Safe Kids in Daily Supervision Limited v McNeill HC Auckland CIV 2010-404-1696
[2010] NZHC 1904
•20 October 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-001696
BETWEEN SAFE KIDS IN DAILY SUPERVISION LIMITED
Plaintiff
ANDBARBARA WINSOME MCNEILL First Defendant
ANDMCNEILL ENTERPRISES LIMITED Second Defendant
ANDNATASHA MAY-BABETTE MCNEILL- O'KEEFFE
Third Defendant
ANDAATA BAYKIDS LIMITED Fourth Defendant
ANDKIDS CHOICE LIMITED Fifth Defendant
Hearing: 20 October 2010
Counsel: M A Karam for Plaintiff
K M Quinn for Defendants
Judgment: 20 October 2010
ORAL JUDGMENT OF ASHER J
Solicitors/Counsel:
M A Karam, Southern Cross Chambers, PO Box 5444, Wellesley Street, Auckland 1140. Email: [email protected]
K M Quinn, Bankside Chambers, Level 22, 88 Shortland Street, Auckland 1010. Email: Kelly[email protected]
SAFE KIDS IN DAILY SUPERVISION LIMITED V BARBARA WINSOME MCNEILL AND ORS HC AK CIV-2010-404-001696 20 October 2010
Introduction
[1] This is an application to vary undertakings provided to the Court relating to an interim injunction application determined by me on 4 April 2010.
[2] The plaintiff, Safe Kids in Daily Supervision Ltd (“Safe Kids”) had sought orders by way of an interim injunction against all defendants. Their essential purpose was to restrain the defendants from operating an after school childrens’ care programme at Murrays Bay Intermediate School, Murrays Bay, Auckland. In broad terms the grounds put forward to support the application were that the first, third and fourth defendants were in breach of restraint of trade clauses when they conducted this business and that all defendants were misusing confidential information relating to the business of the plaintiff.
[3] Safe Kids is a childcare franchise operated with some 55 franchises throughout New Zealand. I set out the background to the current dispute in my judgment of 14 April 2010. The first defendant, Barbara Winsome McNeill, had been a long term master franchise owner within the plaintiff’s franchise group. The agreement had contained a restraint of trade clause. Ms McNeill was a master franchisee and sub-franchised to other Safe Kids operators. Her daughter, Natasha May-Babette McNeill-O’Keeffe, or interests associated with her, began operating as a franchisee of the Pinehill/Northcross franchise within Ms McNeill’s master franchise territory.
[4] During 2009 the plaintiff decided not to renew Ms McNeill’s master franchise agreement. There were then some discussions referred to in my judgment.[1]
Ultimately, Ms McNeill and her daughter, Ms McNeill-O’Keeffe proceeded to set up a new business. The fifth defendant, Kids Choice Ltd, was incorporated to be the new vehicle. A programme was negotiated with Murrays Bay Intermediate School for Kids Choice Ltd to run an after school childrens’ programme. The business was set up and running and employed five staff. My decision records that approximately
50 children attended.
[1] At [89].
[5] Ultimately, I declined to grant an interim injunction. Having considered and determined the issues relating to arbitration clauses, I turned to the issue of a serious question to be tried. I concluded that there was a serious question to be tried and a reasonable possibility of success existed in respect of the claims of the first, third and fifth defendants.
[6] I turned to the balance of convenience and concluded it was likely that a modest damages award could be met by the defendants. The defendants operated a business at a single location. There was no operating franchise in the geographic location from which the defendants operated. The plaintiff had some 55 franchises in New Zealand and the defendants’ actions did not appear to strike at the heart of the plaintiff’s business.
[7] I noted that there was no suggestion that there was any alternative franchisee of the plaintiff currently available to take pupils who were presently attending the fifth defendant’s programme.[2] I was not satisfied that the plaintiff would suffer any significant direct financial loss as a consequence of the defendants’ business and I considered that any damage to goodwill could be limited. I placed the proceedings on the fast track and indeed there is a fixture pending on Monday, 29 November
2010.
[2] At [59].
[8] I declined the injunction recording that this was on the basis of the undertakings that had been provided on behalf of the defendants, which were on the court file. I note that those undertakings were relevant to my refusal to grant the orders sought. I reserved leave to the parties to apply further should there be any relevant circumstances arising in relation to those undertakings. The undertakings were recorded in my judgment at [57].
The parties’ respective positions
[9] Ms McNeill has filed an affidavit. In essence she asserts that over recent times the business of Kids Choice has dwindled to the extent that its survival is in
peril. At the time of the hearing I recorded in the judgment that there was a role of
50 at Kids Choice. Mr Quinn, for the defendants, has suggested that in fact that was a misinterpretation of the numbers and that there were indeed 66 there at the time. Ms McNeill has attached to her most recent affidavit the turnover of Kids Choice for the week of 11 October 2010 and this shows enrolment numbers of 35 to 40.
[10] In response, Mr Karam for the plaintiff submits that in fact for a period of time the defendants had breached their undertakings by increasing enrolments up to
104. Ms Engelbrecht has filed an affidavit which analyses numbers and indicates a significant increase in numbers.
[11] Mr Quinn in his submissions in response suggested that her figures did not take into account attrition and the fact that some of the children were staff children and did not pay. He also submitted that many children do not attend.
[12] Mr Karam also suggested that there had been some advertising by Kids Choice, although this was limited. He also made the point that Kids Choice has now moved from its previous location at Murrays Bay Intermediate School. It has now moved to All Hallows Methodist Church hall at 218 Beach Road, Castor Bay. These new premises are not in the Pinehill/Northcross area where the Murrays Bay Intermediate School premises were located. Rather, they are positioned in the Safe Kids franchise area of Campbells Bay. Thus, they are now in an area where a Safe Kids franchisee is operating.
[13] In response, Mr Quinn submits that the operation is still essentially in the Pinehill/Northcross area and that the nature of the Kids Choice business is different from that of Safe Kids.
Discussion
[14] There is some support in the material before the Court for Ms Engelbrecht’s claim that the first, third and fifth defendant have breached the undertakings by accepting enrolments into their programmes which for a period increased the role. However, it is not possible to be categoric about this as there is no definitive audit of
numbers and there is nothing to indicate any element of flagrancy in the suggested breach.
[15] I am prepared to accept that there has recently been a drop-off of numbers and that Kids Choice now faces something of a crisis and must improve enrolments by advertising. Ms McNeill reports that Kids Choice is losing enrolments and money each week and that she and her daughter have been forced to take out personal loans to keep the business afloat. She observes that if they cannot advertise and bring the roll back up to its previous level the plaintiff will have ended up in succeeding in closing Kids Choice down.
[16] I can see force in her observation that the move that was required as a consequence of the school building leaking has cost Kids Choice business and I can see that there could be a need to advertise to reinforce their availability to carry out the same service from the new premises.
[17] I note that the undertaking to pay 11 percent of revenue into their solicitor’s trust account has been met by Kids Choice and that the following payments have been made:
• $714.29 on 8 May 2010;
• $2,147.55 on 9 June 2010;
• $2,102.50 on 18 August 2010; and
• $2,803.80 on 15 October 2010.
[18] In the balance of convenience assessment that I have carried out in the original judgment, I assumed that Kids Choice would be able to operate the existing business until the determination of the substantive fixture. I do not consider that Kids Choice has disqualified itself from the continuing benefit of that view by virtue of any breaches of the undertakings. I am also satisfied that there is a real risk that if the prohibition on advertising is not lifted, Kid Choice may not be able to continue.
In my earlier judgment I set out my view that this would have drastic consequences for the defendants:[3]
Should the defendants ultimately succeed they will be faced with a business that has ceased to exist and would be very difficult to revive as the goodwill will have been dissipated.
[3] At [64].
[19] I went on to note that there would be a real difficulty in assessing damages in that event.[4] These considerations apply to the assessment of this variation application. Unless the variation is granted there could be the same consequences that I sought to avoid in the earlier orders.
[4] At [65].
[20] However, there is a further factor that I must take into account. This is the fact that the business no longer operates in an area in which Safe Kids does not operate, and has now moved its location into the Campbells Bay Safe Kids franchise area. Mr Karam, in his forceful submissions, has expressed a concern that this will mean more direct damage to the business of Safe Kids, in particular in the Campbells Bay franchise area.
[21] While there is force in this, Mr Quinn has pointed out in response that Kids Choice operates in a different way from Safe Kids. It transports targeted children to the premises rather than them being delivered. The target will remain children in the Pinehill/Northcross area and not children in the Campbells Bay area. The change of geographic location will not necessarily change in any significant way the catchment area.
[22] I consider that any additional disadvantage to Safe Kids arising from this change and the proposed variation of the prohibition on advertising can be met by it being a condition of that advertising only take place in the Pinehill/Northcross area. This will require Kids Choice to limit itself to the same franchise area which is not in direct competition with Safe Kids to date. My decision on this is influenced by the somewhat different nature of the two businesses.
Conclusion
[23] I stand back and look at where the overall justice lies as I must. Although the dynamics have changed a little with the move into the Campbells Bay area, I consider that the balance of convenience supports the continuation of a regime that will allow Kids Choice to continue to trade. I am satisfied that in order to do so there needs to be some variation of the restriction on advertising.
[24] For the reasons I have already set out briefly in this judgment, and in more detail in my earlier judgment, if the consequence of these proceedings is that Kids Choice is forced to close down then ultimately wins the substantive proceedings it will have suffered a significant loss and damages will be most difficult to calculate.
Result
[25] I grant the application to vary the injunction. The undertakings that have been provided to the Court and are recorded at [57] of my judgment of 14 April
2010. The variation to the prohibition on advertising is as follows:
a) The defendants undertaking to refrain from advertising the fifth defendant’s services is varied to provide that the fifth defendant may advertise its services as follows:
i)By distributing flyers or leaflets to and by schools in the Pinehill/Northcross area in which the fifth defendant currently operates;
ii)By placing notices on local community notice boards, such as those found at supermarkets or public libraries in the Pinehill/Northcross area in which the fifth defendant currently operates.
[26] For the avoidance of any doubt, I record that the fifth defendant is not to advertise in the Campbells Bay franchise area and is to limit advertising and the
posting of notices to the area in which it has operated to date. It would go against the spirit of this variation should there be any advertising in a new place where there is any direct competition with a Safe Kids franchise.
[27] It is a further term that the fifth defendant may not increase its roll of regular children (being children who have a standard booking for at least one afternoon or morning each week) beyond 70 and that the fifth defendant will not accept more than
70 enrolments for the summer holiday programme.
[28] I am not prepared to grant the third variation sought, which is “putting the fifth defendant’s name and logo on the shirts worn by the Kids Choice staff”. This is because the business is now in the Campbells Bay franchise area and this could constitute direct competition with the plaintiff’s franchisee. It does not seem to be an important aspect of the variation and is unlikely to make any significant difference to new business.
Costs
[29] Both counsel have asked that costs be reserved. In the circumstances, that seems a reasonable solution. Costs are reserved.
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Asher J
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