Specialised Structures New Zealand Limited v Findlater Construction Limited
[2016] NZHC 1340
•21 June 2016
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
CIV-2016-406-000011 [2016] NZHC 1340
BETWEEN SPECIALISED STRUCTURES NEW
ZEALAND LIMITED Plaintiff
AND
FINDLATER CONSTRUCTION LIMITED
First Defendant
AND
RONALD STEVELY FINDLATER Second Defendant
Hearing: 16 June 2016 Appearances:
P B Churchman QC and C M Kenworthy for Plaintiff
T Sissons and S F Gaines for DefendantsJudgment:
21 June 2016
JUDGMENT OF DUNNINGHAM J
[1] Specialised Structures New Zealand Limited (“SSNZL”) is a building kitset provider specialising in cold rolled steel frame portal buildings. It has developed software to assist with the design and construction of those buildings.
[2] Findlater Construction Limited (“FCL”) was established by Mr Ronald Findlater in 2001. It undertakes a wide range of commercial building work in and around Blenheim.
[3] In 2005, FCL entered into an agreement with Kiwispan Limited to build steel sheds in the Marlborough district. However, as a result of an internal dispute within Kiwispan, the company was dissolved in 2011, and SSNZL took over part of the
Kiwispan operation under the new company branded as SSNZL.
SPECIALISED STRUCTURES NEW ZEALAND LIMITED v FINDLATER CONSTRUCTION LIMITED [2016] NZHC 1340 [21 June 2016]
[4] SSNZL, FCL and its director, Mr Linklater, entered into a contract which governed their relationship. It gave FCL the exclusive licence to sell SSNZL’s products and services in the Marlborough province and to use its proprietary system. The agreement contained certain obligations in restraint of trade at the termination of that relationship.
[5] The relationship was terminated in October last year (although the exact date is disputed), and SSNZL claims that the two defendants are in breach of those restraint obligations. An interim injunction is sought to enforce the contractual restraints.
[6] There are two main concerns raised by SSNZL:
(a) it considers the defendants have been involved in building projects, since termination, which use SSNZL’s proprietary systems, or which have been undertaken for a former customer of SSNZL. Those building projects comprise:
(i)an extension for Marlborough Gold Honey Limited, its premises in Bristol Street, Blenheim;
(ii)two steel hangars at Koromiko Airfield, near Picton, which was built in conjunction with another competing business, Fair Dinkum Sheds;
(b)FCL has taken on a dealership with Fair Dinkum Sheds and SSNZL considers this is in clear breach of the restraint against FCL being involved in any business which is similar to, or competitive, or in conflict, with SSNZL’s business. Buildings which have commenced under this arrangement include the two hangars referred to above, plus
extensions to a warehouse at Liverpool Street, Riverlands.1
1 This last building was brought to the Court’s attention via a memorandum filed subsequent to the
hearing.
[7] While initially SSNZL sought an injunction requiring the defendants to cease their relationship with Fair Dinkum Sheds, and to cease work on the Marlborough Gold Honey extension building contract and the Koromiko Airfield contracts, SSNZL has since accepted that damages would be a sufficient remedy for FCL’s involvement in the Marlborough Gold Honey extension building, taking into account there was only two weeks’ work left on the building.
[8] As a consequence, the order sought at the close of the hearing was as follows:
(a) an order for the defendants to forthwith cease operating as agent, independent contractor or in any other business arrangement with Fair Dinkum Sheds franchise or any other entity similar to, or competitive with, or in conflict with the plaintiff within the restraint
area during the period of restraint.2
[9] I proceed to consider the interim injunction on the basis that the relief sought is confined to that order only.
Principles relating to interim injunctions
[10] The principles relating to interim injunctions are well understood. I must be satisfied that:3
(a) there is a serious question to be tried in the proceeding; and
(b) the balance of convenience favours the grant of the relief sought.
[11] Those two questions are not, however, exhaustive. In every case the Judge has to finally stand back and ask where the overall justice of the case lies.4
2 The defendant says the period of restraint ends on 21 October 2016 as this is a year from the date on which an email was received from FCL terminating the contract.
3 American Cyanamid v Ethicon Ltd [1975] AC 396 (HL).
4 Klissers Farmhouse Bakeries Ltd and Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).
What is the agreement which the plaintiff seeks to enforce?
[12] The relationship between SSNZL and the defendants is set out in a comprehensive written agreement, running to some 43 pages plus schedules and annexures. The parties to the agreement are SSNZL as licensor, FCL as licensee,5 and Mr Findlater, as “guarantor”.
[13] In summary, SSNZL granted a licence to FCL to operate a business involving the design, manufacture, sale, and erection of buildings using the SSNZL trade name, and using SSNZL’s system, which, as Mr Findlater says, included:
(a) a software package to design steel sheds; (b) a materials list for the steel building kitset;
(c) basic quantity surveying sheets suitable for pricing, labour and other materials on those plans;
(d) access to the buying group for materials for the steel building kit sets.
[14] While Mr McCrostie, the director of SSNZL, and Mr Findlater differ on the complexity of building that the system was able to deal with, they do not differ on the core elements of the system set out above.
[15] Under the agreement, FCL paid a licence fee, on a monthly basis, during the term of the licence agreement. Confusingly though, the term of the agreement is expressed at Item 6 in the Schedule to be five years, with three rights of renewal for terms of five years but, under cl 4.1 of the agreement, the term is stated to begin on the commencement date, specified in the Schedule to be 13 September 2005, and end on the expiry date, specified in the Schedule to be 13 September 2025, unless
terminated earlier.
5 Although described in the agreement as “Merchant”.
[16] The critical part of the agreement for the purpose of this application is cl 32 which sets out various restraints on FCL (described as the Merchant in the agreement). Specifically, SSNZL relies on cl 32.2 which provides:
The Merchant (and the Merchant’s shareholders and directors) and the Guarantor/s covenant with SSNZL that solely for the protection of SSNZL in respect of the goodwill of the System and the Group Business, the merchant and Guarantor shall not during the Term and for the Restraint Period, on their own account, individually or collectively; or jointly with or as an employee, contractor, agent, trustee, manager, partner, consultant, or adviser to any person, firm, association, joint venture, or corporation or as a member of any association:
32.2.1 directly or indirectly, whether by means of an agent, independent contractor, trustee or any firm, corporation or trust or other arrangement, association or structure or otherwise in which it may be interested as director, shareholder, beneficial owner of shares (other than as an investor in a listed public company in which the Merchant holds less than 1% of the issued capital), beneficially or in any other way:
(a) be engaged, or interested, or concerned in any business within the Territory or within the Restraint Area which is in the reasonable opinion of SSNZL similar to or competitive or in conflict with the Business;
…
(c) solicit away from SSNZL, Business, or the Group Business, or from the business of any other Merchant of SSNZL any person, firm, or company who was at the time during the
12 months immediately preceding termination a customer of the Business or of SSNZL or a Merchant of SSNZL nor
divert or seek to divert any custom from SSNZL or any other
Merchant of SSNZL.
[17] The Restraint Period is identified in the Schedule as being 12 months after termination of the agreement. While the Restraint Area is defined as “New Zealand”, SSNZL only seeks to enforce it within the Marlborough District where FCL was operating.
[18] The term Group Business used in the restraint provisions is defined in the agreement to mean:
All business involving the sale of the Products or the supply of the Services or of similar products or services which are carried on by SSNZL, including as agent for other building structure suppliers, or by any Merchants or licensees or related companies of either under the Trade Name.
[19] The parties are agreed that the restraint obligations survive the expiry of the contract.
What breaches are alleged?
[20] Mr McCrostie, the managing director of SSNZL, filed an affidavit explaining how the agreement with FCL was terminated and the circumstances which he subsequently discovered which he says give rise to a breach of the restraint provisions.
[21] The last monthly payment under the contract was made for the month running from 13 September to 12 October 2015. Mr McCrostie says “SSNZL treated the licensee as terminating on 12 October 2015”, although Mr Churchman QC pointed out that FCL only advised that it was terminating the contract by email on 21 October 2015.
[22] As a consequence of termination being notified, there were communications between the parties over how FCL was to relinquish the SSNZL software which enables its licensees to design and price buildings. Mr Findlater says that SSNZL remotely disabled the cloud based software immediately following Mr Findlater’s advice to SSNZL in October that FCL would not renew the agreement and, from that time, FCL was unable to use SSNZL software.
[23] While there was some concern by SSNZL that FCL would not allow a software engineer to go through FCL’s computer to ensure all SSNZL’s computer software was deleted, I am satisfied, having read the affidavit evidence of Mr Wells, an IT systems engineer, that all of the SSNZL proprietary software has been removed from FCL’s computer system. There is therefore no practicable risk that FCL can continue to access or use SSNZL’s software, in breach of the restraint of trade provisions.
[24] The primary concern of SSNZL, however, is that it has discovered that FCL has commenced a contractual relationship with Fair Dinkum Sheds in Marlborough, which is a business that is similar to or competitive or in conflict with SSNZL’s business.
[25] Mr McCrostie says he first heard that FCL was going to assume the licence for Fair Dinkum Sheds over the 2015-2016 Christmas vacation. However, at that stage, he checked the Fair Dinkum website, and there was no indication that either of the defendants had been appointed as licensees. The first evidence SSNZL had of a relationship between FCL and Fair Dinkum Sheds was when he discovered, in March 2016, that FCL had obtained building consent for an extension to the premises of Marlborough Gold Honey Limited in Blenheim, and that the consent had been obtained using SSNZL’s plan specifications and engineering certificate. Mr McCrostie explains that the plans had been prepared and filed by FCL on
11 June 2015, while FCL was still SSNZL’s licensee.
[26] SSNZL’s lawyers immediately wrote to Mr Findlater alleging that the use of SSNZL’s plans to obtain a building consent after termination of the agreement was in breach of cl 29.1.3 of the agreement which required FCL to “cease to use in any way whatsoever all of the intellectual property and any other trade names, logos, devices, insignia, procedures or methods which are or may be associated with the Intellectual Property or the System”, and warned of the risk that injunctive relief might be sought.
[27] While correspondence was being exchanged over that issue, SSNZL then discovered that FCL was in the process of building two steel hangars at the Koromiko Airpark development at Koromiko Airfield and those buildings were based on Fair Dinkum Sheds kitsets. The plan submitted for their construction had both Findlater Construction Limited’s name on it and Fair Dinkum Sheds’ logo beside it. SSNZL said that proposals for the construction of those hangars were first undertaken by FCL using the SSNZL system and engineers in 2014, and FCL was still communicating with representatives of the Airpark developers in early October 2015. FCL was therefore in breach of the obligation not to solicit SSNZL customers.
[28] Mr Findlater confirms that FCL has entered into a dealership with Fair Dinkum Sheds for the Marlborough region. He also confirms that “Fair Dinkum was a competitor to both Kiwispan Limited and SSNZL during the time FCL was an SSNZL licensee”. He says “the dealership was entered into after
the expiration of the SSNZL merchant agreement. The dealership provides access to Fair Dinkum’s design software, engineering sign-off, and componentry for shed construction and kitsets”. He says that “save for the Marlborough Honey project … no plan for any of the contracts that the company has entered into since the expiration of the merchant agreement carries the SSNZL branding”.
[29] In terms of the Marlborough Honey Gold Project, he explains that in May 2015, while FCL was an SSNZL licensee, it applied for consent for the Marlborough Gold Honey extension. The extension was designed using SSNZL’s design software and FCL paid SSNZL’s nominated engineer for that design sign off. There was, however, delay in obtaining a resource consent for land use, and it was not obtained until 29 January 2016. It was at that point that FCL resubmitted the original building consent document and the Council then approved the building consent based on plans that carried the SSNZL logo. As a consequence, the situation represented a “one off” which FCL says can be resolved by a negotiated payment.
[30] In respect of the hangars at Koromiko Airpark, SSNZL’s concern appeared to be that FCL, working with Fair Dinkum Sheds, had approached an existing client of SSNZL and diverted that business away from them. The second concern was, of course, that by working with a competitor, Fair Dinkum Sheds, FCL was in breach of the restraint contained in cl 32.2.1 of the agreement.
[31] FCL accepts that in 2010, some plans for hangars at the Airpark had been developed by an entirely unrelated company. Those plans were sent out to interested bidders and FCL, as an SSNZL licensee, prepared an initial costing using the SSNZL design software. However, nothing further occurred at that stage as the plans were “too elaborate and expensive”. Mr Findlater says that in 2014 there was another invitation to consider submitting an initial design and price and, again, FCL as licensee prepared an initial costing using SSNZL’s design software, but nothing further occurred as that proposal did not proceed.
[32] Mr Findlater explains that the current project to build two hangars at the Koromiko Airpark came about through his business relationship with Mr Andrew Crawford. He says FCL has entered into contracts to construct two
individual hangars at the airfield with two purchasers. Those contracts were entered into in November 2015. The design plans do not utilise any part of SSNZL’s intellectual property. The engineering work provided in support of the application was undertaken by Fair Dinkum Sheds’ nominated engineers, and Fair Dinkum software has been used to design the hangar.
[33] Mr McCrostie, however, says that Mr Crawford, who is responsible for the Airpark development, was introduced to Mr Findlater and FCL through SSNZL’s connections, and, as late as early October 2015, SSNZL’s engineers were being contacted regarding the Koromiko Air Park. FCL is therefore said to be in breach of cl 32.2.1(c) which prevents FCL from soliciting away customers of the business or of SSNZL.
[34] In any event, the fact FCL has agreed to be a dealer for Fair Dinkum Sheds is itself said to be a breach of cl 32.2.1(a) and SSNZL is entitled to an interim injunction to enforce that obligation.
Should the application for an interim injunction be stayed?
[35] The first argument raised in opposition to the application relies on cl 41 of the agreement. That clause provides for a dispute resolution process and cl 41.2 states that “subject to clause 41.11, unless a party has complied with [the dispute resolution procedure] that party may not commence court proceedings or arbitration relating to any dispute with any other party to this Agreement”.
[36] Clause 41.11 provides:
Nothing contained in these provisions shall prevent a party from seeking injunctive relief from an appropriate Court, where failure to obtain such relief would cause irreparable damage to the party concerned or the System.
[37] Mr Sisson submits that SSNZL has not attempted to resolve the dispute using the procedure set out in cl 41, and has failed to establish that it or the System will suffer irreparable damage if an injunction is refused. Consequently, the application should be refused and the proceeding stayed.
[38] In promoting this Mr Sisson relies on r 15.1 of the High Court Rules and the Court’s inherent jurisdiction to stay a proceeding that is an abuse of process.6 He maintains that SSNZL has produced no admissible evidence to show that if an interim injunction was refused, either it or the SSNZL system would suffer irreparable damage between the date of hearing and the end of the restraint period. All that Mr McCrostie says in his affidavit evidence is that the alleged breaches of
the restraint “have resulted in our company being materially affected”.
[39] He also submits that there has been no attempt to show why damages would be hard to quantify, or why an award of damages would be insufficient to redress any claimed damage or potential damage. He is particularly critical of the reliance on evidence given by Mr McCrostie that two potential licensees have expressed reluctance to enter into an agreement with SSNZL for the Marlborough area because of their concern that FCL is operating in breach of the restraint of trade provisions, and so any new licensee “will not have a 12 month period to establish their business without the defendant operating a business ‘similar or competitive or in conflict with the new business’, saying this is inadmissible hearsay evidence.
[40] I do not consider that the application for injunctive relief is an abuse of process. The logical interpretation of cl 41.11 is that a claim of irreparable harm is synonymous with a claim that a consequence will be suffered which is not remediable in damages. That is, of course, a relevant (and at times determinative) factor in deciding whether to grant an interim injunction.
[41] As long as the plaintiff’s application for an interim injunction is made on the basis that harm will be suffered that is not remediable in damages, I do not consider there has been a breach of cl 41.11, such as would warrant a stay. Whether that claim can be sustained, having regard to the evidence provided, can then be considered in weighing where the balance of convenience lies.
[42] I therefore go on to consider whether the grounds for injunctive relief have been established.
6 Braid Motors Ltd v Scott (2001) 15 PRNZ 508 (HC) at [18] to [45].
Is there a serious issue to be tried?
[43] As Mr Churchman says for the plaintiff, there is no dispute about the identity of the parties to the contract, the terms of the contract, and the fact that it contained a restraint of trade obligation. There was also no dispute that the first defendant has entered into an arrangement of some form with a competitor of the plaintiff, as Mr Findlater acknowledges that “Fair Dinkum was a competitor to both Kiwispan Limited and SSNZL during the time FCL was a SSNZL licensee”.
[44] In advancing the position that SSNZL has not established that there is a serious issue to be tried, the defendants focused on two matters:
(a) FCL has complied with all of the obligations imposed on it by cl 29, which is, among other things, to relinquish all the intellectual property of SSNZL and not use it; and
(b) the restraint clause relied on is wider than is reasonably necessary to
protect the plaintiff’s proprietary interest.
[45] Thus, while FCL accepts that the plaintiff has a proprietary interest in its intellectual property, including the SSNZL System and the Manual, it does not accept that it is reasonably necessary, in order to protect that interest, to exclude FCL from the shed building market, whether in any area, if it can compete in that market without exploiting SSNZL’s intellectual property.
[46] Both parties accept that restraint of trade covenants are prima facie void and therefore unenforceable, but that where a party seeking to enforce a provision establishes that the restriction is reasonable, it may be enforced.7
[47] SSNZL submits that it is the goodwill in the business and the plaintiff ’s brand that is entitled to be protected by an injunction. Clause 32.2 of the contract refers to “the protection of SSNZL in respect of the goodwill of the System and the Group Business”. To support this, Mr McCrostie gives evidence of SSNZL’s
investment in national advertising of its brand and in its website which directs
7 Brown v Brown [1980] 1 NZLR 484 (CA).
customers to local licensees, such as FCL. As SSNZL has a considerable investment in franchising its systems and intellectual property, these are matters which are capable of supporting a restraint of trade clause. This has been recognised in decisions such as Mike Pero (NZ) v Exact Solutions Ltd, where Miller J said: “I accept that a franchisor such as Mike Pero that has established a successful business
model is entitled to protect its investment by means of restraints of trade”.8
[48] SSNZL says that as long as it can point to a legitimate proprietary interest that it is attempting to protect, rather than merely seeking to restrain competition, then this can support an enforceable restraint of trade.9 In this case it is both the goodwill in the SSNZL brand and the customer base FCL has established through its relationship with SSNZL which is sought to be protected. By upholding the restraint, the Court will be protecting SSNZL from unfair competition from a competitor, Fair Dinkum Sheds.
[49] SSNZL also says that, as the restraint was entered into at the time the contract was entered into, there is a clear consideration for the contract.10 Indeed cl 2.2 provides that:
… each of the restrictions contained in this agreement is reasonably necessary for the protection of SSNZL and other Specialised Structures Merchants, the Group Business (when established), the System and the Intellectual Property and the restrictions do not unreasonably interfere with the freedom of action of the Merchant who enters into this Agreement with the benefit of legal advice in full knowledge of all of its provisions; and the Merchant acknowledges that all of the provisions are fair and reasonable and that in entering this Agreement the Merchant accepts no more onerous restrictions than those to which the Merchant would otherwise expect to have been subjected to when entering into this agreement.
[50] While of course, that is not the end of the matter, and the Court can make its own assessment of reasonableness, this acknowledgement is a factor which should
be taken into account when assessing the reasonableness of the restraint.
8 Mike Pero (NZ) v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [22].
9 Airgas Compressor Specialists Ltd v Bryant [1998] 2 ERNZ 42 (EmpC).
10 Fuel Espresso Ltd v Hsieh [2007] NZCA 58, [2007] 2 NZLR 651.
[51] SSNZL also submits that a 12 month non-compete restraint is well within the range of restraints that the Court have found reasonable and, indeed, no issue was taken with this.
[52] While the restraint was expressed to cover all of New Zealand, SSNZL only seeks to enforce it in the Marlborough district where it is trying to appoint a new licensee. I accept that with this concession, there is nothing unreasonable in the geographic scope of the restraint.
[53] The defendants submit that, in part, SSNZL appears to be claiming an interest for the skills and customer base FCL built up during the years 2005 to 2011 when it was a licensee of Kiwispan Limited, which was a separate company, and which is not a party to the proceeding. At the time FCL entered into the agreement with SSNZL it had an established client base and considerable experience in all aspects of residential and commercial building and property development.
[54] While SSNZL says it is seeking to protect its goodwill, FCL argues there was no goodwill in the sense of a client base associated with the System and Group Business. That goodwill belonged to FCL. However, even if that submission was wrong, then they say SSNZL has failed to identify the clients it says are owned by SSNZL.
[55] FCL says that as the relationship with Fair Dinkum Sheds does not use SSNZL’s system and other intellectual property. It therefore says that the injunction should be declined because there is no arguable case that a proprietary interest of SSNZL is damaged by the relationship.
[56] In summary, the defendants argue that as FCL no longer has access to the plaintiff’s System and Manual since associating itself with Fair Dinkum Sheds, and has never solicited the plaintiff’s clients, relying on its own client base, there is no arguable case that a protectable proprietary interest of SSNZL needs protection through an interim injunction.
Discussion
[57] This case is a little different from other franchise cases in that, while FCL had a license to use SSNZL’s systems, it did so under its own name. Although the SSNZL logo appeared on building plans, and customers were referred to FCL by SSNZL, including through its website, FCL also undertook construction work other than using the SSNZL system. That said, there is clear evidence that FCL has built up a business using, first, the Kiwispan system and then the SSNZL System, and it has been advantageous to FCL to have access to the SSNZL System. It has allowed FCL to expand and maintain a workforce and to demonstrate competence in a wider range of commercial buildings than would have been the case without access to the System.
[58] Even though FCL’s client base cannot be said to be derived solely from its association with SSNZL, it is at least arguable that it has gained clients through that association which has allowed FCL to build buildings it otherwise could not have. It has been a useful adjunct to FCL’s business to have access to SSNZL’s steel building design system.
[59] The utility of such a system is reinforced by the fact that FCL has, on terminating its relationship with SSNZL, immediately sought a similar relationship with a competing business.
[60] I am therefore satisfied that there is a serious question to be tried in respect of SSNZL having a proprietary interest to be protected under cl 32.2.1. If licensees who have built up a business reputation and skill set, relying at least in part on using the SSNZL System, can then immediately use that reputation and skill set to a competitor’s benefit, that is likely to give the competitor an unfair advantage, and erode SSNZL’s goodwill.
[61] In short, I am satisfied that there is a serious question to be tried that there has been a breach of an enforceable restraint of trade, and I therefore turn to the balance of convenience.
Where does the balance of convenience lie?
[62] In determining the balance of convenience, the parties have identified the following factors as being relevant in this case:
(a) the relative strength of each party’s case; (b) the adequacy of damages for both parties; (c) the effect on innocent third parties; and
(d) the conduct of the litigants.
[63] Mr Churchman submits that the relative strength of SSNZL’s case is a strong factor supporting the grant of an interim injunction in this case, citing AMP Services (NZ) Ltd v Visser,11 where Katz J recorded: “in my view the relative strength of the parties’ cases is the decisive factor in this application. As a result the balance of convenience favours the granting of the injunction”.
[64] Mr Churchman submits that here, FCL has admitted it has commenced a business relationship with a direct competitor of the plaintiff, in exactly the same kind of business, and that this is strong evidence of a breach.
[65] I accept that there is clear evidence of a breach of the restraint in cl 32.2.1(a), and the only question is whether that clause should be enforced. In that regard I have found there is a serious question to be tried. This factor favours the injunction being granted.
[66] The next factor which Mr Churchman submits weighs in favour of the injunction being granted is that damages will not be an adequate remedy for the loss suffered by SSNZL. Mr Sisson, however, was critical of the plaintiff’s assertion that damages would not be an adequate remedy. Mr Findlater’s affidavit evidence estimated damages would be less than $100,000. As FCL was in a position to pay
those damages, he submitted that “the plaintiff has failed to provide any evidence
11 AMP Services (NZ) Ltd v Visser [2016] NZHC 134.
regarding the quantification of damages … [nor] submitted any other reason why damages is not an appropriate remedy”.
[67] However, I have found that it is arguable that a restraint of one year against working for a competing business is reasonably required to protect SSNZL’s goodwill and to protect it from unfair competition. The agreement expressly records that the restraints in cl 32.2 are “for the protection of SSNZL in respect of the goodwill of the System and the Group Business”. While it may be possible to calculate damages, as Mr Findlater does, based on profits FCL makes while working with the competing business during the period of the restraint, that does not address the harm which the restraint was expressly intended to prevent, which is harm to the goodwill of the SSNZL business.
[68] If SSNZL is unable to protect its brand from such unfair competition, and demonstrate to its other New Zealand licensees and potential licensees that it can, its brand could be adversely affected in ways which cannot obviously be quantified. While Mr Sisson was critical of the hearsay evidence Mr McCrostie introduced as to the concerns expressed by prospective licensees, I do not rely on the truth of this evidence, but on Mr McCrostie’s own concerns in this regard and on the express terms of the agreement. I am satisfied that damages would not necessarily be an adequate remedy in the circumstances.
[69] The next consideration which is relevant to the grant of an interim injunction is the effect on innocent third parties. In terms of the three building projects which are underway, which are alleged to be in breach of the restraint in cl 32, Mr Churchman properly accepted that, as the Marlborough Gold Honey project was almost finished, it would be futile to include that in the terms of any injunction. I also indicated my view that the two Koromiko Airpark projects, which have been undertaken through contracts with two individual land owners, should not be included in any injunction. To do so would adversely affect those third parties, where there was no reason to believe that they were complicit in any way in the alleged breach of the restraint. For those reasons, the balance of convenience favours excluding those three projects from the terms of any injunction.
[70] In addition, just as this decision was to be released, counsel for the defendants filed a further memorandum and draft affidavit explaining that there was a further building project undertaken using a Fair Dinkum Sheds’ design. This was an extension to an existing warehouse located at Liverpool Street in Riverlands, Marlborough. A construction contract was signed on 29 April 2016 between FCL and the trustee owners of the building and it is due for completion by
19 August 2016 in order to allow a third party lessee to occupy the building under a lease.
[71] Counsel explains that this contract was not put before the Court previously because it understood the plaintiff’s case was that FCL was exploiting SSNZL software in relation to the other identified projects. The defendants now understand that the real thrust of the plaintiff’s case is its concern about the business association with Fair Dinkum Sheds, whether it involves use of SSNZL’s intellectual property or not.
[72] The defendants submit that, like the Koromiko hangar projects, the trustee owners of the Liverpool Street warehouse are innocent third parties who entered into a contract with FCL before FCL became aware of the plaintiff’s intention to seek injunctive relief. There is also the added complication that a further party would be prejudiced if the building project was subject to the injunction, being the lessee who is due to take possession under the lease on 19 August 2016.
[73] In the circumstances, the defendants seek leave to file a further affidavit of Mr Findlater, to be sworn in the form of the accompanying draft affidavit and request that, if an order is granted restraining the defendants, the Liverpool Street warehouse extension is also exempted from the order.
[74] Given the urgency with which the Court is endeavouring to dispose of this application, I grant leave to file a further affidavit of Ronald Stevely Findlater, in the form of the draft attached to the memorandum of counsel for the first and second defendant dated 20 June 2016. Based on the information in the memorandum, I intend treating the Liverpool Street project in the same way as the other contracts which are underway. However, I will reserve leave to the plaintiff to file a response
and seek a variation of the order I make if, in its opinion, there are circumstances which make it inappropriate to treat the Liverpool Street project in the same way as the other buildings which were identified at the hearing.
[75] That leaves the position of the defendants’ relationship with Fair Dinkum
Sheds.
[76] Curiously, the defendants have not disclosed any detail of this relationship other than to say that FCL has entered into a dealership with Fair Dinkum Sheds for the Marlborough region, and that the dealership provides access to Fair Dinkum’s design software, engineering sign-off, and componentry for shared construction and kit sets. Mr Frank Best, the New Zealand Manager of Fair Dinkum Sheds, has provided affidavit evidence. However, it is confined to confirming that “no part of the SSNZL design for the Koromiko hangar proposals were used in creating the NCE design [for the two Koromiko Airpark hangars]”. He sheds no light on the scope of the relationship with FCL, when it started, or what consequence there would be if an injunction was granted preventing FCL from using Fair Dinkum Shed systems for the balance of the restraint period. It also seems that Fair Dinkum Sheds has not invested in promoting FCL as a dealer as Mr McCrostie says that FCL is not shown as a dealer on Fair Dinkum’s website. I therefore do not consider there will be an adverse impact on Fair Dinkum Sheds, if the restraint was enforced for the balance of the restraint period sufficient to affect where the balance of convenience lies.
[77] The more important issue is whether there will be an impact on FCL’s employees. Mr Findlater says “of the 30 staff employed by FCL, approximately
20 to 30 per cent rely on the steel framing part of the company’s project for their employment. If FCL had to stop building I would have to consider whether to make six to nine staff redundant or retain them as employees without work for them to do for the next three months”. However, it is clear from Mr Findlater’s affidavit that FCL has a wide range of business activities and, as even Mr Findlater acknowledges, building steel portal frame buildings is only one component of their business. Furthermore, I have accepted that, because of the impact on third parties, any restraint imposed should not extend to the Marlborough Gold Honey building
extension, the Koromiko Airpark hangars, or the recently disclosed Riverlands project. Thus, there will be some continuing work for staff of FCL.
[78] Furthermore, as Mr Churchman explained, there is no objection to FCL undertaking the construction of steel-framed buildings which it has designed from scratch. The plaintiff only seeks to restrain FCL from using a competitor’s system, and giving that competitor an unfair advantage.
[79] In any event, the restraint only has a further three and a half months to run. There is no evidence that employees would be made redundant during this time. FCL would simply have to comply with the terms of the restraint it has contractually agreed to, for the balance of the restraint period. Accordingly, I do not think that considerations of adverse effects on third parties alters where the balance of convenience lies.
[80] Finally, as an injunction is an equitable remedy, the conduct of the parties is relevant. In this regard SSNZL suggested there was an “element of subterfuge on the part of the defendants in concealing the fact that they had, during the 12 month restraint period, taken up the Fair Dinkum franchise for Marlborough”. It also says there is no disentitling delay on its part in seeking an injunction. Any delay was a consequence of “active concealment of the breach in relation to [FCL’s] entry into Fair Dinkum franchise”. As soon as SSNZL became aware of the existence of the breaches, it raised that with the defendants, endeavoured to negotiate a resolution, and when that was unsuccessful, issued proceedings promptly.
[81] I have insufficient evidence before me to confidently draw an adverse inference about the defendants’ motivations in becoming a dealer for Fair Dinkum Sheds, and decline to do so. I accept that the timeframe from when SSNZL first became aware of the breaches and raised those with the defendants, until it issued proceedings, is reasonable, and delay does not influence me in determining where the balance of convenience lies.
[82] Taking into account all the factors discussed above, I am satisfied that the balance of convenience favours SSNZL, and the grant of an interim injunction it seeks for the balance of the restraint period.
Where does the overall justice of the matter lie?
[83] While my analysis of the considerations to this point favour the grant of an interim injunction, I must still stand back and evaluate the overall justice of the application.
[84] I am satisfied that, when I do so, there is nothing which would alter my initial conclusions. I accept, as the plaintiff says, that there is nothing clearly unreasonable about the restraint, nor that would indicate an imbalance of bargaining power between the parties. Instead, what has been relied on is a commercial contract between two knowledgeable commercial entities, which conferred benefits on both parties. It was advantageous to FCL to have access to a system which allowed it to build steel portal buildings. It initially established an ability to do this when working with Kiwispan, and then with its successor, SSNZL. Having gained a reputation in the market for undertaking such work, it then chose to terminate the license with SSNZL and immediately took up with a company that provided a competing system for construction of such buildings. This confirms the value of such systems to FCL’s business.
[85] Accordingly, I am satisfied that the contract should be enforced in the interim, with the question of whether there have been breaches and, if so, what damages should follow, to be left to the hearing of the substantive claim.
When does the restraint period end?
[86] One complicating factor arising was that it was unclear when the agreement between SSNZL and FCL was terminated, and accordingly when the 12 month restraint period commenced.
[87] Mr Sisson argued that the term of the contract was five years commencing on
13 September 2010, and there was a failure to exercise the right of renewal under
cl 5 by giving a written request for the renewal to SSNZL not less than three months before the expiry date, where the agreement stated that time was strictly of the essence. If he was right, that would mean the contract terminated at the end of
12 September 2015.
[88] However, FCL made the monthly payment for the September/October 2015 period and continued to receive services under the contract for that period. I accept that in those circumstances, the parties treated the licence as running on for a further month. While formal notice of termination was not communicated until
21 October 2015, I consider, for the purpose of the interim injunction only, that the licence should be treated as terminating on 12 October 2015.
Terms of the interim injunction
[89] Having reached the conclusion that it is appropriate to grant an interim injunction, I make the following orders:
(a) the defendants are to forthwith cease operating as agent, independent contractor, or in any other business arrangement with Fair Dinkum Sheds franchise or any other entity similar to, or competitive with, or in conflict with the plaintiff within the Marlborough area until
12 October 2016;
(b) the above order excludes any work by the defendants in relation to:
(i) the extension to the building owned by Marlborough Gold
Honey Limited at 23 Bristol Street, Blenheim;
(ii) the construction of two hangars at Koromiko Airpark for
Messrs Burton and Anderson;
(iii) the construction of the warehouse extension at
4 Liverpool Street, Riverlands, Marlborough;
(c) Leave is reserved to the plaintiff to seek a variation or cancellation of order b(iii) above if it considers that the Liverpool Street project does not fall into the same category as the other building projects where I have held that the effects on third parties weigh against the injunction sought.
[90] Costs are reserved. This is a case where I see no reason to depart from an award of 2B costs. However, if costs cannot be agreed, memoranda may be filed as follows:
(a) by the plaintiff within 15 working days of the date of this decision;
(b) by the defendants within 20 working days of the date of this decision. [91] Costs will be determined on the papers.
Solicitors:
Checketts McKay Law Limited, Alexandra
Lundons Law, Blenheim
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