Prominent Investments Limited v Quest Apartment Hotels (NZ) Limited
[2023] NZHC 2968
•24 October 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-001683
[2023] NZHC 2968
BETWEEN PROMINENT INVESTMENTS LIMITED
Plaintiff
AND
QUEST APARTMENT HOTELS (NZ) LIMITED
Defendant
Hearing: 22 September 2022 Appearances:
S Williams and J Alexander for the plaintiff P Murray for the defendant
Judgment:
24 October 2023
JUDGMENT OF ROBINSON J
This judgment was delivered by me on 24 October 2023 at 1:30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Stewart Germann Law Office, Auckland. Fortune Manning, Auckland.
SD Williams, Auckland. PC Murray, Auckland.
PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2023] NZHC
2968 [24 October 2023]
Introduction [1]
Quest’s application to rescind injunction [7]
Legal principles – Recission [12]
Background – Recission [14]
Analysis [30]
Quest’s strike-out applications [38]
Legal principles – Strike-out [39]
Strike-out - damages in excess of liability cap [43]
Clauses 11.18 and 32.15 [46]
Liability cap [53]
Submissions [55]
Analysis [67]
Strike-out – franchise term renewal [71]
Result [78]
Introduction
[1] The plaintiff (Prominent) as franchiser and the defendant (Quest) as franchisee are parties to a franchise agreement dated 28 September 2012 (Franchise Agreement). This gave Prominent the right to operate a Quest franchise from premises in Ponsonby, Auckland, for an initial term of five years. The Franchise Agreement also entitled Prominent to have three further terms of five years each provided it complied with certain terms and conditions set out in clause 5.1 of the Franchise Agreement.
[2] On 22 April 2021, Duffy J granted the plaintiff an interim injunction as follows:1
(a)Until further order of this Court, Quest by itself and by its servants or agents or otherwise howsoever is restrained from taking any steps or procuring or acquiring any steps to be taken to terminate the franchise agreement between Prominent and Quest dated 28 September 2012;
[3] The injunction was conditional on at least two of Prominent’s shareholders/directors providing written personal guarantees that one or both of them (either jointly or severally) would meet Prominent’s liability under the undertaking as to damages Prominent had given in support of its application for the injunctive.2 That condition has been met.
[4] On 27 June 2022, Quest applied for orders that the interim injunction be rescinded. Quest says there has been a material change of circumstances such that there is no longer a serious question to be tried in term of Prominent’s application for an interim injunction dated 17 September 2020; and the balance of convenience does not favour interim relief continuing.
[5] At the same time, Quest applied for orders striking out those parts of Prominent’s Amended Statement of Claim dated 25 March 2022 (ASoC) that seek:
1 Prominent Investments Ltd v Quest Apartment Hotels (NZ) Ltd [2021] NZHC 862 at [29].
2 At [29(b)].
(a)damages in excess of the limitation of liability cap provided for in clause 29.3 of the Franchise Agreement; and
(b)an order that Quest provide Prominent with duly executed franchise term renewal documentation for a second franchise term of five years on the existing terms and conditions commencing from the date on which the franchise renewal documentation is fully executed.
[6] Also on 27 June 2022, Prominent applied for orders that Quest file and serve a more explicit pleading. By memorandum filed after the hearing, counsel advised that this application had been settled save for Prominent’s application for costs.
Quest’s application to rescind injunction
[7] At [2]–[11] of her judgment, Duffy J set out the relevant background, summarised Prominent’s claims, and identified the key issues. It is convenient to set out in full:
[2] Prominent and Quest are parties to a franchise agreement dated 28 September 2012 (the franchise agreement). The franchise agreement granted Prominent the right to operate the Quest Ponsonby apartment hotel franchise for an initial term of five years, with the option of three renewals, each for a five-year period. In order to renew the franchise agreement Prominent was to provide written notice of its wish to renew within six months but not less than three months before the termination date, in this case being 27 September 2017. To exercise the right of renewal Prominent also had to comply with and satisfy cl 5.1.1 – 5.1.6 of the franchise agreement. In particular, cl 5.1.1 required that Prominent not be in default of any of the terms or the conditions of the franchise agreement, and that it have substantially complied with all of the terms and conditions of the franchise agreement during the five year term.
[3] On 13 March 2017, six months prior to the expiry of the franchise agreement, Quest sent Prominent a letter to provide it with full notice of its compliance issues that needed to be rectified before renewal could be considered. This letter also contained a requirement for Prominent to sign, no later than 21 March 2017, a document acknowledging that Quest’s approval of the renewal depended on the rectification of the items outlined in the letter of 13 March.
[4] On 30 and 31 March 2017 respectively, Prominent’s two directors executed the required acknowledgement and requested renewal of the franchise agreement for a further five years. Quest did not complain that the acknowledgement was given late. An email dated 24 May 2017 from Quest’s manager, Aaron Carpenter, records a meeting between the parties at which
Quest emphasised to Prominent the need for certain actions. Prominent responded on 25 May 2017 confirming its agreement to perform those actions.
[5] However, the franchise agreement was not renewed for a further term of five years upon expiry of the first term. In such circumstances the written franchise agreement provided for its continuation on a month by month basis, terminable by one month’s written notice from Quest. On 31 October 2017, Quest wrote to Prominent setting out the discussions between them at a meeting on 27 October 2017. The letter advised that Quest recognised the improvements Prominent was making to address Quest’s concerns and offered to allow their arrangement to proceed on a month by month basis with a review to take place in January 2018.
[6] Then on 25 June 2018 Quest and Prominent entered into a Deed of Variation under which the terms of the franchise agreement were extended to 1 April 2019 to allow Prominent a further opportunity to meet the renewal requirements. Leading up to the expiry of the extended franchise agreement term no application for renewal was tendered by Prominent. This left Prominent in a month by month holdover arrangement, which continued into 2020.
[7] On 26 June 2020 Quest wrote to Prominent stating that it continued to have no confidence that Prominent would be able to lift its standards to meet the franchise requirements in the future. The letter also indicated that a third party had offered to purchase the business for $270,970 and offered Prominent time to negotiate directly with the third party. Subsequently, on 9 July 2020, Quest forwarded Prominent a further increased offer of $700,000 from the third party. On 4 August 2020 Quest issued a notice of termination of the franchise agreement.
Statement of claim
[8] The plaintiff claims that Quest has breached the franchise agreement by:
(a)failing to provide Prominent with Quest’s franchise renewal documentation for execution on or before 28 September 2017 or at any time thereafter;
(b)purporting, in letters dated 31 October 2017 and 26 June 2020, to deny Prominent’s right to renewal for a further five- year term and asserting that the franchise agreement was terminable on one month’s notice; and
(c)purporting to issue a one-month notice of termination on 4 August 2020.
[9] Prominent also claims that by misrepresenting that it was not entitled to exercise its right of renewal under the franchise agreement, Quest engaged in misleading and deceptive conduct in breach of the Fair Trading Act 1986 and in breach of the contractual duty of good faith it owed to Prominent. This duty of good faith is also alleged to have been breached by Quest when it implemented a “termination strategy” to replace Prominent with its preferred franchisee.
Key issues
[10] There are two key substantive issues. First, whether Quest was entitled to refuse to renew the franchise agreement in September 2017. If Quest has acted wrongly this is a breach of cl 5.1 of the franchise agreement, which has deprived Prominent of a further five-year term that would have expired in September 2022. Second, whether Quest wrongly induced Prominent to enter into the Deed of Variation, which confined the term of the franchise agreement to 1 April 2019 after which it ran from one month to the next, by misrepresenting to Prominent that Quest was entitled to refuse to renew the franchise agreement for a further five years. The second issue is dependent on Prominent achieving a favourable outcome on the first issue. Absent achieving a favourable outcome on the first issue Prominent will be left in the position where at best all it has is a monthly arrangement with Quest, which can be terminated by one month’s notice.
[11] Put shortly the proceeding is a belated attempt by Prominent (albeit within the limitation period) to challenge Quest’s refusal to renew the franchise agreement for a further five years. The catalyst for the proceeding was Quest identifying a third-party replacement for Prominent and proposing to bring the monthly arrangement to an end.
[8] Her Honour identified various factual disputes which could only be resolved at trial.3 Duffy J was satisfied that, when taken at its highest, the evidence from Prominent was enough to establish that there was a serious question to be tried as to whether Quest was entitled to refuse to renew the five-year term as Prominent alleged in its first cause of action.4 Her Honour also considered that on one view of the facts Quest had purported to terminate the Franchise Agreement without good reason to do so.5 Her Honour also considered that if the injunction was not granted, Prominent was at risk of suffering greater loss than it might recover in damages; whilst Quest faced little, if any, risk of irrecoverable loss should the injunction be granted.6
[9] In that analysis, Duffy J took into account that the Franchise Agreement potentially limited damages to $11,200 absent a successful challenge by Prominent to the limitation of liability clause set out in clause 29.3 of the Franchise Agreement.7 Clause 29.3 of the Franchise Agreement is set out at [53] below. Duffy J was satisfied that without injunctive relief an award of $11,200 damages would be “pointless … for Prominent”.8
3 At [13]–[18].
4 At [19].
5 At [27].
6 At [27].
7 At [23].
8 At [23].
[10] On 23 April 2021 (the day after Duffy J’s judgment), Quest filed a memorandum requesting “that the order at [29(a)]” of the judgment,9 “be clarified to confirm that this order is solely in respect of the Notice of Termination dated 04 August 2020, which was the subject of the proceeding”.
[11]Duffy J issued a Minute later that day:10
[3] Quest now seeks to vary the terms of the order I made by requiring that its terms are restricted to the Notice of Termination dated 4 August 2020. I do not consider the judgment requires any further clarification. I agree with the submissions from Prominent that the parties had the opportunity to be heard on the scope of the order at the hearing. The time for Quest to make its submissions on restricting the effect of the order was then.
Legal principles – Recission
[12] The Court retains an inherent jurisdiction to rescind or vary interlocutory orders (including interlocutory injunctions) should the circumstances change such that justice requires a recission or a variation.11
[13] Mr Murray for Quest submits there have been two material changes in circumstance that render it inappropriate to continue the interim injunction:
(a)First, Quest has withdrawn its notice of termination dated 4 August 2020. As such Prominent is no longer at risk of termination or suffering loss so the interim injunction is redundant.
(b)Secondly, Quest has offered to extend the franchise to 28 September 2022. As such Mr Murray submits there is no longer a serious question to be tried as to whether Quest was entitled to refuse to renew the five- year term. Quest has effectively offered Prominent the renewal it sought. Prominent declined that offer, but Mr Murray submits that Prominent cannot rely on its own refusal to agree to a renewal as a ground to maintain the injunction. Mr Murray also points to evidence
9 Set out at [2] above.
10 Prominent Investments Ltd v Quest Apartments Hotels (NZ) Ltd HC Auckland CIV-2020-404- 001683, 23 April 2021 [Minute of Duffy J].
11 GP96 Ltd v F M Custodians Ltd [2019] NZHC 1183 at [82], citing Foodtown Supermarkets Ltd v TSE [1987] 2 PRNZ 545 (HC) at 546.
from Quest that it has offered to engage in a process to agree a further five-year renewal of the Franchise Agreement from 28 September 2022 (that is, a process to grant a third term).
Background – Recission
[14] As Duffy J noted at [7], on 4 August 2020 Quest issued a Notice of Termination of the Franchise Agreement. In his affidavit in support of Quest’s recission and strike- out applications the Chief Executive Officer of Quest, Steven Mansfield explained that four factors had combined together to support Quest’s original decision to terminate the Franchise Agreement, namely:
(a)the impact of Covid-19 and the stress it was likely to bring to the business operations;
(b)the underlying poor performance of the Quest Ponsonby franchise relative to other franchisees even prior to the impact of Covid-19;
(c)the inability of Prominent to secure additional funding to support sustainability of trading requirements. Mr Mansfield says Quest understood Prominent had two funding applications rejected by two separate banks; and
(d)Quest’s understanding of Prominent was either insolvent, or insolvency was imminent.
[15] Mr Mansfield says this was a unique combination of factors and that when Covid-19 hit no other franchisee was experiencing the same combination of issues being faced at Quest Ponsonby.
[16] However, Mr Mansfield says that by April/May 2021 this unusual set of circumstances had changed dramatically. The risks associated with Covid-19 had reduced. Prominent was trading sustainably and Quest no longer had concerns about its solvency. In a letter between counsel dated 31 May 2021 Quest withdrew its Notice
of Termination and agreed to extend the term of the Franchise Agreement to 28 September 2022 on existing terms and condition. The letter provided:
5. To clearly demonstrate that it is not pursuing a termination strategy, Quest will take the following steps:
a. It will withdraw the Notice of Termination dated 4 August 2022.
b. It will agree to extend the current term of the franchise agreement from 1 April 2019 to 2 September 2022 on the existing terms. This extension will be without prejudice to Quest’s position that your client has not, and is not, meeting minimum performance standards (discussed below).
6. Quest has instructed [its solicitors] to prepare a draft deed recording these matters. Once the deed is finalised, the issue of termination will be resolved. The parties can then move to address your client’s poor performance.
Key issue – poor performance
7. The key issue for Quest is (and always has been) your client’s ongoing poor performance in all areas of its business, including guest service standards, operational maintenance, cleanliness and business performance. Your client’s ongoing poor performance is having a detrimental impact on the Quest brand and on other franchisee. Quest is acutely aware of the ongoing poor performance from the guest dissatisfaction feedback it receives on a regular basis.
8. Quest simply cannot allow your client’s ongoing poor performance to continue. It intends to take steps to enforce the minimum performance standards under the franchise agreement.
9. To that end, Quest intends to take the following steps:
a. given the issues raised by your client regarding the process to obtain the January 2020 brand audit, Quest withdraws the brand audit.
b. in consultation with your client, Quest will undertake a fresh brand audit of your client’s property on 9 and 10 June 2021. Quest proposes that your client is present during the audit and has input in the process. The brand input will be provided to your client, and your client will be able to provide feedback and comments.
…
10. Please confirm that your client will attend the brand audit on 9 and 10 June 2021. In the meantime, Quest reserves its position.
[17] In his affidavit Mr Mansfield explains that despite Quest’s ongoing concerns with Prominent’s underlying performance as a franchisee, as at 31 May 2021 it did not consider those concerns were themselves a basis for Quest to terminate the franchise.
[18] On 16 June 2021 Quest wrote to Prominent again raising further concerns about its operational performance. For present purposes it is sufficient to record that Quest considered Prominent was failing to meet minimum standards, which Prominent disputes.
[19] Quest confirmed the rescheduling of the brand audit proposed to take place on 9 and 10 June 2021 would instead take place on 21 and 22 June 2021. Quest confirmed that to meet the minimum performance standard Prominent would be required to:
(a)Participate in the brand audit, including attending the inspection and providing feedback and comment.
(b)Meet to discuss specific actions to be taken to be taken to address issues identified with its property during the audit.
(c)Complete any remedial actions within specified timeframes.
[20] On 16 June 2021 Duffy J ordered that the proceeding be stayed by consent to allow the parties to attempt to settle their dispute under the mandatory dispute resolution provisions contained in the Franchise Agreement.
[21] Ultimately, Quest carried out a two-day Brand Audit inspection on 28 and 29 June 2021. Mr Chopra’s evidence was that this involved a team of four or five personnel from Quest and FURNZ inspecting each room and all common areas at Quest. Mr Chopra’s evidence is that this differs from Quest’s standard approach to brand audits which usually involve a one- to two-hour inspection of common areas and a representative sample of rooms.
[22] On 29 June 2021 Quest’s solicitors provided Prominent with a Deed of Variation to vary the Franchise Agreement by extending the “current term” to 29 September 2022. In light of Quest’s withdrawal of the Notice of Termination and agreement to vary the Franchise Agreement it asked Prominent to confirm which matters recorded in previous correspondence and its statement of claim remained in dispute, and to provide detail of the nature of the loss claimed and quantum. Quest
also foreshadowed that it might issue a notice of dispute under clause 30.3 of the Franchise Agreement once its brand audit report was completed. Quest suggested that any matters raised in that report could form part of negotiations between the parties. In that regard Quest asked Prominent to confirm that it would negotiate in good faith and genuinely attempt to agree resolution.
[23] On 20 August 2021 Quest provided Prominent with a summary of the outcomes of the brand audit and invited Prominent’s feedback. Counsel for Prominent points out that Quest describes the 2021 Brand Audit as “the most extensive and detailed brand audit that Quest has ever undertaken”. Quest explained: “we felt this was necessary given the concerns raised by you in relation to the last brand audit”. In any event, Quest sought Prominent’s written feedback including requests for further clarification and reasons for any disagreement by 3 September 2021. Prominent considered that the information Quest had provided was inadequate and inconsistent with Quest’s standard brand audit process that had been agreed and followed previously. Prominent considered that Quest’s obligations to consult required it to provide Prominent with the entire brand audit report, without which Prominent could not provide feedback. By letter dated 3 September 2021 Prominent’s solicitors advised Quest accordingly.
[24] On 15 September 2021 Quest provided Prominent with further information including what Prominent accepts is a full set of brand audit material. It provided a table of Quest’s refurbishment requirements, and the relevant timeframes within which Quest required these to be completed. Quest’s position was that refurbishment would cost an estimated cost of $614,395, more than half of which would need to be completed “one month from the date Auckland moves to an Alert Level which allows the work to be completed”.12 Quest acknowledged that some refurbishment obligations fell to third parties. It suggested that Prominent attend to these refurbishments and claim the costs back from those third parties in accordance with the terms of the arrangements between them (unless Prominent could persuade those third parties to complete their obligations in accordance with those arrangements).
12 At this time Auckland was in Alert Level 4 as per the New Zealand Government’s response to the Covid-19 pandemic.
[25] On 26 November 2021 the parties attended a mediation. Unfortunately they were unable to settle the various disputes between them. On 10 March 2022 the stay of these proceedings was lifted by consent. On 25 March 2022 Prominent filed an Amended Statement of Claim.
[26] On 30 March 2022 (shortly before Duffy J’s decision) Quest issued Prominent with a notice under clause 8.7 of the Franchise Agreement requiring Prominent to refurbish the premises at its expense in accordance with the 2020 Brand Audit.
[27] On 29 July 2022 Quest issued a Final Notice of Refurbishment Rectification requirement. In his covering email Mr Mansfield set out Quest’s position concerning financial responsibility and communications with third parties.
[28]On its face that rectification plan will take until September 2025 to complete.
[29] Against this background Mr Chopra explained that Prominent did not accept Quest’s offer to extend the term of the Franchise Agreement to September 2022 because that offer was without prejudice to Quest’s continuing allegations that Prominent was not complying with Quest’s minimum standards; and Quest was conducting a further Brand Audit to determine what it considered Prominent’s refurbishment requirements to be. In correspondence Quest made clear that it intended to take steps to enforce Prominent’s performance standards under the Franchise Agreement.
Analysis
[30] I am not satisfied that there has been a material change of circumstances such that the injunction should be rescinded. In my view there remains a serious issue to be tried and the balance of convenance does not favour rescission.
[31] Although Quest has formally withdrawn the Notice of Termination the underlying dispute remains, namely, whether Quest was entitled to terminate the Franchise Agreement; and, more particularly, whether Prominent’s non-performance was such that it was disentitled to a further term from September 2017 in accordance with clause 5.1 of the Franchise Agreement. If Prominent was entitled to a further
term from September 2017 it would also have been entitled to two further five-year terms beyond that, subject to its compliance with the terms of the Franchise Agreement.
[32] Similarly, Quest’s offer on 31 May 2021 to “extend the current term of the Franchise Agreement from 1 April 2019 to 28 September 2022” was without prejudice to Quest’s position that Prominent was not, as at that date, meeting minimum performance standards. Quest remains of the view that Prominent was not entitled to a further term because it had been (and remains) in breach of its performance obligations. Prominent disagrees. In its letter of 31 May 2021 offering to extend the current term Quest made clear that it “simply cannot allow [Prominent’s] ongoing poor performance to continue”, and that Quest would take steps to enforce the Franchise Agreement. It was to that end that Quest withdrew the 2020 Brand Audit and undertook the more extensive Brand Audit in 2021.
[33] Prominent disputes that it was (or is) in breach of the Franchise Agreement. On the contrary, it alleges that the steps Quest has taken to enforce the Franchise Agreement is in breach of Quest’s obligations under it (including to comply with the Franchise Association of New Zealand Incorporated (FANZ); the Code of Ethic and Code of Practice). These are issues that can only be resolved at trial.
[34] As for the balance of convenience, Mr Mansfield’s submission in support of Quest’s application is that since Duffy J granted the injunction the challenges of Covid-19 have dissipated and Prominent is trading sustainably. Mr Mansfield says there is no longer the risk to the Quest brand that was the key driver in its decision to terminate the Franchise Agreement in August 2020. Mr Mansfield says that although Quest has ongoing concerns about Prominent’s performance, there is a process underway to address these matters, and in the meantime Quest does not consider that its issues with Prominent’s performance creates such a catastrophic or immediate risk of damage to Quest’s brand or its business interest as to warrant termination. Mr Mansfield submits that while it is not Quest’s priority focus to pursue the termination of the Franchise Agreement the interim junction is unnecessary and should be lifted.
[35] Quest is also concerned that the injunction creates an imbalance in the commercial relationship between the parties. Mr Mansfield explains that the Quest franchise system is a “prescriptive business format franchise”, of which a franchisor’s right to terminate is an essential part. Although termination is a measure of last resort, the risk of termination incentivises franchisees to comply with their obligations. Although Quest no longer considers Prominent’s under-performance warrants termination, Mr Mansfield expresses concern that if Prominent’s non-performance is not remedied or declines further Quest may need to consider issuing a “breach notice” to Prominent under clause 19.2 of the Franchise Agreement, non-compliance with which may give Quest grounds to terminate the Franchise Agreement. Quest considers it unfair that the injunction protects Prominent from any future breaches of the Franchise Agreement.
[36] However, the injunction need not insulate Prominent from future breaches. It merely maintains the status quo, pending resolution at trial of the issues that have been raised in this proceeding. If in the future Quest considers it has additional grounds to terminate the Franchise Agreement it may apply further. But as I have noted, that was not the basis upon which the current application was made.
[37]For these reasons Quest’s application to rescind the injunction is declined.
Quest’s strike-out applications
[38]As noted Quest applies to strike-out those parts of Prominent’s ASoC seeking:
(a)damages in excess of the limitation of liability cap provided for in clause 29.3 of the Franchise Agreement; and
(b)an order that Quest provide Prominent with duly executed franchise term renewal documentation for a second franchise term of five years on the existing terms and conditions to commence from the date on which the franchise renewal documentation is fully executed.
Legal principles – Strike-out
[39] Under r 15.1(1) of the High Court Rules, the court may strike out all or part of a pleading if it:
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
[40] There is no suggestion by Quest that strike-out should be granted on the basis of the ground under r 15.1(1)(a). Only the other three grounds listed at (b)–(d) are relevant. The Court of Appeal has explained those grounds as follows:13
[89] The grounds of strike out listed in r 15.1(1)(b)–(d) concern the misuse of the court’s processes. Rule 15.1(1)(b), which deals with pleadings that are likely to cause prejudice or delay, requires an element of impropriety and abuse of the court’s processes. Pleadings which can cause delay include those that are prolix; are scandalous and irrelevant; plead purely evidential matters; or are unintelligible. In regards to r 15.1(1)(c), a “frivolous” pleading is one which trifles with the court’s processes, while a vexatious one contains an element of impropriety. Rule 15.1(1)(d) – “otherwise an abuse of process of the court” – extends beyond the other grounds and captures all other instances of misuse of the court’s processes, such as a proceedings [sic] that has been brought with an improper motive or are an attempt to obtain a collateral benefit.
[41]The strike-out principles are well established and not in dispute:14
(a)Pleaded facts whether or not omitted, are assumed to be true.
13 Commissioner of Inland Revenue v Chesterfields Preschoolds Ltd [2013] NZCA 53, [2013] 2 NZLR 679 (footnotes omitted).
14 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(b)The cause of action must be so clearly untenable that they cannot possibly succeed. The case must be so certainly or clearly bad that it should be precluded from going forward.
(c)The jurisdiction is to be exercised sparingly and only in clear cases.
(d)The jurisdiction is not excluded by the need to decide difficult questions of law.
(e)Particular care is required in areas where the law is confused or developing.
[42] Rule 15.1 of the High Court Rules clearly contemplates partial strike-out. It is available with caution where it would promote the efficient resolution of the proceeding.15
Strike-out - damages in excess of liability cap
[43] In its ASoC Prominent alleges five causes of action. In four causes of action it alleges that Quest has breached the Franchise Agreement in various ways. In one cause of action it alleges Quest has breached the Fair Trading Act 1986. In its prayers for relief for each of the four alleged breaches of the Franchise Agreement Prominent seeks (amongst other things):
(a)a declaration that Quest has breached its contractual obligations of good faith to Prominent as set out in clause 11.18 and 32.15 of the Franchise Agreement;
(b)orders directing Quest, within five workdays of judgment, to provide Prominent with duly executed franchise term renewal documentation for a second franchise term of five years on the existing terms and conditions to commence from the date on which the franchise renewal documentation is fully executed; and
15 CBL Insurance Ltd (in liq) v Harris [2021] NZHC 1393 at [27] and [109], citing Body Corporate 360683 v Auckland Council [2017] NZHC 1785 at [31] – [37].
(c)damages in amounts ranging between $14,880 and $119,250 together with interest and costs.
[44] In Prominent’s fourth cause of action (alleging a breach by Quest of its contractual obligations of good faith in relation to refurbishment) Prominent also claims damages for the lost opportunity to sell the Quest Ponsonby franchise business in 2020 in an amount to be quantified on the sale of the Quest Ponsonby franchise.
[45] In Prominent’s second cause of action it alleges a breach by Quest of s 9 of Fair Trading Act 1986 and claims, amongst other things, damages in the amount of
$14,880.
Clauses 11.18 and 32.15
[46]Clauses 11.18 and 32.15 provide that:
11.18 Parties to comply with FANZ Codes
The parties agree to comply with the FANZ Codes at all times.
…
32.15 Standards of Conduct
The parties further agree to act in an ethical, honest and lawful manner.
[47]Clause 1.1.20 of the Franchise Agreement provides that “FANZ Codes” means:
The Code of Practice and Ethics of the Franchise Association of New Zealand Inc. and/or any other mandatory and/or voluntary codes of conduct as the Franchisor may adopt from time to time.
[48] Prominent alleges (and Quest admits) that pursuant to clause 11.18 of the Franchise Agreement, Quest is required to comply with the FANZ Code of Ethics and FANZ Franchising Code of Practice in all its dealings with Prominent.16
[49] Prominent alleges that the effective clause 11.8 is to incorporate (amongst other things) into the Franchise Agreement the ethical obligations pleaded at paragraph 2.3 and the Standard of Conduct pleaded at paragraph 2.4 of its Amended Statement of
16 Amended Statement of Claim [ASoC], para 4.6.
Claim.17 At paragraphs 2.3 and 2.4 of its Amended Statement of Claim Prominent alleges:
2.3 The FANZ Code of Ethics requires Quest (amongst other things) to:
2.3.1 adopt the highest standards of competency, practice and integrity in all matters pertaining to franchising;
2.3.2 respect the confidentiality of all information, know-how and business secrets concerning a franchise business with which it is involved; and
2.3.3 act in an honourable and fair manner in all its business dealings and in such a way as to uphold and bring credit to the good name of the Franchise Association of New Zealand Inc.
2.4 Clause 3 of the FANZ Franchising Code of Practice requires Quest to observe the following standard of conduct:
All members shall act in an ethical, honest and lawful manner and endeavour to pursue best franchise business practice the time and place [sic]. Franchisors and Franchisees shall in their dealings with one another avoid the following conduct where such conduct would cause significant detriment to either party’s business:
(a)conduct which is unnecessary and unreasonable in relation to the risks to be incurred by one party.
(b)conduct that is not reasonably necessary for the protection of the legitimate business interests of the Franchisor, Franchisee or Franchise systems.
(c)any other conduct which is in breach of the Code of Ethics or of this Code.
[50] For its part Quest admits that the effect of the FANZ Code of Ethics is that Quest as a member of FANZ will do what Prominent alleges at paragraph 2.3, but otherwise denies paragraph 2.3. It admits paragraph 2.4.
[51] In each of its causes of action Prominent alleges that Quest has acted in breach of these obligations. In very broad terms, Prominent alleges Quest acted in breach of these obligations by:
(a)terminating and failing to renew the Franchise Agreement;
17 ASoC, clause 4.7.
(b)requiring Prominent to execute the Deed of Variation;
(c)its conduct in relation to refurbishment and Brand Audit Reports, including its direct dealings with third parties; and
(d)devising and implementing a strategy to terminate Prominent’s franchise and to replace Prominent with a preferred franchisee.
[52]Quest strongly denies these allegations.
Liability cap
[53]In its defence, and in support of its strike-out application Quest relies on clause
29.3 of the Franchise Agreement which provides that:
Should the Franchisor or any agent, representative, officer or director thereof be held to have any liability to franchisee in any way connected with this Agreement or with the Franchise Business before, during or after the Term and whether by claim or proceedings under any statute, regulation or rule of law by the franchisee or any third party, the maximum amount that the Franchisor shall be liable for whether by way of damages, costs, interests, fines or otherwise shall be limited to the amount paid or payable by the Franchisee to the Franchisor as the previous month’s Gross Sales Fee by the Franchisee to the Franchisor. The Gross Sales Fee is an amount calculated in accordance with various provisions of the franchise agreement.
[54] For present purposes it is accepted that the “previous month’s Gross Sales Fee” payable by Prominent is $11,200. Quest says that the quantum of Prominent’s claim that exceeds that amount is frivolous, vexatious or an abuse of process.
Submissions
[55] Mr Murray for Quest points out that the Court of Appeal has confirmed that the approach to interpreting exclusion and limitation clauses is the same as that which applies to the interpretation of contracts generally:18
[32] …The approach to interpreting a limitation clause is like any other contractual interpretation exercise. The interpretation of the contract involves an inquiry as to what a reasonable and properly informed third party would consider the parties to mean. The overall commercial context may be relevant.
18 Dorchester Finance Ltd v Deloitte [2012] NZCA 226, (2012) 3 NZTR 22-012 (footnotes omitted).
[33] Given the premise that an exclusion clause will enable a party to escape liability for a breach of a contractual promise, it will be assumed that a party will not have intended to limit liability unless clear and unambiguous language is used. A Court will ordinarily look for clear language or necessary implication before concluding that the right to claim for damages is extinguished. Such an intention will not be lightly attributed. The ultimate objective is to ascertain what the parties intended their words to mean in a particular factual context in which the contract was made.
[56] Mr Murray submits that clause 29.3 is clear and unambiguous. It uses clear language to exclude any claim for damages exceeding $11,200. He submits the Court must therefore strike out Prominent’s claim insofar as it exceeds that amount.
[57]Prominent says that the limitation of liability provisions contained in clause
29.3 of the Franchise Agreement are unenforceable in the present circumstances. Ms Williams for Prominent relies on the principles set out by the Supreme Court of Canada in Tercon Contractors Ltd v British Columbia (Transportation and Highways) recognise that in certain circumstances the Courts may refuse to enforce exclusion clauses.19 Ms Williams submits that the Supreme Court of Canada’s test for the enforceability of exclusion clauses requires three analytical steps:20
(a)As a matter of ordinary interpretation, does the exclusion clause apply to the circumstances established in the evidence?
(b)If so, was the exclusion clause unconscionable at the time the contract was made? Ms Williams submits that this issue has to do with contract formation, not breach, and can arise from situations of unequal bargaining power between the parties such as that between Quest as franchisor and Prominent as franchisee.
(c)If the exclusion clause applies and was not unconscionable, should the Court decline to enforce it because of an overriding public policy concern which outweighs the very strong public interest in the enforcement of contract?
19 Tercon Contractors Ltd v British Columbia (Transportation and Highways) 2010 SCC 4, [2010] 1 SCR 69.
20 At [121] – [123] per Binnie J (dissenting), with the majority agreeing with Binnie J’s formulation of the test: see [42] – [62] (per Cromwell J).
[58] Ms Williams explains that Prominent will contend at trial that Quest’s limitation of liability clause is unconscionable; or alternatively that the Court should decline to enforce it on the grounds that Quest has engaged (and continues to engage) in the pleaded conduct that is so contemptuous of its expressed contractual obligations of good faith to Prominent and reckless as to the consequences of its breaches of those duties as to forfeit the assistance of the Court.21 Ms Williams submits that unconscionability involves an examination of the factual circumstances at the time of contract formation to ascertain whether the Court will intervene to relieve a party from the rigors of the common law in respect of an unconscionable bargain.22 Ms Williams submits that relevant factual circumstances will include: the imbalance of bargaining power that existed between Quest and Prominent at the time of contracting; the standard form nature of the Franchise Agreement; and whether in all of the circumstances it was unconscionable for Quest to attempt to limit its liabilities to its franchisees for breaches of its contractual duties of good faith to one month’s Gross Sales Fee.
[59] Ms Williams acknowledges that the third branch of the Tercon test is “narrow and residual”, and that Prominent will need to persuade the Court that there is an overriding public policy that outweighs the very strong interest in the enforcement of contracts in accordance with their terms. She confronts this squarely, explaining that Prominent’s case is that Quest has engaged in the pleaded conduct that is so reprehensible that it would be contrary to the public interest to allow it to avoid liability. She submits that the enforceability of Quest’s limitation of liability clause ought not to be decided in the context of an application for strike-out because it involves a question of law that requires an evaluation of competing policy considerations with reference to the full factual matrix.
[60] Ms Williams also refers to the House of Lords’ decision in Suisse Atlantique Societe D’armement Maritime SA v NV Rotterdamsche Kolen Central, a case preceding the enactment of the Unfair Contract Terms Act 1977, in which Lord Reid suggested that a Court might refuse to give effect to a clause if it would “lead to an
21 Plas-tex Canada Ltd v Dow Chemical of Canada ltd 2004 ABCA 309, 245 DLR (4th) 650.
22 Gustav & Co Ltd v Macfield Ltd [2008] 2 NZLR 725 (CA).
absurdity” or “defeat the main object of the contract”.23 Lord Reid also thought this may be appropriate if it would “deprive one party’s stipulation of all contractual force” and “reduce the contract to a mere declaration of intent”.24
[61] In response Mr Murray submits that neither the Supreme Court of Canada’s decision in Tercon nor the House of Lords’ decision in Suisse Atlantique reflect the law in New Zealand. He cites Brewer J’s decision in McKenzie (as trustees of the Pepatree Trust) v Protective Canopies Limited:25
[32] Counsel also referred to authorities where foreign courts have refused to give effect to an exclusion clause if it would “defeat the main objective of the contract” or “reduce the contract to a mere declaration of intent”. However, New Zealand Courts have instead focused on whether exclusion clauses are clear and unambiguous. Notions of fairness or reasonableness are not part of that inquiry.
[62] In reply Ms Williams points out that Brewer J’s observations were made in the context of a formal proof application; and that the exclusion and limitation clauses were found not to apply for other reasons.
[63] In terms of policy, Ms Williams points out that the list of examples of potentially unfair contract terms set out in s 46M of the Fair Trading 1986 includes terms that limit or have the effect of limiting one party’s rights to sue another.26 Although the Franchise Agreement is not a consumer contract or specified trade contract to which s 46A would apply, Ms Williams submits that this demonstrates the way in which public policy concerning limitation clauses is developing in New Zealand.
[64] Ms Williams also refers me to the Canadian text Canadian Contractual Interpretation Law which asserts that standard form franchise agreements which provide the franchisor with substantial control over the franchisee’s operations are:27
23 Suisse Atlantique Societe D’armement Maritime SA v NV Rotterdamsche Kolen Central [1967] 1 AC 361 (HL) at 398.
24 At 432.
25 McKenzie (as trustees of the Pepatree Trust) v Protective Canopies Ltd [2017] NZHC 1623.
26 Fair Trading Act 1986, s 46M(k).
27 Geoff R Hall Canadian Contractual Interpretation Law (4th ed, LexisNexis Canada, Toronto, 2020) at [8.7.1] (footnotes omitted).
… among the limited class of contracts for which interpretation reflects policy goals in addition to accuracy in giving effect to the parties’ intentions. Franchise contracts are approached in a manner quite similar to employment contracts, in that the interpretive process is affected by a concern about inequality of power within the contractual relationship, and the result need to protect the more vulnerable contracting party from abuse at the hands of the more powerful party.
These policy concerns were at the forefront in the leading case on franchise contracts in Canada, Shelanu Inc. v Print Three Franchising Corp., and resulted in two principles. First, every franchise contract gives rise to an implied obligation that the parties must act in good faith. Second, a limitation of liability clause within a franchise contract is interpreted with the inequality of power as between the parties in mind, such that a court may refuse to enforce such a clause if it does not truly reflect the intentions of the weaker party.
[65] In Shelanu Inc v Print Three Franchising Corp, the Ontario Court of Appeal held:28
I would also note that the agreement that we are dealing with is a franchise agreement. A franchise agreement is a type of contract of adhesion, that is, a type of contract whose main provisions are presented on a “take it or leave it basis”. In such situations, the case for holding that an exclusion clause represents the intention of the signer and that the signer should be bound by it is weaker because there is usually an inherent inequality of bargaining power between the parties.
[66] As the authors of the Canadian Contractual Interpretation Laws observed, it is not a usual approach to a limitation of liability clause to look only to the weaker party to determine whether the clause represents its intention. However, given the strong policy imperative to protect franchisee “it seems likely that the third branch of the Tercon test might well be used in the franchise context to invalidate limitation of liability clauses that would be found enforceable in another commercial context”.29
Analysis
[67] I agree with Mr Murray that on its face clause 29.3 appears clear. I did not understand Ms Williams to suggest otherwise. Mr Murray is also correct that the Canadian authorities relied on by Ms Williams have not been applied in New Zealand. To the extent they have been considered at all this Court has observed that “notions of
28 Shelanu Inc v Print Three Franchising Corp [2003] OJ No 1919, 64 OR (3d) 533 (Ont CA) at [53].
29 Hall, above n 27, at [8.7.3].
fairness and reasonableness” are not part of the Court’s inquiry into the interpretation of exclusion clauses.30
[68] However, I do not consider it appropriate at this stage to strike-out Prominent’s claim for damages in excess of $11,200.
[69] As noted above, partial strike-out is available with caution where it would promote the efficient resolution of the proceeding. I am not satisfied that would be the case here. All Prominent’s causes of action and the balance of its prayers for relief would remain. These include Prominent’s claims for declarations that in various ways Quest has breached its contractual obligations set out in clause 11.18 (to comply with the FANZ Code of Conduct and Code of Ethics) and clause 32.15 (to act ethically, honestly and lawfully). These significant claims would remain to be resolved regardless of whether part of Prominent’s claim for damages is struck out.
[70] Substantively, Prominent’s case is that clause 29.3 is unenforceable in accordance with the principles outlined in Tercon. This aspect of Prominent’s case may not be straightforward, but on balance I accept Ms Williams’ submission that it should not be decided in the context of a strike-out application. It involves questions of law that will require an evaluation of competing policy considerations in the context of a “business format franchise”. Quest’s evidence was that this is the most proscriptive of the different types of Franchise Agreements. There is no suggestion that Prominent’s Amended Statement of Claim does not disclose reasonable causes of action and in my view this aspect of Prominent’s case should be determined once the Court has heard all the contested evidence and determined the full factual matrix.
Strike-out – franchise term renewal
[71]In all but one of Prominent’s causes of action the relief it seeks includes:
An order directing Quest, within 5 working days at the date of judgment, to provide Prominent with duly executed franchise term renewal documentation for a second franchise term of 5 years on the existing terms and conditions to commence from the date on which the franchise renewal documentation is fully executed.
30 See the excerpt at [61] above.
[72] Quest says this part of Prominent’s claim is frivolous, vexatious or an abuse of process and should be struck out. It says Prominent’s right to any renewal is governed by the terms of the Franchise Agreement; and in any event Quest has offered to provide Prominent with the renewal to which it is entitled under the Franchise Agreement, which Prominent has refused.
[73]Under clause 1.1.28 of the Franchise Agreement any “Further Term” includes
any period of holding over. Clause 5.2 provides:
Holding Over
If the Franchisor permits the Franchisee to conduct the Franchise Business from the Premises after the exploration or determination of the Terms such occupation will be on a month by month basis terminable by one month’s written notice from the Franchisor and shall be on the terms and conditions of this Agreement.
[74] Mr Murray submits that Prominent has been “holding over” since 28 September 2017; and that if Prominent is entitled to a “Further Term” (which Quest denies), that term must include the period of holding over and therefore must commence on 28 September 2017, not the date on which the new franchise agreement is signed. As such, the relief Quest claims is not available under the Franchise Agreement.
[75] Specific performance is a discretionary remedy awarded according to equitable principles. It is a means by which parties are held to the bargain they entered into. It is not for the Court to modify the agreement before ordering that it be performed. However, the Courts have recognised that in some instances the “machinery provisions” of the contract may need to yield to the Court’s directions made in order that the contract can be performed.31
[76] As Toogood J observed in Zhang v Zhai, amending these “machinery provisions” will often be a matter of practical necessity when disputes have meant that the contract can no longer be carried out according to the timetable and in the way the parties initially envisaged. On the other hand, rewriting the essential terms of the
31 Zhang v Zhai [2014] NZHC 2156 at [15] – [16], citing Singh v Nazeer [1979] Ch 474 at 480 – 481 per Megarry J.
contract such as the purchase price would be to substitute the original contract with another.32 Ms Williams submits that in all of the circumstances it is reasonably arguable that the Court retains a discretion to direct that a second franchise term commence on an alternative date. Counsel refers to the particulars of the alleged (but disputed) breaches of the Franchise Agreement.
[77] Once again, I do not consider it is appropriate at this stage to strike out this part of Prominent’s claim. The Court will be much better placed to determine Prominent’s claim for orders directing Quest to renew the franchise term once it has heard the evidence and is appraised of the full factual matrix. In the meantime I do not consider this part of Prominent’s claim to be frivolous, vexatious or an abuse of process.
Result
[78] Quest’s applications to rescind the injunction and strike-out parts of Prominent’s claim are dismissed.
[79] Prominent is entitled to costs on Quest’s applications to rescind the injunction and for strike-out. And as noted at [6] above, costs in respect of Prominent’s application for further particulars remain at large. If the parties cannot agree then Prominent should file a memorandum of no more than five pages in length within 15 working days. Quest should file a memorandum 10 working days later.
Robinson J
32 At [17].
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