substantial degree of mutual co-operation. In granting injunctive relief, the Court reinforced that it was not concerned with a contract of personal service, but a commercial arrangement between two independent companies involving the employment of no named individuals.
[24] Warren v Mendy15 involved a boxing manager (the plaintiff) seeking to restrain the defendant from interfering in the management contract between the
plaintiff and a young boxer, and from acting for the boxer in his career. An
14 Re Regent International Hotels (UK) Ltd v Pageguide Ltd [1985] CA Transcript 164 (EWCA), (1985) Times, 13 May.
15 Warren v Mendy [1989] 1 WLR 853 (CA).
injunction had been refused at first instance and on appeal. In the Court of Appeal, Nourse LJ stated the following:16
It is well settled that an injunction to restrain a breach of contract for personal services ought not to be granted where its effect will be to decree performance of the contract. Speaking generally, there is no comparable objection to the grant of an injunction restraining the performance of particular services for a third party, because, by not prohibiting the performance of other services, it does not bind the servant to his contract. But a difficulty can arise, usually in the entertainment or sporting worlds, where the services are inseparable from the exercise of some special skill or talent, whose continued display is essential to the psychological and material, and sometimes to the physical, well being of the servant. The difficulty does not reside in any beguilement of the court into looking more tenderly on such who breach their contracts, glamorous though they often are. It is that the human necessity of maintaining the skill or talent may practically bind the servant to the contract, compelling him to perform it.
[25] Having examined the earlier authorities, including a number of those discussed above, Nourse LJ went on to observe:17
This consideration of the authorities has led us to believe that the following general principles are applicable to the grant or refusal of an injunction to enforce performance of the servant's negative obligations in a contract for personal services inseparable from the exercise of some special skill or talent. (We use the expressions "master" and "servant" for ease of reference and not out of any regard for the reality of the relationship in many of these cases.) In such a case the court ought not to enforce the performance of the negative obligations if their enforcement will effectively compel the servant to perform his positive obligations under the contract. Compulsion is a question to be decided on the facts of each case, with a realistic regard for the probable reaction of an injunction on the psychological and material, and sometimes the physical, need of the servant to maintain the skill or talent. The longer the term, for which an injunction is sought, the more readily will compulsion be inferred. Compulsion may be inferred where the injunction is sought not against the servant but against a third party if either the third party is the only other available master or if it is likely that the master will seek relief against anyone who attempts to replace him. An injunction will less readily be granted where there are obligations of mutual trust and confidence, more especially where the servant's trust in the master may have been betrayed or his confidence in him has genuinely gone.
[26] More recently, these and other relevant authorities were comprehensively reviewed by the English Court of Appeal in LauritzenCool AB v Lady Navigation Inc.18 In that case, the appellant owners chartered two reefer vessels to the
respondent charterers, for use in the charterer’s pool. The owners subsequently
16 At 857.
17 At 867.
18 LauritzenCool AB v Lady Navigation Inc, above n 1.
alleged that the charterer had breached various terms of the time charters, purported to terminate the time charters and remove the vessels from the pool. The charterers disputed the termination and commenced arbitration proceedings. Interim relief was granted preventing the owners from employing the vessels in a manner inconsistent with the time charters. The owners appealed.
[27] The Court of Appeal dismissed the appeal, observing that there is no inflexible principle precluding negative injunctive relief which prevents activity outside the contract contrary to its terms, including in the context of contracts for personal services.19 The Court concluded that neither the fact that the contracts in that case were for services in the form of a time charter, nor the existence under such contracts of a fiduciary relationship of mutual trust and confidence, represented in law any necessary or general objection in principle to the grant of interim injunctive relief pending the outcome of the substantive claim. Nor was there any objection to
the grant of such relief simply on the basis that the only realistic commercial course which it left to the party which would be the subject of the interim injunction, was to continue to perform the contract in question.
[28] Having found there to be no jurisdictional objection to granting such relief, the Court stated that whether or not such relief should be granted in any particular case was a matter of discretion, and that each case must be viewed upon its own facts.20
[29] The Court referred extensively to the judgment of Mance LJ in Warren v Mendy and set out above, and concluded that that case bore no similarity on the facts to the case before it, which it described as being very far from a contract involving special personal skills. The Court also distinguished the facts in Page One Records Ltd v Britton for similar reasons.
[30] The Court also discussed Pageguide, and concluded:21
Whatever the actual outcome in the particular business context as between the particular parties in Pageguide, the [trial] judge was able to reach clear
19 At [20].
20 At [32].
21 At [32].
conclusions about the workability of the present time charter relationships in the event of negative injunctive relief. The present relationships are between business concerns who, in the event of such relief, can be expected to continue to make them work in their own interests, and to sort out any complaints in arbitration if necessary hereafter.
[31] Reflecting the above comments, Cooke J at first instance in LauritzenCool
had considered the likely effects of granting the relief sought:22
… If an injunction was to be granted until the determination of the current disputes between the parties, that would not present any insuperable problems in the interim period. Lauritzen and the Owners have shown themselves capable of cooperating with each other and working together on a day-to-day basis, despite their differences and such matters as dry-docking have been arranged without apparent difficulty.
…
Here there are commercial arrangements made between independent companies involving the employment of no named individuals, where the services are not "personal" in nature, notwithstanding the fiduciary obligations owed by one commercial entity to another.
[32] Turning to the the New Zealand context, similar issues were considered by the Court of Appeal in Thomas Borthwick & Sons (Australasia) Ltd v South Otago Freezing Co Ltd (albeit at a final hearing, and not at the interim stage).23 Referring to a number of the authorities discussed above, the Court concluded that an injunction may, at the discretion of the Court, be granted to restrain breaches of negative covenants in contracts for service even though this may, in practice, amount
to ordering specific performance over a long period of time. However, the Court cautioned that, in the case of contracts for personal services:24
A line of authorities has developed showing that a negative covenant will not be enforced by injunction if the effect will be that the defendant must either remain idle or serve the plaintiff, they were reviewed in Warner Bros Pictures Inc v Nelson. If the present case falls in principle within that line, or is sufficiently analogous, there would be strong reason for withholding an injunction.
[33] In that case, the Court held that the contract in issue was ultimately a contract for the sale of goods. It found that the contract was in substance a fair and
22 LauritzenCool AB v Lady Navigation Inc [2004] EWHC 2607 (Comm) at [26]-[27].
23 Thomas Borthwick & Sons (Australasia) Ltd v South Otago Freezing Co Ltd [1978] 1 NZLR 538 (CA).
24 At 545.
reasonable contract, a view strengthened by the fact that it a contained a provision for amendment by arbitration at regular intervals.
[34] Ultimately, the Court was satisfied that on the facts of that case, most of the “ancillary machinery” of the contract involved matters of a routine kind. It observed:25
Nor is it at all likely that the personnel concerned in the day-to-day carrying out of the contract would be influenced by this litigation or by the change in the ultimate control of Sofco. Killing operations in a freezing works follow a uniform pattern and are basically the same, no matter whether the stock is subject to some contract or received under statutory obligation. The affidavit and oral evidence for Sofco does not show that the buying part of the contract, under cl 3, has caused or is expected to cause any particular problems. It is significant that there is no evidence of practical difficulties in the working of the contract in the past.
[35] The presence and breath of the triennial arbitration clause was also considered to be “of some importance” to the question of whether an injunction should lie. For these reasons, and recognising that the matter was one of discretion, the Court of Appeal concluded that the Chief Justice had not erred in the manner he exercised his discretion in granting a permanent injunction.
[36] More recently, in Goldridge Estate Vineyards 3552 Ltd v Karaka Estate Ltd,26
Wylie J confirmed that the courts are reluctant to hold parties to contracts of personal services by way of interim orders. Wylie J did not consider the agreements in issue before him to be strictly personal service contracts, but rather agreements between business concerns. He observed that:27
The agreements do not require regular and ongoing personal dealings between the parties who are in dispute.
[37] Finally, similar issues were considered by Brewer J in another case involving wine, in Waihopai Valley Vineyard Ltd v Savvy Vineyards 3550 Ltd.28 Interim relief was sought restraining Waihopai from acting on a purported notice of termination.
Brewer J observed that he was effectively being asked to reinstate a contract which
25 At 551.
26 Goldridge Estate Vineyards 3552 Ltd v Karaka Estate Ltd HC Auckland CIV-2010-404-2838,
3 August 2010.
27 At [82].
28 Waihopai Valley Vineyard Ltd v Savvy Vineyards 3550 Ltd, above n 1.
was, if not exactly, akin to a contract for personal services. Having been referred to various authorities (including Thomas Borthwick & Sons), Brewer J declined to grant the interim relief. He noted that the Court of Appeal in Thomas Borthwick & Sons had found that the contract in that case did not require a high level of personal cooperation. Ultimately, Brewer J concluded:29
There is hostility between the parties. These are not large companies. They are commercial vehicles for Mr Chen, on the one hand, and Mr and Mrs Vegar, on the other. It would be extraordinary for the Court to force Mr Chen to hand his company’s key asset over to the possession and management of people he believes tried to cheat him. I accept that the agreements are detailed and that, objectively, co-operation could make the situation work. But, I do not see this as a situation where objective co- operation is likely.
[38] By way of summary, it is clear from the above authorities that the nature of the contract in question and the relationship between the parties will be key factors when considering an application for relief such as that sought by Finewood. If a contract is properly characterised as a contract for personal services, or akin or suitably analogous to one, specific performance is unlikely to be ordered. The courts may also be hesitant to grant final prohibitory injunctive relief (and therefore also interim relief), where that would, in reality, compel performance by the defendant. In addition, the status of the parties’ relationship will be important, and the court’s overall assessment of whether the relationship is “workable” on an ongoing basis.
[39] Mr Kennedy broadly accepted these propositions, noting that, in the case of a contract for personal services, “the primary consideration as to whether to grant the injunction appears to be the nature of the ongoing contact between the parties which would be required.”
[40] In light of the above principles, I now to turn to the nature of the Agreement
itself and the parties’ relationship.
Agreement and parties’ relationship
[41] Although the Agreement is said to be between Finewood, Mr Vaughan and
“Fletcher Systems”, it does not appear that “Fletcher Systems” was a separate legal
29 At [55](b).
entity at that date. Rather, it was a brand name pursuant to which Mr Vaughan traded. As such, the Agreement is one between Finewood, a company, and Mr Vaughan as an individual. For that reason, these proceedings have been commenced by Finewood against Mr Vaughan only.
[42] The background section of the Agreement provides that “FS" (being Fletcher Systems) is a “design and distribution firm” led by Mr Vaughan as “the principal designer and sole operator”. The Agreement records that Mr Vaughan sought a partner to drive manufacturing and distribution of products under the Fletcher System and Mr Vaughan’s brands, allowing Mr Vaughan to spend more time designing new products. The Agreement records that Finewood wished to manufacture and distribute Mr Vaughan’s products.
[43] In addition:
(a) The Agreement was for an initial term of five years, with a five-year right of renewal. Mr Vaughan was able to extend the Agreement as of right, although Finewood could only extend the Agreement if in the two-year period prior to the date by which a renewal notice was required, it had exceeded a certain gross sales revenue target for Mr Vaughan’s products. The evidence on this application demonstrates that, if the current sales position continued, Finewood would be able to extend the Agreement at the end of its initial term, if it wished.
(b)There is then, as noted, a grant by Mr Vaughan of a worldwide licence to Finewood in respect of the Licensed IP, and the appointment of Finewood as the manufacturer, supplier and distributor of products in the worldwide territory.
(c) Finewood is to pay a royalty to Mr Vaughan, and has agreed not to develop any products that compete with the Fletcher System designs.
(d)I have already noted the fact that, during the term of the Agreement, the arrangements were exclusive, such that Mr Vaughan is prohibited from granting any other licence or making any other appointment to any third party in respect of those matters granted to Finewood and described above. Despite this however, Mr Vaughan is permitted to undertake private commissions and consultancy work for other parties, but notably, only where Finewood has provided prior written consent to any actions that are “a conflict of interest relating to commercial office products or residential products”. How this would apply in practice would, I expect, be subject to some debate between the parties.
(e) During the term, Mr Vaughan is to provide all “know-how” that
Finewood might require in relation to the Licensed IP.
(f) Finewood is obliged to grant Mr Vaughan reasonable access to samples of the products from time to time, to enable Mr Vaughan to assess the product samples’ compliance with relevant specifications.
(g)Finewood is obliged to use reasonable commercial endeavours to increase and maximise the sales of the products within the (worldwide) territory, and Mr Vaughan is obliged to cooperate with all reasonable requests of Finewood to assist with those endeavours.
(h)Finewood is to consult with Mr Vaughan on the production and development of all marketing materials, and is obliged to take into account the reasonable feedback of Mr Vaughan before the materials are used in market.
(i)Each party is obliged to share information with each other in respect of any significant complaint received in relation to the products. Finewood is nominated as having the primary responsibility to manage any significant issues, while Mr Vaughan is obliged to
cooperate with all reasonable requests of Finewood in relation to a
“significant issue”.
(j)During the term of the Agreement, Mr Vaughan is obliged to provide certain design consultancy services to Finewood, namely to provide at least one new product range of a scale and type reasonably acceptable to Finewood per calendar year, to use commercially reasonable endeavours to optimise existing designs, and to assist in design and sales support, including attending meetings when clients request help creating new or amending existing designs. During any renewal term, Mr Vaughan is also to provide these services to Finewood, or to ensure that they are provided by a designer acceptable to Finewood and Mr Vaughan.
(k)Either party is entitled to immediately terminate the Agreement if the other party receives publicity which is detrimental to the first party’s reputation, and which in the reasonable opinion of that party, may cause a loss of reputation or adverse effect to that party’s brands.
(l)Upon a valid termination, Finewood’s licence to use the Licensed IP terminates and Finewood is to return to Mr Vaughan all confidential information and other property of Mr Vaughan’s which is in its possession or control.
(m)The parties are subject to an express obligation to act in good faith in all their dealings with one another.
(n)Clause 16.2 provides that nothing in the Agreement is to be construed to place the parties in the relationship of partners, joint venturers or principal and agent.
(o)There is a dispute resolution clause, but in non-mandatory terms so, while the parties are to explore whether any disputes can be resolved
by agreement using informal dispute resolution techniques, they are not obliged to engage in any particular dispute-resolution process.
[44] Having reviewed the contents of the Agreement I am satisfied that the
Agreement is analogous to a contract for personal services.
[45] First, it is a contract between a company and a named individual. Further, it seems plain that the interactions between the parties pursuant to the Agreement, including but not limited to the design consultancy services, are specific to Mr Vaughan himself.
[46] In addition, it is clear that a high level of mutual trust and confidence is required under the Agreement in order to make it work. Many of the provisions require ongoing and reasonable cooperation, communication and contact. There is also an express obligation of good faith, which would be somewhat unusual in a standard commercial agreement. In addition, it is uncontested that Mr Vaughan’s personal presence at and within the Finewood manufacturing operations is crucial to the ongoing working of the Agreement. Indeed, as noted below at [48](f), Mr McKolskey deposes to this very fact.
[47] For all of these reasons, the Agreement cannot in my view be categorised as a commercial agreement between independent parties, involving no named individuals. Although the Agreement contains a (boilerplate) clause that nothing in it is to be construed as a joint venture or partnership relationship, it is nevertheless clear a close and cooperative relationship is needed under the Agreement in order to make it work.
[48] Turning to the parties’ relationship and the degree of ongoing contact required, the following points can be drawn from the evidence (emphasising that I am not in the position to determine any factual disputes):
(a) The relationship between the parties, until recently, appeared to be sound, and Mr McKolskey describes how it has included social events
such as Christmas functions, celebrations of business events and undertaking international trips together.
(b)Mr Vaughan describes how Fletcher Systems and Finewood grew together. He describes the earlier relationship as “casual and fairly informal”.
(c) Mr Vaughan explains that, prior to the Agreement, he would be present at the Finewood site at least two or three times a week, and every day for some periods.
(d)Mr Rye, a former director of Finewood and now an independent design consultant, deposes that, for a designer such as Mr Vaughan, reviewing the manufacturing process with the Finewood team is “completely orthodox”. Mr Rye states that “custom design is very involved, so it is usual that a designer will stay close to the production of their designs. To a large extent a furniture designer’s reputation rests on the quality of the final product so oversight is necessary”.
(e) Mr Vaughan deposes that after the Agreement had been entered into, he visited the Finewood factory even more than preceding the Agreement. He says he was frequently at the Finewood site for meetings, usually with Mr McKolskey. He also says that in the middle of 2016, he had requested that the parties have regularly scheduled “catch-ups”, to talk about higher level strategic issues and have some time away from the day-to-day operations.
(f) Mr McKolskey says in his affidavit that “I recognise that Mr Vaughan’s presence on site is an important component of the functional relationship between him and Finewood and that the performance of the Agreement will, from time to time, require him to be on site. I had expected that Mr Vaughan would be on site more often than he has across the course of the Agreement …”.
(g)There have been differing views on branding issues since at least the latter part of 2016. Mr Vaughan also does not consider that Finewood is adequately progressing production of Fletcher System branded products, though this is disputed by Mr McKolskey. Finewood also submits that it does not have any legal obligation to progress production at any particular rate.
(h)Mr Vaughan is also of the view that certain Finewood products are competing with Fletcher System branded products, and are also breaching the intellectual property provisions in the Agreement. This is disputed by Finewood.
(i) There is a dispute as to whether or not Mr McKolskey “banned”
Mr Vaughan from Finewood’s manufacturing site in late 2016.
(j)Mr Vaughan refers to certain “negative publicity” he says he has received as a result of the arrangements with Finewood (though it is noted that most of this is not ascribed to particular persons or entities).
(k)Mr McKolskey communicated his view to Mr Vaughan’s partner in December 2016 (in connection with an issue regarding telephone lines) that “you need to trust we are on to this and constantly demanding responses that are not achievable is not helping the goodwill. The relationship is not at an all time high right now and this kind of correspondence is not likely to help…”
(l)In email correspondence in February of this year, Mr McKolskey expressed his concern at discussions he understood Mr Vaughan was having direct with an end client, requesting Mr Vaughan to keep him in the loop “so we are representing as one team”.
(m)In February 2017, Mr Vaughan expressed his concern at what he considered to be the degradation of the Fletcher System brand over
the last 18 months, and that he has no confidence in the future of the arrangement.
(n)Given events which are described in the affidavit evidence, Mr Vaughan deposes that in his view, the relationship is broken down such that it is irreparable.
(o)Mr McKolskey does not consider that the relation between Finewood and Mr Vaughan has broken down, and deposes that Finewood is committed to the Agreement and to working productively with Mr Vaughan for both parties’ mutual benefit.
(p)To deal with any personality conflict between Mr McKolskey and Mr Vaughan, Finewood has suggested that another representative of Finewood (who had previously stepped back from the business) take over primary dealings with Mr Vaughan.
[49] It may be that Mr Vaughan has overstated the extent of the parties’ relationship breakdown. However, I am satisfied that there are genuine concerns in this regard, and the simple fact that the parties are now embroiled in hard fought litigation further reinforces those concerns. The correspondence in recent months has been strong and at times, aggressive. There is a large range of disputes between the parties. Given the personal nature of the Agreement, I do not consider that, in reality, this is a case where those involved in the day to day management of the Agreement will be able to “ignore the effects of the litigation”, as was considered to be the case in Thomas Borthwick & Sons. There is also some independent support for Mr Vaughan’s evidence of the difficulties that have arisen in relation to his relationship with Finewood, and in particular, Mr McKolskey. I am somewhat sceptical that reinserting an alternative “contact point” for Mr Vaughan will remedy these issues, particularly on an ongoing basis.
[50] The Agreement has a fairly lengthy time to run, for a further three years, plus a further five years at Finewood’s option. This would not be a case, therefore, of the parties being “cobbled” together for a relatively short time, as in Alpine
Infrastructure Management Ltd v Queenstown Lakes District Council,30 a case to which Mr Kennedy referred me. Nor is there a mandatory dispute resolution clause pursuant to which ongoing issues could be resolved without recourse to the court (which assumed some importance in the Court of Appeal’s judgment in Thomas Borthwick & Sons).
[51] Given all of these matters, I consider it unlikely that Finewood would obtain an order for specific performance or a negative prohibitory injunction at trial. In light of the matters I have addressed above, and echoing concerns raised by Brewer J in Waihopai, I consider it unlikely that a court would order Mr Vaughan personally to continue to perform the Agreement, and to continue to produce new designs and to hand over the associated intellectual property, to a party he believes is competing with him and whom he no longer trusts. Whether his concerns are factually or
legally correct is somewhat beside the point.31
[52] On this basis, I cannot conclude that there is a real prospect of Finewood obtaining an order for specific performance or a final prohibitory injunction at trial.
Adequacy of damages
[53] Despite the above conclusion, I am mindful of the fact that the Agreement contains exclusions of and caps on liability. Mr Kennedy submits that, as a result of these clauses, and given the evidence of the loss Finewood will suffer, damages will not be an adequate remedy.
[54] The inter-relationship between an inquiry as to the adequacy of damages and liability exclusions and caps gives rise to an interesting issue. Rather surprisingly, it is not one that appears to have been addressed (at least directly) by the New Zealand courts to date, despite the proliferation of such provisions. Mr Salmon did, however, quite properly draw my attention to the English Court of Appeal’s decision in AB v
CD.32
30 Alpine Infrastructure Management Ltd v Queenstown Lakes District Council HC Invercargill
CIV-2006-425-433, 25 August 2006.
31 Page One Records v Britton, above n 11, at p 827. See also the observations of Nourse LJ in
Warren v Mendy, above n 15, at [25].
32 AB v CD, above n 8.
[55] In AB v CD (which did not concern a contract for personal services), the Court of Appeal held that an interim injunction securing performance of a contract could be granted where there is an agreed cap on damages. The Court’s reasoning was that performance is the primary contractual obligation, and the obligation to pay damages upon breach is merely secondary.33 Therefore, the parties’ commercial expectations would not necessarily be undermined by granting the injunction, and the cap on damages should not automatically override the innocent party’s right to secure interim performance.34 However, the Court also observed that claimants will still need to establish a substantial risk as to loss, and even then the granting of an injunction is still an exercise of the court’s discretion:35
A claimant will still have to show that if the threatened breach occurs there is (at least) a substantial risk that he will suffer loss that would otherwise be recoverable but for which he will (or at least may) be prevented from recovering in full, or at all, by the provision in question. If he does, then certainly it will not be sufficient for the defendant to say that the restriction in question was agreed; and to that extent, the claimant will indeed have established that his remedy in damages may not be adequate. But that only opens the door to the exercise of the court’s discretion; and in the exercise of that discretion the fact that the restriction in question was agreed may, depending on the circumstances of the case, be a relevant consideration – as may the scale of any shortfall and the degree of risk of it occurring.
[56] A hint of a similar approach can be seen in the Court of Appeal’s judgment in Thomas Borthwick & Sons, where the contractual formula for calculating damages in the event of termination. The formula was said to produce an unrealistically low figure by comparison with the (then) present day prices for the goods in question. However, there was no detailed analysis of the interaction between the clause and the inquiry as to the adequacy of damages. Rather, the Court simply concluded that:36
On the evidence as a whole, and bearing in mind particularly the subject matter of this contract, we do not regard damages as an adequate remedy.
[57] It is accordingly not clear to what extent the contractual clause, in the context of the evidence as a whole and the subject matter of the contract, led the Court to conclude that damages were not an adequate remedy. And despite having
concluded that damages were not an adequate remedy, the Court of Appeal
33 At [27].
34 At [30].
35 At [30].
36 Thomas Borthwick & Sons (Australasia) Ltd v South Otago Freezing Co Ltd, above n 23, at 549.
nevertheless went on to examine what it described as “perhaps the most difficult point in the case”, namely whether it was possible to grant an injunction which would compel performance of the contract. The Court’s earlier observations in relation to the contractual clause and the adequacy of damages did not feature any further. This is perhaps supportive of Mr Salmon’s submission that the question of adequacy of damages does not feature as strongly in cases of personal service contracts, drawing support for this proposition from the observations of the English
High Court in Akai Holdings Ltd v RSM Robson Rhodes LLP.37
[58] While it could be argued that the provisions limiting liability and capping damages reflect a considered allocation of risk, a detailed examination of whether AB v CD ought to be followed in New Zealand is a matter for another day. Ultimately, even in AB v CD, the presence of liability provisions did not obviate the need for the claimant to demonstrate (at least) a substantial risk that damages in excess of the contractual limitations will be incurred. And even if that threshold is passed, it merely “opens the door” to the court’s discretion. The Court confirmed that in exercising that discretion, the fact that that the restriction in question was agreed may, depending on the circumstances of the case, be a relevant consideration
– as may the scale of any shortfall and the degree of risk of it occurring.
[59] I accordingly turn to consider the damage that Finewood says will flow from an unlawful termination of the Agreement.
[60] Mr McKolskey says the following:38
In the event that the Agreement is prematurely terminated, Finewood expects that it (and the group more widely) would:
(a) suffer loss of projected revenue in excess of $2 million per year, primarily comprised of lost sales of Fletcher Systems products in New Zealand and in the Asia Pacific region;
(b) lose the capital already invested in developing the United States venture of approximately $99k excluding management time involved;
(c) lose the revenue associated with the United States venture;
37 Akai Holdings Ltd v RSM Robson Rhodes LLP, above n 1, at [40].
38 Affidavit of BA McKolskey, sworn 10 April 2017, paragraph 19.
(d) suffer damage to its brand arising from Mr Vaughan’s sudden termination of the Agreement which will have a direct bearing on Finewood’s revenue; and
(e) be forced to restructure the staff positions associated with the
Agreement and lose the expertise held by those staff members.
[61] In relation to (a) above, Mr McKolskey gives evidence that Mr Vaughan’s products represent approximately 30 per cent of Finewood’s group revenue. He says it is therefore material to its ability to continue to trade profitably. However, no further detail or evidence has been presented as to the financial impact of the removal of Mr Vaughan’s products from Finewood’s offering, or how Mr McKolskey has arrived at a figure of “projected revenues in excess of $2 million per year” (or how that translates into profits). And while 30 per cent is obviously not an insignificant proportion of Finewood’s revenues, the majority of its revenues are made up of its own product range. Moreover, termination of the Agreement would enable Finewood to fully compete with the entire Fletcher Systems range (which it is currently prohibited from doing), presumably an opportunity Finewood would take up.
[62] In terms of capital invested in developing a USA venture, Mr McKolskey gives evidence that in April/May 2015, Finewood became involved in early stage discussions with an entity named “Haworth USA”, which he says represented an opportunity for both Finewood and Mr Vaughan to expand their reach into the United States. Haworth apparently expressed interest in Finewood’s portfolio, including Mr Vaughan’s products. Mr McKolskey says this opportunity was the underlying basis for entry into the Agreement. Mr Vaughan disputes that. Mr McKolskey deposes that, subsequently, Haworth determined that it would pursue a licence agreement in respect of the Finewood portfolio, and “more specifically”, three of Mr Vaughan’s designs. The evidence is unclear, however, as to whether and if so what, has come of these arrangements. No documents, agreements or communications are in evidence. Mr McKolskey does say that “to pursue the US venture, Finewood has pursued capital raising options”. But again, there is no evidence as to whether that has progressed, and if so, to what extent. For these reasons, the suggested losses associated with the potential US venture appear speculative, and do not appear to be wholly dependent on the use of Mr Vaughan’s
designs in any event. No evidence is given of the potential loss of revenue from the
Haworth venture itself (were it to come about).
[63] There is evidence from Mr McKolskey that there may need to be restructuring in relation to some staff positions associated with the Agreement, though again that is framed in somewhat high level terms. There is also a suggestion that there will be some negative brand damage from the termination of the Agreement.
[64] Having considered Mr McKolskey’s evidence on these matters, my overall (and firm) impression is that, while there will no doubt be some damage associated with an unlawful termination of the Agreement, the damages deposed to by Mr McKolskey are not well supported. Ultimately, there is little (and in reality, no) detailed or concrete evidence of the suggested losses, or the nature, status and future of the proposed Haworth venture.
[65] For these reasons, Finewood has not demonstrated a substantial risk of loss, at least to the degree described by Mr McKolskey.
Interests of justice
[66] Lastly, I must stand back and consider all of the above matters, and whether it is in the overall interests of justice to grant interim relief.
[67] The existence of the damages restrictions in the Agreement supports interim relief being granted. However, I am ultimately driven back to the fact that I consider it unlikely that Finewood would be awarded specific performance or a final prohibitory injunction at trial. I am conscious of Mr Kennedy’s submission that these are matters for trial. But the simple point is that I must make an assessment of whether there is a real prospect of Finewood ultimately securing such relief. In my view, there is not. Coupled with the fact that I do not consider Finewood to have demonstrated a substantial risk of suffering loss to the degree advanced by Mr McKolskey, and the fact that Finewood freely agreed to the liability caps in the Agreement, I am not prepared to grant the interim relief sought.
Result
[68] Finewood’s application is declined.
[69] Mr Vaughan is entitled to costs. If the parties are unable to agree on costs, memoranda may be submitted within 10 working days of the date of this judgment.
Absent any request for a hearing, I will then determine costs on the papers.
Fitzgerald J
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