Gordon v Christensen
[2022] NZCA 130
•12 April 2022 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA148/2021 [2022] NZCA 130 |
| BETWEEN | TIMOTHY PAUL GORDON AND ANGELA GORDON |
| AND | TONY CHRISTENSEN AND ROSALIND MARY CHRISTENSEN AS TRUSTEES OF THE CHRISTENSEN FAMILY TRUST |
| Hearing: | 12 October 2021 |
Court: | Kós P, Clifford and Gilbert JJ |
Counsel: | E St John and S P Maloney for Appellants |
Judgment: | 12 April 2022 at 11 am |
Reissued: | 28 April 2022 |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe injunction is discharged.
CThe respondents must pay the appellants one set of costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
| Table of Contents | |
| Para No | |
| Background What each business does Issues on appeal Submissions Issue 2: Was ASL in the same or a substantially similar business as TSIL? Submissions (1) Enlarged business? (2) “Namely” (3) “Systems” (4) Competition (5) Vendors deploying their particular knowledge and connections Conclusion Result | [2] [16] [22] [56] |
This appeal concerns the scope of a restraint of trade clause. The clause prevents the vendors engaging in a business that is “the same or substantially similar to” the business sold to the purchasers — “namely the manufacture, . . . distribution … of … partitioning systems or door systems” — for a period of three years. The Judge held the vendors’ new business did so and granted the purchasers an injunction restraining the vendors from being involved in activities along the same lines as the restraint, and more specifically from being involved in their new business, until after 6 December 2022.[1] The vendors appeal.
Background
[1]Christensen v Gordon [2021] NZHC 490 [Judgment appealed] at [41].
Mr and Mrs Gordon (the vendors) sold their majority shareholding in Trans‑Space Industries Ltd (TSIL), to the family trusts of Mr and Mrs Christensen, and Mr Purdom and Ms Clough (the purchasers).[2] The sale agreement was entered in November 2019, and settlement occurred the following month.
[2]Mrs Gordon died just prior to the hearing of this appeal. The appeal was continued by her executor.
The Judge described TSIL’s business in these terms:[3]
[TSIL] manufactures, imports, sells, and installs distributed partitioning systems or door systems. These systems are usually installed in office‑buildings to partition space into offices — including walls, windows, and doors. They are often purchased at the recommendation of building contractors, quantity surveyors, and architects who design fit-outs.
[3]Judgment appealed, above n 1, at [3].
The vendors had owned their shares since 2012. Mr Gordon was the managing director; both he and Mrs Gordon were intimately involved in the business. Mr Purdom had worked for the company since about 2004 and in 2016 acquired 20 per cent of the shares from the Gordons. Mr Christensen had been employed by the company since 2017.
The agreement included the following restraint of trade clause:
7.3The Vendor and his wife, Angela Gordon, covenant that each of them will not, and will not permit any associated party (as defined in the Income Tax Act 2007) of either of them to:
(a)during the period of three years following the Completion Date and within New Zealand directly or indirectly carry on or be interested, engaged or concerned (whether on their own account or in partnership with or as manager, agent, director, shareholder, employee or beneficiary under a trust or in any other capacity), in any business, venture or other activity that is the same as or substantially similar to the Company’s business, namely the manufacture, importation, distribution or installation of mov[e]able walls (operable wall systems), partitioning systems or door systems either in the domestic or commercial markets within New Zealand including but not limited to the Domakaba Group of companies including Skyfold; or
(b)during the period of three years following the Completion Date, whether on their own account or for any other person, solicit, entice or endeavour to entice away any employee, officer or consultant of the Company, any customer of the Company or any employee, officer, consultant or Customer of a Related Party of the Company; or
(c)at any time disclose or use confidential information or other intellectual property rights of the Company or its Related Parties.
(Emphasis added.)
It then continued:
7.4 The Vendor and the said Angela Gordon each acknowledge that:
(a)the restrictive covenants contained in clause 7.3 are reasonable and necessary and have been given to protect and maintain the goodwill and proprietary interests of the Company; and
(b)the Purchaser has entered into this Agreement in reliance of these restrictive covenants; and
(c)if a restrictive covenant is breached, monetary damages may not be sufficient compensation for the harm done to the Company and/or the Purchaser.
Accordingly, if a breach is threatened, or in the opinion of the Purchaser a breach is likely, urgent equitable relief may be sought.
Following transfer of their shares the Gordons continued to work for TSIL, as did their son. But they were looking for something else to invest in. In February 2020 Mr Gordon made enquiries about acquiring a subsidiary of Autex Industries, Autex PSL. It sold aluminium extrusions used to mount and hold interior windows, doors and fixed partitions. As the Judge noted, Autex PSL then described its products as “door systems” and “partitioning systems”.[4] Hearing about this interest, on 28 February 2020 Mr Purdom objected. Mr Gordon responded that he was unlikely to purchase that business. He left TSIL’s employ the same day. On 29 April 2020 he did purchase Autex PSL’s business, advising Mr Purdom the same day. Mrs Gordon was then dismissed by TSIL, and the Gordons’ son resigned from his employment.
[4]Judgment appealed, above n 1, at [9].
Autex PSL’s business was taken over by the second appellant, Aluminate Solutions Limited (ASL). ASL was incorporated by Mr Gordon on 20 February 2020; it has been trading since July 2020.
ASL has continued Autex PSL’s business, albeit it has changed its marketing description in light of the dispute.
What each business does
We have set out at [3] the Judge’s description of what TSIL did as at the point of business acquisition. For convenience we repeat it here:
[TSIL] manufactures, imports, sells, and installs distributed partitioning systems or door systems. These systems are usually installed in office‑buildings to partition space into offices — including walls, windows, and doors. They are often purchased at the recommendation of building contractors, quantity surveyors, and architects who design fit-outs.
No such pithy summary is given for ASL, but the Judge found “ASL sells all the material physical components of partitioning systems and door systems except glazing, wall panels, and door hardware”.[5] Elsewhere he put it slightly differently:[6]
[TSIL] supplies all the components required to construct a partition system or door system. ASL can supply most components for those systems, including quantity surveying and CAD services, but not the wall panels, door panels, glass, door handles, or other door hardware.
[5]At [23].
[6]At [31(b)].
Referring to the evidence of the only expert called to give evidence, Mr Clinton Smith, the Judge noted:[7]
His evidence is that ASL’s products may be used as components of interior partitioning systems and door systems. He says [TSIL] uses large, complex machinery in an extensive factory with specialised tools and designated areas for cutting, welding, assembling, and finishing products. By contrast, he says ASL operates from comparatively small premises and has no machinery other than a basic drop-saw and a forklift. These observations are consistent with my site-visit.
[7]At [25] (footnotes omitted).
ASL’s business is componentry, which it supplies to builders who then install it. ASL will inspect the installation, but not undertake it.[8] The Judge concluded that ASL does not manufacture door systems or partitioning systems.[9] Nor, it appears, does it import them. But the Judge found:[10]
… that ASL distributes a sufficiently large proportion of a partitioning system and, on balance, a door system, that, for the purpose of the restraint clause, it effectively distributes those systems. ASL competes with [TSIL] commercially. Those who want a partition or door system could buy the complete system from [TSIL] or the essential components from ASL and the rest from other sources. The products of both firms compete in the market for interior partitions, or more broadly in the interior-fitout market.
Issues on appeal
[8]At [31(d)].
[9]At [33].
[10]At [36].
Despite rather more articulated issues offered to tempt us, we are satisfied they decant into two, one of law and one of fact:
(a)Did the Judge err in his approach to construction of the clause?
(b)Is ASL in the same or a substantially similar business as TSIL?
Ultimately it proves unnecessary for us to resolve an alternative argument advanced by the vendors: that the clause is unreasonable, and thereby unlawful, and should be “modified” by this Court to remove the phrases “partitioning systems” and “door systems”.
This is a general appeal by way of rehearing. The principles set out in Austin, Nichols & Co Inc v Stichting Lodestar, as further explained by this Court in Green v Green, apply.[11] In particular, the appellant is entitled to judgment in accordance with the independent opinion of this Court even where the issue involves an assessment of fact and degree and entails a value judgment. If this Court’s opinion differs from the Judge below, the appeal must be allowed even if it was a conclusion on which reasonable minds might differ.[12]
Issue 1: Did the Judge err in his approach to construction of the clause?
[11]Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141; Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [27]–[31].
[12]Austin, Nichols & Co Inc v Stichting Lodestar, above n 11, at [16].
The approach taken by the Judge to the clause was:[13]
… “an objective one, the aim being to ascertain ‘the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’”.
[13]Judgment appealed, above n 1, at [17] (footnote omitted), quoting Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann.
The Judge noted “the text remains centrally important” as the ordinary and natural meaning of the text, construed in the context of the contract as a whole, “will be a powerful, albeit not conclusive, indicator of what the parties meant”.[14] The commercial purpose and the structure of the parties’ bargain is also relevant to the interpretative exercise. Restraint of trade provisions are unenforceable, except to the extent reasonable to protect a legitimate proprietary interest.[15] Reasonableness is assessed at the time the restraint is entered into, having regard to all the circumstances including the consideration given, and the parties’ bargaining power and access to legal advice.[16] More latitude is given to restraint clauses in agreements for the sale and purchase of shares, which protect the goodwill of a business.[17]
Submissions
[14]At [17], quoting Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432, at [63].
[15]At [17]–[18], quoting Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 13, at [79]; and citing Brown v Brown [1980] 1 NZLR 484 (CA) at 498–499.
[16]At [18], citing Fletcher Aluminium v O’Sullivan [2001] 2 NZLR 731 (CA) at [42].
[17]At [18], citing Brown v Brown, above n 15, at 488.
For the vendors, Mr St John submits the Court must ascertain the scope of the restraint objectively by reference to the words used. He submits the Judge erred by “veering” into a “purposive” interpretation of the restraint in concluding that the restraint was intended to prevent Mr Gordon from competing with TSIL and to protect the goodwill of the business. There was, he said, no objective evidence that ASL was competing with TSIL. According to the plain meaning of “system” and “component”, ASL’s products are components of a “partitioning system”; not a partitioning system itself. Even if the phrases “partitioning systems” and “door systems” could generally include fixed partitions, the interpretation of those phrases must be limited by the surrounding words in the restraint. Those words, “the same as or substantially similar to [TSIL’s] business” and “including but not limited to the Dormakaba Group of companies including Skyfold” refer to products that are moveable partitioning systems which are installed ready-made. However, these products are “fundamentally different” to “fixed walls constructed using aluminium joinery”.
For the purchasers, Ms Amaranthan essentially supported the Judge’s approach to construction.
Discussion
We are unable to discern error in the Judge’s approach to construction of the clause. The summary given at [16]–[17] above is a correct expression of relevant principle. Subject to a point we are about to make, the focus is on the meaning apparent from the words to a reasonable, objective observer possessed of the background known to both parties at the time of the contract.[18] Neither counsel suggested to us that the recent decision of the Supreme Court in Bathurst Resources Ltd v L & M Coal Holdings Ltd alters the approach to be taken to restraint clauses.[19] We agree. The focus of that decision was on the admissibility of extrinsic evidence; substantially it endorsed the interpretive principles stated more briefly by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.[20]Neither decision concerned restraint clauses.
[18]Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 13, at [60].
[19]Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] NZCCLR 17.
[20]At [10(a)].
Brown v Brown and Fletcher Aluminium Ltd v O’Sullivan remain the leading authorities of this Court on the construction of restraint clauses in the context of the sale of a business, incorporating consideration for goodwill.[21] In the case of restraint clauses, party autonomy gives way to public policy. To be enforceable, the clause must be no wider than the circumstances of the case reasonably require.[22] In the first instance at least, the parties may be taken to have intended the restraint to be lawful, and thereby enforceable, if that construction is available on the words they have adopted. Thus the construction given the clause should reflect the purpose intended by the parties, but in extent be no wider than necessary to protect the legitimate proprietary interest acquired by the purchaser, an interest assessed by reference to all the circumstances of the transaction, including the consideration paid.[23]
Issue 2: Was ASL in the same or a substantially similar business as TSIL?
[21]Brown v Brown, above n 15; and Fletcher Aluminium Ltd v O’Sullivan, above n 16.
[22]Brown v Brown, above n 15, at 491 per Richardson J.
[23]Fletcher Aluminium Ltd v O’Sullivan, above n 16, at [29], citing Dawnay Day & Co Ltd v D’Alphen [1998] ICR 1068 (CA) at 1106–1107 per Evans LJ. See also Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [13.9.9].
The Judge found there was no question that ASL sold only the components of a partitioning or door system, and not the finished systems themselves. The issue:[24]
… comes down to … whether ASL distributes enough of the components of door systems or partitioning systems to effectively be distributing the systems themselves. How many components constitute a “system”?
[24]Judgment appealed, above n 1, at [34].
After summarising the main similarities and differences between the ASL and TSIL businesses, the Judge concluded the differences in ASL supplying components rather than complete systems, and fixed rather than moveable systems, did not sufficiently distinguish its business from TSIL’s to avoid the purpose of the restraint of trade clause. The Judge accepted that while components other than aluminium extrusions are needed to constitute a complete system, ASL’s frames, which are made up of aluminium extrusions, are the essence and most specialised parts of the system.[25]
[25]At [36].
Hence, the Judge considered that ASL distributed a “sufficiently large proportion of a partitioning system and, on balance, a door system, that, for the purpose of the restraint clause, it effectively distributes those systems”.[26] As such, the Judge found that a reasonable person would understand ASL to be engaging in a “substantially similar” business as TSIL.[27] The Judge considered the operation of ASL “trench[es] directly on [TSIL’s] business” and hence the vendors were in breach of the restraint.[28]
Submissions
[26]At [2] and [36].
[27]At [2] and [36].
[28]At [2] and [37].
Mr St John submits that ASL and TSIL are not similar businesses. They operate at different levels of the interior fit-out industry and do not compete as they sell different products to different customers. ASL’s business is described as “aluminium profile and joinery specialists”. It only sells four products: aluminium extrusions, steel studs, sound rated mineral wool (for sound insulation) and hardware accessories (such as steel brackets). Its customers are building companies. On the other hand, TSIL imports, manufactures and installs entire partitioning and moveable wall systems. Its customers include schools, hospitality businesses, and commercial offices. Unlike TSIL, ASL does not sell doors, and the actual construction of partitions using ASL’s products is done by third-party building companies. ASL does not assemble or manufacture anything.
Mr St John submits that ASL’s products are not a “partitioning system” or “door system”. A customer who wanted to construct a partition could only buy the aluminium extrusions for the partition’s frame from ASL, but would need to go elsewhere to purchase other materials needed to then assemble, machine and construct the frame to make a partitioning system. Even then, such a partition would be “radically different” from the products supplied by TSIL, as it would be “fixed and immoveable”. He points out most of ASL’s products cost less than $100 per item, whereas the average value of a TSIL partitioning system is $20,000, and its higher‑end products sell for $250,000.
The vendors therefore contend the Judge was wrong to find that ASL competes with TSIL. The purchasers failed to adduce evidence of competition between ASL and TSIL.
For the purchasers, Ms Amaranathan submits the vendors breached the restraint because the dominant endeavour of ASL is the distribution of the most specialised components required for partitioning and door systems. It was not plainly wrong of the Judge to conclude that ASL distributes a sufficiently large proportion of a door system that, for the purpose of the restraint, it effectively distributes those systems. The purchasers also contend the application of orthodox principles of contractual interpretation to the restraint in the context of the contract as a whole means there was no error in the Judge’s decision.
Ms Amaranathan submits it is material that ASL describes the series products it sells on its website as “systems” and advertises them as being used in commercial offices and in the education sector. These are the same end customers shared by ASL and TSIL, and both also market their products to building contractors and architects. It is also material that ASL’s price list sets out the components ASL sells as part of each of the product series it describes as “systems”. Additionally, it is clear from ASL’s wall chart that almost all of ASL’s aluminium extrusions are for its fixed wall systems, its door series systems, or are accessories and related products used to construct a partitioning or door system.
She further submits the Judge was correct to find that ASL competes with TSIL commercially. The Judge found those who want a partition or door system could buy the complete system from TSIL or the essential components from ASL and the rest from other sources. The products of both firms compete in the market for interior partitions. The differences in ASL supplying components rather than a complete system and fixed rather than moveable systems do not sufficiently distinguish its business from TSIL’s to avoid the purpose of the restraint.
This was an arms-length commercial transaction brokered between legally represented parties. The vendors had accepted the wording of the restraint without challenge or question, and it was entered into for very valuable consideration (more than $1.9 million). Moreover, the vendors are especially dangerous competitors, with Mr Gordon being someone who knew TSIL’s business “inside out”.
Discussion
We are satisfied that this appeal must be allowed. In terms of [15] above, this is a case where reasonable minds may differ. Unfortunately for the purchasers, our three reasonable minds reach a different view from that of the Judge.
Enlarged business?
We start by clearing away an underlying argument that appeared to be advanced by Ms Amaranathan: that the words of the restraint clause might enlarge protection beyond the business being conducted by TSIL at the time of sale. In our view, contemporaneous evidence does not support that; a reasonable and informed independent observer would not infer it; and it would amount to an unreasonably enlarged restraint.[29] To accede to that argument would detach the clause from its context, and invite the prospect of the effect of that clause changing over time as TSIL alters and expands its operations. As we read the clause, it confines the scope of protection to the current business undertaken by TSIL — that is, at the time of entry into the agreement. Enlargement neither reflects mutual intention nor a restraint no wider than the purchasers’ legitimate interest.[30]
“Namely”
[29]Compare, for example, Nordenfeldt (Pauper) v Maxim Nordenfeldt Guns and Ammunition Co Ltd [1894] AC 535 (HL).
[30]See [21] above.
It follows that the words beginning with “namely” serve simply to supply a description of TSIL’s then (and current) business, that is, moveable (operable) interior wall, partitioning and door systems. As Ms Amaranathan acknowledged, that is what TSIL does now. The clause, and some of TSIL’s marketing material, refers to “partitioning systems”, but these do not amount to anything different in character to moveable interior walls and doors. We do not see the words “partitioning systems” as being redundant; rather they are simply another way of expressing the moveable wall and door systems distributed by TSIL.
“Systems”
A crucial component of the restraint is that it relates to (operable wall, partitioning and door) “systems”. It is here that we turn to the evidence of the expert witness, Mr Smith. He was the sole expert witness called and we give his evidence some weight. He is a registered building surveyor, quantity surveyor and building consultant with over 35 years’ involvement in the building industry. He undertook site visits at the premises of both businesses.
He found that TSIL manufactured and installed complete bespoke (or highly specialised) panelised folding door partition systems, either directly for the building occupier or the contractor. Similar folding partitioning systems were produced by other suppliers: Hufcor and Lotus. TSIL undertook this activity from a large 2,300 m2 factory with large, complex machinery sufficient “to manufacture entire partitioning systems ready for delivery and installation”. TSIL does not sell component parts, only complete systems.
ASL, on the other hand, operates from a 275 m2 warehouse set up for storage and not manufacturing.[31] Aluminium extrusions, steel stud sections and sound rated mineral wool are stored there. ASL lacked the machinery to manufacture door systems, moveable walls or partitioning systems: at most, a customer shopping at the ASL warehouse could purchase materials that could be used in the partial (but very incomplete) construction of a frame for a partitioning system. But that is only one of the core components of a partitioning system. A customer would need to shop elsewhere to get the other two basic components (panels and doors) to create a partitioning system. Further, the finishing components of a partitioning system (powder coating and coverings) would also need to be sourced from another business. We add that the evidence shows ASL supplies its products to construction companies and to interior fit-out contractors that are in competition with TSIL. ASL does not itself seek to compete with TSIL’s customers, which Mr Gordon said would mean “disaster” for ASL.
[31]ASL also have premises in Wellington. They are set out in a similar way but are smaller than those in Auckland.
We consider that if the underlying mutual purpose for the clause was to extend to functionally different trading activity — a componentry supplier that supplied TSIL’s competitors with a substantial proportion of the components necessary to create competing products — the clause should have provided as much, and not defined itself by reference to the business of distributing (or manufacturing) “systems”. That is an expression that, in both ordinary and industry parlance, implies completeness:[32]
A group or set of related or associated material or immaterial things forming a unity or complex whole … A set of objects or appliances arranged or organized for some special purpose, as parts of a mechanism, components of an interdependent or interconnecting assembly or network ….
Not the components (or some of them), neither assembled nor organised.
[32]Lesley Brown (ed) Shorter Oxford English Dictionary on Historical Principles (5th ed, Oxford University Press, Oxford, 2002) vol 2 at 3157, definition of “system”.
We are disposed to agree with Mr Smith’s observation that:
A system is not the component parts. A system is the arrangement of those parts so that the components work together in a specific way. For example, a door by itself is not a system. It becomes a system when it is fixed on hinges onto a frame, and that frame is part of a wall.
In his view, a “partitioning system” has four essential components: frames, panels (of glass or wood), doors and the assembly (labour).
We have considered carefully the cross-examination undertaken of Mr Smith’s evidence. It seems to us he made appropriate concessions as to fixed partitions being described by suppliers in the industry as “systems”. Indeed, it was hardly a startling concession. As Mr Smith made clear at the start of his original brief, the point of partitioning is ease of both installation and removal. But he was firm in evidence that componentry could not be given the same description. He accepted that Autex PSL had described itself as supplying “partitioning systems” and “door systems” but, directing himself to what ASL now produced, remained of opinion that incomplete components — which, when assembled, produces a frame — could not be called a “system”.
We agree with Mr Smith about the need for caution about self-description, referencing Autex PSL’s former description of its products as “systems”. The point Mr Smith made is that such self-description is not defining. It does not mean it is a system, or would be so regarded by others active in the industry, of which he is an exemplar. He gave a homely example:
I think one can be confused by the marketing of construction materials. Winstones, as one example, do not market gib board by glossy photos of a piece of gib. Rather they show glossy photos of the finished construction using the gib product. That is because images of finished construction are more attractive than images of construction materials. But just because a company’s marketing materials refer to a picture of finished construction does not mean that company is involved in that construction.
As Mr Gordon observed, the aluminium extrusions Autex PSL sold “are not photogenic”, and “it appears [its] website used images of finished products which they never produced, in order to make [its] website more appealing to customers”.
Ultimately in this matter, we do not think the Judge directed himself to the right question when he asked — in the passage from his judgment quoted at [22] above — “[h]ow many components constitute a ‘system’?”[33] That algebraic approach runs the real risk of disconnecting the inquiry from the parties’ legitimate purpose, disregarding the essential nature of what “systems” in fact are, and expanding the scope of the restraint clause beyond what is necessary to protect the legitimate proprietary interest acquired by the purchasers. It is, for instance, a notorious fact that a complete car may be assembled entirely from spare parts (usually at a considerable price premium), but no one would sensibly suggest the spare parts dealer is in competition with the car dealer for the sale of cars. Or that a restraint clause applying on the sale of, say, a used car dealership[34] could legitimately preclude the vendor from then operating a parts dealership.
Competition
[33]Judgment appealed, above n 1, at [34].
[34]That is, one not selling parts — the equivalent of TSIL.
We turn from the words employed in the restraint to the legitimate interest it protects. In agreeing a restraint clause to describe the protected business interest, the parties are seeking to regulate competition. They describe activities the vendors, with their residual goodwill, may not embark upon because that would compete unfairly with the purchasers and diminish the goodwill they have paid for when buying the vendors’ business. The legitimate interest of the purchasers lies in controlling (and limiting) two things: (1) the vendors competing (and thereby undermining the goodwill paid for the business); and (2) the vendors deploying their particular knowledge and connections in competing against the business sold to the purchasers. So, the fact, or potential fact, of competition is at the heart of the enquiry of whether there has been a breach of a lawful restraint clause.
The essence of competition is substitution.[35] That is to say, that a customer can choose between TSIL and ASL as its supplier. If that choice exists, they may be said in common parlance to be “in competition”. If there is competition, further questions arise as to whether the restraint covers that activity, and then whether the restraint is lawful. On the other hand, if competition neither exists nor is likely to exist — assessed by substitutability and (as here) visible trading activity — then it is unlikely the restraint is infringed. In light of this, we make four points.
[35]Substitution is, for example, at the heart of market definition in s 3(1A) of the Commerce Act 1986.
First, Mr Smith made, we think, the very good point that an occupier faced with a now-failed partition would not be complaining to ASL, but to the contractor ASL had supplied components to and who had then taken those (and the other materials needed) and assembled and installed the partition. This is an important observation. It not only informs the Court about what, in industry parlance, a “system” is, but it tells us something about the legitimate protected interest of the purchasers. That depends, to a significant degree, on whether TSIL and ASL are in fact in competition at all. In Mr Smith’s view, which we are disposed to agree with, the real competition was not between TSIL and ASL, but between TSIL and an interior partitioning company obtaining componentry from ASL.
Secondly, competition from ASL’s business predated the sale of TSIL: Autex PSL was already selling its componentry at the time of the transaction. If Autex PSL had in fact been in competition with TSIL, the purchasers — with their long engagement in the industry through TSIL — would know that fact. In fact, the evidence suggests relatively modest acquaintance of Autex PSL as a competitor by the purchasers. Its competitive status was not obvious at all. When they heard Mr Gordon was looking at buying it, they looked it up on the internet to see what it sold. Much attention was given in evidence to the fact that ASL was selling the same products as Autex PSL did. But that is beside the point; the question is whether ASL now sells the same (or substantially similar) products as TSIL at the time of entry into the sale and purchase agreement.
Thirdly, turning to visible trading activity, what is distinctive in this case is the absence of hard evidence supporting the purchasers’ argument on either element: direct competition or deployment of knowledge and connections.
ASL began business on 1 July 2020, although its purchase of the Autex PSL business only went unconditional on 13 July. Before either of those events, on 29 June 2020 Gault J dismissed an application by the vendors for an interim injunction.[36] He found any loss would be relatively easy to quantify.[37] Trial took place five months later. In that time, if TSIL and ASL were in competition, one would expect to see evidence of that fact. This is not the usual situation as regards restraint cases where the Court is compelled to speculate. What does the evidence of that five-month period demonstrate?
[36]Christensen v Gordon [2020] NZHC 1486.
[37]At [37].
The vendors discovered their invoices on a continuous basis down to trial. In support of their case, the purchasers referenced one such invoice issued by ASL to a company called Key Commercial Interiors Ltd on 15 July 2020. It was for 20 door staking angles, 50 glazing staking angles and 25 metres of grey “Woolpile” fabric. Mr Purdom described it in the following way:
I have looked at only a few of the hundreds of invoices the [vendors] have provided for ASL but I can see straight away that our customers and their customers are the same. For example, Invoice IN-AK000020 is an invoice to Key Commercial Interiors Limited … Key Commercial Interiors is a customer we would work with once or twice a year. Around 24 to 30% of the invoices I looked at had the same customers as [TSIL] already, with [the Gordons] only having had the business a few months so far.
In reply, Mr Gordon said:
Mr Purdom says that some of the invoices are addressed to customers of [TSIL]. That might be right but without further information it is difficult to answer. In any event, [TSIL’s] customers are generally large companies who purchase a variety of products from many different suppliers.
For example, Key Commercial Interiors (the customer named by Mr Purdom as appearing on [ASL’s] invoices) is a large interior fit-out company. Key Commercial also purchase things like countertops, furniture, and carpeting when doing its fitouts. But no one would seriously suggest that a carpeting company is in competition with [TSIL] purely because they share a customer. It is the product being purchased that matters.
We agree with that qualification. In our view Mr Purdom’s evidence conflates ASL’s role as supplier in a distinct market with that of the contractor in fact in competition with TSIL in the market for what might be called “partitioning systems”. Mr Gordon then went on to say:
Mr Purdom does not identify any invoice where [ASL] has sold a “moveable wall”, “operable wall system”, “partitioning system” or “door system”. Nor has he provided evidence of a project lost to Autex PSL … or any other competitor.
(original emphasis.)
In our view, that puts its finger firmly on a fundamental problem lying in the way of the purchasers’ claim. It simply identifies the different functional markets in which each company operates. TSIL sells completed moveable partitioning and door systems to building occupants and contractors that are priced in the tens to hundreds of thousands of dollars and ASL sells components, rarely priced above a few hundred dollars, to building contractors who compete with TSIL. ASL’s functional role is as a components wholesaler; TSIL’s is not.
The purchasers also relied on a set of multiple invoices from ASL to various customers issued in August 2020. Mr Purdom says he “can see from ASL’s invoices that ASL is distributing a complete system for the builders to install doors and partitioning systems, apart from the wall linings or panels”. He had colour-coded the items on each invoice to show what is powder coated, related to a partition or door, or insulation. Mr Purdom says these invoices show that ASL “is distributing partitioning systems and door system for interior fitouts”. But, cross-examined, Mr Purdom had to accept that he could neither show the proportion supplied by ASL of a job completed by an ASL customer, nor their assembly by ASL.
Fourthly, we turn now to evidence of tenders. If ASL were in competition with TSIL, one would expect to see tenders from it for building projects that TSIL was also bidding for. Here, then, another difficulty arises. Mr Gordon states “ASL has never tendered for a project”. So whatever competition there might be cannot be said to be direct.
The purchasers also relied upon a tender invitation from a construction company building a Wellington apartment complex in which “PSL Doors Alement Series”, a product sold by Autex PSL, is specified for the sliding doors. Mr Christensen was taken to this in his cross‑examination, with inconclusive results. The proposition put to him was that it was simply a specification made by a third party — the architects engaged on the project. Mr Christensen deflects the challenge, but the answer is obvious. So are two other points. The specification is by sample only; the builder asks TSIL for a price “using your sliding door system”. And the date of the enquiry is 9 May 2020, predating the vendors’ ownership of the business (and therefore had nothing to do with them).
At the end of the day, this is all that can be said: ASL has not tendered against TSIL for any project. But it will have supplied components at wholesale to construction companies which do.
Vendors deploying their particular knowledge and connections
We can be brief.
First, the absence of evidence of direct competition, essentially because of the different market strata occupied by the two companies, has made it difficult, if not impossible, for the purchasers to adduce evidence of the vendors’ adverse deployment of particular knowledge and connections.
Secondly, in evidence Mr Christensen highlighted the extent of the Gordons’ likely knowledge, and potential to deploy their knowledge in the future. For example, Mr Christensen says the Gordons “could” approach the quantity surveyors and building companies whom they have relationships with. They “would” know how to undercut TSIL’s prices. Mr Purdom’s evidence is to the same effect. He said Mr Gordon “could” use his knowledge of TSIL “to approach people and companies he had formed relationships with … and use his knowledge of our business to compete against us”.
In reply, Mr Gordon said his knowledge of TSIL meant he “can steer the [ASL] business to ensure that [he does] not breach the restraint of trade clause”. ASL “employs a wholly different business model to [TSIL] and operates in a different product category”. He has no intention of manufacturing or selling panels or doors that would compete with TSIL and in any event ASL does not have the capability to begin manufacturing. Instead, ASL will continue to focus on selling wholesale components and accessories that are used to make fixed aluminium joinery and solid walls.
There is, we think, a defeating intangibility about the purchaser’s case as to breach of the restraint by use of knowledge and connections. In this case the absence of direct competition, reflected in the different market strata occupied because ASL does not manufacture or distribute systems, but only components, ends the enquiry there. The intangibility of the accusations is hardly surprising given that context.
Conclusion
Finally, and differing from the Judge, we do not find ASIL’s business activity is the same or substantially similar to TSIL’s business of offering a complete and assembled moveable wall/partitioning/door systems. ASL simply supplies components at wholesale from which competitors of TSIL can assemble similar (and competing) doors. Not only is the functional level different, ASL does not tender for projects. At best it can use Mr Gordon’s contacts to encourage clients to specify ASL products as componentry in a system manufactured by someone else. Its business activity does not breach the restraint clause.
Result
The appeal is allowed.
The injunction is discharged.
The respondents must pay the appellants one set of costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Mackie & Co Ltd, Auckland for Appellants
Rice Craig, Auckland for Respondents
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