On-Line Digital Solutions Ltd v Riddick
[2021] NZHC 3199
•26 November 2021
IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA NGĀMOTU ROHE
CIV-2021-443-35
[2021] NZHC 3199
BETWEEN ON-LINE DIGITAL SOLUTIONS LIMITED
PlaintiffAND
DEANE JASON RIDDICK
Defendant
Hearing: 14 October 2021 (via AVL) Appearances:
L McKeown for Plaintiff
P Dalkie and D Watson for Defendant
Judgment:
26 November 2021
JUDGMENT OF ISAC J
[Application for interim injunction]
Table of Contents
Para Nos
Introduction[1]
Background[8]
The restraint of trade[23]
Open2View Facebook page and cell phone number[32]
The relationship deteriorates[38]
Mr Riddick’s efforts to sell the Taranaki franchise and notice of termination[44]
Post-cancellation conduct and the status quo at the time of hearing[53]
Principles applicable to grant of interim injunctions involving restraints of trade
[58]
Is there a serious question to be tried?[61] The strength of the plaintiff’s claim of breach and the defendant’s counterclaim in estoppel[65]
The reasonableness of the restraint and the impact of s 83 of the CCLA[83] The impact of the holding-over provision on the reasonableness of the restraint [88] Mr Riddick’s alternative argument: the restraint was triggered in 2011[95] Overall conclusion on serious question to be tried[102] Balance of convenience[103]
Overall interests of justice[120]
Conclusion and result[122]
ON-LINE DIGITAL SOLUTIONS LIMITED v RIDDICK [2021] NZHC 3199 [26 November 2021]
Introduction
[1] On-line Digital Solutions Ltd (On-Line) applies for an interim injunction restraining Mr Riddick from breaching a restraint of trade.
[2] On-Line carries on business as the “Regional Franchisor” of the Open2View real estate photography business. On-Line has the right to grant area franchises throughout New Zealand,1 and to provide franchise services to those granted an area franchise.
[3] In 2006 Mr Riddick entered into an area franchise agreement with On-Line for the Taranaki area. That agreement provided Mr Riddick with the right to carry on business under the Open2View banner within the relevant area, principally marketing and supplying clients with real estate digital photography.
[4] On 5 August 2020, just short of 14 years after entering into the franchise relationship, On-Line terminated the agreement on one month’s notice. Almost 11 months later, on 28 June 2021, it commenced these proceedings alleging that Mr Riddick has been operating in breach of a restraint of trade clause within the franchise agreement. It seeks an interim injunction preventing Mr Riddick from carrying out work as a real estate photographer pending trial.
[5] On-Line argues that it had a clear right to terminate the franchise agreement on one-month’s written notice because Mr Riddick failed to give notice of renewal following the first five-year term of the contract. Thereafter, On-Line says a holding- over provision rendered the contract month-to-month. On-Line acknowledges that on its face the restraint of trade is unreasonable, it not being subject to any temporal or geographical constraints. But it says the Court can and should modify the restraint to make it reasonable, using the Court’s discretion under s 83(1)(b) of the Contract and Commercial Law Act 2017 (CCLA).
[6] In response, Mr Riddick submits that On-Line represented the franchise agreement “automatically” renewed for its full 20-year term. That representation gives
1 So, within this country at least, On-Line is effectively a national franchisor despite its contractual designation.
rise to an estoppel preventing On-Line from relying on the requirement for notice of renewal. It follows that On-Line’s notice of termination was itself a repudiation of the agreement. In those circumstances, On-Line is unable to enforce the restraint of trade. Alternatively, if the agreement was not renewed by conduct, Mr Riddick says the restraint of trade applied only from the termination date of 30 August 2011 and has long since expired.
[7]I decline to grant an interim injunction. The principal reasons for this are:
(a)while there is a serious question to be tried, the current state of the evidence indicates the merits favour Mr Riddick’s contention that On- Line is subject to an estoppel that prevented it from cancelling the contract;
(b)according to On-Line’s case, Mr Riddick’s failure to give a written notice of renewal of the contract in 2011 meant that he lost the security of a renewable contract lasting up to 20 years. Instead, On-Line says the relationship became terminable by either party on one month’s notice for any reason. This was so despite the franchise relationship having lasted almost 14 years, and the lack of security inherent in On- Line’s position for nine of those years. If that is the correct legal position, I would not consider it appropriate to use the discretion in s 83(1)(b) of the CCLA to modify the restraint as On-Line seeks, and certainly not at an interlocutory stage; and
(c)On-Line delayed bringing proceedings for over nine months after its purported termination of the contract. In the intervening time Mr Riddick has established a new business in competition with Open2View. On-Line’s explanation for its delay in commencing proceedings is unconvincing. I consider the overall delay is unreasonable. The balance of convenience therefore favours continuation of the status quo until trial, as do the overall interests of justice.
Background
[8] Mr Riddick became a photographer when he left school. Very early in his career he began providing photographic services to the real estate market.
[9] After working overseas, Mr Riddick and his wife returned to Auckland in 2003. In the same year, Mr Riddick became involved with Open2View as a contract photographer. Contract photographers are essentially sub-franchisees and are engaged by area franchisees to take real-estate photography.
[10] In 2005, he moved to New Plymouth to start a family. Soon after he began photographic work for the then Open2View Taranaki franchisee.
[11] In 2006, the area franchise for the Taranaki–Whanganui area was offered to Mr Riddick for purchase. There is no evidence of the amount of consideration Mr Riddick paid for the business, but his evidence discloses that he still retains a debt of $95,000 from his time as the Taranaki area franchisee.
[12] In 2010, Mr Riddick purchased the area franchisee for the Hawkes Bay– Manawatu–Kapiti area under a franchise agreement dated 1 October 2005. The area franchise agreement had originally been granted to a company called Click For Pics Ltd. It sold the business, and assigned the remaining period of the franchise agreement to Mr Riddick, apparently with On-Line’s approval.
[13] The Hawkes-Bay-Manawatu franchise area covers the central and southern North Island from Gisborne in the north of the East Coast as far south as Eketahuna. On the West Coast, the area began just south of Whanganui and extended to Paraparaumu. Combined with the Taranaki franchise, Mr Riddick’s interests provided Open2View services for the southern half of the North Island, excluding the greater Wellington area.
[14] The franchise agreement for the Taranaki area was signed on 1 September 2006. The initial term was for a period of five years, expiring on 31 August 2011. However, Mr Riddick had the option of renewing the agreement for a further three
terms of five years each.2 Clause 3 of the agreement regulated the renewal process. Central to the arguments of the parties were cls 3.1 and 3.8. They provided:
3RENEWAL OF FRANCHISE
3.1The Area Franchisee may at its option renew the grant of Franchise for the Renewal Term subject always to the fulfilment by the Area Franchisee of the following conditions, by giving written notice to the Regional Franchisor not later than 3 months nor more than 6 months prior to the expiry of the Term and the Notice. The notice will be deemed valid if the Area Franchisee has satisfied all monetary obligations due to the Regional Franchisor and is not in breach of any term of this Agreement at the date of the exercise of the option and such compliance continues until the commencement of the Renewal Term.
…
3.8 The Area Franchisee is entitled if it is not in breach of the Franchise Agreement at the expiration of the Term and has not given the Notice to renew in 3.1 to continue to operate the Franchised Business in accordance with this Agreement on a monthly basis where either the Regional Franchisor of the Area Franchisee may give one (1) months notice to the other of its intention to terminate the Franchise.
[15] Clause 3.1 required Mr Riddick to satisfy three things before the franchise agreement could be renewed beyond 31 August 2011 as of right. They were:
(a)the provision of written notice to On-Line “not later than three months nor more than six months prior to the expiry of the Term …”;
(b)payment of “all monetary obligations” due to On-Line; and
(c)the absence of any breach of any term of the franchise agreement.
[16] There is no suggestion in the evidence that Mr Riddick was unable to exercise the right of renewal had he wished to do so in 2011.
2 Given the franchise agreement contains separate definitions of the contract “Term”, defined in the schedule as “Five years from the commencement date”, and the “Renewal Term”, being “Three
(3) terms of five (5) years each”, it seems likely that the entire contract term on renewal was intended to be 20 years. Another aspect of the agreement which lacks clarity is whether it requires only one renewal after five years, or three: one for each five-year renewal period. While it would seem most likely separate renewals were intended, cl 3.1 and the definition of “Renewal term” do not clearly lead to that result. Indeed, there are indications the other way.
[17] The expression “Renewal Term” was defined as “that specified in item 42 of the schedule”. Item 42 in the schedule then records that the renewal term is:
Three (3) terms of five (5) years each.
[18] Given the franchise agreement had an initial “Term” defined in item 13 of the schedule as “Five (5) years from the Commencement Date”, it would appear that provided Mr Riddick met the three requirements of cl 3.1 (set out at [15(a)-(c)] above), he had the acquired a right to the franchise lasting up to 20 years.
[19] However, it was common ground that Mr Riddick failed to give written notice required under cl 3.1 in 2011. Accordingly, On-Line considers the franchise agreement became subject to the month-to-month holding-over provision in cl 3.8. Under it, the agreement became terminable by either party giving one month’s written notice.
[20] According to that view of the world, the parties entered a month-to-month contractual relationship from 1 September 2011 until On-Line purported to terminate the agreement nine years later, on 5 August 2020.
[21] Although there is some evidence that a factor in On-Line’s decision to terminate the agreement was dissatisfaction by at least one national real estate company with Mr Riddick’s services in Taranaki, as Ms McKeown acknowledged, On-Line’s right to cancel the agreement under cl 3.8 does not require any breach by Mr Riddick. It could terminate the agreement for its own reasons, as could Mr Riddick.
[22] In reply, Mr Riddick deposed that in 2011 Mr Christopher Bates, On-Line’s director and principal, advised him that “renewals are unnecessary because the agreements automatically renewed”. I will return to the evidence on this point in greater detail later.
The restraint of trade
[23] On-Line’s application relies on a restraint of the trade contained in cl 38 of the franchise agreement. It provides:
…
38.2The Area 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 Area 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.
38.3The Area Franchise and the Guarantor acknowledge that the Restraint Period, and the Restraint Area, and the Restraint Business and the terms of each are no greater than reasonably required to protect the Regional Franchisor’s interest, the interests of the Franchisor and other Franchisees, and the intellectual Property Entity’s interests.
[24] The expression “Termination Date” in cl 38.2 is defined in the agreement as “the date of the expiration or earlier termination of this agreement.” And the “Restraint Business” is defined as meaning collectively “that business specified in item 44 of the schedule”. Item 44 then provides:
Item 44 – Restraint Business
The Franchised Business.
[25] The “Franchised Business” is in turn defined as “the business carried on by the Area Franchisee”.
[26] Clause 38.2 could not be in broader terms. It contains no geographical or temporal limits, although it seems likely the parties intended cl 38.3, and the definitions of “Restraint Area” and “Restraint Period” to provide some limits. In addition, cl 38.2 requires an area franchisee to contemporaneously complete a “Restraint Agreement”. The Restraint Agreement is defined as “that executed by the regional franchise or, area franchisee and guarantors contemporaneously with this agreement”. Counsel were agreed that no restraint agreement was ever signed.
[27] To add to an already obscure picture, the franchise agreement contains several definitions for terms intended to limit in some way the scope of the restraint of trade. For instance, the “Restraint Area” mentioned in cl 38.3 is defined as “that specified in
item 43 of the schedule”. Item 43 then provides several options, none of which were selected by the parties:
Item 43 – Restraint Area
(a)The Territory.
(b)5 kilometres outside the boundaries of the Territory.
(c)20 kilometres outside the boundary of the Territory.
(d)50 kilometres outside the boundary of the Territory.
(e)100 kilometres outside the boundary of the Territory.
(f)The Territory of any other Open 2 View Area Franchisee.
[28] Finally, the “Restraint Period” in cl 38.3 is defined as “that specified in item 45 of the schedule.” The schedule then records:
Item 45 – Restraint Period
(a)The Term;
(b)The Renewal Term;
(c)1 year from Termination Date;
(d)2 years from Termination Date;
(e)3 years from Termination Date.
[29] The parties did not specify a restraint period either. So, while it seems cl 38.3 was intended to place limits on the scope of the restraint of trade in cl 38.2, the difficulty here is that no limits have been identified by the parties. The result appears to be that the absolute and unqualified terms of cl 38.2 are left to apply.
[30] Despite the difficulties all of this presents for On-Line, and its concession in argument that the unqualified terms of cl 38.2 are unreasonably broad, Ms McKeown submitted that the restraint could be saved in one of two ways. First, the Court could exercise its discretion in s 83 of the CCLA to modify the scope of the restraint to make it reasonable.
[31] Alternatively, the “cascading” options for the restraint area and restraint period appearing in the schedule were said to be typical of contracts prepared by Australian
solicitors, where there is no equivalent to s 83 of the CCLA. I was advised by Ms McKeown that Australian drafting practice commonly involves providing a set of alternatives so the Court can choose the appropriate geographical and temporal limits to apply. In that regard, Ms McKeown pointed to cl 50(a) of the franchise agreement, which provides: 3
If any provision of this Agreement is capable of two constructions, one of which would render the provision illegal or otherwise voidable or unenforceable and the other of which would render the provision valid and enforceable, such provision shall have the meaning which renders it valid and enforceable.
Open2View Facebook page and cell phone number
[32] On-Line also contends that the franchise agreement required Mr Riddick to transfer to it the Taranaki Open2View Facebook page, and cell phone number associated with the franchise business used by Mr Riddick. It relies on cls 22.4, 37.2 and 37.3 of the franchise agreement.
[33] Clause 22.4 relates to the use of names and marks by the area franchisee. It provides that rights granted under the agreement for use of names and marks “shall be automatically revoked on Termination Date and the area franchisee will … transfer the Business Name to the regional franchisor together with all … telephone numbers, email address, domain names, other computer or software identifications and other business listings …” (my emphasis).
[34] Clause 37 sets out an area franchisee’s obligations on termination of the franchise agreement. Clause 37.2 provides the area franchisee on termination of the agreement will immediately “cancel or transfer the Business Name, … email address,
3 The difficulty with On-Line’s submission about the operation of the restraint is, first, that the contract, its subject matter and the parties are all governed by New Zealand law. At an interlocutory stage and with limited argument I am uncertain that it would be appropriate to adopt an Australian approach. The corollary is that the restraint of trade is either incomplete (the parties have not completed the restraint agreement required by cl 38.2, and they have not selected the applicable restraint area or period required by cl 38.3), or, as On-Line presented its case, cl 38.2 applies but is unreasonably broad, and can only be saved through the exercise of the Court’s discretion in s 83 of the CCLA. Second, cl 50 does not appear to be of assistance because cl 38.2 is unambiguous and is not capable of two constructions. And cl 38.3, and the definitions of restraint area and restraint period, do not raise questions of alternative constructions. They simply require a choice of alternatives, but the parties have not done that.
domain names and other computer or software identifications … relating to the use of the Marks and the Intellectual Property and to notify the telephone company … of the termination or expiration of the area franchisee’s right to use all telephone numbers
…”.
[35] In similar terms, cl 37.3 is acknowledgment by the area franchisee that the regional franchisor (On-Line) has a sole right to all registrations relating to the use of Marks and telephone numbers, amongst other things.
[36] Finally, item 8 of the schedule — “Intellectual Property” — defines that term as including “web pages, internet listings and other computer or software identifications”.
[37] Although the use of Mr Riddick’s cell phone number remains in issue, use of the former Taranaki Open2View Facebook webpage was resolved before the hearing. Mr Riddick deposed in his most recent affidavit that he intended to transfer the Facebook page to On-Line. Ms McKeown at the hearing confirmed her client no longer pursued that matter.
The relationship deteriorates
[38] In 2016, the area franchisee for the Wellington Region, a Mr Nathan Sanders, appears to have had a dispute with On-Line which resulted in the termination of his area franchise. The uncontested evidence indicates that after terminating Mr Sanders’ franchise agreement, On-Line took over and continues to run the Wellington area franchise.
[39] Not long after termination of the Wellington franchise, issues appear to have arisen between On-Line and Mr Riddick concerning the Hawkes Bay–Manawatu– Kapiti area. Mr Riddick’s evidence is that Mr Bates informed him one day that the Kapiti Coast region — a profitable area — did not in fact fall within Mr Riddick’s franchise and was instead part of the Wellington area now run by On-Line. Mr Bates did not respond to this allegation in his evidence.
[40] Matters do not appear to have improved. In early 2018, Mr Bates served two “breach notices” on Mr Riddick threatening to terminate the Taranaki franchise if certain remedial steps were not undertaken. While there are recriminations from both sides about the circumstances leading to the issue of those notices, there is no dispute that On-Line was ultimately satisfied by the steps Mr Riddick took and the Taranaki franchise was not terminated, at least at that time.
[41] Despite this, Mr Riddick’s evidence is that “out of the blue, on 1 November 2018, I received a termination notice relating to the Hawkes Bay–Manawatu–Kapiti area franchise”. The notice purported to terminate Mr Riddick’s franchise from 5 pm on 1 December 2018. It alleged that the area franchise agreement in question had expired on 30 September 2010, and not having been renewed, it was terminable under cl 3.8 with one month’s notice.
[42] There was then a disagreement about whether On-Line was permitted to cancel the franchise agreement as it had. Mr Riddick’s evidence is that On-Line, through Mr Bates, now also manages the Hawkes-Bay-Manawatu-Kapiti franchise area. He says he did not pursue an injunction against On-Line because he could not afford to. Mr Bates’ evidence in reply did not engage with the substance of Mr Riddick’s claims. Mr Bates deposed:
I do not see the relevance of the termination of the Hawke’s Bay/Manawatu/Kapiti franchise in 2019. [On-Line] was entitled to terminate on giving one month’s notice, and did so.
[43] Mr Bates further deposed that there were no “photographer franchisees” left in Mr Riddick’s former franchise area at the time of termination, and that the territory is currently vacant.
Mr Riddick’s efforts to sell the Taranaki franchise and notice of termination
[44] The unravelling of the relationship continued. By mid-2020 On-Line had become frustrated with what Mr Bates says were Mr Riddick’s failure to attend area meetings, and the breakdown of his relationship with the proprietor of the New Plymouth franchise of Tall Poppy’s real estate agency. And as noted, there were also claims and counterclaims about Mr Riddick’s efforts to sell the Taranaki franchise
before it was terminated. Mr Riddick claims his opportunities to sell the franchise were frustrated by On-Line’s insistence on particular terms on assignment of the franchise. On-Line claims that the reason the prospective sales fell over was due to Mr Riddick’s refusal to provide an adequate restraint of trade to the prospective purchasers. In other words, Mr Riddick brought it on himself.
[45] The merits of those contentions are for trial. It is enough to observe that On- Line’s notice of 5 August 2020 firmly put an end to any hope Mr Riddick might have had of selling the Taranaki area franchise. The evidence indicates that one purchaser was willing to pay $200,000 for it. Mr Riddick has counterclaimed for that sum.
[46] On-Line’s notice of termination took the form of a letter from its solicitors to Mr Riddick, attaching a “notice of termination of franchise”. The relevant section of the notice records that:
The franchise agreement expired on 31 August 2011 and was never renewed in accordance with the requirements in clause 3.1 of the Franchise Agreement. The Franchise Agreement is therefore now terminable by the party on one month’s written notice pursuant to clause 3.8 of the Franchise Agreement.
[47] This sparked an exchange of correspondence between the lawyers acting for both parties. Notable among them was a request, in a letter from Duncan Cotterill on behalf of On-Line of 24 August 2020 to Mr Riddick’s barrister recording:
Next steps
16We look forward to receiving your confirmation:
16.1Your client will comply with the restraint provisions for two years, within the Territory and an area of 50km from the Territory;
16.2Your client will transfer all phone numbers and email addresses to our client on or prior to the Termination Date;
16.3Your client will continue to invoice for work in accordance with the Franchise Agreement until the Termination Date;
16.4Your client agrees that our client may transfer any sums due to the Sub-Franchisees directly to them; and
16.5The amount your client claims is currently owing to it.
17If the above matters cannot be agreed by mutual negotiation, our client is also willing to engage in the dispute resolution process set out in the Franchise Agreement.
18We look forward to hearing from you.
[48] Subsequently, in a letter of 6 October 2020, On-Line’s solicitors wrote to Mr Riddick’s barrister. The letter made two important comments. First, that:
This is an open letter. We intend to provide a copy to the Court, failing a prompt and satisfactory response from you.
[49]Duncan Cotterill’s letter concluded by saying:
We have been instructed to draft Court proceedings seeking (inter alia) urgent injunctive relief to restrain Mr Riddick. ODS will also seek an account of profits, damages, and costs.
(emphasis added)
[50]And:
Before we file the proceedings, we invite Mr Riddick to promptly provide an undertaking that he will comply with his post-termination obligations (including the restraint of two years/50 kilometres). We will happily review a draft undertaking, should you provide one.
If Mr Riddick refuses to provide such undertaking, the Court is likely to infer that he either is, or intends to, act in breach of the restraint.
[51] Mr Riddick did not provide the undertaking On-Line had requested. Instead his solicitor replied by letter on 6 October 2020. The letter asserted that the restraint clause had “long since terminated” because the restraint provided in cl 38.2 provides expressly that the franchisees obligations commence from the “Termination Date”. That term was defined in the agreement to be the date of expiry or earlier termination of the agreement. Based on On-Line’s own argument, the termination date was 31 August 2011, and any reasonable restraint period would have expired before 2020.
[52]Proceedings in this case issued almost 8 months later, on 28 June 2021.
Post-cancellation conduct and the status quo at the time of hearing
[53] There is little dispute about events following termination of the franchise agreement.
[54] Mr Riddick began offering real estate photography and marketing services almost immediately after termination. Some of his services include those offered by Open2View, such as twilight photography, aerial photography and video. Mr Riddick’s own evidence is that he is currently providing services to 30 of Open2View’s former clients.4 In addition, the Open2View Taranaki Facebook page — then under Mr Riddick’s control — had its name changed repeatedly, settling on “Riddickulously Good Real Estate” on 27 January 2021. This step forced On-Line to open a new Taranaki Facebook page. When Mr Bates swore his first affidavit, the new page had 19 followers. That can be contrasted with the Facebook page Mr Riddick retained control over, which had 974 followers.
[55] Mr Riddick’s re-branded Facebook page also contained a link to his cell phone number, a number that On-Line says he is obliged to transfer to it on termination.
[56] As noted, however, Mr Riddick has now relinquished control over what was formerly the Open2View Taranaki Facebook page. He says he no longer uses the cell phone number for business purposes either.
[57] Finally, it seems that On-Line has since termination actively sought to re- establish its presence in the Taranaki area by sending various senior representatives, as well as employing a contract photographer for the area. Mr Bates’ evidence is that it has been “nigh on impossible” for On-Line to establish a presence despite these efforts. According to Ms McKeown, On-Line sees Mr Riddick’s removal from the area for a lengthy period as essential to its ability to regain a foothold in the market. Mr Bates’ deposed that having met with a number of agents:
…they have expressed reluctance to use our new operator…and some have expressed a view that Mr Riddick has been screwed over by Open2View (apparently based on what Mr Riddick has told them).
4 Mr Bates’ evidence in reply suggests the likely number is higher — with a further six former Open2View clients to whom it is alleged Mr Bates has provided post-termination real estate photography.
Principles applicable to grant of interim injunctions involving restraints of trade
[58] The approach to consideration of interim injunctions is well settled.5 Such applications should be determined by assessing:6
(a)whether there is a serious question to be tried;
(b)the balance of convenience; and
(c)where the overall justice lies.
[59] At the interlocutory stage the Court is not required to resolve conflicts of evidence or resolve difficult questions of law requiring detailed argument and mature considerations.7
[60] The principles informing the grant of interim injunctions to enforce a restraint of trade within a franchise relationship are:
(a)Contractual provisions that constitute a restraint of trade are prima facie void and therefore unenforceable. Nevertheless, where a party seeking to enforce the provision establishes that the restriction is reasonable, it may be enforced.8 Reasonableness is assessed at the time of the contract.9
(b)The first enquiry is whether the franchisor has “an interest which in all the circumstances was protected”.10 In this respect, the courts have
5 See Intellihub Ltd v Genesis Energy Ltd [2020] NZCA 344, [2020] NZCCLR 29 at [24].
6 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142, as cited in Intellihub v Genesis Energy, above n 5, at [23]. See also NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12].
7 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407; Villa Maria Wines Ltd v Montana Wines Ltd [1984] NZLR 4 22 (CA) at 425; Health Club Brands Ltd v Colven [2013] NZHC 428 at [9].
8 Skids Programme Management Ltd v McNeill [2012] NZCA 314, [2013] 1 NZLR 1 at [36], citing Blacker v New Zealand Rugby Football League (Inc) [1968] NZLR 547 (CA) and Brown v Brown [1980] 1 NZLR 484 (CA), following Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 (HL).
9 Mike Pero (New Zealand) Ltd v Heath [2015] NZHC 2040 at [39], citing Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC) at 385.
10 Skids Programme Management Ltd v McNeill , above n 8, at [41], citing Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 1 April 2007 at [22]; Video Ezy
frequently found that in the franchise context a franchisor has a legitimate interest in protecting goodwill after termination.11
(c)A further consideration is whether the restraint is reasonable in light of the public interest. This inquiry is concerned to ensure that the restraint is properly referable to the protection of interests which the law regards as legitimate.12 Generally, if the restraint is properly limited, it will not be contrary to the public interest to give effect to it.13 As Moore J observed,14 the policy interest underpinning this principle is that the market for goods and services should not be distorted by the unreasonable diminution of consumer choice arising from private restrictions on those willing to offer their goods and services to the market. This is likely to lead to monopolies and negative economic consequences.
(d)Where the grant of an interim injunction will have the practical effect of becoming a final judgment or putting an end to an action, the Court should bear in mind that it does so without permitting the defendant the right of trial. In such cases, the Court should be slow to decide the entire contest between the parties on what is in effect a summary basis.15 It
International (NZ) Ltd v Cameron (2004) 8 NZBLC 101,550 (HC); Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 (HC) at [275]; and Washworld Corporation (Leases) Ltd v Reid, above n 9, at 385.
11 Mad Butcher Holdings Ltd v Standard 730 Ltd [2019] NZHC 589 at [19] and the cases referred to therein.
12 Washworld Corp (Leases) Ltd v Reid, above n 9, at 383. In Skids Programme Management Ltd v McNeill, above n 8, at [51]-[52], the Court of Appeal noted that more recent decisions have revealed little sympathy for sweeping public interest claims. Nevertheless, the Court also observed that “in some respects, the franchise situation may be more akin to that of an employment contract than to that of a vendor by purchaser contract. Unlike the position in a vendor/purchaser context where the grantor of the restraint of trade received a sum of money from the grantee, the grantor fo the restraint of trade clause in a franchise context has in fact paid money itself to the grantee, rather than receiving money. The grantor provides a restraint of trade clause as part of its endeavour to obtain a source income from the franchise, just as an employee provides a restraint of trade for the opportunity to earn income from employment.”
13 Washworld Corp (Leases) Ltd v Reid, above n 9, at 385.
14 Mike Pero (New Zealand) Ltd v Heath, above n 9, at [34].
15 In Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (HC) at 138, Davison CJ referred to the Court of Appeal of England and Wales’ decision in Cayne v Global Natural Resources Plc [1984] 1 All ER 225. Although that case did not involve a franchise relationship, Kerr LJ noted at 236 that if the position in that case were viewed as an application for summary judgment that it would be clear beyond argument that Global must be entitled to a full trial, and in that context, it would be wholly wrong to decide the case summarily.
may be more appropriate to require the applicant to meet the threshold for the grant of summary judgment, rather than ask whether there is a serious question to be tried.16
Is there a serious question to be tried?
[61] I am satisfied that On-Line has established a serious question to be tried, and that it had an interest which in all the circumstances was protected by the restraint of trade.
[62] The evidence establishes that since 5 August 2020, Mr Riddick has continued to provide real estate photography to the Taranaki real estate market. It is inherent in the defendant’s case that he has done so because, he claims, he is not subject to a restraint of trade. So on its face, Mr Riddick could be operating his business in breach of the restraint contained in cl 38.2 of the agreement. In addition, there seems little argument that following termination Mr Riddick retained use of the cell phone number and Facebook page associated with the Taranaki Open2View franchise. On the evidence On-Line has demonstrated those alleged actions constitute an apparent breach of the franchise agreement.
[63] However, to leave the analysis at this point would provide a misleading impression of the merits. In my view, there are three key considerations suggesting that while a serious question to be tried has been made out, the merits at this interlocutory stage favour Mr Riddick’s position. Those considerations are:
(a)The evidence suggests there is force in Mr Riddick’s claim to an estoppel;
(b)alternatively, there is doubt as to whether the period of restraint commenced on the “Termination Date”, being 1 September 2011, and is now at an end; and
16 There is support for departure from the usual approach to the grant of interim injunctions in appropriate cases. See Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, above n 15, at 142.
(c)it would not be reasonable to use the Court’s power under s 83 of the CCLA at this interim stage to support an interim injunction.
[64]I now turn to address those issues.
The strength of the plaintiff ’s claim of breach and the defendant’s counterclaim in estoppel
[65] The real issue at trial will be whether there has been a valid termination of the franchise agreement in turn triggering the operation of the restraint of trade.
[66] The evidence currently suggests the plaintiff may find it difficult to persuade the Court to grant a permanent injunction. That is because there is evidence tending to support Mr Riddick’s assertion that Mr Bates led him to believe the franchise agreement would automatically renew without any need for written notice.
[67] Mr Riddick’s first affidavit in opposition recorded that he did not believe he had to formally renew either the Taranaki or Hawkes Bay franchise agreements because:
I recall a comment from Mr Bates (whether it was directly between me and Mr Bates or something Mr Bates said at a conference or at a meeting with another Area Franchisee) to the effect that “renewals are unnecessary because the agreements automatically renewed.” I cannot recall precisely when this was but it would have been around 10 years ago. …
[68] In his evidence in reply, Mr Bates said that he did not recall “ever making any such comment”. He said that it made no sense that he would. His explanation for that was:
I am very familiar with the renewal process in the Franchise Agreement, i.e. written notice of renewal under clause 3.1, failing which clause 3.8 (continuing to operate on a monthly basis) may apply.
[69] Were it left to Mr Riddick’s rather vague assertion in his first affidavit, and Mr Bates’ response, the evidential foundation for Mr Riddick’s claimed estoppel would have been weak.
[70]However, there are two further important pieces of evidence.
[71] First, in a further affidavit from Mr Riddick of 21 September 2021, he provided evidence relating to an issue that arose in 2014 with one of his contract photographers.
[72] In May 2014 Mr Riddick had a dispute with a Mr Whittaker, one of his sub- franchisee photographers. Mr Whittaker had left the sub-franchise relationship and began competing in the Hawkes-Bay area with Open2View and Mr Riddick. Mr Riddick did not produce in evidence the entire sub-franchise agreement with Mr Whittaker, but it is at least clear from the evidence that cl 3 of the sub-franchise agreement — relating to renewal — is in identical terms to the area franchise agreement in issue here.
[73] Mr Riddick’s second affidavit also exhibited an email of 13 May 2014 from Mr Bates which, he said, supported his previous claim that Mr Bates had told him written notice of renewal was not required. The email in isolation is somewhat cryptic, but broadly might be taken to support Mr Riddick’s claim. I produce the text of the email below, but in essence it set out Mr Bates’ view of the term of the sub-franchise agreement by reference to the renewal period.
[74] What was missing from the evidence as filed before the hearing was a letter from Mr Whittaker’s solicitors, which had been attached to the email from Mr Bates, and to which he responded. This is the second important piece of evidence.
[75] Objection was initially taken to the late provision of Mr Riddick’s 21 September affidavit, and what was said to be the prejudice caused by the plaintiff’s inability to reply to it given there was no timetabling order for a second affidavit in reply from Mr Bates. Despite this, during the hearing Ms McKeown was able to provide the missing letter that had been attached to Mr Riddick’s email to Mr Bates.17
17 At the hearing it appeared that Mr Dalkie had not seen the letter before its provision to the Court. He expressed concern about it being made available in those circumstances. In addition, Ms McKeown noted that the letter was marked “without prejudice save as to costs”, and ought not therefore come before the Court without a waiver from Mr Whittaker. As it happened, Ms McKeown provided the letter to Mr Dalkie over the luncheon adjournment, and it was provided to me when Court resumed. On reading the letter it is clear that while it is marked “without prejudice save as to costs”, it does not qualify for the privilege. It contains no offer of settlement, and is merely a refutation of a demand Mr Riddick made for compliance with the restraint of trade. In addition, contrary to On-Line’s submission that the email and letter were irrelevant to the issues the Court had to determine, it was clearly relevant. The fact it had not been provided to the Court by the applicant for an interim injunction is troubling.
Upon reading the letter, a clearer picture emerges of the significance of Mr Bates’ May 2014 email to Mr Riddick. The letter is dated 9 May 2014. In it, Mr Whittaker’s solicitors argued that:
1. Under Clause 38.1, the “Term” of the franchise (as defined in Item of the Schedule) was 5 years from the commencement date, which Item 16 states was 1 April 2008 – i.e. any restraint based on the “Term” expired on 1 April 2013.
2. The “"Termination Date” is defined on page 6, and on the facts that date would appear to be 1 April 2013.
3. Your 7 May letter confirms that the “...Franchise Agreement dated 31 March 2008 was not renewed...” and that coincides with our instructions.
4. We are instructed that no separate “Restraint Agreement” (as defined on page 6 of the Franchise Agreement and referred to in Clause 38.2) was ever signed.
5. Clause 38.2 does not refer to any “Restraint Area” or “Restraint Period” as those terms are defined in Items 41 and 43 in the Schedule, and the Clause purports to apply from the Termination Date. However, in our opinion, Clause 38.2 is so broadly stated as to be unenforceable – it purports to be a restraint not to do work similar to the franchised business anywhere in the world in perpetuity. Following longstanding English and New Zealand authorities, in Air New Zealand Ltd v Wellington International Airport Ltd [2009] NZCA 259 the Court of Appeal confirmed that such a restraint of trade is unenforceable:
[159] The law will intervene against one who abuses a position of authority and acts unreasonably to inhibit another’s legitimate activity. An example of the principle is the rule inhibiting restraint of trade, stated by Lord Macnaughten in Maxim Nordenfeldt Guns and Ammunition Co v Nordenfeldt [1894] AC 535 at 565 (HL):
All interference with individually liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy and therefore void. Only if the conduct is reasonable is it justifiable: see Brown v Brown [1980] 1 NZLR 484 at 491 (CA) per Richardson J.
6. If the restraint of trade is unenforceable (because, on its terms, it is unreasonable because of its unlimited scope as to area or time) your client is unable to pursue proceedings successfully.
…
[76]These arguments are remarkably like those Mr Riddick raises in this case.
[77] The email from Mr Bates to Mr Riddick in reply is four days later and is clearly Mr Bates’ response to the contentions made by Mr Whittaker’s solicitors. Mr Bates used paragraph numbering reflecting that used in Mr Whittaker’s solicitors’ letter:
Comments in regards to letter from Bannister & von Dadelszen
1/ the term is 5x5x5 if I am not mistaken (but don't have a copy of the full agreement)
2/ Termination would be at the end of the 5x5x5
38.1 has not been complied with by the franchisee as they have competed directly and billed separately.
38.2 similarly provides an undertaking that from the termination date the franchise will not conduct a similar business
(This page is initialled and the agreement is signed presumably)
My opinion is that the restraint is agreed to by the parties by simply signing the agreement.
The separate clause that is an appendix J in the back of the agreement is a double up that reenforces the restraint. (Below ) But even if this is not signed separately restraint is at the very least implied and agreed too.
5/1 disagree with their opinion, as they pointed out there is sufficient flexibility in both the restraint area and restraint period defined in items 41 and 43 as to avoid any risk of the restraint being unreasonable because of unlimited scope, (the scope is clearly NOT unlimited)
6/ The restraint is enforceable for true reasons outlined in 5 (above)
7/ a, and b are nonsense, At no time has Tim made any assertions to Deane in regards to either of these issues. In regards to c my understanding is that Tim has orchestrated a “private deal” with this agency.
[78] Critical in this preliminary assessment of the merits of the parties’ cases is Mr Bates’ claim that he did not tell Mr Riddick the franchise agreement was automatically renewing. As I have noted, Mr Bates’ explanation for his denial is that he is:
…very familiar with the renewal process in the franchise agreement, i.e. written notice of renewal under cl 3.1, failing which cl 3.8 (continuing to operate on a monthly basis) may apply.
[79] The difficulty with this claim is that Mr Whittaker’s solicitors’ letter explicitly asserts, at paragraph 3, that the sub-franchise agreement had not been renewed. Mr Bates’ email of 13 May 2014 in reply makes no reference to the need for notice of renewal, or the important consequences of the failure to do so. Instead Mr Bates
referred to the term of the contract as “5x5x5” and that “termination would be at the end of the 5x5x5”. Had Mr Bates appreciated in 2014 the need for written notice of renewal, and the effect of cl 3.8 rendering the contract month-to-month in the absence of such notice, one would have expected him to have made this point to Mr Riddick at the time. Instead, he emphasised the renewal period.
[80] While this is not direct evidence supporting Mr Riddick’s claim of an estoppel by representation, it is certainly supportive of it, and undermines Mr Bate’s denial based on his claimed familiarity with the renewal provisions of the agreement.
[81] It is not possible, nor is it appropriate, to make any determination of the factual position in relation to Mr Riddick’s estoppel claim at this interlocutory stage. But based on the material currently available, the merits favour the defendant’s position. They certainly indicate that Mr Riddick’s counterclaim, and his argument that the restraint of trade has not been breached due to On-Line’s repudiation of the franchise agreement, must be taken seriously.
[82] And given the rather late and informal provision by On-Line of what appears to be an important piece of evidence bearing on the merits, I would also be concerned to grant an interim injunction before completion of discovery. Nor am I troubled by the effect of the late provision of Mr Riddick’s 21 September affidavit. There was still time for an affidavit in response from On-Line prior to the hearing had it wished to provide one.
The reasonableness of the restraint and the impact of s 83 of the CCLA
[83] On-Line accepts that the scope of the restraint in cl 38.2 is likely to be unreasonable. That was a sensible concession. A restraint that prevented Mr Riddick from pursuing photography services in the real estate market indefinitely and throughout New Zealand (if not further afield) is a perfect example of an unreasonable restraint.
[84] Despite this, On-Line argues that the apparent illegality of the term should be remedied at the interlocutory stage by the Court exercising its power in s 83(1)(b) of CCLA. Section 83 provides:
83 Restraints of trade
(1)The court may, if a provision of a contract constitutes an unreasonable restraint of trade,—
(a)delete the provision and give effect to the contract as amended; or
(b)modify the provision so that, at the time the contract was entered into, the provision as modified would have been reasonable, and give effect to the contract as modified; or
(c)decline to enforce the contract if the deletion or modification of the provision would so alter the bargain between the parties that it would be unreasonable to allow the contract to stand.
(2)The court may modify a provision even if the modification cannot be effected by deleting words from the provision
[85] There are differing views in the High Court as to the appropriateness of the Court exercising a power under s 83 (or its predecessor s 8 of the Illegal Contracts Act 1970) at the interlocutory stage. For example, in Grigg Auto Sales v ACP Media Ltd,18 the High Court considered the District Court Judge ought to have considered whether what was sought in the injunction was a justified restraint.19 However, in two subsequent decisions of this Court, doubt has been cast on the appropriateness of exercising the power at an interlocutory stage. First, in Deacon Holdings Ltd v Colenso Holdings Ltd,20 Smellie J considered it was inappropriate to exercise the power before trial. A similar view was expressed by Moore J in Mike Pero (New Zealand) Ltd v Heath,21 where His Honour noted:
[53] Even if a Court or an arbitrator ultimately determines that the restraints extend beyond what is reasonable the remedies for an adjustment may be made under s 8 of the Illegal Contracts Act 1970. That is a question to be addressed at the substantive phase of the dispute when there is a more comprehensive body of evidence; not at an interlocutory stage.
[86] There are undoubtedly significant difficulties with the Court exercising a far- reaching statutory power to modify the terms of a contract at an interlocutory stage. I respectfully prefer the approach in Deacon Holdings and Mike Pero. The better view is to consider the likely need for modification as a factor in the overall assessment of
18 Grigg Auto Sales v ACP Media Ltd HC Wellington CIV-2003-485-932, 5 June 2003, per Ronald Young J.
19 At [32].
20 Deacon Holdings Ltd v Colenso Holdings Ltd HC Auckland CP 125-SW00, 12 April 2000 at [21].
21 Mike Pero (New Zealand) Ltd v Heath, above n 9, at [53].
the interests of justice. It may be that at an interlocutory stage the Court ought to restrain a defendant on terms which are more limited than the terms of the restraint sought. Doing so is not the result of a power under s 83. It is simply the result of the exercise of the Court’s equitable jurisdiction to grant injunctive relief, requiring the balancing of the risk of irreparable harm to both sides pending trial.
[87] Regardless, I am left with no doubt that the restraint in the present case is unreasonable. The plaintiff’s ability to achieve a final order will very much depend on its ability to persuade the trial Court that it should exercise its discretion to modify, rather than excise, the provision. And that leads to the next issue for consideration — the reasonableness of the restraint assuming the franchise agreement became a month- to-month relationship as a result of the holding-over provision in cl 3.8.
The impact of the holding-over provision on the reasonableness of the restraint
[88] The essential argument for Mr Riddick is the extent of any restraint — and therefore an assessment of its reasonableness — must be assessed against the loyalty to the venture both parties have made. A commercial relationship renewed month to month and terminable with only one month’s notice could not warrant a restraint of trade extending for two years after termination, especially where On-Line was able to cancel for any reason and Mr Riddick’s position was correspondingly fragile.
[89] In reply, Ms McKeown argued that the key factor was not the duration of the immediate contractual relationship, but the overall length of time Mr Riddick had occupied as the regional franchisee: over 14 years. She argued that the duration of Mr Riddick’s presence as the Open2View area franchisee had strongly skewed the market and made entry for a replacement franchisee virtually impossible. A restraint of two years starting from the grant of the order (rather than termination) would be reasonable in that it would enable the establishment of a new area franchisee.
[90] It is unnecessary to determine whether a two-year restraint period would be unreasonable at this stage. However, if On-Line’s principal submission is correct, and Mr Riddick’s security of tenure in the franchise from September 2011 was limited to a month at most, terminable at will without any triggering event, it would seem likely he ceased to have a franchise business of any value from that point on. He had only
the security of a one-month contractual commitment from On-Line to sell to a prospective purchaser.
[91] The value of a franchise on sale is strongly linked to the duration of the right of a purchaser to operate it. Given the franchise agreement initially gave Mr Riddick up to 20 years’ trading to recover his capital investment in the enterprise, the fact those rights came to an end after only five years is material to a consideration of the reasonableness of the period of any restraint, and all the more where, as here, On-Line terminated the franchise agreement and seeks to remove Mr Riddick from the market.
[92] This case is very different to most franchise cases where injunctions have been granted. Those cases generally involve a franchisee quitting the franchise to establish a competing business, taking knowledge and goodwill with them. There is no hint of that in this case. On-Line is solely responsible for the situation it now faces.
[93] In my view, On-Line’s decision to take advantage of the holding-over provision after nine years starts to tip the public interest balance against enforcement of the restraint. As the Court of Appeal noted in Skids, franchise cases involving enforcement of a restraint of trade have a closer alignment to those involving an employer and employee rather than a vendor and purchaser.22 A franchisee commonly pays an upfront capital sum to the franchisor to secure the benefit of the franchise. A franchisor who then seeks to take advantage of a holding over provision to cancel a franchise agreement and trigger a restraint, with the ability to either sell the franchise rights to a new franchisee or operate the franchise itself, ought to be confident the terms of the restraint are reasonable without recourse to s 83. If the Court were prepared to exercise its power under s 83 in such circumstances, it could encourage franchisors to terminate franchise agreements subject to holding over provisions to gain commercial benefits at the franchisee’s expense. In doing so, the franchisor removes a willing participant from the market and reduces competition. In my view, s 83 should not be exercised in a way that would encourage such commercial practices.
[94] For these reasons, I am not prepared to grant an interim injunction that would, by the time of trial, begin to approach the final relief sought by On-Line. Indeed, I
22 Skids Programme Management Ltd v McNeill, above n 8, at [50].
would be concerned to grant any restraint beyond a few months given the impact of the holding-over provision according to On-Line, and the effects of its election to terminate on one month’s notice when combined with the impact of the restraint on the defendant.
Mr Riddick’s alternative argument: the restraint was triggered in 2011
[95] If the franchise agreement was not renewed by conduct, Mr Riddick argues the proper construction of cl 38.2 is that the restraint became operative from the “Termination Date”, as that term is used in cl 38.2. The effect of this interpretation would be that the restraint period began on 1 September 2011, and whatever reasonable period might be applied is now at an end. Mr Riddick also relies on several cases to support a submission that the restraint of trade cannot be assumed to be implied into the holding over arrangement without express provision.23
[96] In response, On-Line submits that such an interpretation is contrary to common sense and would lead to absurd results. In effect, Mr Riddick would be obliged by the restraint not to provide real estate photography services while continuing to provide those services under the agreement.
[97] Given the conclusions I have already made it is unnecessary to finally resolve this issue. I would, however, make one brief observation.
[98] It would seem most consistent with common sense and commercial reality that the terms of the month-to-month relationship between the parties incorporated all the relevant terms of the franchise agreement, including the restraint of trade. And, it would seem most likely that any restraint would commence on notice of termination, including termination of a holding-over period.
[99] However, that view must be tempered by reference to Item 45 of the schedule, which is set out at [28] above. Item 45 defines the “Restraint Period” of the agreement.
23 See for example Mainland Digital Marketing Ltd v Willets [2019] NZHC 1201 at [50], where Nation J said “… 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.”
The cascading options, unusually, begin with “The Term”, and then “The Renewal Term”, before moving to restraint periods specified to run for a fixed period of time beginning from the “Termination Date”.
[100]On one view, the definition of “Restraint Period” could be taken to suggest that
— consistent with Mr Riddick’s argument — the parties contemplated the non- competition period might not operate after termination of the agreement, but instead would be limited to the duration of it. This would reflect a restraint limited to cl 38.1, which imposes non-competition requirements during the term of the franchise agreement, rather than one arising under cl 38.2, which imposes restrictions after the agreement is terminated.
[101]Whatever the right answer is, the question is one for trial.
Overall conclusion on serious question to be tried
[102] Overall, while I am satisfied that On-Line has established there is a serious issue to be tried, I have also reached the clear view that the merits currently favour Mr Riddick. This conclusion is also relevant to my consideration of the balance of convenience and the overall interests of justice.
Balance of convenience
[103] Next, it is necessary to consider the effect of the grant of an interim injunction on the defendant, and to balance that against the effect of refusing to do so on the plaintiff. This is commonly described of as “the balance of the risk of doing an injustice”.24 It is the “guiding principle” in granting an interim injunction.25 Although the enquiry is flexible,26 the Court will commonly consider:
(a)the adequacy of damages to both parties;
(b)preservation of the status quo;
24 Cayne v Global Natural Resources Plc, above n 15 at 237; McLaughlin v McLaughlin [2019] NZHC 2597 at [37].
25 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 337.
26 McLaughlin v McLaughlin, above n 24, at [38].
(c)relative strength of each parties’ case;
(d)the conduct of the parties; and
(e)the effect on innocent third parties.
[104] In this case, the adequacy of damages on both sides is a neutral factor. While it may be possible to calculate On-Line’s losses by reference to reduction in franchise income, and therefore quantification may not be a difficult exercise, as Gault J noted in Mad Butcher Holdings Ltd v Standard 730 Ltd, it is wrong to equate ease of calculation of loss with the adequacy of damages as a remedy.27 A party to a contract with a valid restraint of trade clause is entitled to have the clause enforced and damages would not often be regarded as an adequate remedy for loss of the plaintiff’s contractual rights.28
[105] Equally, Mr Riddick is reliant on the income he is currently generating from the provision of photography services to the real estate market in order to fund a mortgage and support his wife and two young children. His evidence indicates that the effect of an injunction will be calamitous. It is likely to be cold comfort for Mr Riddick to learn after trial that his rights had been infringed by the grant of an interim injunction if his ability to earn a living and meet his financial commitments in the interim is removed by a Court order.
[106] In my view, the determinative factors under the balance of convenience are the relative strength of each parties’ case, the conduct of the parties, and the plaintiff’s delay in seeking interim relief.
[107] Turning first to the strength of the parties’ cases, as I have already found, the overall merits currently favour Mr Riddick. Should his position be vindicated at trial, it is in fact On-Line which is in breach of the franchise agreement. If On-Line repudiated the franchise agreement when it gave notice of cancellation, it would seem highly likely Mr Riddick had a right to cancel it. And where a franchisor is found to
27 Mad Butcher Holdings Ltd v Standard 730 Ltd, above n 11, at [40].
28 At [40].
be in breach of a franchise agreement, it is a live question whether a restraint of trade will survive cancellation.29 As the judgments in Pirtek30 and Health Club Brands Ltd v Colven Botany Ltd indicate:31
… there may be good arguments for construing the restraint of trade clause as applying after termination for breach by the franchisee … . But arguments that it should be construed to apply after termination for breach by the franchisor are far less clear.
[108] Next there is the conduct of the parties. There are accusations and counteraccusations about the conduct of both On-Line and Mr Riddick before termination. It is unnecessary, if not impossible, to resolve the merits of those allegations at this stage. However, what is not in dispute is that On-Line purported to terminate a business relationship lasting almost 14 years with one month’s notice. As Ms McKeown frankly accepted, on her client’s case the contract permitted termination without reason. As Mr Dalkie pointed out, had there been a breach of the franchise agreement or some inadequacy in Mr Riddick’s performance, one might have expected a franchisor committed to the enterprise to have used the contractual machinery available to remedy any such problems. Indeed, On-Line had chosen to do this in 2018 when it issued two breach notices to Mr Riddick. But it did not follow this path again in 2020. Without expressing a final view, I am left with some unease about the reasons for termination of Mr Riddick’s franchises. The peremptory cancellation of the franchise unrelated to an on-going and serious issue of non-performance by the franchisee informs my assessment of the conduct of the parties and the balance of convenience.
[109] Here, it appears that On-Line may have created its current difficulties by electing to cancel the agreement rather than seeking to resolve any genuine commercial or relationship issues that might have existed. The matters it points to as suggesting underperformance by Mr Riddick32 are, in my assessment, either relatively
29 See Jeremy Finn and Stephen Todd and Matthew Barber Burrows Finn & Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at 734.
30 Pirtek (New Zealand) Ltd v Mega Fluid Solutions Ltd HC Hamilton CP5/03, 7 March 2003.
31 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [33]. See also Enersave Products Ltd v Arrowsmith [2013] NZHC 467 at [35]–[37].
32 The principal matter in Mr Bates’ evidence is a concern over a breakdown in the relationship between Mr Riddick and the owner of a local real estate franchise. At most it appears the client expressed a desire not to have direct involvement with Mr Riddick in favour of a contract photographer engaged by Mr Riddick in the area. In oral submissions Ms McKeown pointed to
minor, or of historical interest only. They do not appear to provide an obvious rational basis for the cancellation decision. This in turn, according to Mr Dalkie’s submission, suggests the decision to cancel was opportunistic and for an ulterior purpose.
[110] As I have noted, this case is far removed from those relied on by On-Line where a franchisee has established a rival business and purported to terminate the contract while seeking to exploit the goodwill and know-how of the franchisor. In the present case On-Line simply terminated a 14-year business relationship and now seeks to enforce a provision before trial that will prevent Mr Riddick from earning an income.
[111] Finally, there is the important question of the plaintiff’s delay in bringing an application for an interim injunction.
[112] The status quo which is normally in contemplation is that which existed at the end of the term of the franchise agreement. However, Mr Riddick argues that the status quo to be preserved must be considered in light of On-Line’s nine-month delay before commencing proceedings. In that time Mr Riddick has established and continued a new photography business, on which his ability to derive an income is now dependent. There is a difference between stopping a franchisee from starting something new — where an injunction would at worst postpone the start — and a situation where there is an established enterprise.33 In ER Squibb & Sons Ltd v ICR NZ Ltd,34 the Court observed where a plaintiff had delayed bringing an application for an injunction, or essentially has sat back for months and allowed a defendant to expand operations without protest, the status quo would be taken as the date of the proceedings. Here, On-Line’s delay has resulted in a change of the status quo. Mr Riddick has spent the best part of a year establishing a new business. So, the effect of an injunction now is not the same as one imposed following the putative termination of the franchise agreement.
the removal of Open2View signage from the side of a vehicle and Mr Riddick’s refusal to attend area meetings. Finally, there was some suggestion of Mr Riddick doing private work for Jennian Homes, so that the income generated was removed from the franchised business. In reply, Mr Dalkie pointed out that the specific job involving Jennian occurred in 2016, some four years before notice of termination, and involved a photo shoot worth $258.
33 See the observations of Diplock LJ in American Cyanamid v Ethicon Ltd, above n 7, at 408.
34 ER Squibb & Sons Ltd v CIR NZ Ltd (1988) 32 CLR 296 at 49.
[113] The explanation advanced by On-Line for its delay is not convincing. While it was suggested that it was unaware initially of Mr Riddick’s breach of the restraint, and then needed time to gather evidence, a different position is revealed by its solicitor’s correspondence from October 2020. As is made clear from [49]–[52] above, there was an almost eight month delay after On-Line had instructed its solicitors to commence proceedings in the absence of an adequate undertaking by Mr Riddick that he would not act in breach of the restraint of trade before proceedings were commenced. No such undertaking was forthcoming. It was unnecessary, in my view, for further evidence to have been found. It was readily apparent from the correspondence in October 2020 that Mr Riddick no longer considered himself bound by the restraint of trade.
[114] In addition, it seems obvious that the plaintiff was aware at an early stage that Mr Riddick was in competition with it. It was aware that the Open2View Taranaki Facebook page had been converted for use in Mr Riddick’s new enterprise. Mr Bates’ evidence indicates that visits to local real estate agents indicated that they did not wish to use Open2View any longer as a result of Mr Riddick’s comments to them about the end of his association with Open2View.
[115] Nor is the approach to delay in Supatreats Asia Pte Ltd v Grace & Glory Ltd,35 on which Ms McKeown relied, of assistance to On-Line’s cause. In that case, Wylie J was not persuaded that the plaintiff’s delay was a basis on which to deny it an interim injunction. In doing so, the Court observed that the defendant had been on early notice that the plaintiff intended to enforce its claimed rights under the franchise agreement.36 Ms McKeown argued the same position applies in this case.
[116] I do not accept that submission. In Supatreats, the evidence established the plaintiff applied for an interim injunction just over a month after becoming aware of the breach of the restraint of trade.37 No change of position in that short period would tip the balance against the applicant. In this case, the delay is nine months. The evidence indicates On-Line had early knowledge of the anticipated breach of the
35 Supatreats Asia Pte Ltd v Grace & Glory Ltd [2018] NZHC 1612 at [71]–[76].
36 At [73].
37 At [73].
restraint. It threatened proceedings but did nothing, leaving Mr Riddick to change his position in the interim.
[117] Finally, On-Line’s position at hearing was that no concession ought to be made for its delay in seeking interim relief. It argued that it should be entitled to a two-year restraint commencing from the grant of any interim injunction, rather than the date of the alleged termination of the franchise agreement.
[118] In my view, given the further delay until trial, the grant of interim relief at this juncture would in substance amount to final relief on a summary basis. In such cases, it is more appropriate to require an applicant to meet the threshold applicable to applications for summary judgment, rather than ask whether there is a serious question to be tried. On that assessment, given my findings on the merits of the two cases, On- Line has fallen well short of the mark.
[119] Overall, the plaintiff’s delay has materially altered the status quo. It has not provided a convincing explanation for the its delay. This factor alone would leave me satisfied that the balance of convenience points against the grant of an interim injunction. An injunction is, after all, an exercise of the Court’s equitable jurisdiction, and courts of equity have long recognised that unreasonable delay affecting others will tell against the grant of equitable relief.38
Overall interests of justice
[120] There is nothing under this head that would lead me to depart from my conclusion under the balance of convenience. The factors that I have identified as telling against the grant of an interim injunction under the balance of convenience also support the conclusion that the interests of justice are best served by declining the plaintiff’s application. It must seek its remedy at trial and may be limited to a claim for damages.
38 Where an interlocutory injunction is concerned, delay of a relatively short time is generally held to be unreasonable, and ordinarily the plaintiff should seek relief promptly after they obtain notice of the wrongful acts in question. See I.C.F Spry QC The Principles of Equitable Remedies (9th ed, Sweet & Maxwell, London, 2014) at 507.
[121] In relation to On-Line’s claim to Mr Riddick’s cell-phone number, that alone would not warrant an interim injunction at this late stage. The evidence is that Mr Riddick is no longer using it for business purposes. Given the nine-month delay in seeking an injunction, there would seem little benefit for On-Line in securing the number.
Conclusion and result
[122]On-Line’s application for interim injunction is dismissed.
[123] If the parties are unable to reach agreement on the question of costs, memoranda should be filed. My current inclination would be to award costs to Mr Riddick on a 2B basis. Memoranda from Mr Riddick should be filed within ten working days, and not exceed five pages in length, including schedules. Any memorandum in reply by On-Line should be filed ten working days thereafter, and should also be limited to five pages, including schedules.
Isac J
Solicitors:
Duncan Cotterill, Wellington for Plaintiff Nicholsons, New Plymouth for Defendant
On-Line Digital Solutions Ltd v Riddick [2021] NZHC 3199
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