Mainland Digital Marketing Limited v Willetts
[2019] NZHC 1201
•30 May 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-000205
[2019] NZHC 1201
BETWEEN MAINLAND DIGITAL MARKETING LIMITED
ApplicantAND
PAUL WILLETTS
First Respondent
AND
RACHEL ANNE VON NORDECK MEYERS
Second Respondent
Hearing: 15 May 2019 Appearances:
P A Cowey and D L Bell for the Applicant
A L Keir and J Brown for the First and Second Respondents
Judgment:
30 May 2019
JUDGMENT OF NATION J
[1] The applicant (MDM) is the area franchisee of a business that provides photography services to real estate agents and people selling property to assist in the marketing of properties. The business model they use is the Open2view system. The respondents were sub-franchisees authorised by MDM to use the Open2view system within MDM’s franchise area.
[2] While operating their sub-franchise, the respondents provided real estate photography services to a number of agents associated with real estate business in Canterbury, including Whalan and Partners Ltd (Whalans). Whalans is in business in Canterbury and Wanaka as Bayleys.
MAINLAND DIGITAL MARKETING LTD v WILLETTS & VON NORDECK MEYERS [2019] NZHC 1201 [30 May 2019]
[3] The sub-franchise agreement between MDM and the respondents ended on 31 March 2019. There was some discussion between the respondents and other directors and shareholders of MDM as to an exit strategy but no agreement was reached.
[4] On 26 March 2019, the respondents signed employment contracts with Whalans for them to be employed from 1 April 2019 as in-house photographers, available to provide marketing photographic support for Bayleys sales people and their vendor clients.
[5] MDM says the respondents’ employment with Whalans is in breach of restraint of trade covenants by which the respondents agreed not to compete with MDM for a period of two years following termination of the sub-franchise agreement. MDM seeks an interim injunction restraining the respondents from being involved in the business of providing real estate photography, real estate videography or real estate internet marketing within the franchise area to anyone, including Bayleys, until 31 March 2021.
Background
[6] Although this is an interlocutory application for only an interim injunction and there was no cross-examination on the affidavits, certain aspects of the background are reasonably clear. I set them out.
[7] MDM filed full proceedings, including an interlocutory application for interim injunction, against the respondents on 1 May 2019. The application for an interim injunction was made on a without notice but Pickwick basis.1 On 2 May 2019, after a telephone conference with counsel, Osborne J directed that the matter proceed on an on notice basis but as a matter of urgency.
[8] The respondents filed notices of opposition and affidavits in opposition on 13 May 2019.
1 Pickwick International Inc (GB) Ltd v Multiple Sound Distributors Ltd [1972] 1 WLR 1213 (Ch).
[9] Tim and Janetta Perry own 75 per cent of the shares in MDM. MDM engages photography sub-franchisees to supply services to the real estate industry. These include real estate photography, real estate videography, floor plans, real estate internet marketing services and other complimentary products and services.
[10] On 1 April 2014, MDM entered into a sub-franchise/photographer franchise agreement with each of the respondents. The agreements entitled each of the respondents to act as independent franchise photographers using the name “Open2view”. Sub-franchise agreements granted each of the respondents the right to operate the franchised business for the specified term and within the specified area, and to use the franchise system, signage, intellectual property and confidential information in the operation of the franchise business. The franchise system included administrative and marketing systems, equipment, training programmes and the goodwill and business reputation of MDM and Open2view.
[11] The sub-franchise agreement authorised the respondents to provide authorised services to a maximum of 100 agents from real estate businesses named in an appendix to the agreement, all but one of which were located within Canterbury. The agreement however contemplated this schedule of firms could change but the respondents were limited to each providing the authorised service to 100 agents from real estate businesses within the specified area. The original list included Bayleys Rural. During the term of the sub-franchise agreement, the list came to include Bayleys offices in Christchurch.
[12] As photographers under the sub-franchise, the respondents were entitled to 55 per cent of all payments made for the photographic services they provided.
[13] Through various sub-franchises, Bayleys became MDM’s biggest client. Bayleys were invoiced $85,000 in the calendar year 2014, increasing to $247,029 in 2018. Bayleys was serviced by MDM sub-franchisees other than the respondents. In the 2017 year, the combined invoicing to Bayleys’ rural and commercial offices from other sub-franchisees was $42,344. In the 2018 year, it was $36,004.
[14] The respondents received some training. They did not have to pay for goodwill because they were not taking over any existing business. It took several years for the respondents to build up their business with work from various agents. The first respondent (Mr Willetts) said in March 2019 he was working regularly with about 50 agents from a number of real estate brands across Christchurch. In his last month of that work he did work for nearly 35 non-Bayleys agents. The second respondent (Ms von Nordeck Meyers) says in her last month she did work for almost 40 agents; five were from Bayleys.
[15] In 2016, another sub-franchisee, Mr Armstrong, decided to leave the business. After lengthy negotiations, the respondents, through a family trust and their own company, purchased Mr Armstrong’s shares in MDM and an associated company. The respondents were appointed directors of MDM.
[16] In October 2017, when the respondents were directors, MDM pursued a claim against Mr Armstrong to enforce a restraint of trade he had agreed to when selling his shares.
[17] The sub-franchise agreements between MDM and each of the respondents included these restraint provisions:
38.1 The Photographer Franchisee and the Guarantor agree that during the Term and any renewal they will neither jointly nor severally conduct on their own or other account or be concerned or interested either directly or indirectly as owners partners, directors, officers, consultants, representatives, agents, licensees, investors with or as part of any business firm or corporation which could be regarded as a market competitor or an imitation of the Franchise System including without limiting the generality of this clause any business identical with or similar to the Franchised Business or the Restraint Business.
38.2 The Photographer Franchisee and the Guarantor agree that on Termination Date they jointly and severally will not from Termination Date conduct on their own or other account or be concerned or interested either directly or indirectly as owners, partners, directors, officers, consultants, representatives, agents, licensees, investors with or as part of any business firm or corporation which could be regarded as a market competitor or an imitation of the Franchise System including without limiting the generality of this clause any business identical with or similar to the Franchised Business or the Restraint Business and the Photographer Franchisee and the Guarantor shall contemporaneously with completion of this Agreement, complete the Restraint Agreement and be bound by the terms of that Restraint Agreement.
[18]Under a separate clause, each of the respondents agreed as follows:
37.4 The Photographer Franchisee agrees that on and after Termination Date it will not directly or indirectly in any manner identify itself or any business as the Franchised Business or as an agency of or for the Area Franchisee which may suggest a continuing association with the Franchise System, the Franchise Image, or the Franchised Business.
[19]An appendix to the sub-franchise agreement began:
Appendix I – Restraint Agreement
If this Agreement with the Area Franchisee terminates for any reason, the Photographer Franchisee will not, for a period of two years from the date of termination and within the same geographic areas in which the Area Franchisee operates, solicit any business dealings in the same type of business (Real Estate Photography, Real Estate Videography, Floor Plans, Sign Boards and Real Estate Internet Marketing) unless a specific exemption is granted by the Area Franchisee to the Photographer Franchisee; either directly or indirectly through associates with any person, company or other organization whether a customer or client of the Area Franchisee or its subsidiaries or any person or firm with whom the Photographer Franchisee has made contact in connection with their Contracting activities for the Area Franchisee or unrelated to the Area Franchisee.
[20] In the sub-franchise agreement, the “franchised business” which the respondents had the right to operate was described as:
The right to the Photographer Franchisee within the Territory for the Term and in accordance with this Agreement to carry on the Business, the marketing and supplying to Clients real estate digital photography and the promotion of lead based real estate marketing services and other complimentary products and services.
[21] Issues arose between the respondents and Mr Perry. In February 2019, the respondents began discussing with Mr and Mrs Perry the possibility of the respondents not renewing their finance agreements. They were aware of the restraint provisions but sought some relaxation of them. This did not eventuate. There was some negotiation between the parties and their lawyers. From 25 February 2019, the respondents had only limited access to aspects of MDM business.
[22] On 22 March 2019, both respondents advised Mr Perry in writing that they would not be continuing with the franchise business.
[23] One of the Bayleys owners, Mr Jones, who is a director and shareholder in Whalans, knew of Mr Willetts through the work he had done. He was interested in the possibility of employing a photographer who would work for Bayleys exclusively. He says he talked in a casual way of this possibility more than a year ago and a couple of times over the last summer and then discussed this as a possibility with another owner, Mr Whalan, in “the first months of 2019”. Mr Whalan met with the respondents “on a couple of occasions over 3 or 4 weeks in March 2019”, ultimately putting a proposal to them. This led to his announcing their appointment and employment at a Bayleys staff meeting on 26 March 2019. The respondents signed employment agreements with Whalans on 26 March 2019.
The legal context
[24] It is well settled that on an application for an interim injunction, the Court addresses:2
(a) whether the plaintiff can show there is a serious question to be tried;
(b) where the balance of convenience lies; and
(c) where the overall justice lies.
[25]As stated by the House of Lords:3
It is no part of the Court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavits as to fact on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations.
Is there a serious question to be tried?
[26] For the respondents, Ms Keir argued that the starting point is that a contract in restraint of trade is invalid as being contrary to public policy. Counsel accepted a contractual restraint may be valid if it exists to protect a legitimate proprietary interest
2 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142;
American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL).
3 American Cyanamid Co v Ethicon Ltd, above n 2, at 407 quoted in Villa Maria Wines Ltd v Montana Wines Ltd [1984] 2 NZLR 422 (CA) at 425; Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [9].
and is no more restrictive than is reasonable to do so.4 Ms Keir argued that provisions in restraint of trade should be interpreted strictly. In this case, she submits cl 38.2 of the sub-franchise agreement is incomplete. She submitted it required the completion of a separate restraint agreement, which did not happen. Consequently, the restraint was not limited by time or place which means it cannot be seen as reasonable.
[27] Clause 38.2 of the sub-franchise agreement referred to the parties, contemporaneously with that agreement, completing the restraint agreement and being bound by it. That clause did not refer to that document having to be a separate restraint agreement. Incorporated into the agreement was “Appendix I – Restraint Agreement”. That document limited the term of the restraint to two years from the date of termination. The area to which the restraint applies is “the same geographic areas in which the Area Franchisee operates”. The Area Franchisee was and is MDM.
[28] The territory within which the respondents could operate as franchisees was defined initially in the sub-franchise agreements by reference to certain real estate firms listed in Appendix H and a maximum of 100 agents from those offices. The “restraint area” was also defined in the sub-franchise agreement as being the whole of the South Island.
[29] In cl 38.3, each of the respondents expressly acknowledged that the restraint area and the restraint period were “no greater than reasonably required to protect the Area Franchisee’s interests, the interests of the Franchisor and other Franchisees …”.
[30] The complaint made for the respondents is that there is uncertainty as to the area to which it relates, not as to the unreasonableness of the area to which it relates, as referred to in the sub-franchise agreement and the restraint agreement, or as to the area in respect of which the injunction is sought.
[31] The applicant is seeking an interim injunction applying to an area in the mid South Island, consistent with the way that franchise area is defined in the area franchise agreement granted to MDM. The respondents were actively involved in MDM’s business. MDM can seriously argue that, in the sub-franchise agreement, the
4 Brown v Brown [1980] 1 NZLR 484 (CA).
respondents agreed they would be restrained from competing with MDM in that part of the South Island in which MDM operates for two years from the termination of the sub-franchise agreement.
[32] In seeking to negotiate a relaxation of the restraint covenant, the respondents effectively acknowledged they understood and accepted that it could apply to prevent them from going into business in competition with MDM in the area in which MDM operates.
[33] The respondents next submit that the restraint provision has not been drafted to prevent the respondents from being employed as an in-house photographer for a real estate firm, even when that firm was previously a major client of the sub- franchisee in operating the franchise business.
[34] It does appear that MDM filed these proceedings thinking that the respondents were going to be in the business of providing real estate photography, real estate videography or real estate internet marketing to other businesses. MDM sought:
(a) an interim order that the respondents not be involved in providing such services to anyone, including Bayleys Canterbury, within the specified area until 31 March 2021; and
(b) an order that the respondents not solicit any such business from any customer or client of MDM or any person who the respondents made contact with in connection with their sub-franchise between 1 April 2014 and 31 March 2019, again until 31 March 2021.
In its accompanying statement of claim, MDM alleged the respondents, on 1 April 2019, engaged in and remained engaged in providing relevant and restricted real estate photography services to Bayleys in breach of the restraint provisions of their agreements.
[35] Ms Keir submits that the key phrases in the restraint are consistent with the covenants restraining the respondents from operating a business venture that provides image-based marketing resources to real estate agents on a basis that would be in competition with MDM’s business.
[36]In cl 38.2, the restraint is against the respondents’ covenant not to:
(a) conduct on their own account or be concerned or interested, either directly or indirectly as owners, partners, directors, officers, consultants, representatives, agents, licensees, investors with or as part of any business, firm or corporation; or
(b) which could be regarded as a market competitor or an imitation of the franchise system, including without limiting the generality of this clause any business identical with or similar to the franchised business or the restraint business.
[37] There is no express provision there against the respondents being involved in providing a service, similar to that in the franchised business, to a real estate firm as an employee of that firm.
[38] Mr Cowey argues that to restrict the effect of the restraint provisions in the way the respondents contend is appropriate would be to allow the respondents to misappropriate to themselves the benefits of MDM’s business relationships. The restraint provisions were intended to protect MDM’s interest in the goodwill of its business. The courts have recognised that it is reasonable for them to do so and the restraint covenants are in terms wide enough to bar the respondents from being employed by Bayleys in the way they are.
[39] He referred to the way clause 38.2 of the franchise agreement prohibited the respondents from being:
… concerned or interested either directly or indirectly as … officers, … representatives, agents, … or as part of any business … which could be regarded as a market competitor.
[40]He submitted that, in breach of Appendix I, the respondents are:
… solicit(ing) any business dealings in the same type of business (Real Estate Photography … [etc]) … either directly or indirectly … with any … company
… whether a customer or client of the Area Franchisee … with whom [they] made contact in connection with their [franchise activities].
[41] Ms Keir submits that, if the sub-franchise agreement was intended to protect MDM against any loss of goodwill through stipulating that the respondents could not be employed by a real estate business that had previously been a client of MDM, the agreement could have said so. The restraint provisions are carefully worded in ways that would indicate they were intended and are effective to prevent the respondents from being involved in an ownership sense in a business that is competing with that of MDM. She argues that it is significant that in the sub-franchise agreements there was no express prohibition against the respondents being involved in an employee capacity as there was in the agreement entered into with Mr Anderson in 2016. She also submitted that, in this case, the parties did not use words that would have extended the potential application of the provisions to cover “any situation whatsoever” where the respondents might be working in a manner that “directly or indirectly”, or in any way whatsoever, might be in competition with MDM’s business. The restriction is against them being involved in a business in a particular capacity, which is in competition with that of MDM but not as an employee.
[42] At this stage of the proceedings, I am not required to determine what the ultimate interpretation should be. It is however relevant that the interpretation contended for by the respondents is seriously arguable.
[43] Restraint provisions in contracts are prima facie unenforceable as contrary to public policy unless they are reasonable with reference to the interests of the parties concerned and to the interests of the public.5 Because of this, they will be interpreted strictly.
5 Skids Programme Management Ltd v McNeill [2012] NZCA 314, [2013] 1 NZLR 1 at [36]; Brown v Brown, above n 4, at 499.
[44] The wording in the restraint provisions is in contrast to that in the agreement with Mr Armstrong. In the agreement with all continuing shareholders and the new shareholder, Mr Armstrong and his shareholder company agreed that:
Neither he, nor any entity he is associated with (including the vendor), whether now or which may be formed in the future, and whether directly, indirectly, carries on, or be interested in either alone, in partnership or as a manager, agent, director, shareholder, financier or employee, will not conduct as a market competitor or an imitation of the franchise system “Open2view” per section 38 of the Open2view area franchise agreement for a period of two years commencing 1st November 2016.
[45] The wording of the restraint provisions is also in contrast to cl 15.2(g) of the sub-franchise agreement by which the respondents agreed to “conduct the Franchised Business as an independent business and not as a partner, joint venturer, representative, employee, agent or sub-Contractor of the Area Franchisee”.
[46] The words used in the restraint covenants here can be contrasted with wording of more general application or which have expressly restrained franchisee from doing business with former customers of the franchise business in other cases the Court has had to deal with. For example:
(a) A restraint against franchisees or covenantors being:6
… concerned or interested in any capacity whatsoever in any business conducted in competition with the business of the Franchisor (or its other franchisees) where such business relates to the provision of mortgage broking and Related Services.
And not to:
directly or indirectly canvas solicit or attempt to solicit, serve or act for any customer of the [franchised] Business.
(b) A restraint against an employee “being interested in any way in any business involving marketing, promotional work, consultancy or approval of loans for any lending institution or any similar services” and “from dealing with any former or existing client” of the franchisor.7
6 Mike Pero (New Zealand) Ltd v Krishna [2016] NZHC 1255, (2016) 14 NZELR 244 at [40].
7 Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [1].
(c) A restraint on a franchisee not to “engage directly or indirectly in any capacity in any business venture which is in competition or in conflict with the Franchise Business”.8
(d) A restraint against the franchisee during the restraint period not to:9
… conduct on their own account a business similar to the [franchised] Business or be concerned or interested in, directly or indirectly, as agent, representative, consultant, employee, shareholder or director, of any firm or corporation conducting a business similar to the [franchised] Business.
(e) A restraint against a franchisee “either solely or as director, manager, employee, advisor or agent or otherwise howsoever for any person or corporation directly or indirectly” operating or being concerned or interested in any business in competition with the business of the franchisor or its other franchisees, and not to approach or solicit or endeavour to obtain the custom of any existing customer of the franchisor.10
[47] The respondents can seriously argue that the ordinary meaning of the words used in the restraint covenants do not cover the employment situation the respondents are in. If there is uncertainty as to this, they may well succeed with an argument that, in such a situation, the interpretation should be in their favour.
[48] They will be able to argue that the restraint covenants limit the rights they would normally have to pursue business, a trade or employment of their choosing. The contra proferentem rule applies, that being a rule designed to resolve ambiguities against the party who prepared the document in which the relevant clause appears, or against the person for whose benefit the clause operates. If so, the respondents are well placed to argue that, at best from MDM’s position, more than one interpretation would appear to be reasonably open. That would be the very kind of situation for which the doctrine of contra proferentem is designed so that the interpretation most favouring the respondents would prevail.11
8 Mad Butcher Holdings Ltd v Standard 730 Ltd [2019] NZHC 589 at [7].
9 Health Club Brands Ltd v Colven Botany Ltd, above n 3, at [13].
10 Skids Programme Management Ltd v McNeill, above n 5, at [32].
11 HC Senior & Co Ltd v Body Corporate 52655 CA175/90, 27 September 1991 per Cooke P at 4, per Holland J at 9.
[49] It could be argued the contra proferentem rule should not be applied to resolve a potential uncertainty given the more modern approach to the interpretation of contracts in accordance with the presumed mutual intention of the parties.12
[50] However, until any conflict between the application of the contra proferentem rule and what might be described as a more modern approach to contractual interpretation is resolved, there is still authority that, in a situation where a party to a contract is limiting their rights, a Court will normally look for clear language or necessary implication before holding that this is what a contract achieves.13
[51] The respondents argue that Bayleys is not a business in competition with MDM. It is not providing photographic services of the sort MDM promote and seek to provide to other real estate agents. Bayleys is in the business of selling real estate for its own vendor clients. Ms Keir submits there is a fundamental difference in the businesses in that Bayleys has no interest in selling photographic services as a business. It is simply making that resource available to its agents. Bayleys is in the business of providing real estate brokerage services.
[52] MDM submits that the sub-franchise business protected by the restraint provisions was all about the offering of photographic services by the respondents to real estate agents so that those services could then be utilised by the vendor clients of the real estate agents, including Bayleys.
[53] In his affidavit, Peter Whalan, the general manager of Whalans, describes the way Whalans operates as Bayleys in Canterbury and Wanaka. He says that Bayleys Licensed Real Estate Agents work as independent contractors, not employees of Bayleys. Bayleys provides the branding so that vendors want to use Bayleys agents and provides “back of house” support to “develop excellent salespeople, and enable smooth marketing campaigns and ultimately sales” to maximise income for both Bayleys and the agents through commission payments on the sale of real estate. He
12 See discussion in 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 [7.3.1]; Lumley General Insurance (NZ) Ltd v Body Corporate No 205963 [2010] NZCA 316, 15 ANZ Insurance cases 61- 853 at 27; Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
13 See Dorchester Finance Ltd v Deloitte [2012] NZCA 226, (2012) 3 NZTR 22-012 at [33];
Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128 at [21].
says salespeople may use different third party providers in a sales campaign, including such people as gardeners, property stagers or dressers and printers to make and direct sign boards on properties. He says, from the client’s perspective, each third party engagement is a cost they pay (unless they come to some other arrangement with the salesperson).
[54] Mr Whalan said, most of the time, to make things easier for vendor clients, the invoices from the third party providers are made out to Bayleys. Bayleys pay those costs. On occasions, those costs are deducted from Bayleys eventual commission. “So, while the vendor client is really the customer, [Bayleys] handle the detail with third party suppliers.”
[55] It appears from Mr Perry’s initial affidavit for MDM that MDM invoiced Bayleys for the work the respondents and other sub-franchisees did for Bayleys agents.
[56] Mr Whalan said Open2view is one provider of real estate photography and associated services in Canterbury. Some of the Bayleys salespeople used Open2view photographers for their photography and video work.
[57] Mr Whalan says that, for some years, he had been thinking of developing an in-house photography team within Bayleys to assist their sales people. He said that, in the first months of 2019, he had a conversation with another Whalans director and shareholder, Chris Jones, and understood as a result that there could be an opportunity to have the respondents work for Bayleys. He said this led to him meeting with the respondents “on a couple of occasions over 3 or 4 weeks in March 2019”, ultimately putting a proposal to them by which they would be employed to ensure that he would have control over their work, their schedules, the cost of their service to Bayleys clients and the quality of their work.
[58] Mr Whalan says he announced the respondents’ appointment at a sales meeting on 26 March 2019 and subsequently sent an email “to our staff to confirm that advice”. That email was a pitch to Bayleys agents to use the respondents. The email included the paragraphs:
Many of you will be well aware of the professional standards of Paul and Rachels work having used them in their past business, for those that haven’t used them we can assure you they are the best in the business and that having them now 100% focused on working for our licensees will be of great benefit for yourself and your vendors.
We are working in the background now tweaking the photography section of the marketing media guide but in the meantime all costs remain the same so just carry on quoting per open2view as now.
[59] The respondents’ employment contracts provided for them to each receive a base salary of $18,408 gross per annum for 20 hours per week. The contracts provided for taxable payments to be made for photography assignments in connection with the marketing of properties at specific rates and reimbursement for reasonable expenses directly associated with their employment. Under the contracts, the respondents must use best endeavours to promote and protect the employer’s interests and must not do anything that is harmful to those interests. There is a specific provision that each of the respondents:
… must not take on any other employment, business or other interests (without the Employer’s prior written consent) that:
i. May have the effect of infringing to any degree on the Employee’s time and attention during the hours in which the Employee is required to provide services to the Employer; or
ii. May be in direct or indirect competition with the Employer.
There is no specific provision that the respondents are not to provide similar photographic services to any other real estate firm.
[60] Mr Whalan in his affidavit said the respondents are paid in a similar manner to their sales managers, with a relatively small base and then an at-risk component based on the income generated by their business unit.
[61] Each of the respondents has said in affidavits that they appreciate that, because of the restraint provisions in their sub-franchise agreements, they cannot provide photography services to other real estate firms and have said so to non-Bayleys agents for whom they previously did work. Ms von Nordeck Meyers claims that, as a result, since 31 March 2019 she has walked away from about 80 per cent of her income due to the restraint provisions.
[62] Mr Willetts annexed to his affidavit a text exchange he had with a Harcourts agent on 8 May 2019 as an illustration of how he had acknowledged he was unable to provide photographic services for Harcourts. The exchange is actually somewhat equivocal. The Harcourts agent began asking Mr Willetts if he would do a shoot for Harcourts on the basis “we wouldn’t disclose we used you”. Instead of saying simply that he could not do the assignment because of his then employment with Bayleys or the restraint covenants with MDM, Mr Willetts said “I would love to say yes” but he did not think it would be a “good idea for our position at the moment” with them about to be in Court over the injunction. His ultimate text in the exchange was “This is just the first hurdle on Wednesday [the day of the injunction hearing]. I will let you know as soon as we are through this mess. Heads up, I’ll be back.”
[63] Mr Whalan in his affidavit said that his motivation in employing an in-house photography team was to maintain an advantage over their competitors in the real estate market. He says the respondents “are expected to work exclusively for Bayleys and in accordance with [Bayleys’] Brand Standard”.
[64] Mr Whalan says that “photography is only ever neutral in terms of [Bayleys’] business position” because when external providers are engaged no margin is added to the price for the ultimate client. He said some of what Bayleys will be paid for the service will however be retained by Bayleys “to make up their salary” and for other costs associated with providing the photographic service.
[65] Having considered this evidence, my assessment is that MDM has a seriously arguable case that, in its business, Bayleys is now providing a photographic service to vendor clients to assist them in the marketing of those clients’ properties, a similar business to that which the respondents were providing in terms of the sub-franchise agreement. Through their employment with Bayleys, it is thus seriously arguable the respondents are offering photography services to agents and thus seeking to solicit business from Bayleys agents and their clients which, in that way, could be regarded as a market competitor for the Open2view business and the same type of business.
[66] There are however significant differences. In terms of the sub-franchise agreement, the respondents were able to offer that service to a range of real estate firms and their agents within the mid South Island area. In their employment with Bayleys, it is likely they will be free to provide that service only to Bayleys agents. Pursuant to cl 15.2, it was a condition of the sub-franchise agreements that in conducting their franchise business the respondents had to operate as independent businesses and not as employees. With Bayleys, they are not operating as independent businesses but as employees of a real estate agency.
[67] I am satisfied that, as to whether Whalans and Bayleys Canterbury are a business which could be regarded as a market competitor to MDM, there is a serious question. It is, however, arguable for the respondents that Bayleys is not in competition with MDM because Bayleys provides real estate brokerage services. It does not seek to profit from providing photography services to its agents. It does not prescribe that its agents or vendor clients must use the in-house photographic resources which are available to Bayleys through employment of the respondents.
[68] A franchisor that has established a successful business model is entitled to protect its investment by means of restraint of trade.14
[69] In Skids Programme Management, the Court of Appeal observed that a franchise may offer a trade name which may have some goodwill (that was probably the case here with the trade name Open2view).15 It may offer assistance on start up which enables the franchisee to position its business in a way that is more attractive to the market. It can provide material such as an operation manual, accounting and marketing techniques which offer some advantages. It is the provision of franchise benefits, that a franchisee perceived would have been of value when entering into the franchise contract, that it has been held gives rise to a reasonable interest on the part of the franchisor to protect its investment in its name, its business model and the systems and written materials from exploitation by franchisees immediately following the termination of a franchise agreement.
14 Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC) at 385; Mike Pero (New Zealand) Ltd v Exact Solutions Ltd, above n 7, at [22]; Health Club Brands Ltd v Colven Botany Ltd, above n 3, at [26]; Skids Programme Management Ltd v McNeill, above n 5, at [41].
15 Skids Programme Management Ltd v McNeill, above n 5, at [43]-[49].
[70] There is thus a serious question to be tried as to whether MDM’s interest in its goodwill requires the protection of an injunction but at trial that will be arguable only if the restraint covenants have been drafted so as to restrain the respondents from being employed as they are now with Bayleys.
Where does the balance of convenience lie?
[71] Because a restraint of trade provision in a contract is prima facie unenforceable as against public policy, courts will often consider whether damages would be an adequate remedy and are thus to be preferred. The evidence from Mr Perry is that, since the respondents have been employed by Bayleys, no MDM franchisee has been engaged to provide photographic services to a Bayleys agent. The submission for MDM is that the respondents’ involvement with Bayleys has and will deprive MDM of the income it might have otherwise obtained from work done for Bayleys agents and will reduce the value of a sub-franchise arrangement for any new potential franchisee. Mr Cowey also submitted that damages would be difficult to quantify when MDM would have to establish the value of a counterfactual situation, i.e. an assumed situation, which has not come about.
[72] For the respondents, Ms Keir submitted that, through the respondents’ involvement with Bayleys, MDM is claiming to have lost and will continue to lose a measure of goodwill that, in all the circumstances, is likely to be modest. Insofar as they claim to be losing income, their loss in that respect would also be modest. It would not be difficult to establish an appropriate starting point for assessing such a loss.
[73]I accept that latter submission.
[74] MDM has a record of the income the respondents, as franchisees, obtained through Bayleys agents before the end of their sub-franchise agreement. Bayleys will have a record of all income generated by the respondents in any work they do for Bayleys agents in their new positions.
[75] The respondents also argue that, because MDM is in control of funds due to the respondents, there is a reasonable assurance they will be able to recover from the
respondents any amount for which the respondents might be liable in damages if, at trial, MDM is ultimately successful.
[76] In terms of damages for a potential loss of goodwill, I accept that MDM’s claim could only be for that proportion of any goodwill that was built up by the respondents through their work as sub-franchisees for Bayleys. With the respondents being expected to now work exclusively for Bayleys agents and with their accepting they are subject to a restraint within the mid South Island area as to any photographic work they might do for non-Bayleys agents, the goodwill they created in respect of business with non-Bayleys agents is now available to MDM and for any potential sub- franchisee who is interested in taking over that business.
[77] The value of any goodwill associated with the respondents’ work as sub- franchisees for Bayleys agents will not necessarily reflect the potential value of what might have been ongoing work by the respondents for Bayleys agents. The respondents’ sub-franchise agreement terminated on 31 March 2019. With the respondents’ sub-franchise agreement at an end, there was no assurance that MDM would have continued to receive income from work for Bayleys agents in the way that had been achieved by the respondents.
[78] The respondents did not have to pay for goodwill when they entered into their sub-franchise agreement, it seems because it was expected they would have to build up business over time. They did so but, at present, evidence suggests much of that goodwill would attach to them personally and would thus not necessarily have continued with MDM or be available to a new sub-franchisee once the respondents decided not to renew their sub-franchise agreement. Their sub-franchise agreement, at least arguably, recognised the potential for the respondents to have a significant element of personal goodwill through the way the sub-franchise agreement gave them the right to sell their interest in the sub-franchise agreement subject to the consent of MDM but on the basis that consent would not be unreasonably withheld.
[79] In Green Acres Franchise Group Ltd v Ruebe, the High Court said that a similar sale provision “arguably suggests that the [franchisees] have a proprietary interest in customers”.16
[80] The respondents argue that MDM’s potential net loss from the loss of work for Bayleys agents will be less through having to bring into account an obligation to pay to the respondents’ trusts’ shareholding company 25 per cent of the income that MDM would have been entitled to retain from the fees generated by any new further work for Bayleys agents after 31 March 2019.
[81] MDM do retain some $69,000 which it accepts is due to the respondents for the respondents’ share of costs generated by their work with Open2view before 31 March 2018. That credit will be reduced by termination fees of $10,000 payable to MDM, MDM’s potential entitlement to damages for loss of profits which it assesses as being $46,078 for April 2019, and potentially the legal costs it has incurred in these proceedings which it says it is entitled to under the franchise agreement because those costs have been incurred through the respondents’ being in breach of the franchise agreement.
[82] I accept that an award of damages may be an adequate remedy but arguably this is not so. In Skids Programme Management Ltd and other cases, the courts have recognised that the grant of an injunction may be needed to protect the investment a franchisor has made in the franchise business.17 Because of this possibility, it is recognised that whether an injunction should issue should not necessarily be determined through deciding whether damages could be an adequate remedy.
[83] Mr Cowey referred me to a statement from Sachs LJ in the English Court of Appeal in Evans Marshall & Co Ltd v Bertola S.A. where Sachs LJ noted:18
The standard question in relation to the grant of an injunction, “Are damages an adequate remedy?”, might perhaps, in the light of the authorities of recent years, be rewritten: “Is it just, in all the circumstances, that a plaintiff should be confined to his remedy in damages?”.
16 Green Acres Franchise Group Ltd v Ruebe [2014] NZHC 402 at [27].
17 Skids Programme Management Ltd v McNeill, above n 5.
18 Evans Marshall & Co Ltd v Bertola S.A. [1973] 1 WLR 349 (CA) at 379.
[84] Mr Cowey submitted Sachs LJ’s statement was approved in Spry’s The Principles of Equitable Remedies.19
[85] Although the passage referred to by Mr Cowey was with regard to issues as to specific performance, the author makes the same observation with regard to consideration of inadequacy of damages as a jurisdictional matter in the context of negative obligations in contract. The author was of the opinion that “generally the context of negative obligations is such that damages would not put the plaintiff in the same position in all material respects as would an injunction”.20
[86]Spry goes so far as to advocate that the starting point now should be:21
Where a party to a contract agrees, expressly or impliedly, not to perform a particular act, and the conditions for the partial enforcement of the contract are satisfied, prima facie he will be enjoined from performing it, and, save in exceptional cases, damages will not be regarded as an adequate remedy; but the defendant may nonetheless be able to establish special circumstances of such a nature that the hardship that the making of the order would cause him would so far outweigh the inconvenience to the plaintiff through denying him specific relief that the court considers that its intervention would be unjust; and further, here as elsewhere other discretionary considerations, such as unfairness or laches, may be found to render the grant of an injunction inappropriate.
[87] In considering the balance of convenience, Mr Cowey submits that the refusal of an interim injunction now, but the grant of it in several months time if MDM is successful at trial, would fail to preserve the very thing sought to be protected by the restraint provisions – the relationship with MDM’s customers. As to that submission, I note however that the issuing of an interim injunction will not affect MDM’s ability to maintain a relationship with former customers serviced by the respondents, other than the Bayleys agents. The issuing of an injunction is unlikely to maintain MDM’s relationship with Bayleys agents who were serviced personally by the respondents during the term of their sub-franchise agreement but who will no longer be serviced by them because that sub-franchise agreement has not been renewed.
19 ICF Spry The Principles of Equitable Remedies (9th ed, Lawbook Company, Sydney, 2014).
20 Spry, above n 19, at 607.
21 Spry, above n 19, at 610.
[88] MDM originally submitted that, if departing franchisees were permitted to take over franchises biggest clients, the Open2view franchise would implode and it would be impossible to compensate those who would suffer loss resulting from such a ripple effect.
[89] That submission was made at the outset of these proceedings before MDM would have been aware that the respondents were being employed by Bayleys, and the respondents were accepting that the restraint provisions in the sub-franchise agreement would prevent them from providing photographic services to other agents.
[90] As in Green Acres Franchise Group Ltd v Ruebe,22 I do not accept that a refusal of an interim injunction would lead other sub-franchisees to think they could be free to compete with MDM or other sub-franchisees for the business of former franchise clients in breach of reasonable restraint covenants in their franchise agreements on termination of those agreements, despite the restraint covenants in those franchise agreements.
[91] Sub-franchisees might think that, on termination of their sub-franchise agreement, they could provide a similar service as an employee of a previous franchise client. Franchisors could however protect themselves against such a possibility, at least in the future, by drafting their franchise agreements so as to prevent a former franchisee from being engaged as an employee or in any way whatsoever being involved in the business of a client in a way that would compete with the interests of the franchisor or other sub-franchisees.
[92] It is unlikely that the refusal of an interim injunction at this stage would lead other parties to think that similar restraint covenants in Open2view franchise agreements would be of little value or force. Because of those restraint agreements, whatever happens over their employment with Bayleys, the respondents recognise that the restraint covenants prevent them from competing with the franchise business with regard to all agents other than Bayleys agents. As a result, the respondents are having to walk away from much of the value of their previous business. It would seem that the situation they are now in is unlikely to be generally available or particularly
22 Green Acres Franchise Group Ltd v Ruebe, above n 16.
economically attractive to many who might do the work required of the respondents. In his affidavit, Mr Whalan says Bayleys Canterbury is the “largest full service real estate business in the South Island”. The respondents’ employment contracts provide a base salary for only an anticipated 20 hours of work per week.
[93] MDM also submits that damages are less likely to be an adequate remedy because current evidence suggests the respondents are unlikely to have assets sufficient to enable them to pay a likely award of damages.
[94] MDM does hold the funds referred to earlier for the credit of the respondents. MDM is also in control of the respondents’ 25 per cent shareholding in that company. MDM contends that, with the respondents terminating their sub-franchise agreement, if the respondents were not competing with MDM’s business, the business the respondents conducted under their sub-franchise agreement would have been of value to MDM.
[95] To the extent that value relates to the services previously provided by the respondents to non-Bayleys agents, it will now be available to MDM. Evidence as to the limited negotiations which took place over the respondents’ exit from the business indicates that the value of the 25 per cent shareholding interest in MDM is likely to be now available to either MDM or its other shareholders.
[96] For the respondents, Ms Keir suggested that, in weighing the balance of convenience, the Court should have regard to the inconvenience which would be caused to Bayleys which has developed a business model incorporating in-house photography. I do not give that much consideration. Mr Whalan must have known when he decided to employ the respondents that there could well be a claim that their employment with Bayleys would be in breach of a restraint covenant. At the very least, he ought to have enquired as to whether there was the potential for such a dispute. It is reasonable to assume that he and Whalans decided to employ the respondents and assume the risk that their employment might have to be ended or at least temporarily suspended as a result of Court proceedings.
[97] The respondents also submit that, given the size and scale of the Open2view system and its dominance in the New Zealand market, there is little risk of harm to the integrity of its system. There is however no evidence as to those matters in the evidence currently before the Court. The only evidence currently before the Court is that MDM holds the Open2view franchise for the middle of the South Island of New Zealand, a Hamilton Open2view photographer/sub-franchise sold in December 2018 for $98,500 on a turnover warranty of $75,029, and that of a Whakatane franchise sold in March 2019 for $95,000 on a turnover warranty of $101,710.
[98] My assessment as to the issue of the balance of convenience at this stage is that MDM will be able to obtain a remedy in damages for much of the economic loss it might be able to establish at trial if it is held to be contractually entitled to such damages. As to protecting its interest in the goodwill associated with this franchise, it will be able to seek to protect that interest with the grant of an injunction at trial if it can establish the restraint covenants are effective to restrain the respondents from being employed by Bayleys as they are now. MDM will not be worse off in this respect if an interim injunction is refused at this stage.
Where does the overall justice lie?
[99] The respondents have, on my assessment, a seriously arguable case that the restraint covenants MDM seeks to enforce by way of an interim injunction do not restrain them from being employed by a competing business. There may also be some merit in their argument that, in being employed by a real estate firm, they are not in a business which is competing with MDM or MDM’s other franchisees.
[100] The availability of a defence to an applicant’s claim for an injunction and the strength of that potential defence has been a relevant consideration in other cases when the High Court has had to consider either the balance of convenience or the overall justice as to the remedy sought.23
[101] There was no provision in the sub-franchise agreement that clearly prohibited the respondents from providing photographic services to former clients as employees.
23 Mad Butcher Holdings Ltd v Standard 730 Ltd, above n 8.
There were a number of provisions in the agreement which sought to prevent the respondents, as sub-franchisees, from using Open2view systems, equipment, marketing material and so on after the sub-franchise agreement had ended. There was no suggestion in the material before the Court that the respondents are in breach of those provisions. There was one item of equipment which I was told they retained and which they are obliged to return but counsel indicated this was accepted and that particular item was to be delivered to MDM without delay.
[102] In this judgment, I am not determining how the contract is to be interpreted in a way that will be binding on the parties. The interpretation could however, if the parties choose or the Court directs, be determined in a hearing just for that purpose. Such a hearing could properly take just a day. It should be possible for the Court to make such hearing time available within the next three months. If necessary, MDM’s claim for damages as a result of the respondents working for Bayleys in the interim could be taken to a separate hearing. Because of the way MDM’s earnings from Bayleys agents in the past and the respondents’ earnings from services provided to Bayleys agents in the meantime will be a subject of record, the delay in that damages claim going to a hearing is unlikely to cause prejudice to MDM.
[103] A franchisor’s investment in the franchise business may be recognised through the grant of an interim injunction, even when damages might be an appropriate remedy or because courts recognise that it will not be just for a party that has, through contract, obtained the benefit of a restraint provision and a franchisee has accepted that restraint provision for the franchisor to be limited to a claim for damages. Where however there is a real dispute as to whether the franchisor does have the benefit of such a restraint provision, that must weigh against the grant of an interim injunction, when the grant of an interim injunction would prevent the respondents from using their particular skills and experience to gain employment.
[104] Mr Whalan and other owners of Whalans/Bayleys in Canterbury are committed to employing in-house photographers able to provide to Bayleys salespeople the sort of services which were previously provided by Open2view. Mr Whalan, in particular, has said he will be encouraging Bayleys salespeople to use the in-house photographic resources now available to Bayleys salespeople through the employment of the
respondent. Mr Whalan says, although he is not prescriptive as to what external contractors Bayleys sales people use, he would search for replacement employees who could continue to keep photographic activity in-house. He said that Whalans are not prescriptive as to who the salespeople should use. If an interim injunction were to issue, MDM would likely find that Bayleys salespeople will still be discouraged from using Open2view photographers, as will be the position if an injunction does not issue.
[105] On MDM’s own evidence, it does seem likely that much of the goodwill associated with the work the respondents did using Open2view for MDM related to the respondents personally. Much of that goodwill was likely lost to MDM when the respondents lawfully terminated their sub-franchise agreement with MDM. Even if Bayleys had not employed the respondents, MDM and its other sub-franchisees would have had to compete against all people available in Canterbury who can provide the sort of photographic service that was available through Open2view for continuing work from Bayleys. That will continue to be the situation while these proceedings come on for trial within what should be a reasonable timeframe of a few months.
[106] The issuing of an interim injunction is unlikely to alter what is now the status quo. MDM and other Open2view sub-franchisees are free to approach all agents for whom the respondents previously did work, including Bayleys agents. As to non- Bayleys agents, the respondents accept that restraints apply and the respondents are not free to compete for that work.
[107] The evidence does not establish that the respondents have deliberately chosen to ignore and flout restraint covenants which they had earlier agreed to. They accept they are bound by them. There is however a genuine issue as to whether they are restrained from being employed by Bayleys in the way that has occurred. At this stage, I proceed on the basis that the respondents’ position over the breadth of the restraint provision is genuinely and reasonably held.
[108] On balance, having regard to these matters and all those referred to earlier, I do not consider it would be just to issue an interim injunction restraining the respondents from being employed by Bayleys on the terms provided for in their employment contracts. That order will however be reviewed in three months’ time
with the expectation that the Court is likely to determine the interpretation issue before then.
[109] Although the respondents have succeeded with this application, there is a provision in the sub-contract that they will be liable for actual costs incurred by MDM in respect of any breach by the respondents of their sub-franchise agreements. That being the case, I reserve costs in respect of the application for an interim injunction.
Conclusion
[110]The applicant’s application for an interim injunction is denied.
[111] The proceedings are adjourned for a case management telephone conference on 19 June 2019 at 9.30 am. If necessary, counsel are to file a joint memorandum, or separate memoranda, with directions they seek as to how they wish to continue with the proceedings, addressing in particular whether they seek or can agree on whether there is to be a separate trial and determination of the question as to how the restraint covenants are to be interpreted and whether and how further evidence on that issue might be dealt with.
[112]Costs on the current application are reserved.
[113] Leave is reserved to the applicant to file an on notice application, to be heard on an urgent basis if, in the interim, there is evidence of the respondents offering to provide services similar to those offered by Open2view to non-Bayleys agents within the Canterbury area.
Solicitors:
Parry Field Lawyers, Christchurch Hill Lee and Scott, Christchurch.
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