One New Zealand Group (fta Vodafone New Zealand Limited)
[2024] NZHC 633
•22 March 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-969
[2024] NZHC 633
BETWEEN ONE NEW ZEALAND GROUP (formerly
trading as VODAFONE NEW ZEALAND LIMITED)
ApplicantAND
REDFONE LIMITED
First Respondent
GRANT KNOX and LINDA KNOX
Second Respondents
Hearing: 5 March 2024 Appearances:
F C Monteiro and N Skara for the Applicant S Kilian for the Respondents
Judgment:
22 March 2024
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
[Application for summary judgment]
This judgment was delivered by me on 22 March 2024 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Wilson Harle (Felicity Monteiro/Nik Skara), Auckland, for the Applicant Kilian & Associates (Shane Kilian), Auckland, for the Respondents
ONE NEW ZEALAND GROUP (formerly trading as VODAFONE NEW ZEALAND LIMITED) v REDFONE LIMITED [2024] NZHC 633 [22 March 2024]
Introduction
[1] One New Zealand Group Limited (formerly Vodafone New Zealand Limited) (Vodafone) applied for defendant’s summary judgment in relation to a claim by Redfone Limited (Redfone), Grant Knox (Mr Knox) and Linda Knox (Mrs Knox) (the plaintiffs).
Background
[2] Mr and Mrs Knox (the Knoxes) are the shareholders and directors of Redfone. They are also named as guarantors and franchise principals in the franchise agreement between Redfone and Vodafone (the Redfone Agreement).
[3] One of Vodafone’s franchises concerned the management of stores at the terminals of Auckland, Wellington, Christchurch, and Queenstown airports (Airport Franchise). The franchisee of the Airport Franchise was GSM Retail Limited (GSM). The Knoxes were employed by GSM.
[4] For reasons in dispute, Vodafone decided to not renew its franchise agreement with GSM which was set to expire in June 2017. Vodafone was happy with the Knoxes’ performance, and they appeared to be good candidates to enter a franchise agreement with.
[5] In 2016, Vodafone discussed the possibility of a franchise agreement with the Knoxes. On 2 February 2017, Vodafone entered into a franchise agreement with Redfone which was incorporated by the Knoxes as the party that would be the franchisee.
[6]The Knoxes were the party to the agreement as guarantors.
[7]On 18 May 2017, Vodafone terminated the Redfone Agreement.
[8] The Knoxes were both convicted of dishonesty offences in criminal proceedings subsequent to the termination of the Redfone Agreement.
Vodafone’s application for summary judgment
[9]Vodafone seeks the following orders:1
(a)Summary judgment against the plaintiffs that none of the causes of action in the plaintiff’s statement of claim can succeed; and
(b)Costs.
[10]The grounds on which the orders are sought are, in summary:2
(a)The first and second causes of action in the plaintiff’s statement of claim cannot succeed.
(b)Redfone and Vodafone entered into the Redfone Agreement under which Redfone was the franchisee, and Vodafone was the franchisor. Under this agreement, the Knoxes were franchise principals.
(c)The Redfone Agreement contained clause 11.1(f), which states:
11.1 Events of Termination: Without prejudice to any other rights of the Franchisor to terminate in the Redfone Agreement, the Redfone Agreement may be terminated by the Franchisor immediately, by giving written notice to the Franchisee if:
(f) there is any conduct by the Franchise Principal, or the Franchisee or its directors, officer, employees, agents or contractors that the Franchisor considers is fraudulent, unethical or may cause loss of reputation to the Franchisor.
1 Interlocutory application on notice for defendant’s summary judgment dated 28 July 2023 at [1].
2 At [2].
(d)Vodafone was entitled to terminate the Redfone Agreement if there was conduct by a franchise principal which it considered was fraudulent, unethical or may cause loss of reputation to Vodafone.
(e)It was reasonable for Vodafone to consider that it may cause damage to Vodafone’s reputation to enter into an agreement with a franchise principal who had admitted to misappropriation of their employer’s property and, as a result, was going to be subject to criminal investigation.
(f)The termination under clause 11.1(f) by Vodafone was valid and reasonable. There was no breach of any duty of good faith or breach of contract by Vodafone.
Affidavit of Owen Grant Swinson dated 21 July 2023
[11] Mr Owen Grant Swinson (Mr Swinson) has made an affirmation in support of Vodafone’s application.3 He was the Distribution Strategy Manager of Vodafone at the time the events relevant to this matter took place.
[12] Mr Swinson deposes that in March 2017, Mr Roberts, the Head of Distribution and Channels told him that he had heard from GSM’s directors that they were looking into potentially serious issues with the Knoxes which could lead to the termination of their employment with GSM. He notes that the phone call was followed by an email from the director of GSM, Mr Landsman, to him and Mr Roberts.
[13] Mr Swinson states that in April 2017, Mr Berry, the Retail Channel Manager informed him that he had received a troubling phone call from Mrs Knox in which she had confessed to Mr Berry that she had used Prezzy cards belonging to GSM for her own purposes.
3 Affirmation of Owen Grant Swinson in support of defendant’s interlocutory application for summary judgment dated 21 July 2023.
[14] Mr Swinson deposes that Mr Berry’s report was alarming as the franchise agreement would have seen Redfone operating a business under the brand of Vodafone. On 15 May 2017, he states that Vodafone received a letter from GSM confirming the results of the employment investigation into the Knoxes’ conduct. He notes that the letter stated that shortly after the phone call to Mr Berry, Mrs Knox had confessed to theft of Prezzy cards to GSM’s directors but indicated that Mr Knox had “nothing to do with it”. Mr Swinson deposes that the letter also confirmed GSM’s intention to pursue the matter with the Police.
[15] Mr Swinson deposes that Vodafone was close to the expiry of the GSM contract, but the successor franchisee, Redfone, did not seem suitable to be entrusted with the brand. He states that what appeared to be admission from Mrs Knox along with the knowledge that GSM intended to report the matter to the Police, meant that there was no reasonable option other than to terminate the Redfone Agreement. Mr Swinson notes that the conduct was fraudulent and could have caused loss of reputation to Vodafone.
[16] Mr Swinson deposes that the meeting between the Vodafone decision makers and the Knoxes took place on 18 May 2017. He states that he attended the meeting along with Mr Roberts. He states that while their view was that they could terminate the agreement, they wanted to give the Knoxes a chance to persuade them otherwise.
[17] Mr Swinson states that at the meeting, he asked Mrs Knox if what Mr Berry had told him had taken place. He deposes that Mrs Knox did not refute the allegation, nor she made any further admission. Instead, she reiterated that Mr Knox had done nothing wrong. He states that nothing the Knoxes said at the meeting led them to doubt the need to terminate. He deposes that the Knoxes were provided with a letter which had been prepared before the meeting, terminating the Redfone Agreement.
[18] Mr Swinson concludes his affidavit by stating that the Knoxes had appeared to be excellent candidates until they knew of the dishonesty involved in their employment. He further states that terminating the Redfone Agreement seemed certain to put Vodafone in a worse commercial position but was a necessary step due to the potentially significant damage to Vodafone’s reputation if it had continued.
Affidavit of David Keith Berry dated 26 July 2023
[19] Mr Berry, an employee of Vodafone, has made an affidavit in support of Vodafone’s application.4 He was the Retail Channel Manager at the time the events relevant to this matter took place.
[20] He deposes that towards the end of April 2017, he received a phone call from Mrs Knox. He mentions that the call was unpleasant as Mrs Knox was crying and very upset, that he can recall her saying “I fucked up” and “Grant had nothing to do with it”. He states that he discerned the reason for the call was something to do with Mrs Knox misusing money or Prezzy cards which belonged to GSM. He further states that when he asked Mrs Knox what sort of sum was in question, Mrs Knox said, “well it’s not $100,000”. Mr Berry understood that Mrs Knox was confessing to some sort of dishonesty or theft.
[21] Mr Berry deposes that he reported his conversation with Mrs Knox to Mr Swinson and passed on his understanding that Mrs Knox had confessed to him. He states that the phone call was concerning enough for them to form the view that the franchise agreement Vodafone had recently entered into with Redfone may need to be terminated.
Plaintiff’s opposition
[22]The plaintiffs oppose the application on the following grounds:5
(a)Respondents have strong causes of action supported by necessary evidence; and
(b)Costs cannot be sought against the Respondents as they are legally aided.
4 Affidavit of David Keith Berry in support of interlocutory application for summary judgment dated 26 July 2023.
5 Notice of opposition to the interlocutory application on notice for summary judgment dated 11 August 2022 at [2].
Affidavit of Linda Knox dated 11 August 2023
[23] Mrs Knox has made an affidavit in support of opposition to the interlocutory application.6 In her affidavit, she addresses the affidavits of Mr Berry and Mr Swinson.
[24] She refers to the statement to the Police attached to Mr Berry’s affidavit where he confirms that it was at the stage of providing that statement that he considered Mrs Knox’s statement to be about Prezzy cards. She deposes that it indicates that he was not aware of any concerns about Prezzy cards during that discussion. She states that this position was further confirmed when Mr Berry was previously cross- examined.
[25] Mrs Knox deposes Mr Swinson was aware from the documents held by Vodafone that the first time an issue relating to the use of Prezzy cards arose was once the Franchise Agreement was already terminated by Vodafone. She further states that the determination to terminate the Agreement was formulated before the letter they received from GSM dated 15 May 2017.
[26] Mrs Knox refers to the email between Mr Landsman, Mr Reen, Mr Roberts and Mr Swinson which she says is an indication that a meeting was planned between the four of them. She states that GSM had already determined the termination of her and Mr Knox’s employment, despite the absence of an investigation or any disciplinary meeting.
[27] Mrs Knox further refers to an email chain between various parties within Vodafone following the letter of 15 May 2017. She deposes it can be seen from the communication that Mr Roberts relied solely on the information provided by Mr Reen, without consideration of the facts alleged. She states that Mr Swinson and Mr Roberts had already made an arrangement with Mr Reen that he was to take over the Franchise Agreement once it was terminated with Redfone. She also notes that the termination of Redfone Agreement had already been determined and a letter was drafted.
6 Affidavit of Linda Knox in support of opposition to the interlocutory application on notice for sumary judgment dated 11 August 2023.
[28] She deposes the email of 18 May 2017 indicated that Mr Williams signed the termination of the Redfone Agreement and agreed on the appointment of Mr Reen at
12.26 pm on 18 May 2017 which was prior to the meeting with the Knoxes.
[29] Mrs Knox deposes Vodafone did not speak to either Mr Knox or her to fully obtain information as to what had happened.
Affidavit of Grant Knox dated 11 August 2023
[30] Mr Knox has made an affidavit in support of opposition to the interlocutory application.7 He deposes that the meeting on the 18 May 2018 occurred at or about 1pm where the Knoxes and Mr Swinson and Mr Roberts were present on behalf of Vodafone. He deposes that the termination letter was provided at the beginning of the meeting, prior to any discussions.
Legal principles
[31] Rule 12.2(2) of the High Court Rules 2016 provides that the Court may enter judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[32] The test for defendant’s summary judgment was set out by the Court of Appeal in Stephens v Barron:8
(a)The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually this will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim.
(b)An application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment able to be properly arrived at only after a full hearing of the evidence.
(c)The Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment
7 Affidavit of Grant William Knox in support of the notice of opposition to the interlocutory application on notice for summary judgment dated 11 August 2023.
8 Stephens v Barron [2014] NZCA 82 at [9] (footnotes omitted).
is not to be arrived at on a fine balance of the available evidence as would be appropriate at a trial.
(d)The residual discretion of the Court to refuse summary judgment would be properly invoked to avoid the oppression which would otherwise result if an application by a defendant for summary judgment would pre-empt a plaintiff exercising the right to amend the pleadings.
(e)Summary judgment should not be applied for unless the substantive merits of the case are clear and capable of summary disposal.
[33]In Westpac Banking Corp v M M Kembla New Zealand Ltd,9 Elias CJ said:
[63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff's claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff's case prematurely before completion of discovery or other interlocutory steps and before the plaintiff's evidence can reasonably be assembled.
[64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.
[34] In Bernard v Space 2000 Ltd,10 Thomas J, referring to the predecessor of r 12.2(2), described the onus on the defendant as requiring a “king hit”:
[21] Rule 136(2), as indicated in Kembla (at 313), is only appropriate where the defendant has a “clear answer to the plaintiff which cannot be contradicted”. Summary judgment for a defendant “will arise where the defendant can offer evidence which is a complete defence to the plaintiff's claim”. (Emphasis added). The requirement that there be a clear answer which cannot be contradicted and a complete defence before judgment is entered for a defendant under r 136(2) is not to be disregarded. Examples which are given of appropriate cases for summary judgment under the subrule are where the wrong plaintiff has proceeded (Coastal Tankers Ltd v Southport NZ Ltd 17/5/99, Master Venning, HC Invercargill, CPI4/96) or where the situation is clearly one of qualified privilege (Ferrymead Tavern Ltd v Christchurch Press Ltd 11/8/99, Master Venning, HC Christchurch, CPI84/98). Thus, the subrule
9 Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
10 Bernard v Space 2000 Ltd (2001) 15 PRNZ 338 (CA).
contemplates an answer which is clear-cut; what in colloquial language would be described by counsel as a “king hit”.
Analysis
[35] The issue to be determined in this judgment is whether either of the causes of action brought by the plaintiffs against Vodafone can succeed. These causes of action are:
(a)in respect of Redfone, an alleged breach of contract by Vodafone in terminating the Redfone Agreement; and
(b)in respect of the Knoxes, a breach of duty owed by Vodafone to the Knoxes personally as franchise principals of the Redfone Agreement, caused by the alleged breach of contract by Vodafone in terminating the Redfone Agreement.
[36]I deal with each of these causes of action in turn.
First cause of action – breach of contract
[37] Ms Felicity Monteiro (Ms Monteiro), for Vodafone, submits the first cause of action cannot succeed because Vodafone can establish that:
(a)Vodafone terminated the Redfone Agreement in accordance with cl 11.1(f); and
(b)it did not act in bad faith in doing so.
[38] Ms Monteiro submits that only the following four requirements must be met for a valid termination under cl 11.1(f):
(a)there must have been conduct;
(b)by a franchise principal or the franchisee or its director, officer, employee, agent or contractor (Relevant Person);
(c)Vodafone must consider that the conduct by the Relevant Person is fraudulent or unethical, or that the conduct may cause loss of loss of its reputation; and
(d)Vodafone must provide written notice of termination.
[39] Ms Monteiro submits it is clear that there was some conduct by Mrs Knox while she was a director of Vodafone. She is expressly identified in the Redfone Agreement as a franchise principal, and Vodafone gave Redfone written termination. Accordingly, the requirements set out at [38](a), (b) and (d), are satisfied.
[40] Ms Monteiro submits the only remaining question is whether the requirement set out at [38](c) has been complied with, namely Vodafone considered that the conduct was fraudulent or unethical, or that it may cause loss of its reputation. She submits that Vodafone considered the conduct of Mrs Knox to be both fraudulent and unethical (given the subsequent criminal prosecution and guilty verdicts). Ms Monteiro submits that the plaintiffs will have no viable causes of action if it is shown that Vodafone considered the conduct to be fraudulent and unethical, and that the conduct may have caused loss of its reputation.
[41] Ms Monteiro emphasises the wording of cl 11.1(f), which provides Vodafone with the sole discretion to terminate the Redfone Agreement if Vodafone considers that the conduct by the relevant person was fraudulent or unethical or may cause loss to Vodafone’s reputation. She submits that it is sufficient to meet the requirement in cl 11.1 (f) if Vodafone reasonably considered, rightly or wrongly, that there was a chance Mrs Knox’s conduct could cause loss of its reputation.
The default rule
[42] For the purposes of applying for defendant’s summary judgment, Ms Monteiro has adopted the position that the expanded “default rule” applies to Vodafone in its actions in terminating the Redfone Agreement. The “default rule” is that a party must act reasonably when exercising a contractual discretion as discussed in the decision of
Woolley v Fonterra Co-Operative Group Ltd.11 As expressed in the Woolley decision, the default rule prevents a party from exercising the seemingly unfettered contractual discretion if it does so arbitrarily, capriciously, in bad faith or unreasonably, albeit only in the sense that no contracting party could have rationally so acted.
[43] An expanded form of the default rule is adopted in the United Kingdom Supreme Court decision of Braganza v BP Shipping.12 The effect of this decision was to import into the default rule consideration of the decision-making process ensuring that when the parties exercise a contractual discretion, relevant matters are considered and irrelevant matters are ignored. Isac J summarised the test from Braganza in the Woolley decision, as assessing:13
whether the conclusion reached was so unreasonable that no reasonable authority could ever have come to it – the common understanding of the Wednesbury unreasonableness – but also whether relevant matters have been taken into account in the decision-making process or irrelevant matters ignored, which is the often-forgotten element of the Wednesbury test.
[44] Ms Monteiro submits that on any standard, Vodafone had not acted unreasonably or in bad faith in terminating the Redfone Agreement. Given the approach taken by Ms Monteiro of holding Vodafone to the standard of the expanded default rule, it is not necessary in this judgment to decide the extent to which the expanded default rule applies in New Zealand as considered by the Court of Appeal in the Woolley decision.
Did Vodafone act reasonably in terminating the Redfone Agreement?
Issues raised by the plaintiffs
[45] Ms Monteiro summarises the plaintiffs’ allegations that Vodafone breached the duty of good faith and acted unreasonably by terminating the Redfone Agreement, by failing to consider:
(a)that the conflict of interest between GSM and the Knoxes;
11 Woolley v Fonterra Co-Operative Group Ltd [2023] NZCA 266 at [103].
12 Braganza v BP Shipping [2015] UKSC 17, [2015] 1 WLR 1661.
13 Woolley v Fonterra Co-Operative Group Limited [2021] NZHC 2690 at [419].
(b)that the directors of GSM were motivated to remove the Knoxes as competition;
(c)that the alleged period of offending demonstrates that GSM waited until the last minute to raise any issues;
(d)that there was no proper investigation and no opportunity to reply;
(e)that the Redfone Agreement had not yet commenced;
(f)that there was no evidence of when the offending occurred;
(g)that the termination clause related to cl 4.9 directly.
[46] Ms Monteiro also summarises that the plaintiffs allege that Vodafone breached the Redfone Agreement by:
(a)disclosing the Redfone Agreement to GSM;
(b)not conducting a proper investigation;
(c)not identifying the reputational damage that Vodafone said would occur;
(d)not telling Mr Williams (Vodafone Consumer Director) about the GSM conflict of interest.
[47] Mr Kilian, for the plaintiffs, submits that there is an inherent lack of credibility to the evidence that has been provided by Vodafone. He submits that instead of focusing on the evidence Vodafone has in its possession, it has selectively attempted to show a set of facts which Vodafone knows is inconsistent with the evidence.
[48] Mr Kilian submits that Vodafone’s evidence lacks credibility which can be highlighted by the following key aspects of the evidence before the Court:
(a)The evidence of Mr Berry refers to a telephone discussion 2½ years prior to the formal witness statement being made.
(b)The witness statement has to be taken in the context that there are no contemporaneous notes that were referred to in the discussion. The call took place in April 2017 and Mrs Knox admitted to making a mistake but the nature of that mistake was unknown to Mr Berry at the time.
(c)Mr Berry was one of the parties that received the email correspondence from Mr Swinson. The Court could infer that there was some concern about what Mr Knox may say to Mr Matt Williams.
(d)Mr Berry has mentioned that he cannot recall the contents of the conversation but now relies on the statement provided 2½ years after the event. The plaintiffs say is self-serving, particularly, given his lack of knowledge relating to any matters involving Prezzy cards and Mrs Knox.
(e)The evidence in Mr Swinson’s affidavit is inconsistent with the evidence as to why Vodafone took no step when being alerted to a possible breach by the Knoxes. Mr Swinson states there was a decision to let the process play out, whereas the explicit position of Vodafone was that the outcome of investigations relating to Mr Knox would not be of any concern to them;
(f)Mr Swinson alludes to the fact that Vodafone wanted to hear what the Knoxes had to say yet had already determined to terminate the Redfone Agreement and appoint Mr Reen, who a few months later brought Mr Landsman back into the new company which held the franchise.
[49] In summary, Mr Kilian submits that when looking at the evidence, the Court can be sure that the claims made by GSM against Mr Knox were false and made by a party that had a vested interest in making claims to re-secure a franchise agreement it had just lost.
[50] Mr Kilian submits the Court can be sure that there is evidence of various discussions between the employees of Vodafone and Mr Reen. However, he states that no such evidence has been provided and will need to be tested by oral examination. He also submits that at the time of the decision to terminate the Redfone Agreement, no evidence had been provided that any of the allegations against Mrs Knox took place neither while she was a director of Redfone, nor after Redfone Agreement had been executed, or that Vodafone were aware of any conduct alleged by GSM and upon which they relied.
[51] Mr Kilian submits that Vodafone’s submissions are focused on Mrs Knox because Vodafone is aware that they have no evidence of any substantial allegations against Mr Knox. He submits that the evidence provided seems to avoid the reasons Mrs Knox was being paid by Prezzy cards.
[52] Mr Kilian also submits that there was a premeditation by Vodafone in terminating the Redfone Agreement and providing the franchise back to Mr Reen. He submits this can be seen from the internal email evidence of Vodafone, which contradicts the evidence of Mr Swinson that an opportunity was provided by Vodafone.
[53] In response to the issues raised by the plaintiffs, Ms Monteiro submits that Vodafone acted reasonably and not in bad faith in terminating the Redfone Agreement. She submits that at the time of making the decision they were taking into account relevant considerations such as:
(a)Mrs Knox’s confession, which was later not denied by Mrs Knox.
(b)the GSM letter which confirmed her confession and GSM’s intention to involve the police; and
(c)Mrs Knox’s failure to deny the allegation put to her again at the meeting of 18 May 2017.
[54] She submits that Vodafone did not take into account any irrelevant considerations as the information from Mrs Knox herself and GSM could not be deemed irrelevant. She states that who would take over the franchise was not part of the decision to terminate.
[55] Ms Monteiro submits that the decision to terminate the Redfone Agreement was not made hastily by Vodafone. She notes Mr Swinson’s evidence that Vodafone considered the Knoxes to be good candidates; that it was left in a difficult commercial position following the termination; and that Vodafone was reluctant to terminate the Redfone Agreement but considered it had no option.
[56] In relation to the issue of loss of Vodafone’s reputation, Ms Monteiro submits that it is self-evident that a major New Zealand company (operating in a highly- competitive industry), by entering into an agreement with a party being investigated for criminal conduct, may cause loss to that company’s reputation. She submits that to the consumer, the franchisee using Vodafone’s logo, name and products, is Vodafone, and Vodafone could not have one of its most significant franchises associated with the parties potentially subject to criminal convictions.
[57] In support of this proposition, Ms Monteiro cites JAH v Police14 and its appeal, H v R.15 In referring to the Court of Appeal judgment, she submits the Court had received evidence that termination of the franchise agreement by the franchisor was “virtually inevitable” as a result of the criminal charges. She submits that although the Court of Appeal was not required to decide whether the franchisor’s discretion to terminate was exercised reasonably in the face of the franchisee’s charges, the decision provides a strong indication that termination of a franchise agreement in such circumstances was inevitable.
14 JAH v Police [2012] NZHC 408.
15 H v R [2012] NZCA 514.
Second cause of action
[58] This cause of action is summarised as a claim for breach of duty owed by Vodafone to the Knoxes personally as the franchise principals of the Redfone Agreement, caused by an alleged breach of contract by Vodafone.
[59] Ms Monteiro submits that as has been demonstrated in relation to the first cause of action, termination of the Redfone Agreement was valid and lawful and there is accordingly, no claim against Vodafone by the plaintiffs, including under the second cause of action.
[60] Ms Monteiro submits that the second cause of action has insurmountable issues, as an essential principle of company law is that a company, in this case Redfone, is a separate legal personality from its directors, shareholders and employees. She submits that the Redfone Agreement is a contract between Vodafone and Redfone and the Knoxes in their capacity as guarantors. She rejects the proposition that the Knoxes, are beneficiaries of the Redfone Agreement under s 12 of the Contracts and Commercial Law Act 2017 (CCLA). She submits that the Redfone Agreement does not confer any benefit (as required by s 12 and defined in s 11 of the CCLA) on Mr and Mrs Knox.
[61] She submits that whatever the basis of the Knoxes’ claim, Vodafone is entitled to rely on the terms of the Redfone Agreement to govern the relationship, and therefore, to exercise its termination clause lawfully, which it has done, citing the decision of Frost and Sutcliffe v Tuiara16 in support of that proposition.
Result
[62] I am of the view that the defendant summary judgment should be granted to Vodafone as neither of the plaintiffs’ causes of action can succeed. The reasons for this are set out in the following paragraphs.
16 Frost &Sutcliffe v Tuiara [2004] 1 NZLR 782 (CA) at [22].
[63] I do not accept the argument put forward by Mr Kilian that the Redfone Agreement did not come into force until 1 July 2017 and that accordingly, the Knoxes were not franchise principals until that date. While the franchise did not commence operation until that date, under cl 2.1 of the Redfone Agreement, its terms came into force at the date of the Redfone Agreement which was 2 February 2017.
[64] I am of the view that Vodafone validly terminated the Redfone Agreement pursuant to cl 11.1(f). In applying the expanded default rule, Vodafone did not act unreasonably or in bad faith, given at the time of termination, the position known to Vodafone was:
(i)Mrs Knox’s confession to Mr Berry which was not denied by Mrs Knox;
(ii)the GSM letter, which confirmed her confession and that GSM would be involving the police, hence resulting in a reasonable conclusion by Vodafone that there was a risk of criminal convictions in respect of the franchise principals in the new franchise with Redfone; and
(iii)Mrs Knox’s failure to deny the allegations put to her again at the meeting of 18 May 2017.
[65] In my view, these factors were sufficient for Vodafone to form a reasonable view that Mrs Knox had been guilty of conduct that may cause loss of Vodafone’s reputation.
[66] Mr Kilian has raised doubts about Vodafone’s premeditated termination, and whether the decision by Vodafone to terminate the Redfone Agreement was influenced by an objective to restore the franchise to Mr Reen or his associated company. Mr Kilian also submits there are issues with the credibility of Vodafone’s evidence as set out at [48] and there must be other evidence of behind-the-scenes dealings between Mr Reen/GSM and Vodafone employees which should be tested at trial. There are also criticisms of Mr Berry’s affidavit and attempts to explain Mrs Knox’s conduct as an employment dispute between her and GSM.
[67] In my view, these issues do not raise a sufficient argument to oppose Vodafone’s position that the plaintiffs’ causes of action cannot succeed. They are either irrelevant (for example, the criticisms of Mr Berry’s affidavit and the attempts to explain Mrs Knox’s conduct as an employment dispute, her motive for the misappropriation being irrelevant) or speculative (for example the suspicion of behind the scenes dealings between Vodafone employees and GSM and GSM’s motive of re- acquiring the franchise). When it is measured against the evidence Vodafone had to hand at the time of the termination, it does not raise a sufficient argument that Vodafone had acted unreasonably or in bad faith.
[68] As to the second cause of action, even if the Knoxes could establish that they were owed a duty by Vodafone as franchise principals (which in my view is doubtful but which I do not decide as it is not necessary for this judgment), this cause of action essentially fails on the basis that the first cause of action fails. If there was no breach by Vodafone of the Redfone Agreement by terminating it in accordance with cl 11.1(f), there is no breach of contract by Vodafone which could cause a breach of any duty owed by Vodafone to the Knoxes. Hence this cause of action cannot succeed.
Orders
[69]I make the following orders:
(a)Vodafone’s application for defendant’s summary judgment against the plaintiffs is granted;
(b)As to costs, as Vodafone is the successful party, costs should normally follow the event. However the plaintiffs are legally aided and so prima facie a costs order against the plaintiffs is prevented by s 45 of the Legal Services Act 2011 unless there are exceptional circumstances. Counsel are directed to endeavour to agree the position as to costs within 20 working days of the date of this judgment. If no agreement is reached within that time, counsel for Vodafone will file a memorandum as to costs (not to exceed 5 pages) within 5 working days of expiry of the 20 working day period and counsel for the plaintiffs will file a
memorandum in response (not to exceed 5 pages) within 5 working days of receipt of counsel for Vodafone’ memorandum. A decision as to costs will then be made on the papers.
…………………………….. Associate Judge Taylor
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