Mike Pero Real Estate Ltd v Tauranga Realty Ltd
[2015] NZHC 1162
•26 May 2015
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2015-470-9 [2015] NZHC 1162
BETWEEN MIKE PERO REAL ESTATE LIMITED
Plaintiff
AND
TAURANGA REALTY LIMITED First Defendant
DARREN RICHMOND YOUNG Second Defendant
Hearing: 26 May 2015 at 2:15pm Appearances:
P J Woods and E E Gerring for Plaintiff (by audio-visual link) A J Bush for Defendants
D R Young, Second Defendant, in person
Judgment:
26 May 2015
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Anthony Harper (P J Woods/E E Gerring) Christchurch, for the Plaintiff
Bush Forbes (A J Bush) Tauranga, for the Defendants
MIKE PERO REAL ESTATE LIMITED v TAURANGA REALTY LIMITED [2015] NZHC 1162 [26 May
2015]
[1] The plaintiff has filed an appearance under protest to jurisdiction in response to the defendants’ counterclaim. The defendants have applied to set aside the appearance. Underlying that procedural contest is an argument whether the plaintiff has invoked the substantive jurisdiction of this court when it began this proceeding and has thereby given away its right to have differences between the parties heard in accordance with the dispute resolution provisions of a franchise agreement.
[2] The plaintiff, Mike Pero Real Estate Ltd, is based in Christchurch. It carries on its real estate business by franchising. Tauranga Realty Ltd was established in
2013. It became Mike Pero Real Estate Ltd’s Tauranga franchisee under a franchise agreement of 2 September 2013. Mr Young is director of Tauranga Realty Ltd. He is a party to the franchise agreement as covenantor of the obligations of Tauranga Realty Ltd.
[3] The franchise agreement is a complex commercial agreement. In this decision it is unnecessary to go through all of its provisions, but it is necessary to refer to some.
[4] Under the agreement the franchisee was given a territory within which it could operate. The territory was defined as Tauranga Central, Sulphur Point, Tauranga Hospital and Tauranga South. A map was attached to the agreement showing the area. The agreement also contained a restraint of trade provision to operate upon termination of the agreement. It is in fact called a “Restraint on competition.” It restricts the franchisee and covenantors from operating in competition against the plaintiff following the expiration or termination of the franchise agreement. The restraint is twofold:
(a) an initial period of four months during which the restraint applies to the area within a 25 kilometre radius around the territory; and
(b) a period of five years applying only within the territory.
[5] For this decision another important provision is the dispute resolution clause
31:
31. Dispute resolution
31.1No party to this agreement shall commence any court proceedings relating to any dispute arising out of this agreement (including any dispute as to the validity, breach or termination of this agreement or as to any claim in tort, in equity or pursuant to any statute) unless that party has complied with the following paragraphs of this clause
31.2Any party who claims that a dispute has arisen under or in relation to this agreement must give written notice to every other party specifying the nature of the dispute.
31.3On receipt of such notice by the other parties, the parties to this agreement:
(a) must co-operate and use their best endeavours to resolve the dispute expeditiously.
(b) must, if they do not within fourteen days of the receipt of the notice (or such further period as they may agree in writing) resolve the dispute, refer the dispute to mediation (“the mediation”).
31.4The mediation shall in all respects be conducted in terms of the procedure provided by the Franchise Association of New Zealand mediation panel or if no such panel exists by the LEADR New Zealand Inc. Standard Mediation Agreement.
31.5The mediation shall be conducted in the centre in which the Franchisor is located as specified in clause 13 of schedule 1 or, at the Franchisor’s approval at such other location as agreed by the parties. Should the nature of the mediation require that multiple franchisees attend the mediation the Franchisor shall take into consideration the travel costs to be incurred by the Franchisor and franchisee parties and may select an alternative location which alleviates the franchisee’s travel costs. Where this results in the Franchisor incurring travel related costs the costs shall be shared equally between the Franchisor and franchisee parties.
31.6The mediation shall be conducted by a mediator and at a fee agreed by the parties, failing agreement between the parties, the mediator shall be selected, and the mediator’s fee shall be determined, by the Chair for the time being of the Franchise Association of New Zealand mediation panel or if no such panel exits by the Chair for the time being of LEADR New Zealand Incorporated. The costs of the mediator appointed shall be shared equally between the parties.
31.7A party who seeks urgent interlocutory relief may, by written notice to each other party to the dispute, elect not to comply with the provisions of clauses 31.1 to 31.5, but only to the extent of the relief sought and for the period required to dispose of the application for
such interlocutory relief. Except to that extent, on the disposal of the application the provisions of clauses 31.1 to 31.5 inclusive shall once again take effect.
31.8If mediation has taken place and no agreement has been reached, then the parties must submit the dispute to arbitration in accordance with the Arbitration Act 1996 (excluding clause 4 and 5 of the Second Schedule). Any party may commence the arbitration by giving a written notice to the other(s) stating the subject matter and details of the dispute and that party’s desire to have the dispute referred to arbitration. The arbitration will be conducted by a sole arbitrator, and the place of arbitration will be Christchurch. If the parties cannot agree on the appointment of an arbitrator within 5
Business Days, an arbitrator will be appointed by the President for the time being of the New Zealand Law society or his or her nominee at the request of either party.
[6] Mr Young found that he could not operate the franchise business sustainably. On 19 January 2015, Tauranga Realty Ltd gave 14 days’ notice to Mike Pero Real Estate Ltd terminating the agreement. That was allowed under cl 25.3 of the agreement. Termination has various consequences set out in cl 26 of the franchise agreement. The defendants might consider some of those provisions draconian, but it is not necessary for me to consider that aspect.
[7] Mr Young was making arrangements to join another real estate franchise. Mike Pero Real Estate Ltd pointed out to Mr Young that there was a restraint of trade following termination. Mike Pero Real Estate Ltd took the view that Mr Young had breached provisions of the franchise agreement and gave notice terminating the franchise agreement forthwith. Clause 25.1 allows Mike Pero Real Estate Ltd to give immediate notice of cancellation if the franchisee has breached. The question of breach is in contention between the parties. Mike Pero Real Estate Ltd also gave notice to the defendants that they would be held to the restraint of trade clause following termination.
[8] On 3 February 2015, Mike Pero Real Estate Ltd began this proceeding. It filed a notice of proceeding, a statement of claim, a without notice application for an interim injunction, an undertaking as to damages in conventional form, a memorandum of counsel, and an affidavit in support. The application for interim injunction sought to restrain the defendants from carrying on any type of real estate business or competing against the plaintiff in terms of the 25 kilometre four-month
restraint under the franchise agreement. The injunction sought was to run for four months from 29 January 2015. The application also sought an interim injunction restraining the defendants from competing with the plaintiff under the second part of the restraint, within the territory for five years from 29 January 2015. The application set out a number of grounds. Importantly it said that the order is necessary to protect the plaintiff from damage until the substantive matter can either be resolved at mediation or determined by way of arbitration.
[9] The statement of claim pleads provisions of the franchise agreement extensively, including particular references to cl 31 and the provisions allowing a party to apply for urgent interlocutory relief under cl 31.7. It recites the background facts leading the plaintiff to believe that the defendants had breached the franchise agreement and that they were likely to breach the restraint of trade following termination. Paragraph 18 of the statement of claim says:
18. The plaintiff is bound to invoke the dispute resolution process in clause 31 of the franchise agreement but is seeking urgent interlocutory relief under clause 31.7 until such a time as either agreement has been reached at mediation or the matter has been heard and determined by arbitration.
[10] The cause of action against both defendants is said to be for breach of restraint of trade. The prayer for relief seeks an injunction in terms of the restraint of competition in the franchise agreement with this qualification:
Until such a time as the plaintiff’s substantive claim against the defendant has been resolved at mediation or heard and determined by way of arbitration.
The statement of claim also seeks “damages to be quantified at trial”.
[11] Muir J directed the application to be served on Mr Young on a Pickwick basis. Toogood J heard the application on 13 February 2015. He made an order for an interim injunction in terms of the four month 25 kilometre radius restraint on competition in the franchise agreement. That was to run until 29 May 2015. He did
not qualify his order expressly in terms of the prayer for relief in the statement of claim. At [5] he noted:1
A statement of claim alleging breaches of the franchise agreement and seeking injunctive relief and damages was filed by the plaintiff on
4 February 2015. On the same day, the plaintiff made an interlocutory application without notice for interim relief seeking orders in terms by which
it seeks to enforce the restraint of trade covenant pending a full hearing of the claims.
At [17] he referred to the parties’ intention to seek resolution through mediation or
arbitration. He encouraged them to resolve questions of costs in that context.
[12] Mr Young has stated that since that order he has been at pains to observe the injunction. He has joined another real estate franchise. He has operated at Katikati – more than 25 kilometres outside the territory under the franchise agreement – and also at Rotorua, well outside the territory.
[13] Mr Young was not represented at the hearing before Toogood J. Later, he instructed his present solicitors. Noting that a statement of claim had been filed, they thought it prudent to file a statement of defence to prevent judgment going by default against the defendants. They filed a statement of defence together with a counterclaim. No objection was taken to the defendants filing a statement of defence. Objection was taken, however, to the defendants’ counterclaim.
[14] The counterclaim alleges four causes of action against Mike Pero Real Estate
Ltd:
(a) a claim for damages under the Contractual Remedies Act 1979 currently for breach of contract;
(b) a claim for misleading and deceptive conduct under the Fair Trading
Act 1986;
(c) a claim that the franchise agreement is an unconscionable bargain;
and
1 Mike Pero Real Estate Ltd v Tauranga Realty Ltd [2015] NZHC 175.
(d)a challenge to the validity of the restraint of trade, contending either that it is unenforceable or, seeking modification of the restraint under s 8 of the Illegal Contracts Act 1970.
[15] For its part, after Toogood J’s decision, Mike Pero Real Estate Ltd has sought to deal with the dispute under cl 31 of the franchise agreement. First, letters were sent, in terms of cl 31, proposing to resolve the matter informally. After 14 days proposals were made for the parties to submit the matter to mediation. Initially there was a proposal that mediation should take place, in terms of the franchise agreement, in Christchurch. Later, it was proposed that a mediation take place in Auckland. The names of mediators were proposed, mediators apparently approved by the Franchise Association. There were no replies to that correspondence. The defendants explained that they did not want to accede to that lest it be thought that they were abandoning their rights to have matters determined in this court rather than by mediation and arbitration under the franchise agreement.
[16] Essentially, the defendants say that in taking the proceeding in the form it did, Mike Pero Real Estate Ltd has gone beyond asking for interim relief in terms of cl 31.7 of the franchise agreement, but has submitted the substance of the dispute to this court’s jurisdiction.
[17] In approaching this matter, it may be helpful to draw a distinction between a proceeding in which a party seeks only interim relief and no greater relief, and one in which a party submits the entire differences between the parties to the final decision of this court. I call the first kind of proceeding an auxiliary proceeding – that is, the court is granting relief only to assist a party in a dispute which is pending before some other court or tribunal or has still to be started. Such auxiliary relief has a long history in equity. Nowadays we can see the auxiliary jurisdiction operating in cases where, for example, a first instance court grants relief when one party appeals and seeks interim protection of its position. Similarly, even before the Arbitration Act
1996, the court would grant relief to parties to arbitration agreements to protect their position while the substance of a dispute was submitted to arbitration.
[18] The Arbitration Act now formally enacts such a practice. The starting point is art 5 in Schedule 1:
In matters governed by this schedule, no court shall intervene except where so provided in this schedule.
[19] Article 9 is one such provision:
(1) It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure and for a court to grant such interim measure.
“Interim measure” is defined in art 17:
interim measure means a temporary measure (whether or not in the form of an award) by which a party is required, at any time before an award is made in relation to a dispute, to do all or any of the following:
(a) maintain or restore the status quo pending the determination of the dispute:
(b) take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral proceedings:
(c) provide a means of preserving assets out of which a subsequent award may be satisfied:
(d) preserve evidence that may be relevant and material to the resolution of the dispute:
(e) give security for costs
Articles 17A and 17B allow arbitral tribunals to grant interim measures. Under art
9(2) the High Court or District Court may give similar relief.
[20] The provision for the court to grant interim relief allows parties to arbitration agreements to obtain interim curial relief in circumstances, for example, where arbitration has not yet started or unavoidable delays would be experienced in appointing an arbitrator and applying to an arbitrator for interim relief under arts 17A and 17B. Article 9 therefore serves a practical purpose.
[21] A question can arise whether a party seeking interim relief has gone further and submitted the substance of the dispute for the determination of the court. If the substance is placed before the court for determination, art 8 can apply. If the
substance of the court is placed before the court and the other party does not object, under art 8 the court may retain jurisdiction over the subject matter of the proceeding.
[22] The question here is whether Mike Pero Real Estate Ltd has gone beyond seeking only an interim measure under art 9. Clause 31.7 mirrors art 9 in recognising that while the parties must follow the dispute resolution procedures under cl 31, there is the right to apply to a court for interim relief under cl 31.7.
[23] The argument for the defendants is that the matters that were submitted to the court went beyond simply seeking interim relief. The defendants, in particular, focus on the extensive pleading in the statement of claim which is said to go beyond simply seeking interim enforcement of a restraint of trade, and pleads other breaches of the agreement. The defendants also refer to the prayer for relief seeking damages.
[24] I raised with the plaintiff the form of the proceeding. The plaintiff filed a general proceeding – that is, a conventional claim for common law relief with a standard statement of claim. The plaintiff could have made its position clearer if it had filed an originating application under r 19.2 of the High Court Rules. The proceeding would be an application for interim relief under art 9 of the first schedule of the Arbitration Act, a matter appropriate for an originating application under r 19.2(a).
[25] To the extent that the plaintiff’s pleading goes beyond simply seeking enforcement of the restraint of trade and seeks damages in its statement of claim, the plaintiff has muddied the waters. However, that muddying of the waters does not mean that it has submitted the substance of the dispute to this court for final determination.
[26] The plaintiff’s statement of claim and its application for an interim injunction make it clear that it was following the procedures under cl 31 and was seeking only interim relief from the court. The decision of Heath J in Pathak v Tourism Transport Ltd indicates that at least pending the grant of interim relief a party may equivocate
on whether to go to arbitration or to ask for the court to determine the merits of the matter.2 In that case, a plaintiff had applied to the court for interim relief which was granted, even though the contract between the parties contained an arbitration agreement. Heath J held that if the plaintiff had stopped there, and had sought a stay of proceeding so as to go to arbitration, the arbitration agreement could have been enforced. Instead the plaintiff sought particulars from the defendants and made
discovery. Those steps were consistent with submitting the substance of the dispute to the High Court and were incompatible with arbitration.
[27] Applying that approach, I do not regard Mike Pero Real Estate Ltd as having submitted the substance of the dispute to the determination of this court. It has done no more than seek interim relief consistent with cl 31.7 of the franchise agreement and art 9 of Schedule 1 of the Arbitration Act. Certainly its conduct after Toogood J gave his decision is consistent with it seeking to follow the procedures under cl 31 of the arbitration agreement. It has resisted taking any steps towards a final determination in this court.
[28] The defendants have explained their reluctance to go to mediation and to take part in arbitration. Mr Young is not in good financial shape. His position is so bad that he has qualified for legal aid. While he can have legal aid to defend this proceeding and to pursue his counterclaim in this court, it will not extend to arbitration with the plaintiff. Mr Young fears that if he is held to the arbitration clause, he will be required to put up significant funds to meet the costs of the arbitrator. He notes that the arbitration clause provides for the arbitration to be held in Christchurch where the plaintiff is based, not where he is based. He fears that he will not be able to afford the costs of arbitration. Because of his lack of resources the plaintiff may obtain an award against him by default.
[29] If this court had a discretion to stay proceedings to allow arbitration – as it used to under s 5 of the Arbitration Act 1908 – those submissions might carry some weight. But the position has now changed under the Arbitration Act 1996. Clause 8
makes it clear that the court must stay a proceeding in favour of arbitration. There is
2 Pathak v Tourism Transport Ltd [2002] 3 NZLR 381 (HC).
no balancing discretion. Accordingly I am not able to base my decision on those considerations raised by the defendants.
[30] That means that I am required to dismiss the defendants’ application: I make
an order dismissing it.
[31] I deal with some ancillary matters.
[32] The parties had also prepared submissions on extending injunction on amended terms after 29 May 2015 when Toogood J’s order will expire. I do not have jurisdiction to deal with that question because of the limitations under s 26J(4) of the Judicature Act 1908. I direct the Registrar to make arrangements, after consulting with the parties, for a hearing of the plaintiff’s application for extending the injunction beyond 29 May 2015. The parties should be prepared for a hearing at short notice, and they should be prepared for some flexibility. There is no certainty that the hearing will take place in Tauranga.
[33] Toogood J reserved costs on his order. I decline to deal with that. As that also goes to the question of injunctive relief, costs should likewise be determined by a justice.
[34] The plaintiff asks for costs on the application. Ordinarily costs follow the event. No order for costs can be made against Mr Young because he has a grant of legal aid. Costs require consideration only in respect of Tauranga Realty Ltd, the first defendant. It does not have legal aid.
[35] This matter has required a decision of the court because there was some muddying of the waters by the plaintiff. The plaintiff could have made its case clearer if it had filed an originating application under r 19.2 of the High Court Rules without a statement of claim. It would have been clearer, by proceeding in that manner, that the plaintiff was seeking only limited relief. It need not have gone into a long pleading of other breaches by the defendants. It need not have set out any claims for damages. Then it would have been apparent that there was no basis on
which the defendants could counterclaim. To that extent, the plaintiff, by muddying the waters, has also contributed to the need for this application.
[36] In the circumstances I order that costs lie where they fall.
…………………………………………
Associate Judge Bell
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