Smith & Sons Limited v Sear

[2019] NZHC 2170

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CIV-2019-412-27

[2019] NZHC 2170

BETWEEN

SMITH & SONS LIMITED

Plaintiff

AND

THOMAS JOHN SEAR and LYNDA MAREE WRIGHT-SEAR

Defendants

Hearing:	26 August 2019
Appearances:	S A McClean for Plaintiff Defendants self-represented
Judgment:	2 September 2019

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 2 September 2019 at 12pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

………………….

SMITH & SONS LTD v SEAR [2019] NZHC 2170 [2 September 2019]

[1]    The plaintiff applies for summary judgment under a guarantee given by the defendants.  The  guarantee  is  part  of  a  franchise  agreement  entered  into  by   the defendants’ company, Heath Larnach Construction Ltd (“the franchisee”) and the plaintiff dated 3 November 2014 (“the agreement”).

[2]    The defendants do not dispute that the guarantee they gave is binding on them and indeed, when this matter was first called, they accepted it was appropriate to enter judgment as to liability. The issue in this judgment is quantum.

[3]    The amount claimed by the plaintiff is made up of a number of components and it is necessary to address each separately. Some components are not disputed, while others are disputed in part.

[4]    In relation to the claims that are not accepted by the defendants, I need to be satisfied  that  the  plaintiff  has  demonstrated  that  the  defendants  do   not  have    a reasonably arguable defence.

[5]    The franchise business was, as the franchisee’s name suggests, a construction business specialising in renovations and extensions to properties. Clients of the franchisee would pay deposits against work that the franchisee had contracted to complete.

[6]    The plaintiff considered the franchisee was in default of its obligations under the agreement and issued notices to remedy as required by the agreement. The plaintiff considered the franchisee failed to remedy the issues raised in the initial notice within  the  time  provided  for  and  issued  a   second  notice  to   that   effect   on  15 November 2018. The second notice was the precursor to the plaintiff’s ability to cancel the agreement. The agreement was cancelled on 19 November 2018.

[7]The defendants accept that the plaintiff was entitled to cancel the agreement.

Deposits

[8]    Following cancellation of the agreement, the plaintiff says that in order to preserve the reputation of its brand, it refunded deposits to three clients of the franchisee for work that was not completed.

[9]    The first of these refunds was in relation to a job known as “Cosgrove and Wrathall” and was in the sum of $19,611.02. This amount was invoiced to the franchisee by the plaintiff on 22 November 2018.

[10]   The second refund was in relation to a job known as the “Brosnan” job and was invoiced to the franchisee on 26 February 2019. That invoice also included other claims which are referred to below. The Brosnan deposit repaid with GST was

$12,867.09.

[11]   There is a further amount in the sum of $1,950.00 (including GST) referred to in the affidavit of Mr Myles in support of the application for summary judgment, being the refund of the balance of a deposit paid by a Miss Sleigh, said to have occurred after 26 February 2019.

[12]   These amounts are claimed by the plaintiff under cl 9.9 of the agreement which provides:

9.9 Indemnity – Customer Complaints The Franchisee shall use its best endeavours to resolve and settle all complaints by the Franchisee’s customers in accordance with the contract between the Franchisee and the customer. The Franchisee will indemnify and keep indemnified the Master Franchisee in respect of any costs incurred by the Master Franchisee to minimise damage to the Smith & Sons Renovations & Extensions’ brand as a consequence of any failure by the Franchisee to comply with this clause.

[13]The plaintiff is the Master Franchisee.

[14]The defendants’ position is recorded in their notice of opposition. They state:

While we agree that we owe money to Smith & Sons SI including refunds to clients, we have been unable to confirm the amounts owed as Smith & Sons SI have denied [franchisee] access to … accounting records (my emphasis added)

[15]   But for this acknowledgement, I would have had doubts as to whether the plaintiff’s case met the threshold for summary judgment. I say that as there is no evidence that the franchisee breached its obligation to use best endeavours to resolve and settle customers’ complaints. No details of the complaints are provided nor why the complaints warranted the return of the deposits.   As the last part of cl 9.9 of     the agreement shows, it is only costs incurred as a consequence of a failure by the franchisee to comply with the obligations in cl 9.9 that entitle the plaintiff to claim costs incurred.

[16]   Ms McClean for the plaintiff submitted that the fact that the complaints had come to the attention of the plaintiff was some indication that the franchisee had failed to properly deal with the complaints. However, such could equally indicate an unreasonable complainant who would not accept the solution the franchisee put forward.

[17]   In other words, the amounts claimed by the plaintiff are not payable simply because the plaintiff has raised an invoice for those amounts. In the absence of an acknowledgement from the  defendants  of  liability,  the  plaintiff  has  to  establish a breach by the franchisee that triggers the plaintiff’s entitlement to incur costs to protect its brand under cl 9.9.

[18]   The evidence of quantum in respect of the two larger deposits is limited. In relation to the Brosnan deposit, an invoice is produced which states the deposit refund was made to minimise brand damage. In relation to the Cosgrove and Wrathall deposit only, the invoice is produced without any further explanation. In relation to the Sleigh deposit, more detail, albeit relatively brief, is supplied.

[19]   The deposits total $34,428.11. At the end of the day the defendants during the hearing accepted liability for the deposits and there will be judgment against them for that amount.

Overdue franchise and other fees

[20]Four invoices have been raised for overdue invoice fees. They are:

(a)       31 July 2018:              $366.56;

(b)       23 August 2018:         $262.20 (Trademe advertisement);

(c)       30 September 2018:    $3,271.47; and
(d)      31 October 2018:        $2,393.36.

[21]   In respect of the last two invoices, the defendants say the jobs were cancelled only after some of the work was completed and accordingly, the franchise fees payable on those jobs need to be reduced to reflect that amendment to the building contract. The plaintiff accepts there is evidence of cancellation of the invoice [20](d) but not of [20](c). Ultimately whether the contracts, subject to the fees in the last two invoices, were cancelled is a factual issue that cannot be resolved in this context.

[22]   In respect of the invoice dated 30 September 2018, the defendants accept that the sum of $1,584.70 is payable.

[23]   In respect of the invoice dated 31 October 2018, the defendants accept that the sum of $478.67 is payable.

[24]   The agreement provides that the continuing franchise fee is payable on jobs started or commenced during the preceding month by the franchisee. Clause 19.4 is part of Part 19 of the agreement which deals with obligations on termination. That clause provides:

19.4 Outstanding Fees The Franchisee will not be  entitled  to  any payment, repayment or compensation for any goodwill attaching to the Franchise Business. The Franchisee must immediately pay Continuing Franchise Fees to the Master Franchisee on all contracts and/or Jobs in the System  which  the  Master  Franchisee  has   consented   in   writing   that the Franchisee may complete. If the sale/s do not proceed for whatever reason within a reasonable time and the Franchisee provides the Master Franchisee with written evidence that the sale has not proceeded, the Franchisee shall be entitled to a refund of the Continuing Franchise Fee paid to the Master Franchisee.

[25]   That clause is not directly relevant as it relates to jobs which the plaintiff has given the franchisee consent to complete. However, it indicates that where a job is in the system and that job has been cancelled, that there will be a refund.

[26]   The plaintiff accepts that the franchise fee is to be adjusted for variations  to  a building contract between the franchisee and its clients which is the manner in which the fee is adjusted up and down when the franchise is operating. It asserts that in this

case there are no variations, that is cancellations of the job, because they were not entered into the computer system operated by the franchisee. It argues that irrespective of whether the contracts were cancelled, if such was not entered into the system, then the cancellation was not contractually effective to diminish the franchise fee payable. I do not accept that submission. Entry of the cancellation of a job into the system is an administrative step. That the administrative step may not have been completed does not prevent the plaintiff from calculating the correct franchise fee payable.

[27]‘Variations’ are defined in the franchise agreement as follows:

“Variation/s” means any variations to a contract after execution thereof, made either verbally or in writing by the parties and includes any and all extras or credits the customer of the Franchisee pays or receives as a result of any such variation/s.

[28]   A variation that has the effect of deleting such work that it brings an agreement to an end is more or less a variation. The definition also confirms that an oral variation/cancellation would qualify to reduce the franchise fee.

[29]   I am satisfied that there is a reasonably arguable defence in relation to the amounts challenged by the defendants and under this head there  is  judgment  for  the first two invoices (not disputed) and in the sum of $1,584.70 in respect of the    30 September 2018 invoice and in the sum of $478.67 in respect of the invoice dated 31 October 2018.

Internal time spent

[30]   The first invoice raised by the plaintiff seeking to charge for its internal time is dated on 22 November 2018 and includes the following narration:

General Expenses for time by staff of Smith & Sons SI Ltd in dealing with clients & their projects at 46 Henry Street & 102 Glenross Street. These include but are not limited to: Phone calls, emails and texts with clients, John Sear, Eruera Kupenga, subcontractors, suppliers, Dunedin City Council

The amount claimed is $10,400 plus GST. A total of $11,960.

[31]   There are two disbursements claimed in relation to airfares and car hire in the sum of $533.76 and $488.74 (plus GST) for visits to Dunedin. The total claimed under this invoice is $13,135.87 (including GST).

[32]   The next invoice for internal costs was issued on 26 February 2019 and is part of the Brosnan deposit invoice already referred to. It includes the following narration:

General Expenses for time by Directors & Staff of Smith & Sons SI Ltd in dealing with WM Brosnan and her family, Media, Corporate Office, lawyers and each other to minimise brand damage as per above.

The amount claimed is $3,504.35 plus GST. A total of $4,030.

[33]   There is a further uninvoiced claim referred to at para [38](c) of Mr Myles’ first affidavit being:

(c)$2,392.00 for 32 hours’ worth of time, at a rate of $65 per hour inclusive of GST, expended by the Smith & Sons Directors, General Manager and Business Support personnel between 27 February and

15 March 2019, in dealing with brand protection, including correspondence with clients, media and suppliers, with particular regard to complaints received from:

(i)Wynsom Brosnan;

(ii)Steve Rate and Cathy Hewitt;

(iii)Tina Sleigh; and

(iv)Ruth Heron.

[34]   The last amount claimed for internal costs was included in a letter of demand issued by the plaintiff to the franchisee (with a similar demand sent to the defendant guarantors) dated 21 December 2018 as follows:

In addition, SSL has incurred costs and expenses of $1,839.83 as a result of time spent dealing with HLCL’s clients and their projects. This amount is now due and owing from you.

The claims in this category total $21,397.70.

[35]   I am not satisfied that the plaintiff has established that it is entitled to judgment in respect of this category of claim. I take that view because, as I have said earlier,

before the plaintiff can exercise its right to claim costs under cl 9.9 it must demonstrate that the franchisee failed to use its best endeavours to resolve and settle a complaint, in effect leaving the Master Franchisee with no option but to step in and protect its name.

[36]   Secondly, the franchisee is entitled to recover under cl 9.9 “any costs incurred”. I am not convinced that internal costs, which I presume are part of the cost of the day-to-day operation of the plaintiff, are costs incurred as contemplated by cl 9.9. Employee time is an overhead of the business. The staff need to be paid irrespective of breaches by franchisees. In other words, these costs would have been incurred by the plaintiff whether or not the franchisee was in breach of the franchise agreement. The costs claimed were not a consequence of a failure by the franchisee to manage complaints – they were, as far as I can see, day-to-day staff costs. There is no evidence of additional costs incurred in respect of these claims, save the travel disbursements  I refer to. The travel disbursements were accepted by the defendants at the hearing.

[37]   The claim is not advanced on the basis that the time claimed for could have been otherwise charged out by the plaintiff – see McVeagh Fleming v Garnett.1

[38]   Accordingly, I do not accept the plaintiff has demonstrated to the required standard that it is entitled to judgment in respect of this category of claim save for the travel disbursements of $533.76 and $488.74 (plus GST) accepted by the defendants.

Signage removal $391

[39]   I accept the signage removal claim of $391 is established. On termination the franchisee had to remove all signage. The fact that the plaintiff had to incur the costs of removing the signage, and it has produced the third party invoice in that regard, establishes that it is entitled to judgment in respect of this part of the claim. The defendants did not dispute this claim.

Glass Heron job $863

[40]The evidence on this claim is as follows:

1      McVeagh Fleming v Garnett, HC Auckland CIV-2010-404-7652, 28 June 2011.

Since 26 February 2019, Smith & Sons has also received the following costs as the direct result of [the franchisees] default:

(b) $863.00 paid by Smith & Sons to Metro Glass for the supply and installation of glass windows in Ruth Heron’s bathroom (as a result of a complaint made).

[41]The defendants did not dispute this claim.

Recovery of legal costs

[42]These proceedings were commenced in early April 2019.

[43]   The plaintiff’s solicitors have issued the following invoices to the plaintiff which the plaintiff included in its claim as pleaded against the defendants:

(a)       30 November 2018:     $6,926.45;
(b)       21 December 2018:     $2,760.58;
(c)       31 January 2019:        $659.20; and
(d)      26 March 2019:          $10,735.26.

Those invoices total $21,081.49.

[44]   The invoices are before the Court, but the narrations are brief and essentially pro-forma.

[45]   In addition to these amounts, further costs on a solicitor-client basis, exclusive of GST, of $12,392.04 are claimed for attendances after 26 March 2019 covered by the invoice at [45](d) along with costs on a 2B basis for counsel’s appearance at the second call in the sum of $478 and further anticipated costs:

Being additional costs not yet incurred by the plaintiff for preparation for and attendance at the hearing on 26 August 2019 and sealing costs (calculated on a 2B basis plus disbursements)

in the sum of $6,735.48.

[46]   Accordingly, in respect of costs after the invoice of 26 March 2019, additional costs of $19,605.52 are sought. Total legal fees claimed for this proceeding are therefore $30,340.78 as the 26 March 2019 fee relates as far as can be ascertained from the invoice for the preparation of these proceedings.

[47]   I consider that sum disproportionate to the amount in issue. While the plaintiff has the benefit of solicitor-client costs permitting it to recover such costs, it is long established that such a clause only applies to costs that are reasonable in the circumstances.  One of the circumstances must be the amount in issue.  Also, this is  a case that was well within the District Court jurisdiction.

[48]McGechan records:2

Assessing whether indemnity costs claimed under a contract are reasonable involves the Court assessing whether the tasks undertaken were reasonably necessary and were covered by the contract, whether the charge rate(s) was reasonable, and whether any other general contract law principles deny the claimant its prima facie right to judgment.

[49]   The difficulty in this case is that the narrations on the invoices are brief, no hourly rate/s are referred to and no time records have been produced. Other than the documents before the Court, it is not possible to identify the tasks undertaken.

[50]   Accordingly, while I do not base my assessment of “reasonableness solely by a comparison of costs charged against sum at stake”, that is a factor that I take into account.3 I also take into account that this claim is based on a comprehensive guarantee given in a franchise agreement. This was not a case where it was ever likely that liability was going to be in dispute. The defendants did not at any time include that liability was disputed.

[51]   At the end of the day, the onus is on the plaintiff to demonstrate that the costs it claims in respect of this proceeding and in respect of steps taken prior to the issue of this proceeding are reasonable. The clause of the agreement relating to legal costs entitles the master franchisee to recover its reasonable legal fees. I am not satisfied that it has discharged that onus.

[52]   In respect of the pre-litigation costs, there may well be fees incurred that relate to breaches of the agreement by the franchisee, or which were incurred by the plaintiff as part of protecting its brand, but that cannot be determined on the face of the

2      McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.03(3)(e)(iii)].

3      McGechan, above n 2, at [HR14.6.03(2)], noting such would not be the correct approach.

narrations. It is not possible on the evidence provided to identify what the solicitors costs relate to.

[53]   Other than this matter being within the District Court jurisdiction, there could be no argument with the plaintiff claiming costs in this Court on a 2B basis and the plaintiff adopts the scale for some of its claim in relation to this proceeding. If the plaintiff is content to deal with costs on that basis then that will address the issue of the costs on this proceeding, failing which, the plaintiff will have to file a detailed memorandum including hourly rates, details of work done and time records to support its claim for costs in respect of this proceeding.

[54]   That leaves the first three invoices which relate to pre-proceedings costs. Given the incomplete information provided in respect of these costs, the application for summary judgment in respect of these costs is declined.

Positive defence

[55]   The defendants raised two matters that they consider give rise to a defence. The first is a claim that they were shut out from the Master Franchisee’s accounting system Xero and related to that issue that they were also shut out from a business management system called “Buildxact”.

[56]   The  second  claim  was  that  in  the  weeks  prior  to  the  cancellation  of  the agreement on 19 November 2018, negotiations were underway for the sale of the business operated by the franchisee to a third party. The sale price was $40,000 (plus GST). A $2,000 deposit was paid by the purchaser to the plaintiff.

[57]   There is an email from the plaintiff to the purchaser, with Mr Sear being copied in, which referred to Mr Patterson of the plaintiff working as a broker to put the transaction together. The potential purchaser was located by the plaintiff. The arrangements were expressed as being subject to a due diligence period – the purchaser was to have an agreement provided by the plaintiff reviewed by the purchaser’s solicitor - and to other conditions.

[58]   The transaction had not crystallised into a firm agreement prior to the cancellation of the agreement. After the cancellation of the agreement, the plaintiff entered a separate agreement with the purchaser. The $2,000 deposit was applied to the post cancellation transaction rather than the plaintiff refunding it to the purchaser on the basis the first attempted sale had fallen over.

[59]   Accordingly, no contract was in place pre-cancellation. Whatever agreement was in circulation was apparently not signed (no signed copy is produced) and was in any event subject to being reviewed by the purchaser’s solicitor.

[60]   The defendants’ primary argument was that they should have the benefit of the sale price for the business.

[61]   As already noted, the defendants accept that the plaintiff had, after the notice it issued on 15 November 2018, the right to cancel the agreement. What the defendants really complain of here is that the plaintiff did not hold off from cancellation for a period that would have allowed the franchisee to have finalised sale terms with the third party purchaser. There is no suggestion that the plaintiff agreed to grant time in that regard or led the defendants to believe that it would allow time for a sale to occur.

[62]   The defendants really complain of the plaintiff taking advantage of its contractual right to terminate the agreement which allowed the Master Franchisee to then enter negotiations with the third party purchaser directly. That was a commercial opportunity that was open to the plaintiff to exploit. That the defendants feel hard done by through that process does not give them a right to claim a credit for the sale proceeds. The agreement is unambiguous with cl 19.23 headed “No goodwill on termination” and providing:

Upon termination or expiration of this agreement for whatever reason, the Franchisee shall not have any claim against the Master Franchisee in respect of the goodwill of the Franchise Business regardless of whether such termination is due to the breach of this agreement or due to the expiration of the term pursuant to any other provision of this Agreement.

[63]   I do not consider that the defendants have an arguable defence in respect of the sale of the franchise post termination in the circumstances that I have outlined. They cannot point to a breach of any obligation owed to them by the plaintiff.

[64]   In relation to access to Xero and Buildxact, the evidence is that access to Xero was something beyond the control of the plaintiff. The defendants are sceptical about that but there is no real evidence to show that the plaintiff controlled access to the Xero accounting database.

[65]   The plaintiff did have control over access to Buildxact. The defendants say that they were prejudiced in not having access to these systems as it prevented them being able to complete outstanding work at the time the agreement was terminated.

[66]   Even accepting this, the defendants do not attempt to quantify any losses said to flow from this loss of opportunity. In the absence of the defendants attempting that quantification exercise, I am unable to conclude that it is arguable that they have suffered any loss from the claimed inability to complete jobs on hand at the time of cancellation.

[67]   The defendants also say that given they have not disputed that they are bound by their guarantee, had they had access to the accounting information systems, they would have been able to verify or reconcile the amounts claimed against them much sooner than has occurred which would have reduced the plaintiff’s claim for interest and costs.

[68]   I accept Ms McClean’s submission that that argument does not survive the fact that the defendants, after demand was made upon them as guarantors, did not communicate with the plaintiff or the plaintiff’s solicitors to say that they acknowledged liability under their guarantee but wanted to verify the amounts claimed and needed access to the information systems to do that.

[69]   I do not accept that the defendants have established a positive defence against the amount claimed.

Order

[70]   I have concluded that the plaintiff has established the defendants have no defence to the following amounts:

(a)Deposits:  $34,428.11 (including GST) (para [19]);

(b)Overdue fees:             $2,692.13 (para [30]);

(c)Internal costs:             $1,022.50 (para [39]);

(d)Signage:  $391.00 (para [40]); and

(e)Herons Glass:             $863.00 (para [42]).

[71]   I consider the plaintiff is entitled to judgment for the above sums together with interest at the contractual rate. Ms McLean sought an opportunity to consider whether the amounts for which judgment was sought should be on a GST exclusive basis.

[72]   Ms McLean is to file a memorandum setting out the plaintiff’s position as to whether judgment is sought on the above sums which include GST or on a GST exclusive basis. Such memorandum is to calculate the amount for which judgment is sought, if different from the above.

[73]   The plaintiff is also to set out its interest calculation and to advise its position in respect of costs.

[74]   As to the claims for which judgment has not been entered, that is the plaintiff’s internal costs and the pre-litigation fees. I am concerned that the costs that may be incurred in proving those claims may significantly add to the amount claimed and in the first instance the plaintiff is to advise if it wishes to pursue those claims. If it does not, then this proceeding can eventually be discontinued once judgment is finalised. If it does wish to pursue those claims, then it should address in the memorandum referred to above how it proposes that should occur.

[75]The plaintiff’s memorandum addressing the above points is to be filed within

15 working days (that is by Monday 23 September 2019).

[76]   Any respondence to the plaintiff’s memorandum is to be filed and served within 10 working days.

[77]   I encourage the parties to attempt to resolve any issues directly but if not possible, leave is reserved to request a telephone conference.

Associate Judge Lester

Solicitors:

Anderson Lloyd, Christchurch Defendants in person