Green Acres Franchise Group Limited v L & K Ferrick Limited
[2021] NZHC 997
•5 May 2021
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2020-441-000090
[2021] NZHC 997
BETWEEN GREEN ACRES FRANCHISE GROUP LIMITED
PlaintiffAND
L & K FERRICK LIMITED
First Defendant
KATHRYN MARY FERRICK
Second DefendantLLOYD HARVEY FERRICK
Third DefendantL & K FERRICK (2021) LIMITED
Fourth Defendant
Hearing: 28 April 2021 Counsel:
D Chisholm QC & J Ryan for the Plaintiff
J Bates for the Second, Third and Fourth Defendants
Judgment
5 May 2021
JUDGMENT OF GWYN J
[1] The plaintiff seeks an interim injunction arising from a sub-franchise agreement it had with the first defendant. The specific orders sought by the plaintiff are at “Appendix A” to this judgment.
[2]The defendants oppose the orders sought.
GREEN ACRES FRANCHISE GROUP LIMITED v L & K FERRICK LIMITED [2021] NZHC 997 [5 May 2021]
Factual background
[3] The plaintiff, Green Acres Franchise Group Limited (Green Acres), is a nation- wide franchisor. It operates a three-tier franchise system (franchisor, franchisee and sub-franchisee/contractor1) for the marketing and operation of lawn-mowing, gardening and property maintenance services.
[4] The second defendant, Katherine Mary Ferrick, and the third defendant, Lloyd Harvey Ferrick, are the directors of the first defendant, L & K Ferrick Limited (the Company). They are also the shareholders of the Company, together with Gerard Searle.
The contractual background
[5] In 2007, D R and C Lay Ltd was the Green Acres franchisee in the Hawke’s Bay. On 6 December 2007, the Company entered into a sub-franchise agreement with D R and C Lay Ltd (the original sub-franchise), to operate a lawn and garden care business in Hawke’s Bay (including Napier, Hastings and Havelock North), using Green Acres’ franchise system, know-how and intellectual property.
[6] On 24 May 2010, Green Acres, as the franchisor, granted Royssa Enterprises Ltd (Royssa), as the franchisee, the right to operate the Green Acres franchise in Hawke’s Bay (the Master Agreement), in place of D R and C Lay Ltd.
[7] In mid-2010, the Company sold the original sub-franchise. On 4 October 2010, the Company entered into a new sub-franchise agreement with Royssa (the Agreement).2 This Agreement is the subject of the current proceedings.
[8] In late 2012, Mr Ferrick and other Green Acres contractors raised concerns regarding the performance of Royssa as the Green Acres franchisee in Hawke’s Bay. Among their concerns were that Royssa had not met its obligations regarding advertising, had provided insufficient referral work to the contractors to allow them to
1 This third tier is referred to interchangeably by the parties as a “sub-franchisee” and a “contractor”; for clarity, I will refer to it as a “contractor” for the purposes of this judgment.
2 The relevant provisions of the Agreement are discussed in more detail at [11]-[12] below.
achieve the guaranteed turnover, was under-pricing jobs, and was ignoring or failing to respond to communications from the contractors.
[9] On 4 February 2013, the Master Agreement was assigned to Green Acres from Royssa through a Deed of Assignment and Settlement. At that point Green Acres became both the franchisor and the franchisee in relation to the Company.
[10] On 31 October 2020, the term of the Agreement expired. No new agreement was signed between Green Acres and the Company, but the Company continued to operate in accordance with the terms of the Agreement.
The 4 October 2010 sub-franchise agreement (the Agreement)
[11] The Agreement was for an initial term of ten years, with a right of renewal for a further ten years. It took effect from 27 September 2010. The second and third defendants signed as directors of the Company but did not sign as guarantors.
[12]The provisions of the Agreement relied on in this application are:
(a)Clause 4.1, which makes the Agreement subject to the Master Agreement.
(b)Clause 32, which grants Green Acres (as Franchisor) a right to enforce the Agreement. In any event, in this case, Green Acres is itself a party to the Agreement – as a result of the Deed of Assignment and Settlement between Green Acres and Royssa, Green Acres was both franchisor and franchisee with effect from 4 February 2013.
(c)Clause 1.1, which contains relevant definitions including the definitions of “Business”, “Contractor’s Business”, “Franchise”, “Franchise Agreement”, “Intellectual Property”, “Know How”, “Trade Mark”, and “System”. “Intellectual Property” is defined as “all intellectual property relating to Green Acres services and the System including the Know How, confidential information, copyright and Trade Mark relating to the business”. “System” is defined as:
… the total concept created by Green Acres in relation to the creation, development and maintenance of the Business as is operated by a number of contractors and incorporates the comprehensive system for the conduct of the franchised business in accordance with the uniform standards of operations, identification, design and merchandising of goods and services;
(d)The Master Agreement (in sch 3) defines Business as:
The Business shall mean those: Commercial Cleaning, Lawnmowing, Domestic Cleaning services which have been granted within the designated Territory to the Franchisee by this Agreement and shall require the implementation of the System and its operation through the allocation, sale and maintenance of Sub Franchise Agreements throughout the Term. For the avoidance of doubt, the Franchisee is to conduct the Business on the terms and conditions contained in the Agreement.
(e)Clause 2.1, which provides a non-exclusive grant of the right to “use and apply the System and Know How of Green Acres within the Territory”.
(f)Clause 20.1, which provides that the grant to the Company of the right to undertake the business included the non-exclusive use of the “Trade Mark, Intellectual Property and Know How” of Green Acres.
(g)Clause 9.7(b), which Green Acres relies on as confirming its continuing interest in the customers, provides:
The Contractor shall immediately report to the Franchisee details of any customers that cancel their contracts with the Contractor including the name and address of the customer, any complaints or problems that arise between the Contractor and the Contractor’s customers and the reason given to the Contractor by the customer for such cancellations.
(h)Clause 9.2, which required the Company to operate the Business in accordance with the Green Acres Operations Manuals or instructions.
(i)Clause 6.3, whereby the Company acknowledges Green Acres’ proprietary rights in the System and Operations Manual.
(j)Clause 9.6(a), which provides:
The Contractor shall not do or be a party to the doing of any act matter or thing whereby the goodwill of the Business or the Contractor’s Business (including the Intellectual Property, the Trade Mark and the Know How) may be prejudicially affected.
(k)Clause 9.17, which provides that the Company can service customers other than those referred to it by the Franchisee and/or Green Acres, subject to the payment of the royalty.
(l)Clause 15, which sets out the consequences of termination of the Agreement, whether for cause or expiration of the term. On termination, cl 15.1 requires the contractor to return the “Intellectual Property and all customer details including addresses, keys and codes for properties and all other notes. Clause 15.5 requires the Contractor to cancel all telephone numbers used in connection with the Contractor’s Business, or assign them to Green Acres.
(m)Clause 15.7 which required the contractor to cease using the “Trade Mark, Intellectual Property or the Know-How” on termination of the Agreement.
(n)Clauses 9.13 and 19.1(b), which provide that the Intellectual Property relating to the Green Acres System is commercially sensitive property and imposes an obligation on the company to maintain strict secrecy about Green Acres’ System and Know How.
(o)Clause 16.1, which is a non-competition or restraint of trade clause, provides:
… the Contractor … will not at any time during the Term (or any renewed term) or for a period of two years following the expiration or termination of this agreement be interested in any business the same as, or similar to or in competition with the Business within New Zealand …
a.Protection: the restrictions in this clause protect both the Business and any other similar business in which Green Acres or the Franchisee is interested (whether because it ultimately owns and/or operates the business, or has granted a franchise to that business or in any other way and whether branded as a Green Acres business or otherwise).
b.Restrictions Reasonable: the restrictions set out in this clause are reasonable and the Contractor and the Guarantor waive any right of defence against strict enforcement of this clause by the Franchisee or Green Acres.
The dispute
[13] Following expiry of the Agreement in October 2020, on 29 November 2020 the solicitors for the Company wrote to Green Acres alleging breaches of the Agreement which it said were issues raised previously by the Company and others nine years earlier. It also alleged misrepresentation in relation to the marketing of the Green Acres franchises. The letter noted that the Agreement ended on 1 November 2020, but the Company was confirming that it would not renew its franchise and would “cancel any residual holding over by the franchisee in relation to the now expired franchise agreement.”
[14] Green Acres’ solicitors responded on 1 December 2020, rejecting the allegations that it had breached the Agreement and had misrepresented the benefits of the franchise, and also rejecting the Company’s assertion that it had grounds to cancel the Agreement. It said that the purported cancellation was a repudiation. The letter went on to note that Green Acres affirmed the Agreement and would continue to perform it and sought confirmation by the following day that the Company would continue to perform under the Agreement.
[15] The Company did not respond to the 1 December 2020 letter. On 3 December 2020, Green Acres’ solicitors cancelled the Agreement, effective immediately, citing the Company’s repudiation of the Agreement.
[16] Green Acres’ solicitors advised that the provisions of cl 15 of the Agreement then applied and sought action by the Company in terms of cl 15.3 The letter also drew the Company’s attention to its obligations under cl 16 of the Agreement.4
[17] The Company did not provide the confirmation sought that it would continue to comply with its payment obligations and comply with cls 15 and 16 of the
3 Set out at [12(l)-(m)] above.
4 Set out at [12(o)] above.
Agreement. The current proceedings were filed on 11 December 2020. Green Acres now seeks an interim injunction.
The claims
[18]Green Acres advances four causes of action:
(a)first, against the Company, for breach of contract in relation to the Agreement (specifically, the restraint of trade);
(b)second, against all of the defendants, for breach of confidence;
(c)third, against the second to fourth defendants, for interference with contractual relations; and
(d)fourth, against the second to fourth defendants, for unlawful means conspiracy.
The evidence as to the need for an interim injunction
[19] The Company has not in the intervening period provided the requested confirmation that it will comply with its post-termination obligations under the Agreement, as requested by Green Acres on 3 December 2020.
[20] The evidence for Green Acres is that on 17 and 18 December 2020, a private investigator engaged by it observed Mr Ferrick carrying out lawn and garden work at three separate properties in the Napier area.
[21] Mr Ferrick’s own evidence is that on 1 November 2020 all Green Acres signwriting was removed from the vehicle used to carry out the Company’s business, his Green Acres uniform was destroyed, and nothing else retained by the defendants has the Green Acres trade mark. However, Mr Ferrick’s evidence is also that: “We have remained with our customers as there is no one here that will take our customers on.”
[22] On 31 March 2021, Mr and Mrs Ferrick incorporated a new company, L & K Ferrick (2021) Limited (the New Company). Mr and Mrs Ferrick are the directors and shareholders of the New Company. Mr Ferrick’s evidence is that the New Company has been incorporated for the purposes of providing lawnmowing services, but not, he says, to “customers of Green Acres in breach of the agreement.”
[23] On the morning of 27 April 2021, shortly before a teleconference with counsel on this matter, the Company’s shareholders (Mr and Mrs Ferrick and Mr Searle) resolved to appoint a liquidator to the Company. Green Acres and the Court were notified of this in a further affidavit from Mr Ferrick, which was filed and served late in the afternoon of 27 April 2021. In that affidavit, Mr Ferrick indicated that the New Company is interested in purchasing the Company’s assets. He also said that he and Mrs Ferrick have:
… not engaged in a business the same as, or similar to in competition with the business of lawnmowing, gardening and property maintenance services in New Zealand in breach of the agreement. We are not parties to that agreement and have not traded personally.
[24]Mr Ferrick’s further evidence is:
We have not personally used and nor are we about to use any information of the categories claimed including all customer information to the detriment of Green Acres. We have never done that.
Preliminary applications
[25] In light of these developments, Green Acres has applied to join the New Company as a fourth defendant, and for an order under s 248(1)(c)(i) of the Companies Act 1993 that this proceeding may be continued against the Company, notwithstanding the appointment of a liquidator. The defendants have also applied for summary judgment or strike out of the plaintiff’s claims.
Application for joinder of fourth defendant
[26] Under r 4.56(1)(b)(ii) of the High Court Rules 2016, the Court may add the name of a person as a defendant where that person’s presence before the Court may be necessary to adjudicate on and settle all questions involved in the proceeding.
[27] Green Acres advances the application for joinder on the basis that the New Company appears to have been incorporated by the second and third defendants in an attempt to carry on lawns, gardens and property management services and to circumvent the post-termination obligations of the Company under the Agreement. Green Acres says that the joinder of the New Company is necessary to avoid any indirect use of Green Acres’ confidential information or further interference with the Company’s post-termination obligations.
[28] Green Acres argues the defendants had knowledge of the Agreement (the New Company had imputed knowledge of the second and third defendants). By continuing to provide lawnmowing and garden services to Green Acres’ customers, Mr and Mrs Ferrick, have interfered with the Company’s performance of its post- termination obligations under the Agreement. They have conspired to engage in a lawnmowing and garden service business the same as or similar to, or in competition with, the business provided for under the Agreement, in breach of the Agreement. In doing so, Green Acres says they have unlawfully used information relating to the customers, systems, technical information, trade secrets and pricing structures obtained by Mr and Mrs Ferrick in the course of performing the Agreement.
[29] Mr Bates, counsel for the defendants, resists joinder on the basis that there is no tenable cause of action against the New Company, for the same reasons that he says the claims against Mr and Mrs Ferrick are not tenable.
[30] In light of Mr Ferrick’s evidence that he and Mrs Ferrick have incorporated the New Company for the purpose of providing lawnmowing and garden services, and his further evidence that the New Company has expressed to the liquidator of the Company an interest in buying the Company’s assets, I am satisfied that the New Company’s presence as a party is necessary in order to adjudicate on all issues before the Court, in terms of r 4.56.5 For the reasons set out below, where I consider the claims against the defendants for the purposes of the interim injunction analysis, I do not accept that the claims against the New Company are untenable.
5 Mainzeal Corp Ltd v Contractors Bonding Ltd (1989) 2 PRNZ 47.
[31] I grant the application to join L & K Ferrick (2021) Limited as fourth defendant.
Order under s 248 of the Companies Act 1993
[32] Once a company has been put into liquidation, s 248(1)(c) of the Companies Act provides that, unless the liquidator agrees or the court orders otherwise, a person must not: commence or continue legal proceedings against the company or in relation to its property; or exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company.
[33] Green Acres says the liquidation of the first defendant is a “strategic liquidation”. Although the liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed,6 it was clear from correspondence between the parties’ solicitors and submissions before me at the hearing that, as at the date of hearing, the liquidator had not yet been given possession of the assets of the Company; the assets and records of the Company remained in the hands of Mr and Mrs Ferrick. It is those records that are central to Green Acres’ interim application. Green Acres’ solicitors have written to the liquidator seeking confirmation that the addresses, keys and codes for all properties where the Company was performing services under the Agreement, plus all notes, writings and other documents relating to that business, had been delivered to the liquidator and no copies had been retained by the directors (Mr and Mrs Ferrick). The letter also sought confirmation that the liquidator would comply with cl 15.1 of the Agreement. No response had been received from the liquidator at the time of the hearing.
[34] I am satisfied that leave ought to be granted under s 248 of the Companies Act for Green Acres to continue this proceeding against the Company. Green Acres is seeking to enforce a claim to its own property – where such a proprietary claim is made, the applicant for leave is not a creditor as such, and the Companies Act procedures for determining creditors’ claims in a liquidation are not appropriate.7
6 Companies Act 1993, s 241(5).
7 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [21.4]; Commissioner of Inland Revenue v Compudigm CIV-2008-485-1000, 21 September 2010 at [38].
[35] It may well be that, once the liquidator is fully apprised of the situation, there will be no practical need for orders against the Company, but in the meantime the Company’s position remains unclear. In any event, I accept Green Acres’ argument that, if it is ultimately successful, orders against the Company may be relevant to protecting the integrity of its franchise system.
[36] I grant leave for Green Acres to continue its proceedings against L & K Ferrick Limited.
Defendants’ application for summary judgment/to strike out the claim
[37] On 20 April 2021, the second and third defendants filed an application seeking to strike out Green Acres’ claims against them as disclosing no tenable cause of action and/or for summary judgment. In my Minute of 27 April 2021, I recorded that the applications had not been scheduled for hearing, but that the substance of any submissions to be made in support of the applications would no doubt inform Mr and Mrs Ferrick’s submissions in relation to Green Acres’ application for interim relief.
[38] The defendants’ applications will fall away in the event that I find a serious question to be tried in Green Acres’ application for interim relief.
Principles relating to interim injunctions
[39] The principles relating to interim injunctions are well known. The Court must consider:8
(a)whether there is a serious question to be tried in the proceeding;
(b)whether the balance of convenience favours the grant of the relief sought; and
(c)the overall justice of the case.
8 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA); American Cyanamid v Ethicon Ltd [1975] AC 396.
[40] The balance of convenience, also described as “the balance of the risk of doing an injustice”,9 is the “guiding principle” in assessing an application for an interim injunction.10 The Court is required to balance the injustice or harm that may be caused to Green Acres if an interim injunction is not granted and Green Acres ultimately succeeds in gaining a permanent injunction, against the injustice or harm that may be caused to the defendants if an interim injunction is granted and Green Acres ultimately fail to gain a permanent injunction. Although this inquiry is “broad and flexible”,11 the Courts usually consider factors such as:
(a)the adequacy of damages to both parties;
(b)preservation of the status quo;
(c)the relative strength of each party’s case;
(d)the conduct of the parties; and
(e)the effect on innocent third parties.
Is there a serious question to be tried?
Breach of contract
[41] The claim for breach of contract is brought against the Company, in relation to the Agreement (specifically, the restraint of trade and confidentiality provisions).
Green Acres’ position
[42] Green Acres says that at least since 3 December 2020, the Company has continued to engage in a business the same as, or similar to, or in competition with, the business of lawnmowing, gardening and property maintenance services in New Zealand; and has misappropriated information relating to the customers, systems, technical information, trade secrets and pricing structures obtained by the Company
9 Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA) at 237; McLaughlin v McLaughlin [2019] NZHC 2597 at [37].
10 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 337.
11 McLaughlin v McLaughlin, above n 9, at [38].
and the other defendants in the course of performing the Agreement (the Information), which is the intellectual property of Green Acres.
[43] The primary allegation against the Company is that it has acted in breach of restraint of trade and has failed or refused to deliver up the Information since termination of the Agreement.
[44] Green Acres relies, first, on cl 16.1 of the Agreement which provides that the Company:
… will not at any time during the Term (or any renewed term) or for a period of two years following the expiration or termination of this agreement be interested in any business the same as, or similar to or in competition with the Business within New Zealand …
[45] Green Acres says the restraint in cl 16.1 is reinforced by cl 15.7, which requires the Company to cease using the “Trade Mark, Intellectual Property or the Know How” on termination of the Agreement.
[46] Green Acres also relies on cl 15.1 of the Agreement, which obliges the Company to deliver all addresses, keys and codes for all properties where the Company was performing the business under the Agreement, plus all notes, writings and other documents relating to the business.
[47] It says those obligations are reinforced by the confidentiality provisions in cls 9.13 and 19.1(b) of the Agreement.
[48] While acknowledging that, prima facie, restraints of trade are unenforceable, Green Acres points out that they are regularly given effect by the Courts when they are no wider than is reasonably necessary to protect the legitimate interests the restraint was intended to protect.12 Green Acres argued that the goodwill attached to the franchise at the end of the franchise period belongs to the franchisor, and the business model operated by the franchise business is protectable. To the extent that the restraint
12 Skids Programme Management Ltd v McNeill [2012] NZCA 314, [2013] 1 NZLR 1 at [36].
protects goodwill it is analogous to the situation where the vendor of a business enters into a restraint in order to protect any goodwill transferred to a purchaser.13
[49]Green Acres says that the restraint is necessary because:
(a)The Company was supplied with information relating to Green Acres’ customers, systems, technical information, trade secrets and pricing structures.
(b)It is apparent on the evidence (including Mr Ferrick’s own evidence) and on the submissions for the defendants before the Court, that the Company has continued to carry out the business from the date of termination of the Agreement, at least until the date of appointment of the liquidator.
(c)Although the franchised services in question do not involve a high level of expertise, nevertheless it will be appropriate to enforce the restraint of trade. Green Acres points, for example, to Skids Programme Management Ltd v McNeill,14 and Health Club Brands Ltd v Colven Botany Ltd.15 In Health Club Brands, an interim injunction was granted to enforce a restraint of trade in respect of a gym franchised business. Winkelmann J held that the plaintiff had a legitimate interest in ensuring the transfer of the goodwill built up through its brand and business model to an incoming franchisee, and noted that “can only be achieved if the defendants are prevented from exploiting the goodwill in competition with the new franchisees”.16
The Company’s position
[50] The Company has not substantively responded to the claim regarding the restraint of trade. At the hearing, Mr Bates advised that, a liquidator having been
13 Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [22].
14 Skids Programme Management Ltd v McNeill, above n 12, at [47]-[49].
15 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428.
16 At [28].
appointed, he was no longer instructed to act for the Company. Accordingly, the Company was not represented at the hearing. I therefore proceed on the basis of the written submissions filed on behalf of the Company in advance of the hearing.
[51] In his written submissions, Mr Bates submitted that there was no point to an injunction enforcing the restraint of trade as, upon liquidation, the Company will no longer trade.
[52] Other arguments that were put forward for the Company were, first, that it is arguable that in the particular circumstances of the termination of the Agreement the terms relied on by Green Acres do not survive termination. Second, mandatory injunctions are rare, and there is a higher test for the granting of one, and this is not a circumstance where mandatory orders are appropriate. Third, the Information is not adequately identified, and there is a factual dispute as to what was in fact provided to the Company by Royssa or Green Acres for the purpose of the Agreement. Fourth, the Information is not confidential.
Analysis
[53] I address first the submission that an injunction against the Company is not necessary given the appointment of the liquidator. Green Acres has sought confirmation from the liquidator of the Company that the Information has been delivered into his possession and no copies are retained by the directors, and an assurance that the Company will comply with its obligations under cl 15.1 of the Agreement. As at the date of hearing, the assurances sought had not been provided.
[54] As I have already concluded in relation to the application for leave under s 248 of the Companies Act, I agree with counsel for Green Acres that in the circumstances currently known to the Court – particularly the uncertainty as to what information has been provided to the liquidator and what steps he proposes to take – it remains appropriate to make orders against the Company (assuming the other requirements for interim orders are made out).
[55] Turning now to the test, I note interim mandatory injunctions are subject to broadly the same test as interim prohibitory injunctions, but the Court is entitled to
seek a higher degree of assurance that Green Acres will be able to establish the right to such a positive step at trial. However, as the Court said in Commerce Commission v Viagogo, what matters is what the practical consequences of the injunction are likely to be.17 The present case is similar to Greymouth Holdings Ltd v Jet Trustees Ltd, where the Court granted a mandatory injunction to deliver up electronic records and a computer.18 The Court considered the order was analogous to an order for preservation of property.19
[56] Here, the Company is in liquidation, so the practical consequences of being required to deliver up Green Acres’ Information are minimal. Similarly, in relation to Mr and Mrs Ferrick, the orders sought do not prevent them from carrying out a lawnmowing and garden services business per se, in the period until Green Acres’ substantive claim has been determined – they just cannot do so using Green Acres’ Information.
[57] I am satisfied in the circumstances of the case that the Court has sufficient assurance to make the mandatory orders sought (if the other conditions for interim relief are made out).
[58] In relation to the submission that the terms relied on by Green Acres did not survive termination of the Agreement, the Company says that its complaints about the franchise were never appropriately dealt with by Royssa or Green Acres and that was the context for the ending of the Agreement; it is therefore arguable that the terms of the Agreement relied on by Green Acres post-termination do not survive. The difficulty with that argument, for the purposes of this application, is that the breaches of Agreement alleged by the Company are not particularised. All that is before the Court is Mr Ferrick’s evidence about the complaints he and other contractors had raised with Royssa, the then franchisee, nine years ago. There has been no counterclaim filed. I am therefore not able to place any weight on this submission.
17 Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 4559 at [90].
18 Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, 19 December 2011.
19 At [48].
[59] I turn now to the Company’s submissions about the Information itself. It became clear in the lead up to and during the hearing that, for the purposes of this application for interim orders, what Green Acres seeks is return of and restraint on the use of Green Acres’ customer information: that is the addresses, keys and codes for all properties where the Company was, as at 3 December 2020, performing the business, plus all notes, writings and other documents relating to that business (pursuant to cl 15.1); and assignment to Green Acres of all telephone and cell phone numbers used in connection with that business (pursuant to cl 15.5). I will refer to this as the Customer Information.
[60] For the purpose of the interlocutory application, I am satisfied that the Customer Information is adequately defined and confidential, and the Company’s retention and use of it is contrary to the Agreement. While the parties disagree about the extent to which Green Acres assisted the Company with customer referrals during the course of the Agreement, I do not understand there is disagreement that an initial customer list was provided to the Company. Green Acres seeks protection of both that initial information and information relating to customers subsequently acquired by the Company by virtue of its Green Acres get-up.
[61] In terms of the enforceability of the restraint of trade, I note a franchisor may have an interest capable of protection by a restraint of trade provision, including in relation to goodwill, material such as manuals, and know how.20 I find Green Acres has a protectable interest as a result of the restraint of trade provision, especially in relation to the Customer Information.
[62] The question then becomes whether the terms of the restraint of trade are reasonable – in particular, the two year term, and the geographic boundary of all of New Zealand. Given the appointment of the liquidator, plainly a two-year restraint is not necessary, even if I considered it to be reasonable. If interim relief is warranted, the terms of the interim injunction will simply restrain the Company in the way sought until further order of the Court and while the substantive litigation is being pursued. I note that although the Agreement provides that the restraint of trade applies to all of
20 Skids Programme Management Ltd v McNeill, above n 12, at [41]-[49].
New Zealand, Green Acres seeks an interim injunction only in relation to the Hawke’s Bay area. I consider that reasonable.
[63] In those circumstances, I am satisfied that there is a serious question to be tried against the Company for breach of contract.
Interference with contractual relations
[64] The claim of interference with contractual relations is brought against Mr and Mrs Ferrick and the New Company.
[65]The elements of the tort of interference with contractual relations include:
(a)There must be a legally enforceable contract in existence.
(b)The defendants must have engaged in conduct which in fact induced a breach of the contract.
(c)The defendants must have known that their conduct would induce the breach.
(d)The defendants’ conduct inducing the breach must have caused loss or damage to the plaintiff.
(e)The interference must have been without lawful justification.
Green Acres’ position
[66] Green Acres says that since 3 December 2020, Mr and Mrs Ferrick have interfered with the Company’s performance of the Agreement, by continuing to engage in the business of lawn-mowing, gardening and property maintenance services and using the Information, in breach of the Company’s obligations under the Agreement.
[67] Green Acres says it cannot be disputed that there was a legally enforceable agreement in place between Green Acres and the Company, and that Mr and Mrs Ferrick had knowledge of the terms of the Agreement, having signed the Agreement
as directors of the Company and having been the Company’s agents for the purposes of carrying out the Business.
[68] Green Acres says it is also clear from the evidence that Mr and Mrs Ferrick have engaged in conduct which in fact induced a breach of the Agreement. It notes the evidence of the private investigator, who observed Mr Ferrick carrying out lawn and garden work at three Napier addresses on 18 December 2020. It also refers to Mr Ferrick’s own evidence that “We have remained with our customers as there is no one here that will take our customers on”, that Mr and Mrs Ferrick have “not traded personally” and “have not personally used” customer information, and that “my wife and I did not use or misuse that information [including information from its customers who contracted the company] personally”.
[69]Green Acres says the defence of justification does not arise.
[70] Green Acres says that, in the circumstances of the case, it is arguable that Mr and Mrs Ferrick knew or ought to have known that their conduct would induce the breaches of restraint of trade and confidentiality provisions of the Agreement by the Company. Green Acres say this conduct has caused the loss to Green Acres of the particular customers, but also damage to the underlying integrity of its franchise system.
The defendants’ position
[71] Mr Bates’ submission is that the claim is untenable because the rule in Said v Butt, that a servant or agent acting within the scope of their authority who causes a breach of a contract is not liable to an action in tort, provides a complete defence.21 Mr Bates cites Bromley Industries Ltd v Martin & Judith Fitzsimmons Ltd, where French J, applying Said v Butt, said:
… my reading of the authorities is that under the rule, if the deliberate actions of the director in extricating his company from a contract are done in the best interest of the company, then he is immune from tortious liability, regardless of whether the elements of the tort are otherwise satisfied.
21 Said v Butt [1920] 3 KB 497, cited in Bromley Industries Ltd v Martin & Judith Fitzsimmons Ltd
CIV-2008-409-001406, 21 October 2009 at [27]-[33].
[72] Mr Bates submits that Mr and Mrs Ferrick, at all times, acted within the scope of their authority as directors of the Company.
Analysis
[73] The rule in Said v Butt requires that the directors (or employees) of the company be acting in good faith, in the interests of the company. If they were not, then they do not come within the protection of the rule.
[74] On the evidence before me, it is arguable that the second to fourth defendants were directly instrumental in the first defendant breaching those of its contractual obligations that survived termination of the Agreement. It does not at this stage appear to be a case of Mr and Mrs Ferrick, as directors, “assisting” the Company to “extricate” itself from the Agreement. It is also questionable whether their actions in doing so were in good faith for the benefit of the Company, or, rather, in their own interests. I accept Green Acres’ submission that it is arguable that the actions of the second to fourth defendants were for their own benefit.
[75] Mr Bates also relies on the fact that a liquidator has now been appointed to the Company and in those circumstances, there can be no sensible claim for ongoing interference in the Company’s performance of the Agreement.
[76] Mr Chisholm, counsel for Green Acres, agrees that following the appointment of a liquidator, and going into liquidation, the need for an interim injunction on the grounds of this cause of action largely falls away. Accordingly, I do not address it further for the purposes of this application for an interim injunction.
Breach of confidence
[77] The claim in equity for breach of confidence is brought against all of the defendants. Although pleaded against all of the defendants, in submissions before me both counsel focused on the second to fourth defendants.
[78] Green Acres relies on Coco v AN Clark (Engineers) Ltd,22 where Megarry J set out the three elements of the action:
(a)The information in question must have a necessary quality of confidence about it.
(b)The information must have been imparted in circumstances importing an obligation of confidence.
(c)There has been an unauthorised use of the information to the detriment of the person entitled to the benefit of the confidence.
Green Acres’ position
[79] Green Acres says that the Information plainly has the necessary quality of confidence. It says Mr and Mrs Ferrick received the Information in their capacity as directors of the Company and agents of the Company carrying out the business, and in no other capacity and for no other reason. Those circumstances import an obligation of confidence.
The defendants’ position
[80] I understood the defendants to rely on the rule in Said v Butt in relation to this cause of action too. In addition, Mr and Mrs Ferrick submit that the Information is not sufficiently defined and nor does it have the necessary quality of confidence. Mr Bates refers to Ocular Sciences Ltd v Aspect Vision Care Ltd (No 2) in support of the submission that the claim in relation to confidential information must be clearly and precisely pleaded.23
[81] The defendants also argue that the information (however defined) was not provided to them in circumstances importing an obligation of confidence owed to Green Acres.
22 Coco v A N Clark (Engineers) Ltd [1969] RPC 41 (Ch) at 47.
23 Ocular Sciences Ltd v Aspect Vision Care Ltd (No 2) [1997] RPC 289 at 360.
[82] In addition, Mr Ferrick’s evidence is that the defendants did not receive from Green Acres or Royssa any “systems”, technical information or pricing structure documents, or an Operations Manual. They say that, in any event, they have not used the allegedly confidential information for their own purposes and nor have they disclosed the information. As directors of the Company, they were carrying out their proper constitutional role and working for the Company within the scope of their role. They say they have not used the information asserted to be confidential for their own purposes, only for the purposes of the Company. They say they have not disclosed the information to any third party.
Analysis
[83] I note first, plainly the rule in Said v Butt can have no application to a claim that the defendants have, independently of the Company’s breach of contract, themselves breached equitable obligations not to use confidential information.
[84] I have already found that for the purposes of the orders sought before me the Customer Information is sufficiently defined, and I proceed on the basis that an interim injunction, if granted, should apply only to the Customer Information (as defined at
[59] above, rather than the broader set of Information defined at [42] above).24
[85] As to whether the Customer Information has the requisite confidentiality, all the defendants rely on Donovan Group New Zealand Ltd v Reid,25 where the Court held that there was no confidentiality in relation to the plaintiff’s customers. However, Green Acres says Donovan is of little assistance because there the Associate Judge found that in the construction industry there is usually no secrecy about the identity of customers:
[31] … Invariably, signs are erected on building sites, prominently announcing contractors, consultants and sub-contractors involved in the project. On their websites and other promotional materials, construction companies proclaim the jobs they have successfully completed. There is nothing in Donovan Group Ltd’s pleadings or case to show why there is any secret about its customers.
24 See above at [59]-[60].
25 Donovan Group New Zealand Ltd v Reid [2020] NZHC 3367.
[32] In the construction industry there is normally no secrecy about the identity of suppliers, materials, consultants or sub-contractors. There is nothing in this case to show why that information was confidential in the hands of Donovan Group.
[86] Green Acres points instead to Target Recruitment Services v Lewin,26 and Peninsular Real Estate Ltd v Harris,27 where an interim injunction was granted against former employee real estate agents who took away or retained customer details.
[87]I also note, for example, Laws of New Zealand:28
Goodwill is an asset of a company, being the valuable reputation that brings in the custom. A commercial trade secret can be regarded as part of the goodwill of a business. Similarly, customer details, sources of supply, methods of business operation, and methods of manufacture will all qualify as goodwill capable of protection. Information in the possession of an employer as to his or her customers and the details of the working relationships with them is also part of the goodwill of a business. Such information will be protected from unfair competition by means of a temporary limited restraint, even if it is not strictly able to be classified as a trade secret or as highly confidential.
[88] I am satisfied for the purposes of this application that the Customer Information has the necessary quality of confidence.
[89] As to the second requirement in Coco, it is a question of fact whether in the particular circumstances an obligation of confidence is imposed on the defendants. The test is whether a reasonable person would assume an obligation arose in the specific circumstances of the case.29 The reasonable person for this purpose is a person of ordinary intelligence experienced in the particular industry who would take into account all the relevant surrounding circumstances.30 Here, the second and third defendants received the Customer Information in their capacity as directors of the Company and solely for the purpose of carrying out the Agreement as the agents of the Company. I am satisfied that those circumstances imported an obligation of confidence.
26 Target Recruitment Services v Lewin (1987) 2 TCLR 391 at 396.
27 Peninsular Real Estate Ltd v Harris [1992] 2 NZLR 216.
28 Laws of New Zealand Intellectual Property: Confidential Information (online ed) at [22] (footnotes omitted).
29 Coco v A N Clark (Engineers) Ltd, above n 22, at 48.
30 New Zealand Needle Manufacturers v Taylor [1975] 2 NZLR 33 at 44.
[90] As to the third requirement, unauthorised use, I do not accept the argument for the defendants that they have used the Customer Information only for the purpose of the Company carrying out the Agreement. The incorporation of the New Company, Mr Ferrick’s evidence that the purpose of the New Company is to undertake a lawnmowing and garden service business, and the fact that the New Company is interested in purchasing the Company’s assets from the liquidator, strongly suggests that the Customer Information has been or will be used by the second to fourth defendants for their own commercial purposes, now that the Company is in liquidation. Given their refusal or failure to hand back the information as demanded by Green Acres, and the opaque framing of Mr Ferrick’s evidence, it is clearly arguable that they have used it for their own purposes and the purposes of carrying out a competing business through the vehicle of the New Company.
[91] I therefore accept that there is a serious question to be tried against the defendants for breach of confidence.
Unlawful means conspiracy
[92] The claim against the second to fourth defendants for unlawful means conspiracy was not fully argued before me at hearing, and I do not need to consider it for the purpose of interim relief. Green Acres may wish to pursue the claim at the substantive hearing.
The balance of convenience
Adequacy of damages as a remedy
[93] The defendants have provided no evidence as to their ability to meet any damages award that might ultimately be made against them. A liquidator has been appointed to the Company. Mr Ferrick’s evidence is that one reason for placing the Company into liquidation was the receipt of legal and accounting advice; he did not believe the company could fund this litigation and continue to trade and remain solvent. In the absence of an undertaking as to damages from the Company and adequate information as to its financial position on liquidation, the Company’s ability to meet any award of damages is questionable. The other defendants have not
provided undertakings or any indication of their financial position. In contrast, Green Acres has given an undertaking as to damages, and there is no issue as to its ability to meet a damages award if it is ultimately unsuccessful in its substantive claims.
[94] Green Acres has also argued that damages would not be an adequate remedy. If the defendants are able to continue to deal with the customers introduced to them through the Green Acres’ network and goodwill, Green Acres’ relationship with those customers will be lost forever. Green Acres also submits there is a risk that other Green Acres’ sub-franchisees/contractors might look to similarly breach their agreements.
[95] In addition, damages would be difficult to quantify, particularly having regard to the underlying damage to the franchise system generally. Green Acres says the Company’s actions will cause damage to the Green Acres franchise model and to its goodwill. These factors are notoriously difficult to quantify for the purposes of a damages award.
[96] Green Acres also points to what it says is a deliberate strategy on the part of the defendants to continue undertaking the Business following termination of the Agreement on 3 December 2020, and to retain the customer and other information necessary to enable that continuation and to transfer the conduct of the Business to the New Company. In those circumstances, damages would not be an adequate remedy. As stated in BDM Grange Ltd v Parker, the Courts: 31
… tend to be vigilant in ensuring, where there has been a serious breach …, that down stream benefits do not flow to a party as a result of that party’s unlawfulness. This observation additionally applies to an assessment of damages as a remedy, it being very difficult to quantify losses which might flow from departing customers and matters of that sort.
[97] Taking these submissions into account, I accept that damages will be difficult to assess if Green Acres succeeds in its substantive claims against the Company, and this risk is compounded by the uncertainty as to the ability of any of the defendants to meet an award of damages.
31 BDM Grange Ltd v Parker (2005) 2 NZELR 523 at [35].
Status quo
[98] Green Acres says the status quo is the position immediately prior to the Company’s breach. However, given that a liquidator has been appointed to the Company and the Court has been advised that the Company is no longer trading, the preservation of the status quo is of limited relevance in relation to the Company.
[99] In relation to the remaining defendants, Green Acres submits it acted promptly at the time of termination of the Agreement, inviting the defendants to reengage with the franchise and, when they did not do so, taking steps to enforce its rights and maintain the integrity of its system. In contrast, the defendants have in the intervening months failed to respond to Green Acres’ demands and effectively continued to carry on the business under the Agreement.
Relative strength of each party’s case
[100] As to the relative strength of each party’s case, I have already found Green Acres’ claims against the first defendant to be arguable, and I consider Green Acres’ claim is strong enough to support the granting of an interim injunction against the defendants.
Conduct of the parties
[101] On the information currently available to the Court, I accept there is a tenable argument that the defendants have been engaged in a scheme to transfer the Information and business that was the subject of the Agreement to the New Company, through the means of Mr and Mrs Ferrick.
[102] I also note again that Green Acres acted immediately to bring its claim, whereas the defendants refused or failed to respond to Green Acres’ requests. Mr Bates submitted that the first pleading filed by Green Acres, which claimed against Mr and Mrs Ferrick as guarantors, was in bad faith because Mr and Mrs Ferrick were not in fact guarantors. I am satisfied that the circumstances in which the claim was originally drafted – where Green Acres did not itself have a copy of the Agreement and assumed
the directors had signed as guarantors in accordance with Green Acres’ usual practice
– led to a genuine error which was corrected once realised.
[103] I approach Mr Ferrick’s evidence and the submissions for the second to fourth defendants that the Customer Information has been used only for the Company’s purposes, with some scepticism. This is to all intents and purposes a two-person operation (albeit the Company has a third shareholder), with Mr Ferrick carrying out the work of the business. There is a tenable case that the defendants have deliberately retained the Customer Information and have refused to return it to Green Acres in order to advance their purpose of setting up a business in competition with Green Acres, through the vehicle of the New Company.
[104] Mr Bates submits that Green Acres is impermissibly seeking to restrain Mr Ferrick from making a living. However no restraint of trade is pleaded against the second to fourth defendants. They remain free to set up a competing business but not, Green Acres says, utilising Green Acres’ Information.
Effect on third parties
[105] There was no evidence before me as to other creditors of the Company or the effect on the customers serviced by the Company if the orders sought are granted. If, as Mr Ferrick has indicated, all assets and information of the Company are to be transferred to the liquidator, then there will be no effect on third parties.
[106] All of these factors favour the application for an interim injunction being granted in respect of the defendants.
Overall justice of the case
[107] For the reasons already advanced in relation to the balance of convenience, I am satisfied that the overall justice of the case lies in granting the orders sought against the defendants.
Conclusion
[108] I have found Green Acres has a serious question to be tried in relation to two causes of action; breach of contract against the first defendant, and breach of confidence against the remaining defendants. The remaining two causes of action, interference with contractual relations and unlawful means conspiracy, are not determinative in this application for interim relief and are left for further argument at the substantive hearing. The balance of convenience, particularly due to the inappropriateness of damages as a remedy for Green Acres and the conduct of the defendants, supports the granting of an interim injunction.
[109] I therefore find an interim injunction, imposing a restraint of trade and requiring the return to Green Acres of the Customer Information, is appropriate.
[110] For completeness, I note the second aspect of the orders sought by Green Acres against the Company, in relation to lending money or guaranteeing debts, is, it seems to me, no longer relevant given the appointment of the liquidator.
[111] I do not make any orders in relation to the defendants’ application for strike out/summary judgment, but plainly that application cannot succeed now that I have found there is a serious question to be tried against the defendants.
Result
[112] I grant the application to join L & K Ferrick (2021) Limited as fourth defendant.
[113] I grant leave for Green Acres to continue its proceedings against L & K Ferrick Limited.
[114]I grant an interim injunction, on the following terms:
(a)The first defendant is restrained from being interested in any business the same as, or similar to, or in competition with, the business of lawn-mowing, gardening and property maintenance services in the
Hawke’s Bay (including Napier, Hastings and Havelock North) until further order of the Court.
(b)The first defendant is to deliver to Green Acres a list of all addresses, keys and codes for all properties where the first defendant was, as at 3 December 2020, performing its business, plus all notes, writings and other documents relating to the business, and shall assign to Green Acres all telephone and cell phone numbers used in connection with the first defendant’s business.
(c)All defendants are restrained from using or disclosing any customer details, as defined at [59] above, provided to them while acting as a Green Acres contractor, either directly or indirectly, and whether individually or in conjunction with any person, as principal, agent, shareholder, employee or otherwise.
Costs
[115]Costs are reserved, to be dealt with at the substantive hearing.
Next step
[116] The substantive proceedings are to be placed in the next available Chambers List for further timetable orders to be made.
Gwyn J
Solicitors:
Claymore Partners Limited, Auckland Brown & Bates Limited, Napier
APPENDIX A
The plaintiff’s Second Amended Notice of Interlocutory Application for Interim Injunction, dated 22 April 2021, seeks:
(a)Orders restraining the first defendant at any time for a period of two years from 3 December 2020 from:
(i)Being interested in any business the same as, or similar to or in competition with the business of lawn-mowing, gardening and property maintenance services in Hawke’s Bay (including Napier, Hastings and Havelock North); and
(ii)Advising, lending money to, guaranteeing the debts or obligations of, any person that is engaged in or concerned with or interested in any business of lawn-mowing, gardening and property maintenance services in Hawke’s Bay (including Napier, Hastings and Havelock North), whether individually or in conjunction with any person, as principal, agent, shareholder or otherwise;
(b)Orders requiring the first defendant to:
(i)Deliver to Green Acres the Operation Manual, the Trade Mark, and the Intellectual Property (as those terms are defined in the sub franchise agreement);
(ii)Deliver to Green Acres a list of all addresses, keys and codes for all properties where the first defendant was as at 3 December 2020, and is currently, performing its business;
(iii)Assign to Green Acres all telephone and cell phone numbers used in connection with the first defendant’s business; and
(iv)Cease the use of the Trade Mark, the Intellectual Property and the Know How;
(c)Orders restraining the defendants from using or disclosing any customer details, systems, technical information, trade secrets and pricing structures provided to them while acting as a Green Acres sub- franchisee either directly or indirectly and whether individually or in conjunction with any person, as principal, agent, shareholder, employee or otherwise.
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