Ppo (NZ) Limited v Wallace HC Auckland CIV 2010-404-7527

[2010] NZHC 2323

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-7527

BETWEEN  PPO (NZ) LIMITED Plaintiff

ANDDEREK WALLACE First Defendant

ANDW.I.P NZ LIMITED Second Defendant

Hearing:         15 December 2010

Counsel:         A Gilchrist for Plaintiff

G Collecutt for First Defendant
A Clemow for Second Defendant

Judgment:      15 December 2010

ORAL JUDGMENT OF MILLER J

[1]      Before  me  is  an  urgent  application  for  an  interim  injunction.    I  must necessarily deal with it in a brief oral judgment.

[2]      The plaintiff is the NZ holder of a franchise called Pita Pit.   As the name suggests, its business involves the retailing of pita bread products.  It is a relatively new entrant to the New Zealand retail fast food market.

[3]      The first defendant is a former director of Café Bocca Limited, the first Pita Pit franchise in central Auckland.  It traded from premises that it leased at 29 Vulcan Lane.   Café Bocca is now in liquidation.   The first defendant is said to be the

guarantor of its obligations to the plaintiff under a franchise agreement.

PPO (NZ) LTD V DEREK WALLACE AND ANOTHER HC AK CIV 2010-404-7527  15 December 2010

[4]      The  second  defendant  operates  a  Café  called  Flavour  from  the  former premises of Café Bocca.   It employs the first defendant as its manager, and its director is Sharon Scott-Nicholson, his wife and also a former director of Café Bocca.

[5]      Café Bocca was placed into liquidation on 21 October.  The liquidator traded it for a short time while the parties tried to negotiate the plaintiff’s assumption of the lease.  Those negotiations failed, and the plaintiff terminated the franchise agreement on 4 November with immediate effect.  Café Bocca ceased trading the following day and on Monday, 8 November, Flavour opened, to the apparent surprise of the plaintiff, which had tendered for the lease and evidently expected to get it.  Flavour operates with the support of the lessor and the banker to the defendants and Café Bocca.

[6]      The  plaintiff  initially alleged  that  Flavour  passed  itself  off  as  a  Pita  Pit franchise and made use of intellectual property.  In the face of abundant evidence to the contrary those allegations are not pursued today, which is an important point. For  my  purposes,  Flavour  is  simply  one  of  many  cafes  and  fast  food  outlets operating in central Auckland.  Pita Pit cannot claim any special connection to the premises, and it has taken steps to announce to the market that its store in Vulcan Lane has relocated to other central Auckland premises.

[7]      The application now rests on a restraint of trade which is said to bind the first defendant in his capacity as guarantor of Café Bocca’s obligations.   The second defendant is said to be susceptible to restraint because it induced his breach of his contractual obligations to the plaintiff.

[8]      Counsel join issue on arguable case and balance of convenience.   Many issues were traversed in the written submissions;  it is safe to say that no stone was left unturned.  But in the end I need not express any view on most of the arguments.

[9]      The first question is whether the franchise agreement binds the first defendant at all.   He was named in it as guarantor – indeed, he wrote his own name in that capacity – but he signed it expressly it for Café Bocca, and, on the face of it, only for

Café Bocca.   He initialled each page, but that prima facie must have been in the capacity in which he signed it.[1]

[1] Trotter v Avonmore Holdings Ltd CA162/04, 1 August 2005.

[10]     A guarantee must be in writing and signed by the party to be charged.  The signature may take diverse forms, but it serves a different function from the name, which identifies the party.[2]   Mr Gilchrist’s argument rests in the proposition that the first defendant signed it by writing his name as the guarantor;   he must have understood that he was thereby assuming obligations as guarantor.  The initialling is said to have happened some time after he had signed it for Café Bocca, although the name of Café Bocca was corrected at the same time.  In this case the first defendant did not use his printed name for his signature when executing the agreement for Café

Bocca which suggests that his printed name was not intended to serve that purpose as  guarantor.    A  signatory  for  a  company  prima  facie  does  not  bind  himself personally by signing an agreement.[3]

[2] Welsh v Gatchell [2009] 1 NZLR 241.

[3] Vuletic v Contributory Mortgages Ltd CA 250/05 31 July 2006.

[11]     I accept however, that the plaintiff does have an arguable case that the first defendant  has  signed  the  agreement  qua  guarantor.     I  need  not  deal  with Mr Clemow’s point that he could not thereby have anticipated a restraint of trade because such is not a normal incident of a guarantee.  That is an issue that can be left for trial.

[12]     The franchise agreement is extensive, and much of its content can fairly be described as boilerplate.  Clause 14(2) dealt with competition after termination.  It provided that:

In the event of the expiration or termination or assignment by [Café Bocca] of this Agreement for any reason whatsoever, each of [Café Bocca] and the Guarantor…shall not…at any time within the period of two (2) years from the date of such expiration or termination…carry on, be engaged in…any person…competitive   with   the   Subfranchised   Business   or   franchising business similar to the business carried on by PPO, within the Territory or within a five (5) mile radius from the Subfranchised Business….

The Subfranchised Business was defined as the business of operating a retail outlet for the sale of pitas and other ancillary products using the Pita Pit System.  The area

covered  by the  restraint  would appear to encompass a large part of the former

Auckland City, including the entire downtown area.

[13]     It is the plaintiff’s case that this covenant bound Café Bocca and the first defendant notwithstanding that the agreement was terminated by the plaintiff, not Café Bocca.   The point is arguable, but the clause is certainly capable of the construction that it did not apply in circumstances where the plaintiff terminated the franchise.   It would not seem to matter that it did so because Café Bocca was in default.    The  clause  is  also  likely  to  be  construed  contra  proferentem.    The boilerplate to which I have referred generally protects the plaintiff’s interests rather than those of the  franchisee, and  there is evidence that the  first defendant was encouraged not to take legal advice about it on the grounds that its terms were non- negotiable.

[14]     The Territory was the area within which Café Bocca would be the only Pita

Pit franchise.  According to the first defendant’s evidence, that was agreed orally at

.5km during negotiations, and the figure of .5km was subsequently inserted into the agreement.  Thereafter, however, the plaintiff refused to honour the agreement and insisted on a much smaller territory of first at .4km and then at .3km.   The first defendant admits that he agreed to the smaller area, under pressure because resources had already been committed to the new business, but he attributes the failure of Café Bocca to it.  He says that in an attempt to preserve the value of the business Café Bocca opened a second franchise on Queen Street when the plaintiff made it plain that  another  would  be  licensed  just  outside  the  .3km  away.    The  Vulcan  Lane business was profitable, but the Queen Street one was a disaster.  These bare facts do not appear to be in dispute, although blame for the failure of Café Bocca is very much disputed.  The only point to be made for present purposes is that it is arguable that  through  unconscionable  behaviour  the  plaintiff  contributed  to  the  eventual failure of Café Bocca.

[15]     This  is  not  a  strong  foundation  for  what  is  in  substance  a  mandatory injunction enforcing a restraint of trade.  In such a situation there would ordinarily be no doubt that the restraint was prima facie binding on the defendant.   The issue would be whether the restraint was reasonable.

[16]     Reasonableness is certainly a live issue in this case, given that the restraint is personal to Café Bocca and the first defendant but there is not said to be anything special about his skills, let alone anything special that is attributable to what he learned from the plaintiff.   As such the case that there is something that merits protection in law is not particularly strong.  There are no trade secrets or intellectual property  or  customer  connections  that  are  being  exploited  on  the  face  of  it. Mr Gilchrist  was  alive  to  this  issue;     he  emphasises  that  if  the  restraint  is unreasonable the Court may adapt it to a more reasonable time and area.  It is true that the area and duration are both arguably unreasonable.  But the problem for the plaintiff is more fundamental than that;   it is not obvious that the plaintiff suffers anything by the first defendant’s employment in a competing retail food outlet, no matter how recent and no matter how local.

[17]     That brings me to the plaintiff’s case against the second defendant, which actually operates Flavour.  It is on the evidence before me a weak case.  Mr Gilchrist properly accepted that if it is to be liable, the second defendant must have used direct persuasion or interference, intending to interfere with the franchise agreement in order to harm the plaintiff.   (Indirect persuasion will suffice, but it requires some independently unlawful means, and none is identified.)  There is simply no evidence of such persuasion or purpose, and no reason to suppose that the second defendant needed  to  bring  any pressure  or  persuasion  to  bear,  still  less  that  it  acted,  the franchise agreement having been terminated, to harm the plaintiff by interfering with the said agreement.  It needs to be borne in mind that the plaintiff had no interest in the premises from which the second defendant  operates, and that it is not now suggested that the second defendant is using Pita Pit’s getup or intellectual property. I accept that Ms Scott-Nicholson formed the second defendant to operate a business which competes with other retail food outlets, and that the first defendant is the manager.  But that appears to fall far short of establishing the elements of the tort. The most that Mr Gilcrist could offer was the non-sequitur that because she acted against its interests she must have meant to harm the plaintiff.

[18]     That   brings   me   to   the   balance   of   convenience   or   fairness,   which unequivocally favours the defendants for a variety of reasons.  As I have said, there is nothing special about the first defendant’s skills such that a restraint is needed to

protect its business.  There is no reason why Pita Pit may not open another outlet in the Territory.   It has already announced that its Vulcan Lane outlet has moved to Britomart Centre and AUT Tower.

[19]     I observe at this point that an underlying theme of Mr Gilchrist’s submissions was that the plaintiff has suffered harm because it no longer has access to the Vulcan Street premises.  That rather than anything peculiar to the first defendant appears to be the core of its complaint, particularly against the second defendant.   As I have said, it is common ground that the Vulcan Lane business of Café Bocca was profitable.   The evidence of the lessor and the second defendant, substantially undisputed in this respect, is that the plaintiff sought to acquire the lease cheaply, on terms that would result in the ruin of the first defendant and his wife, who guaranteed Café Bocca’s indebtedness.  As the lessor’s representative puts it, that seems to be a harsh outcome for Café Bocca.  In his third affidavit, Mr Tweedie, for the plaintiff, has made it plain that the plaintiff’s object is to stop the store trading.   It is particularly telling that the application against the second defendant would restrain it from operating within a 5km radius of Vulcan Lane although there can be no justification for such restraint; the most that the plaintiff can properly seek against the second defendant is an order preventing it from employing the first defendant. There is also evidence from Ms Scott-Nicholson that the plaintiff has been placing pressure on suppliers not to supply Flavour, although that is disputed.

[20]     The plaintiff’s losses are also compensable in damages.  Mr Gilchrist made the point that the losses are not easily quantified Media Works.[4]    That principle is certainly recognised in intellectual property in passing off cases.   In this case, however, the difficulty for the plaintiff is that the losses claimed are indirect and somewhat speculative.   The plaintiff does not complain that the first defendant’s employment at Flavour, as opposed to the failure of Café Bocca, is causing it any

ongoing loss of direct custom, and as I have mentioned it cannot complain that another retail food outlet has replaced its former franchise at Vulcan Lane.  Instead it complains, in essence, about a loss of discipline within its franchises if a former

franchisee is able to ‘get away with it’.  It is said that it will make it harder to attract new franchisees because they will know that they lack support from the franchisor.

[4] Media  Works NZ  Ltd  v  Sky  Television Network  Ltd  HC  Auckland CIV  2007-404-5674, 18

September 2009.

[21]     This point has some force in principle, but it is far from self-evident on these facts.  The main benefits of the franchise must lie not in restraints of trade but in the competitive advantage offered by distinctive Pita Pit getup and products.  Failure to protect those advantages would certainly disadvantage other franchisees, but that is not this case.   On one view of it, the conduct of the plaintiff in this case is a far greater deterrent to prospective franchisees.

[22]     Mr  Gilchrist  made  the  point  that  there  is  reason  to  worry  about  the defendants’ ability to meet an award of damages.  I accept that point, but it remains the case that damages prima facie are the appropriate remedy for any losses the plaintiff may suffer and damages will certainly signal to other franchisees that the plaintiff is serious about protecting its interests.

[23]     The next point is that I accept Mr Clemow’s submission that this is not a case of franchisees cynically exploiting the franchise to build an independent business. Café Bocca got into financial problems and tried to salvage the business by selling it to the plaintiff.  The opportunity was there for the plaintiff to acquire the premises at a competitive price.  It did not do so.

[24]     The next point is that the application would restrain the first defendant from working in his chosen field in a very large part of Auckland City.  I am not prepared to deal with the apparently excessive breadth and duration of the restraint by remedying it in some way arbitrary way in the context of this application.

[25]     Lastly, third party interests are in issue.  Ms Scott-Nicholson and the second defendant’s lessor and bankers have an interest in the success of Flavour.  The effect of the injunction sought would be to shut the business down.  The seven employees (excluding the first defendant) would lose their jobs.  That might result in losses for the bank and perhaps the lessor and insolvency for the first defendant and his wife, long before the substantive claim came to trial.  There is evidence that the nature of Ms Scott-Nicholson’s own employment in the financial services sector is such that

insolvency would likely mean losing her job.    In these entirely plausible circumstances, the plaintiff’s undertaking to pay damages, while it is of substance, would be of no consolation.

[26]     The application for an interim injunction is dismissed.

[27]     I have been asked to reserve the question of costs.  I am not prepared to do that.  The defendants will have the costs of this application and the plaintiff must pay the costs of both defendants.

[28]     I  have  hesitated  over  the  question  of  indemnity  costs.    The  injunction application has exploited a narrow ground of complaint – a restraint of trade that is personal to the first defendant –  for what seemed on the face of it to be a collateral purpose, the plaintiff’s desire to secure the lease at 29 Vulcan Lane by closing down the second defendant’s business although it has no cause of action that might entitle it to such relief.[5]

[5] Bradbury v Westpac [2009] NZCA 234, [209] 3 NZLR 400.

[29]     However,  Mr  Gilchrist  stoutly maintained  that  such  is  not the  plaintiff’s purpose and I accept that it would be necessary to draw an inference against the plaintiff before I could reach that conclusion.  The inference is arguably available but I choose not to draw it today.   I accept that the plaintiff does have a legitimate interest, albeit a limited one in the restraint of trade.  Accordingly, I will not order indemnity costs, but there will be costs for both defendants on a Category 2B basis.

Miller J

Solicitors:

Burton & Co, Auckland for Plaintiff

Gaze Burt, Auckland for First Defendant

Simpson Dowsett Mackie, Auckland for Second Defendant