Para Rubber New Zealand Limited v Bailey

[2012] NZHC 2143

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

CIV 2012-454-491 [2012] NZHC 2143

BETWEEN  PARA RUBBER NEW ZEALAND LIMITED

Plaintiff

ANDPAUL ANDREW BAILEY First Defendant

ANDTHE FIRST COMPANY LIMITED Second Defendant

ANDTHE SECOND COMPANY LIMITED Third Defendant

ANDTHE FOAM AND RUBBER STORE LIMITED

Fourth Defendant

ANDPOOL AND SPA 2 LIMITED Fifth Defendant

Hearing:         20 August 2012 (Heard at Wellington)

Counsel:         C Shannon for plaintiff

P Drummond for defendants

Judgment:      23 August 2012

JUDGMENT OF MALLON J

Table of contents

Introduction ....................................................................................................................................... [1] Background........................................................................................................................................ [2] Serious question to be tried ............................................................................................................ [28] Balance of convenience ................................................................................................................... [35] Result ................................................................................................................................................ [47]

PARA RUBBER NEW ZEALAND LIMITED v BAILEY HC PMN CIV 2012-454-491 [23 August 2012]

Introduction

[1]      The plaintiff (Para Rubber) and the second defendant (FCL) were parties to a franchise agreement.  The first defendant (Mr Bailey) was the principal of FCL and was a party to the agreement.  Under the agreement FCL sold swimming pools, pool chemicals, pumps and filters, and other rubber and foam products.   The franchise agreement has come to an end.  Para Rubber claims that Mr Bailey is now involved, through the remaining defendants, in a business which breaches the terms of the franchise agreement.  Para Rubber seeks interim orders:

(a)      restraining  Mr Bailey  from  being  involved  in  a  business  which supplies synthetic or natural rubber or foam products, pool and spa chemicals, pumps and filters, or above ground swimming pools; and

(b)compelling the defendants to transfer to Para Rubber the telephone and facsimile numbers previously used by FCL in respect of the Para Rubber business.

Background

[2]      Mr Bailey and his wife commenced their association with Para Rubber as employees in the early 1980s.

[3]      In 1993 Mr Bailey purchased a Para Rubber business which at that time operated  from  premises  at  Broadway Avenue  in  Palmerston  North.    Mr Bailey operated the business under the umbrella of FCL.  There was a licence agreement in place under which FCL were licensed to sell and service products under the Para trade mark and the trade names of other manufacturers listed in a schedule to the agreement.   These products included plastic products and equipment and above- ground pools.  FCL was also licensed to service Para pools.  The licence agreement did not prohibit the business from selling products supplied by any party other than the licensor, provided that the total cost price of those products did not exceed 25 per cent of the cost price of the total stock in the licensed premises.

[4]      Mr Bailey accordingly approached other suppliers and took on dealerships from Cascade Pools and Spas, Hot Spring Spas, Leisurerite Spas and Water Co NZ Ltd. All of these dealerships fell under the banner “Cascade”.  Mr Bailey considered this to be a “win/win” for all parties because the shop was more attractive to clientele through having a wider range of products to sell.

[5]      In  July  1996  the  licence  agreement  was  replaced  with  a  new  franchise agreement.  FCL was the franchisee and Mr Bailey signed the agreement as FCL’s director.  Mr Bailey was also a party to the agreement and signed it as “Covenantor”.

[6]      Under this new franchise agreement there were Category A and Category B products.    Category  A  products  consisted  of  various  rubber,  foam,  fabric  and polyester products. These products were the traditional Para products. The franchise agreement required FCL to purchase all Category A products from the franchisor (at that time called Para Franchising Ltd) and prohibited FCL from selling competing products.   A percentage of the proceeds of sale from Category A products was payable to the franchisor.  Category B products were “outdoor furniture” and “pools and  pool  accessories”.    The  franchise  agreement  required  that  FCL  purchase Category B products only from suppliers which had been first approved by the franchisor in writing.

[7]      The franchise agreement provided that on termination of the agreement FCL was, at the franchisor’s option, to deliver up to the franchisor the occupation, possession and control of the premises.  FCL (as the franchisee) and Mr Bailey (as the Covenantor) were prohibited from engaging in any business involved in the supply (etc) of Category A and Category B products for a period of two years and within a ten kilometre radius of the premises.

[8]      In 2001 there was a change in the ownership of the Para franchise.   As a result, Mr Bailey received a statutory declaration which he was asked to sign.  The statutory declaration asked him to declare that he had received notice of the assignment of the franchise agreement to the new owner.  It also asked him to certify that the franchise agreement was “in full force and [has] not been modified, amended or assigned”.   Mr Bailey’s evidence is that he was unable to sign that declaration

because, with the franchiser’s knowledge and consent, he had continued to operate and develop the Cascade business (which included Wright Spa Pools and Cascade pools) alongside the Para business.  He therefore amended the statutory declaration to certify that the franchise agreement had not been modified, amended or assigned, “except as follows: ... Permission to act as agency for Wright Spa Pools (Hot Spring Spas) and Cascade Pools.”

[9]      Subsequent  to  the  assignment  to  the  new  owner  of  the  Para  franchise, Mr Bailey’s evidence is that he (through FCL) continued to operate the Cascade part of the business as he had always done.

[10]     In 2006 the franchisor required its franchisees to enter into a new franchise agreement.  This agreement, dated 16 March 2006, was signed by FCL (Mr Bailey signing as Director) as franchisee and by Mr Bailey as covenantor and guarantor.

[11]     As  with  the  previous  franchise  agreement  there  were  Category  A  and Category B products.  Category A products were required to be purchased from the franchisor  and  the  franchisee  was  prohibited  from  selling  competing  goods. Category B products were required to be purchased only from suppliers that had first been approved by the franchisor in writing.   In contrast with the earlier licence agreement but consistent with the first franchise agreement, this agreement did not limit the amount of Category B goods that could be purchased from other suppliers.

[12]     Schedule 4 set out the Category A and Category B products.   No products were listed under Category A.   Rubber products and products manufactured from foam, fabric and polyester were listed under Category B.  The Category B products also included “pools and pool accessories” and “spas and spa accessories”.

[13]     The agreement set out the consequences of termination of the franchisee.  In relation  to  telephone  and  facsimile  numbers,  clause  11.5(d)  of  the  agreement provided that:

The Franchisee must transfer all electronic, internet, web or email registrations as may have been permitted by the Franchisor and all telephone and facsimile numbers to the Franchisor or any new franchisee as nominated

by the Franchisor at the Premises and take all necessary steps to change directory listings relating to the Franchise or the Para Trade Marks ...

[14]     At the time of the 2006 franchise agreement the business was operated from premises in Main Street, Palmerston North.  Clause 11.6 of the franchise agreement dealt with the transfer of the premises from which the business was conducted. Clause  11.6(a)  provided  that  FCL  acknowledged  that  the  premises  were  of significant value and importance to the franchisor.  Clause 11.6(b) of the franchise agreement provided that FCL was required, at the franchisor’s option, to deliver up the premises on termination of the agreement.   Clause 11.6(d) provided that FCL would suffer loss and damage, including damage to its goodwill, if the franchisee failed or refused to transfer the premises to the franchisor.

[15]     The franchise agreement included a restraint of trade clause as follows:

13.4     Non Compete by Franchisee and Covenantors

In order to protect the goodwill of the Franchisor, the Franchisee and the Covenantors and each of them must not, whether solely or in association with each other or others, without the prior written consent of the Franchisor (which the Franchisor may withhold in its absolute discretion), whether as principal, agent of any person, firm or company, director of any company, shareholder, servant or employee, adviser or consultant to any person, firm or company or in any other capacity, either directly or indirectly carry on or conduct or be engaged in or concerned or interested in the conduct of any business involving the promotion, distribution, marketing or supply of:

(a)       synthetic or natural rubber; (b)     foam;

(c)       above ground swimming pools; (d)         pumps and filters;

(e)       pool and spa chemicals

(provided in each case the restriction will only apply to products which are, or are competitive with, products or services sold by any business operating under the Para System), during the Term and for a period of two years thereafter within a ten (10) kilometre radius of the Premises or any other Para Rubber business.

[16]     At the same time as signing the franchise agreement, Mr Bailey signed a confidentiality and non-compete Deed.  This Deed, amongst other things, prohibited Mr Bailey from conducting a competing business for one year after termination or

expiry of his employment with or engagement by FCL, and within a five kilometre radius of the premises and a two kilometre radius of the territory as defined in the franchise agreement.

[17]     Mr Bailey also signed a guarantee and indemnity agreement.  The provisions of this agreement included a guarantee from Mr Bailey of the due performance by FCL of all the terms and conditions of the franchise agreement.

[18]     After these agreements were entered into, Mr Bailey’s evidence is that he continued to develop the Cascade pool part of the business as well as operating under the franchise.   He says that he ran the two separate businesses within one company structure.   He says that one business sold products supplied by the franchisor.  These consisted of rubber and foam products as well as traditional Para steel wall pools (which could either be installed above or below the ground).   On these products FCL paid a percentage of the sale price to the franchisor.

[19]     FCL’s other business sold products that were not supplied by the franchisor. These continued to include Cascade pools and Hot Spring Portable Spas.  The pools were sold with pumps, filters and chemicals.  These products were recorded in FCL’s financial statements under the Cascade side of the business.   Purchasers of these products (and other people who owned pools and spas) would, from time to time, need replacement pumps and filters.   They would also need more chemicals. According to Para Rubber’s evidence (which I understand was not disputed in FCL’s evidence), all pumps and filters and chemicals (not sold as part of a pool package) which were sold by FCL were recorded as sales in the Para Rubber side of FCL’s business.   Para Rubber’s evidence is also that it did not know that Mr Bailey was selling any above-ground pools as part of the Cascade business.

[20]     On  4  May  2012  FCL gave  notice  that  it  was  terminating  the  franchise agreement.   By this time Para Rubber had purchased the franchise rights.   Para Rubber responded to FCL’s notice of termination by setting out FCL’s obligations on termination  (including  transferring  telephone  and  facsimile  numbers)  and  the restraint of trade provision.  Para Rubber also advised that it would not be exercising

its  option  under  11.6(b)  of  the  franchise  agreement  to  take  possession  of  the premises.

[21]     Mr Bailey then set about setting up a new business.   The third defendant (SCL) was incorporated with Mr Bailey and his wife the directors and shareholders. The fourth defendant (the Foam and Rubber Store Ltd) and the fifth defendant (Pool and Spa 2 Ltd) were incorporated with Mr Bailey’s wife as the sole director and shareholder of these companies.   The premises in Main Street, Palmerston North, was rebranded as “Pool and Spa 2” on one side and “Foam and Rubber Store” on the other side.

[22]     On 7 June 2012 a representative of Para Rubber (Mr Moore) visited the premises.  Mr Bailey explained to Mr Moore that there were two shops within the premises.   He explained that he only worked on the Pool and Spa 2 side of the premises.   Consistent with that, he and his staff wore  Pool and Spa 2 branded clothing.  He explained that the other side of the premises was the Foam and Rubber Store, and the employees on that side wore clothing with this brand.

[23]     Mr Moore noted on this visit that, on the Pool and Spa 2 side, the products on display included pool and spa chemicals, pumps and filters, spa pools (both Hot Spring and Spa and Pool Factory brands) and above-ground pools.  He noted that the Foam and Rubber Store side had products that were typically provided in a Para Rubber store.  He noted that there was no physical barrier between the two sides and there was one point of sale area in the middle with two cash registers.

[24]     On 22 June 2012 investigators acting for Para Rubber visited the premises. They indicated an interest in products in the Foam and Rubber Store and were attended to by Mr Bailey.   They also telephoned the number listed in the Yellow Pages for the Foam and Rubber Store and the telephone was answered by “Paul” (presumed to be Mr Bailey.)

[25]     Para Rubber also made internet and other enquiries.  It noted that Pool and Spa 2’s website, and the online Yellow Pages advertisements for Pool and Spa 2, the Foam  and  Rubber  Store  and  SCL  gave  the  telephone  number  as  the  number

previously used by FCL.   The online Yellow Pages advertisement also gave the facsimile number for these three companies as the facsimile number previously used by FCL.

[26]     On 11  July 2012  solicitors  acting  for Para Rubber wrote to  Mr Bailey’s solicitors.  The letter noted that Mr Bailey was involved in the Pool and Spa 2 and Foam and Rubber businesses, and that these businesses were selling products and services  which  were  competitive with  the products  and  services  sold  under the franchise agreement in breach of clause 13.4 of that agreement and the non-compete clause in the non-compete Deed.   The letter requested that Mr Bailey desist from doing any work for either businesses up until 3 June 2014 and that he take immediate steps to transfer the telephone and facsimile numbers to Para Rubber.

[27]     These  demands  were  not  complied  with.    A follow  up  letter  from  Para Rubber’s solicitors dated 17 July 2012 was sent, but also did not result in compliance with Para Rubber’s demands. This proceeding was filed on 23 July 2012.

Serious question to be tried

[28]     There are a number of causes of action pleaded in the statement of claim.  For the purposes of the interim orders sought, the relevant claim is the claim against Mr Bailey for breach of contract.  Para Rubber claims that Mr Bailey has breached clause 13.4 of the franchise agreement on the basis that he is engaged in the business of selling rubber and foam products, above-ground swimming pools, pumps and filters and pool and spa chemicals.

[29]     In  relation  to  the  rubber  and  foam  products,  Para  Rubber  refers  to  the evidence that, although separate companies have been set up, the practical reality of the operation is that they are conducted as one business.  Mr Bailey responds that he accepts that Para Rubber are entitled to some protection of its business model as it relates to traditional Para Rubber products.   He accepts that he made errors in relation to the Foam and Rubber Store and has put in place some steps to correct those errors.

[30]      In relation to above-ground swimming pools, pumps and filters and pool and spa chemicals, Para Rubber says that Mr Bailey has breached clause 13.4 through his involvement in Pool and Spa 2 Ltd which sells products covered by that clause. Mr Bailey  says  that  although  Para  Rubber  might  have  a  protectable  interest  in relation to some products that were part of the franchise agreement, the restraint of trade seeks to encompass all above-ground swimming pools, pumps and filters, and pool and spa chemicals.  These products are not trade-marked to the Para system, are sold by many other retailers, and have been marketed and sold by Mr Bailey for the last nineteen years.

[31]     Mr Bailey says that Pool and Spa 2 Ltd is a continuation of the Cascade business, which he has conducted as long as he has been licensed to sell or had the franchisee for Para products, and which has always been conducted with the licensor/franchisor’s knowledge and consent.  Mr Bailey says that the Cascade part of the business has always involved the sale of pools of various brands, including above-ground pools.   Mr Bailey says that it also included chemicals, pumps and filters sold with the pools and ongoing sales of chemicals and replacement pumps and filters.

[32]     Mr Bailey therefore says that, in relation to the products previously operated as part of the Cascade business, Para Rubber has waived compliance with clause

13.4.  Para Rubber responds that there has been no waiver of the restraint of trade because:

(a)       Para Rubber did not know that Mr Bailey was selling chemicals and pumps with the Cascade Pools.

(b)Mr Bailey had always put the pumps, filters and chemicals through the Para Rubber side of his business.

(c)       The franchise agreement requires any waiver to be in writing.

[33]     Para Rubber  submits  that  its  restraint  of trade  is  reasonable.    Mr Bailey submits that the restraint is unreasonable both as to the geographical area (which

encompasses the entire trading area of Palmerston North) and in period.  It is noted that the restraint in the non-compete Deed has different geographical and term restrictions than the restraint in the franchising agreement.

[34]     As conveyed to counsel at the hearing, I am satisfied that there is a serious question to be tried.  Mr Bailey is operating or involved in a business which, prima facie, is in breach of clause 13.4 of the franchise agreement, in relation to all the products listed in that clause.  Mr Bailey may have arguments as to why the clause is unenforceable.  It may be that there has been waiver in respect of some products.  It may be that the clause is unreasonable as to term and geography.  These arguments will need to be considered at the substantive hearing.

Balance of convenience

[35]     Para Rubber submits  that  the balance of  convenience  favours the  orders sought for a number of reasons.

[36]     The  first  reason  is  that  the  orders  sought  are  limited.    They  relate  to Mr Bailey only and therefore do not prevent the third, fourth or fifth defendants from operating at the premises.  They also would not prevent Mr Bailey from making a living selling Cascade pools outside the ten kilometre radius from the premises that the franchisor has promoted.  The response from Mr Bailey is that he is the person with the expertise on the pool side of the business.   He has always conducted his Cascade business within the franchise model.  The restraint would prevent him from continuing to operate his Cascade business pending the substantive matter being heard.  It is not feasible to operate that business outside the ten kilometre area, where there would be little or no customers.   I accept these points from Mr Bailey, and therefore consider that this factor does not favour granting the orders.

[37]     Secondly, it is said that the interim orders would not prevent Mr Bailey from arguing later about the length of the restraint.  The response for Mr Bailey is that a substantive hearing may not take place for some time even with the co-operation of both sides.  The Court may find at the substantive hearing that the restraint is valid but its scope is excessive.   If the Court reduced the term to three months then the

restraint would end in two weeks; and if the Court reduced the term to six months, then the restraint would end on 3 December 2012.   If the substantive hearing was some time next year, then Mr Bailey will have been prevented from operating his business, which is his livelihood, for many months longer than the proper scope of the restraint.  I consider there is at least a prospect that the full extent of the restraint will not be upheld at a substantive hearing.  There is therefore merit in Mr Bailey’s response and this factor does not favour granting the orders.

[38]     Thirdly, Para Rubber submits that damages are not an adequate remedy.  That is because the assessment of damages would be difficult and there are doubts about Mr Bailey’s ability to pay.   Para Rubber will have lost the ability to secure a new franchisee who  could  set  up  business  free of  the competition  from  Mr Bailey’s business.    By the time of a substantive hearing Mr Bailey’s  business  will  have solidified its position.  This effect would be difficult to quantify in monetary terms. Even  if  quantification  were  possible,  Mr Bailey  is  thought  to  be  in  financial difficulty.  Para Rubber refers to Mr Bailey not having paid $85,000 (plus interest) in marketing  fees.    It  also  refers  to  FCL’s  statement  of  financial  position  for  the

31 March 2011 year which shows a negative equity position of $263,519.

[39]     For Mr Bailey it is submitted that there does not appear to be any evidence that Para Rubber is taking any legitimate steps to recommence a franchise in Palmerston North.  It is said that, in the absence of such evidence, there is no interest to protect or any loss to Para Rubber if the restraint is not granted.   It is also submitted that the evidence of Mr Bailey’s inability to pay is weak.   The debt of

$85,000 is in dispute (as the correspondence shows), and Mr Bailey has been in this business for around 20 years which must say something about his ability to operate a successful business.

[40]     As to the likelihood of a new franchisee setting up, Para Rubber’s chief executive deposes that Para Rubber has received “an application from a potential franchisee  to  re-open  the  business  in  Palmerston  North,  but  subject  to  [the] successful restraint of Paul Bailey”.  It is not said whether there are other conditions. Nor is it said whether the application is acceptable to Para Rubber, nor when the new franchisee would intend to commence business.   Nevertheless, proceeding on the

basis of the evidence that is given, I accept that Para Rubber may lose this potential franchisee.    I  also  accept  that  it  will  be  more  difficult  to  find  a  replacement franchisee  with  Mr Bailey’s  business  operating.    I agree  with  Para  Rubber  that damages arising from this lost opportunity will be difficult to quantify.  I also agree, in light of the limited evidence about this, that there is a risk that Mr Bailey may not be able to meet any damages award.

[41]     The difficulty in assessing damages and the question mark over Mr Bailey’s ability to meet a damages award favours granting the interim orders.  But balanced against that, is that there is nothing in the agreements to prevent the third and fourth defendants from operating the Foam and Rubber Store.  Therefore, a potential new franchisee will not have a business that is free of that competition.  Furthermore, the restraint in the franchise agreement prevents Mr Bailey from selling pools which are “above ground pools”.  It seems from the evidence that Cascade pools are primarily a below-ground pool, although it is possible to construct them above ground.  In my view clause 13.4 is not intended to apply to this type of pool.  Nor does it prevent Mr Bailey from selling spa pools.  Therefore the protection a new franchisee would have from clause 13.4 is very limited and any loss suffered by Para Rubber is consequently likely to be small.

[42]     Balanced against the loss which is somewhat speculative and likely in any event to be small, is the real and significant loss Mr Bailey’s business is likely to suffer if he is restrained from selling all pools (on the basis that Cascade pools can be constructed  “above  ground”),  pumps  and  filters  and  chemicals.    If  Mr Bailey’s financial position is not strong (as Para Rubber contends), then there must be a risk that he will suffer irreparable harm if he is restrained from selling these products. On a “least harm” basis, an interim order should not be granted in relation to “pool and spa chemicals, pumps and filters, or above ground swimming pools”.

[43]     There is also a potential difficulty in complying with an injunction in relation to “above ground pools” when there may be legitimate differences in view about what falls within that description.  Similarly, there may be a difficulty in complying with an injunction in relation to “chemicals, pumps and filters” when Cascade pools

come with those products. Those difficulties also point against an order in relation to those products.

[44]     However, I cannot see any basis on which Mr Bailey can resist an interim order in relation to “synthetic or natural rubber or foam”.  There is no question that the Foam and Rubber Store is selling products which previously were supplied to FCL under the franchise agreement.  No issue of possible waiver arises in relation to these products.  The Foam and Rubber Store was set up as a business in which he had no direct involvement.  Mr Bailey will need to take steps to ensure that he is not involved in that business pending the substantive determination of Para Rubber’s proceeding.

[45]     Nor can I see any basis on which the defendants can resist the order that they instruct the telecommunications company to transfer the telephone and facsimile numbers to Para Rubber.   Mr Bailey has taken steps to put in place a reasonable compromise, in that if the numbers are called the caller is given the number for Para Rubber and the new number of his business.  However this is not acceptable to Para Rubber.   Para Rubber is entitled to insist on compliance with the terms of the contract notwithstanding the compromise offered by Mr Bailey.

[46]     Taking all these matters into account, it is in the interests of justice to grant interim orders in relation to the synthetic or natural rubber and foam products and the telephone and facsimile numbers.

Result

[47]     Para Rubber is granted orders as follows:

(a)      Pending further order of the Court, the first defendant shall forthwith refrain from directly or indirectly working for, carrying on or conducting or being engaged in or concerned or interested in any business involving the promotion, distribution, marketing or supply of synthetic or natural rubber or foam.

(b)Pending   further   order   of   the   Court,   the   defendants   shall   by themselves, their servants or their agents, forthwith be compelled to provide  a  duly  executed  instruction  to  the  relevant telecommunications company to immediately transfer the following telephone or facsimile numbers (06 952 1224 and 06 952 1226) to the plaintiff, if that defendant is the account holder for such numbers at the time of the order.

[48]     Costs are reserved.

Mallon J

Solicitors:

Duncan Cotterill, Christchurch for the plaintiff

Grant O’Donnell, Palmerston North for the defendants