M and L Holdings (2012) Limited v Whenua Productions Limited
[2020] NZHC 2541
•28 September 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2020-404-001580
[2020] NZHC 2541
BETWEEN M AND L HOLDINGS (2012) LIMITED
Plaintiff
AND
WHENUA PRODUCTIONS LIMITED
First Defendant
AND
WENYUAN KUANG
Second Defendant
Hearing: 28 September 2020 Appearances:
J W H Little for the Plaintiff
No appearances for the Defendants
Judgment:
28 September 2020
JUDGMENT OF CAMPBELL J
This judgment was delivered by me on 28 September 2020 at 4.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Stewart Germann Law Office, Auckland Shortland Chambers, Auckland
M AND L HOLDINGS (2012) LIMITED v WHENUA PRODUCTIONS LIMITED [2020] NZHC 2541 [28
September 2020]
Introduction
[1] The plaintiff, M and L Holdings (2012) Ltd (M&L), is the area franchisee of a business that provides photography services to real estate agents to assist in the marketing of properties. The business model they use is known as the Open2view system. M&L is the area franchisee for South, Central and West Auckland.
[2] As an area franchisee of the Open2View system, M&L grants sub-franchises to other businesses to operate Open2View franchises within the areas over which M&L is the area franchisee. Such sub-franchisees are called Photographer Franchisees.
[3] By a franchise agreement dated 13 April 2018 M&L granted to the first defendant, Whenua Productions Ltd (WPL), the right to operate an Open2View franchise in an area described in the agreement as Auckland South. The second defendant, Mr Kuang, is also a party to the franchise agreement. Mr Kuang is the sole director and shareholder of WPL. He in practice operated WPL’s business.
[4] When he and WPL entered into the franchise agreement, Mr Kuang had a background as a wedding photographer, but did not have any experience in real estate photography. M&L provided Mr Kuang with training in real estate photography, and connected him with real estate agents to whom he (and WPL) could provide photographer services.
[5] The franchise agreement was for an initial term of five years. In March 2020 Mr Kuang told M&L that he intended to stop operating his Open2View franchise. In an email to Mike Taylor, a director of M&L, Mr Kuang then said that he would “also continue to shoot for the agents I have now should they decide to stay on”. At about the same time he told another party that he would “be leaving Open2View to shoot by myself”.
[6] The franchise agreement contains restraints of trade in clause 36 and in a deed of restraint that is an appendix to the agreement. In response to the email from Mr Kuang, Mr Taylor told Mr Kuang that he could not continue to shoot for agents as that would put him in direct contravention of the restraint of trade.
[7] Subsequent discussions between the parties did not resolve matters. M&L believes that Mr Kuang and WPL have been acting in breach of the restraint of trade provisions. On 10 September 2020 M&L gave notice to WPL and Mr Kuang that it was terminating the franchise agreement, on the ground that WPL had abandoned the franchise business in March 2020.
[8] M&L then brought this proceeding on 11 September 2020, seeking an injunction restraining the defendants from breaching the restraint of trade provisions, an account of profits, damages, and costs. At the same time M&L made an interlocutory application for interim injunctions.
[9] The application for interim injunctions had its first call before me this morning. The application was served on the defendants, together with the substantive proceeding, on 18 September 2020. The defendants were due to file any opposition by 23 September 2020. No opposition has been filed, and there was no appearance for the defendants this morning.
[10] Mr Little, who appeared for the plaintiff, had in advance filed a detailed memorandum in support of the application. I heard further from Mr Little this morning. I have decided to grant the injunctions, with some modifications to the proposed wording. Given the lack of opposition, I can express my reasons briefly.
Serious question to be tried?
[11] M&L must first show that there is a serious question to be tried that the defendants are breaching the restraint of trade provisions, and that those restraint of trade provisions are enforceable.
[12] The effect of the restraint of trade provisions is that the defendants agree, during the “Restraint Period” and within the “Restraint Area”, not to carry on a business which could be regarded as a market competitor of, or similar to, the Open2View franchise business. The Restraint Period and the Restraint Area are defined as including several elements. The Restraint Period is defined as (i) the term of the agreement, (ii) one year from the termination date, and (iii) two years from the termination date. The Restraint Area is (i) Auckland South (as defined in the
agreement), (ii) 50 kilometres outside Auckland South, and (iii) the territory of any other Open2View Photographer Franchisee. The definitions adopt this cascading structure, I understand, to make it easier for the Court to sever any elements that are found to be unreasonable.
[13] One of M&L’s directors, Mr Taylor, made an affidavit in support. This shows that Mr Kuang announced in March 2020 that he intended to stop operating the Open2View franchise. At the same time he made it clear that he intended to continue to provide photographic services to real estate agents. He described the agents as ones that “I have now”. Mr Taylor deposed that certain real estate agents that the defendants used to service have not used Open2View for real estate photography since March 2020. He exhibited an email between Mr Kuang and an agent that is consistent with Mr Kuang having provided photography services to an agent since March 2020. Mr Taylor also explained that in August 2020 M&L asked the defendants to undertake not to continue to operate a business similar to Open2View within the Auckland South area, and not to further breach the restraint of trade provisions. The defendants declined to provide that undertaking.
[14] Based on that evidence it is, at the least, seriously arguable that the defendants are breaching the restraint of trade provisions. The only justification that Mr Kuang has put forward for his actions (as appears from Mr Taylor’s affidavit) is an allegation that M&L were in breach of clauses 2.3 and 2.4 of the agreement. I have not had the benefit of argument from the defendants on those clauses, but on the face of it I have to say that the defendants’ position does not appear strong.
[15] I turn now to whether it is seriously arguable that the restraint of trade provisions are enforceable. Mr Little referred me to a recent judgment of Gault J in Butcher Holdings Ltd v Standard 730 Ltd,1 which summarises the applicable legal principles. Restraint of trade clauses are prima facie invalid, but will be enforced where they are no wider than is reasonably necessary to protect the legitimate interests the restraint was intended to protect. The Courts have frequently found that in the
1 [2019] NZHC 589.
franchise context a franchisor has a legitimate interest in protecting goodwill after termination.
[16] Mr Taylor explained in his affidavit the extensive assistance and training that M&L provided to the defendants, including introductions to real estate agents. He explained M&L’s rationale for a Restraint Period that potentially ends two years after termination of the franchise agreement. In short, this is that it takes about two years for a new franchisee to build up a business with the departing franchisee’s clients. Without a two-year restraint, M&L would be unable to establish a new franchisee in the same area.
[17] Mr Taylor also explained that there are Open2View Photographer Franchisees operating throughout New Zealand, except for the West Coast. That, therefore, is the potential area of the restraint, if all the elements of the agreement’s definition of Restraint Area are valid.
[18] I find that it is seriously arguable that the restraint of trade provisions are enforceable for a period beyond the termination of the agreement, up to the two-year period in the agreement. I have doubts as to whether a Court would ultimately hold the two-year period to be reasonable, but at this point I only need to decide whether it is seriously arguable, and in my view it is.
[19] As to the area of the restraint, I do not think it is seriously arguable that a restraint through the whole of New Zealand (excluding the West Coast) is reasonable. I also have some doubts about the reasonableness of a restraint extending 50 kilometres outside the franchise area, but again at this point I am satisfied that it is seriously arguable that it is reasonable.
Balance of convenience
[20] As to the balance of convenience, in my view that favours the grant of an interim injunction. A key consideration is that damages are likely to be difficult to quantify. Mr Taylor has deposed that if the defendants continue to breach the restraint of trade clauses, M&L will lose the opportunity to grow a new Photographer Franchisee in Auckland South, free of competition from the defendants. M&L will
also lose goodwill that it enjoys as area franchisee for most of Auckland. I accept that these are losses that will be difficult to quantify in damages.
[21] I can see, even without hearing from the defendants, that Mr Kuang will suffer some prejudice from an interim injunction. But he will still be free to offer and provide photography services of a type that do not breach the restraint of trade clauses – such as the wedding photography services he was previously providing. M&L has given the required undertaking as to damages.
Overall justice
[22] At this stage M&L appears to have a strong case that the defendants are breaching the restraint of trade clause. Moreover, on the face of it the breach is deliberate. The only justification that the defendants have given for their actions depends on an allegation that M&L are themselves in breach of the agreement. That argument does not appear to be strong.
[23]In those circumstances, justice favours the grant of an interim injunction.
[24] As to the geographical scope of the injunction, I have found that it is seriously arguable that the restraint is valid both within Auckland South and within 50 kilometres of Auckland South. I will therefore grant an interim injunction to that extent.
[25] As to the period of the injunction, I have found that it is seriously arguable that the restraint is valid for up to two years from the date of termination. Nonetheless, I do not think that overall justice requires that at this point an injunction be granted for a two-year period; one year is sufficient for now. If the substantive proceeding remains unopposed, M&L will have the opportunity within that one-year period to seek final injunctions (including for the two-year period it seeks) at a formal proof hearing. If the defendants start opposing the substantive proceeding, M&L is reserved leave to ask for the interim order to be extended.
[26] Finally, Mr Little very properly drew my attention to Mainland Digital Marketing Ltd v Willets.2 That case also concerned an application by an Open2View area franchisee for an interim injunction to restrain former sub-franchisees from breaching post-termination restraints of trade. Nation J declined to grant the interim injunction. But the circumstances were very different. The former sub-franchisees had not set up a competing business. They were merely being employed by one particular real estate agency to provide photography services to that agency. The terms of the franchise agreement did not expressly apply to providing such services as an employee, so the plaintiff’s case was not as strong as here. And, because the defendants were providing services to only one agency, there would not be the usual difficulty in quantifying damages.
Orders
[27] I raised with Mr Little some concerns about the proposed wording of the injunctions as sought in the application. He acknowledged that some changes were appropriate. Those are reflected in the orders that I will make, which are:
(a)Until 10 September 2021 or further order of the Court the defendants shall not:
(i)Be concerned or interested in or carry on, within Auckland South (as defined in the Photographer Franchise Agreement Open 2 View Frankton dated on or around 13 April 2018) or within 50 kilometres of Auckland South, the business of providing real estate photography, videography and signage services.
(ii)Solicit any business for the provision of real estate photography, videography and signage services from any real estate agent serviced by Open2View in Auckland South (as defined above) or any other client to whom the first and/or second defendant
2 [2019 NZHC 1201.
made contact in connection with their Open2View franchise between 13 April 2018 and 10 September 2020.
[28] M&L is entitled to costs on the application. It says it is entitled to indemnity costs under the franchise agreement. But because that entitlement depends on establishing a breach of the agreement, it asks that its claim to indemnity costs be reserved at this point. For now it seeks costs on the application on a 2B basis. I award costs on that basis, with the question of any uplift beyond 2B to be reserved.
Campbell J
0
1
1