Prominent Investments Limited v Quest Apartment Hotels (NZ) Limited
[2021] NZHC 862
•22 April 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2020-404-001683
[2021] NZHC 862
BETWEEN PROMINENT INVESTMENTS LIMITED
Plaintiff
AND
QUEST APARTMENT HOTELS (NZ) LIMITED
Defendant
Hearing: 27 October 2020, 11 and 13 November 2020 Appearances:
S D Williams and R Langdana for the Plaintiff C Pendleton for the Defendant
Judgment:
22 April 2021
JUDGMENT OF DUFFY J
This judgment was delivered by me on 22 April 2021 at 4:00 pm pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Solicitors:
Patel Nand Legal, Auckland Tuner Hopkins, Takapuna
PROMINENT INVESTMENTS LIMITED v QUEST APARTMENT HOTELS (NZ) LIMITED [2021] NZHC 862 [22 April 2021]
Introduction
[1] The plaintiff, Prominent Investments Ltd (Prominent), seeks an interim injunction restraining the defendant, Quest Apartment Hotels (NZ) Ltd (Quest) from taking steps to terminate the franchise agreement currently in place between the parties. In the event the injunction is granted the plaintiff also seeks a stay of the substantive proceeding to allow the parties to engage in the contractual dispute resolution process mandated by the franchise agreement.
Background
[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.
Relevant law
[12] The relevant legal principles for an application for an interim injunction are well established. These principles, as set out in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd1, and reasserted in NZ Tax Refunds Ltd v Brooks Homes Ltd, dictate that the approach is threefold:2
The applicant must first establish that there is a serious question to be tried or, put another way, that the claim is not vexatious or frivolous. Next, the balance of convenience must be considered. This requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order. Finally, an assessment of the overall justice of the position is required as a check.3
Is there a serious question to be tried?
[13] The first step involves an assessment of whether there is a serious question to be tried. It will not be sufficient for a plaintiff to say there is a tenable cause of action from a legal point of view. Rather, the plaintiff must adduce sufficiently precise factual evidence to satisfy the Court there is a real prospect of succeeding in the claim for a permanent injunction at trial.4 Ultimately, whether there is a serious question to be tried is a matter for judicial evaluation.
[14] Regarding the alleged breach of cl 5.1 of the franchise agreement, cl 5.1 provides Prominent with a right of renewal upon written notice to Quest, however, any renewal is also conditional upon Prominent meeting the requirements in cl 5.1.1 –
5.1.6. Clause 5.1.1 requires Prominent to not be in default of, and to have substantially complied with all of the terms and conditions of the franchise agreement. This includes the requirement that franchisees operate their business in accordance with the various manuals and guidelines issues by Quest.5 Quest contends that pursuant to this provision it was entitled to refuse to renew the franchise agreement on account of Prominent’s failings on six key performance measures, to which it alerted Prominent in its letter of 13 March 2017. However, Prominent disputes the performance
1 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (HC) at 133.
2 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12].
3 See, for example, Roseneath Holdings Ltd v Grieve [2004] 2 NZLR 168 (CA) at [35]–[37].
4 See Ansell v New Zealand Insurance Finance Ltd HC Wellington A434/83, 30 November 1983;
Re Lord Cable (dec’d) [1976] 3 All ER 417 (Ch) at 431.
5 See clauses 11.2, 15.2 and 19.4.3.
measures were so bad that refusal of renewal was warranted. It contents the concerns Quest had were in part due to factors beyond Prominent’s control and where it had control, it was undertaking remedial action to the point where refusal to renew was not warranted.
[15] There is clearly a dispute on the evidence relevant to the first cause of action that cannot be resolved before trial.6 The contemporaneous documents show that well before September 2017 Quest was expressing its concerns about Prominent addressing Quest’s various performance measures. On the other hand, the circumstances were not so bad that Quest had determined to end the relationship. The contemporaneous evidence shows that before September 2017 Quest was engaging with Prominent and was willing to give Prominent opportunities to address Quest’s concerns. Further, Quest accepted that some issues of concern were beyond Prominent’s control. For example, balcony areas of some units had to be closed off for remediation. This was a responsibility which lay with the Body Corporate responsible for the unit title complex in which the apartments were situated. This circumstance was out of Prominent’s control however it could have adversely affected how some guests viewed their experience at the Quest residence. Even after 27 September 2017 Quest cannot have been completely disenchanted with Prominent’s efforts because it was prepared to give the company further time to improve even to the extent that it entered into the Deed of Variation for a one-year period.
[16] What is difficult to determine from the written material is why Quest sought to move to a monthly basis followed by the Deed of Variation. Either Quest did so because Prominent’s poor performance truly warranted this approach. Alternatively, Quest followed this course of action because it offered a better way of managing its relationship with a franchisee whose performance needed improvement, but was not so poor that Quest wanted to find a new franchisee. In the second case, the performance may not have been so bad that it warranted a refusal to renew the five- year term. A third explanation is that Prominent was making progress and Quest’s later change of stance was brought about by outside factors. The latter possibilities
6 Prominent asserts many facts it relies on are not disputed by Quest. Quest rejects this and asserts that those facts are disputed. I have treated every material factual issue as being in dispute.
would arguably provide a basis for finding there was no proper basis for Quest to refuse to renew the five-year term.
[17] An application for an interim injunction is not the time for the Court to resolve conflicts of evidence on affidavits.7 It is apparent from the affidavit evidence and the submissions for Prominent that it believes the 2017 renewal was not granted due to its failure to complete a range of refurbishments. The property’s need of refurbishment dates right back to 2012, when Prominent became the franchisee. Subsequently, in 2014 Quest prepared a Rectification Plan to guide Prominent on which refurbishments ought to take priority. Items were prioritised on a numbering system: items identified as Priority Three were to be completed prior to the time of the first renewal, and Priority Two items were to be completed during any second term if the agreement was renewed. Prominent says that it completed all Priority Three requirements by the requisite date. Both parties knew that the failings in the guest satisfaction measures were a result of the rundown state of the property. Further, Prominent says that in 2017 none of the key performance measures were alleged to constitute substantial non- compliance such as to endanger any opportunity for renewal.
[18] Even if Prominent is correct in stating that it had carried out all the necessary refurbishments and the low guest satisfaction scores could be explained by the state of the property, there are other failings listed in the letter of 13 March 2017. These include: data entry and reporting issues; incomplete staff training; incomplete insurance requirements; and accounting practice concerns. Each of these failings would have influenced Quest’s assessment of whether the plaintiff had substantially complied with the terms and conditions of the franchise agreement. But, whether these failings justify Quest’s refusal to renew the agreement is a different matter that cannot be resolved at this stage.
[19] I am satisfied that, when taken at its highest, the evidence from Prominent is enough to establish that there is a serious question to be tried on whether Quest was
7 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 2 WLR 316 (HL) at 407 and 510.
entitled to refuse to renew the five-year term (the first cause of action). This finding is enables me to proceed to the next stage of the test for granting interim relief.8
The balance of convenience and overall justice
[20] The second step of the analysis involves an assessment of the balance of convenience, which is said to be the guiding principle in an application for an interlocutory injunction.9 In applying this guiding principle the Court must have regard to a range of factors, including the ability of damages to adequately compensate the plaintiff for their loss.
[21] Prominent submits that its case against Quest is strong, and that refusing relief will likely have the effect of determining the proceeding, as it will allow Quest to terminate the franchise agreement and to contract with a new party. This in turn will leave Prominent with no business, no payment of goodwill and no means of generating income to pursue its claim against Quest. Moreover, Prominent submits that damages will not be an adequate remedy because the franchise agreement limits the damages it may claim to one month’s gross revenue, which totals approximately $11,200.10 Prominent says that comparatively there will be no serious injustice to Quest if an interim injunction is granted. Ultimately, Prominent submits that there is value in preserving the status quo, that being the position before Quest issued the notice of termination.
[22] On the other hand, Quest submits that damages are an adequate remedy as all causes of action, if successful, are amenable to an award of damages. Quest says that nothing in this case justifies a departure from the principle that damages can provide an adequate remedy and accordingly, Prominent’s application for an injunction must fail. Further, that Prominent has underperformed for many years, which has caused Quest reputational damage. There is a real risk of this continuing if an injunction is granted.
8 The second and third causes of actions are dependent upon the success of the first cause of action. Thus a finding on whether they present any serious question to be tried adds nothing here.
9 Eng Mee Yong v Letchumanan [1980] AC 331, [1979] 3 WLR 373 (PC).
10 Clause 11.29 of the franchise agreement.
[23] Prominent has raised a valid point in noting that if the interim injunction is not granted then Quest will proceed to terminate the franchise agreement and replace Prominent with another franchisee. This would essentially limit Prominent’s remedy, if successful, to one of damages. Because the franchise agreement potentially limits damages to $11,200, absent a successful challenge to that contractual limitation, Prominent would then find itself in the position where even if the Court found Quest was wrong to refuse to renew the franchise agreement for a further five years and the Deed of Variation could not deprive Prominent of this benefit, (because Quest had wrongly induced Prominent to enter into this Deed by misrepresenting there was no right to renew for five years), all Prominent would receive in compensation for the loss of a further five-year term (with expiry in September 2022) may be around
$11,200. This potential limitation on the quantum of damages means that damages may be an inadequate remedy in this case. Prominent has provided a valuation which has valued its business at over $1,000,000. The valuation excludes shareholder liabilities and is based on information provided by Raj Chopra, shareholder-director. It appears to be overly optimistic. A large part of the value is attributed to goodwill. However, even when regarded conservatively, the valuation shows how pointless an award of around $11,200 damages would be for Prominent.
[24] Prominent has relied upon AB v CD an English authority regarding the assessment of limitations on damages when it comes to granting interim injunctions.11 Quest submits that AB v CD has not been applied in New Zealand. I do not consider a limitation clause on the award of damages to be determinative of whether to grant the injunction or not. But I consider it to be a relevant factor for consideration.
[25] In AB v CD, Laws LJ considered a limitation on damages clause may tend to favour the grant of an injunction to prohibit a potential breach of contract occurring in the first place where no such breach had occurred. In essence the present circumstances have similarities with a threatened breach because although the alleged breach here has already occurred the consequences that would generally follow a failure to renew the franchise agreement have not happened. The parties’ relationship, for all practical purposes, has continued in much the same way that it would have done
11 AB v CD [2014] EWCA Civ 229, [2015] 1 WLR 771.
had the renewal been granted. The legal circumstances are vastly different but on a practical day-to-day level each has carried on as before the alleged breach. In such circumstances an injunction will preserve the status quo until their dispute is resolved. Prominent will be in a position where if the outcome of the proceeding is favourable it has something more valuable to sell than is presently the case. If the parties’ relationship is beyond repair Prominent will nonetheless be in a better position to exit its franchise business than it otherwise would be. Alternatively, should the parties find a way to continue to work together they can do so. On the other hand, if the outcome is unfavourable for Prominent, Quest can claim damages for any loss it may have suffered. Given Quest’s decision not to end its arrangement with Prominent in September 2017 and its willingness to continue to work with Prominent until 2020, I consider that Quest’s expressed concerns about reputational damage carry little weight. Had its reputation been seriously at risk as a result of Prominent’s alleged underperformance, I would have expected Quest to have severed all ties with Prominent well before 2020.
[26] Quest has queried the undertakings as to damages provided by Prominent. The company’s accounts show it owes significant liabilities to its shareholders, who have taken out loans to fund Prominent. It is a family company. The three shareholders are also directors, they are Raj Chopra, his wife Anju Chopra and his daughter Drishti Chopra. I am satisfied that any concerns about Prominent’s ability to pay damages should Quest suffer loss from the grant of an injunction can be satisfied by Prominent’s shareholders/directors providing personal guarantees of Prominent’s liability to meet the undertaking. They can also provide an account of their own financial worth. Accordingly, I consider that the undertaking as to damages is not a barrier to granting an injunction. Nor do I think that an injunction will cause irrecoverable loss for Quest. Until 2020 it has been content to work with Prominent. Doing so for a while longer until the substantial dispute is determined is simply an extension of those circumstances. Provided any financial loss is adequately covered by the undertaking (which I consider to be the case if it is personally guaranteed) the balance of convenience lies in favour of granting an injunction.
Conclusion
[27] I am satisfied there is a serious question to be tried. Whilst its determination will hinge largely on disputed factual determinations, these cannot be made now. However, on one view of these facts Quest has purported to terminate the agreement without good reason for doing so. The balance of convenience favours the grant of an injunction. If an injunction is not granted Prominent is at risk of suffering greater loss than it may recover in damages. On the other hand, Quest faces little, if any, risk of irrecoverable loss should an injunction be granted. Accordingly, I consider an interim injunction should be granted.
[28] Prominent also submitted that if an injunction were granted the proceeding should be stayed and the parties engage in the dispute resolution process provided in the franchise agreement. The parties may choose to resolve their substantive dispute in this way. Whether I can order them to do so is another matter. This would hinge on the effect of the dispute resolution clause in the franchise agreement. Neither party adequately addressed the topic of whether the dispute resolution clause still has force and requires them to submit to that process. If it has that effect, then the proceeding should be stayed. I consider the parties should be given the opportunity to address this issue further before I determine it.
Result
[29]I make the following orders:
(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;
(b)The order in (a) above is conditional on at least two of Prominent’s shareholders/directors (Raj Chopra, Anju Chopra and Drishti Chopra) providing written personal guarantees that one or both of them (either jointly or severally) will meet Prominent’s liability under the undertaking Prominent has given to support the injunction;
(c)The parties have leave to file further submissions on the question of whether the substantive proceeding should be stayed and the parties directed to participate in the dispute resolution process provided for in the franchise agreement. Such submissions are to be filed sequentially by Prominent within 15 working days of delivery of this judgment. Submissions in response by Quest within 15 working days from receipt of Prominent’s submissions. Prominent to file any reply submissions within five working days of receipt of Quest’s submissions.
[30] There is to be a telephone conference at a time and date arranged by the case officer with the parties no later than 10 working days after the time for Prominent to file its submissions in reply. The purpose of the telephone conference will be to review matters and to make any timetable directions that may be required.
[31]The parties have leave to file memoranda on costs.
Duffy J
2