Supatreats Asia Pte Ltd v Grace & Glory Ltd
[2018] NZHC 1612
•2 July 2018
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2018-470-000044
[2018] NZHC 1612
BETWEEN SUPATREATS ASIA PTE LIMITED
First Plaintiff
SUPATREATS NZ LIMITED
Second PlaintiffAND
GRACE & GLORY LIMITED
First Defendant
REDNEPS LIMITED
Second DefendantZHE XU
Third DefendantContd. over
Hearing: 11 June 2018 Appearances:
D Chisholm QC for Plaintiffs K Quinn for Defendants
Judgment:
2 July 2018
JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie On 2 July 2018 at 4.00pm
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
SUPATREATS ASIA PTE LTD v GRACE & GLORY LTD [2018] NZHC 1612 [2 July 2018]
J & S SPENDER
Fourth Defendant
CHANG XI
Fifth Defendant
SHAKE SHED & CO NZ LIMITED
Sixth Defendant
ZHENYU ZHONG
Seventh Defendant
The application
[1] The plaintiffs, Supatreats Asia Pte Limited (Supatreats Asia) and Supatreats NZ Limited (Supatreats NZ) – jointly Supatreats – apply for interim injunctions against the defendants.
[2]The injunctions were initially sought in the following terms:
(a)Pending further order of the Court, prohibiting the first to fourth defendants from competing with, engaging in or being in any way involved in a business or activity in competition with, detrimental to or interfering with the plaintiffs’ Wendy’s Supa Sundaes business;
(b)Requiring the first and second defendants to immediately remove all signage, branding and other paraphernalia which identifies their premises, merchandise and business as Shake Shed & Co;
(c)Prohibiting the fifth to seventh defendants from:
(i)inducing or encouraging any Wendy’s Supa Sundae franchisees to compete, engage in or be any way involved in a business or activity which involves the selling of retail ice-cream and associated foodstuffs in competition with, detrimental to or interfering with the plaintiffs’ Wendy’s Supa Sundaes business, in breach of those franchisees’ franchise agreements;
(ii)operating, controlling or offering any business, franchise or otherwise that utilises the plaintiffs’ intellectual property or confidential information;
(iii)continuing to supply or operate an ice cream franchise business in conjunction with any sub-franchisees of the plaintiffs including the first to fourth defendants;
(iv)using or replicating the first plaintiff’s confidential information or intellectual property in any way.
(d)Prohibiting the first to fourth defendants from:
(i)using or replicating the first plaintiff’s confidential information or intellectual property other than for the purpose of carrying on business as Wendy’s franchisees under their agreements with the plaintiffs;
(ii)engaging in or being in any way involved in a business or activity which uses or replicates the first plaintiff’s confidential information or intellectual property other than for the purpose of carrying on business as Wendy’s franchisees under their agreements with the plaintiffs;
(iii)carrying on an ice cream business other than under the Wendy’s brand and in accordance with the terms of their agreements with the plaintiffs.
[3] During the course of the hearing, Mr Quinn, appearing on behalf of all defendants, advised that the fifth to seventh defendants do not oppose the orders sought in para (c)(ii) and (iv).
[4] Mr Chisholm QC, appearing for the plaintiffs, accepted that the order sought in para (c)(iii) is unnecessary and too widely worded. He advised that Supatreats would no longer seek this order. He also accepted that the first to fourth defendants would need time to comply with proposed orders (a), (b) and (d). He suggested that a period of four to six weeks would be sufficient.
[5] Supatreats also seek orders requiring the fifth defendant to deliver up specified materials and information to them.
[6] During the course of the hearing, agreement was reached between Supatreats and the fifth defendant. The fifth defendant consented to orders as follows:
(a)The fifth defendant is to provide, within 10 working days of the date of this judgment, copies of all Wendy’s franchise agreements and leases in his possession and control as at 1 March 2018;
(b)The fifth defendant is to provide, within 10 working days of the date of this judgment, copies of all documents in his possession and control relating to the surrender or termination of the Wendy’s franchise agreements; and
(c)The fifth defendant is to provide, within 20 working days of the date of this judgment, any and all documents in his possession or control evidencing the arrangements and agreements between the fifth and/or the sixth defendants on the one hand, and the Shake Shed franchisees on the other hand.
[7]Except as recorded, the applications are opposed.
Background
[8]As can be seen from the orders sought, this matter concerns a franchise dispute.
[9] An international company based in Singapore – Global Food Retail Group Pte Limited (GFRG) – has invested in developing an image, brand recognition and goodwill in distinctively presented and packaged ice cream products. The products are marked and sold under the brand name “Wendy’s”.
[10] Supatreats Asia is also a Singaporean company. It is a subsidiary of GFRG and it is licensed to franchise the Wendy’s business in New Zealand under the brand name “Wendy’s Supa Sundaes”.
[11] On 1 September 2015, Supatreats Asia entered into a master franchise agreement for the Wendy’s Supa Sundaes brand in New Zealand with Cone Enterprises (New Zealand) Ltd (Cone). The fifth defendant, Chang Xi (Mr Chang), is the sole director and shareholder of Cone. Cone in turn entered into or assumed obligations in
respect of approximately 34 Wendy’s Supa Sundaes franchise agreements with individual franchisees and their guarantors.
[12] The first and second defendants, Grace & Glory Ltd (Grace & Glory) and Redneps Ltd (Redneps), are franchisees who used to operate Wendy’s Supa Sundaes stores in Mt Maunganui and Hastings respectively.
(a)Grace & Glory’s franchise agreement is dated 10 August 2006. It is with Supatreats Asia and Cone. The agreement has a term of four years and six months, beginning on 8 August 2016 and expiring on 31 March 2021. During the term of the agreement, Grace & Glory was to operate a Wendy’s Supa Sundaes store at Shop 510, Bayfair Shopping Centre, Mt Maunganui. The third defendant, Zhe Xu (Mr Zhe), provided guarantees and indemnities in respect of Grace & Glory’s obligations under the franchise agreement.
(b)Redneps’ franchise agreement is dated 21 November 2011. It was with Wendy’s Supa Sundaes Pty Ltd and Cone. At the time Wendy’s Supa Sundaes Pty Ltd and another company were the owners of the intellectual property used in the Wendy’s business. In 2014, Wendy’s Supa Sundaes Pty Ltd’s and the other company’s rights and obligations under the franchise agreement were assigned to Supatreats Asia and the franchise agreement is now with that company. The agreement has a term of six years 11 months and 10 days, beginning on 5 December 2011 and expiring on 15 December 2018. During the term of the agreement, Redneps was to operate a Wendy’s Supa Sundaes store at 2, The Plaza, Russell Street, Hastings. The fourth defendants – Mr and Mrs Spender – provided guarantees and indemnities in respect of Redneps’ obligations under the franchise agreement.
[13] During 2017, GFRG, Supatreats Asia and Cone fell out over a proposed change in the approved supplier for ice cream to franchised stores. GFRG and Supatreats Asia wanted to change to a new Australian supplier. Cone wanted to stay with the existing New Zealand supplier. Mr Chang argued that the proposed new supplier was too
expensive and that its ice cream was inferior to that provided by the then existing supplier. Supatreats Asia and Cone could not agree. Supatreats Asia – acting under the master franchise agreement – required Cone, and through Cone, its franchisees, to only purchase scoop ice cream manufactured by the new supplier approved by it and GFRG. Cone and a number of the New Zealand franchisees refused to comply.
[14] Supatreats issued Cone with a breach notice on 9 May 2017 for allowing Wendy’s Supa Sundaes franchisees to purchase and serve ice cream procured from the existing supplier rather than the new supplier approved by it and GFRG. Cone was required to remedy the breach by 24 May 2017. It did not do so. Cone was also required by Supatreats to serve breach notices to each of the New Zealand franchisees for not using the stipulated ice cream. These breach notices were not remedied either.
[15] On 24 May 2017, the sixth defendant was incorporated. It was initially called Sweets Maison NZ Ltd and the seventh defendant, Zhenyu Zhong (Mr Zhenyu), was its sole director and shareholder. The company changed its name a few days after incorporation to Shake Shed & Co NZ Ltd (Shake Shed).
[16] Shake Shed has the same registered office as Cone. Mr Zhenyu is Mr Chang’s cousin. He has not had any day to day involvement in managing Shake Shed’s affairs, and it is clear from Mr Chang’s affidavit that he is very much in control of Shake Shed.
[17] In late July 2017, Supatreats served a further breach notice on Cone, asserting that it had failed to pay a marketing contribution and franchise fee due under the master franchise agreement.
[18] Unknown to Supatreats, Mr Chang opened an ice cream parlour in Rolleston, near Christchurch, in August 2017. He traded under the Shake Shed & Co banner.
[19] In late 2017, it came to Supatreats’ attention that the franchise operated by Grace & Glory had been rebranded as a Shake Shed & Co store. It was selling products substantially similar to those sold by Wendy’s Supa Sundaes stores, but the Wendy’s Supa Sundae branding had been replaced with Shake Shed & Co branding.
[20] Also, unknown to Supatreats, on 31 December 2017, Redneps gave notice to Cone and Mr Chang purporting to surrender its franchise agreement. It seems that a number of other Wendy’s Supa Sundae franchisees have also taken the same step.
[21] Thomas Lovejoy, who is an Australian solicitor, an advisor to Supatreats Asia, and a director of Supatreats NZ, wrote to the Wendy’s Supa Sundaes franchisees in New Zealand, including Grace & Glory and Redneps, on 9 February and again on 27 February 2018. Mr Lovejoy advised them that Supatreats had been informed that several franchisees had rebranded in breach of their franchise agreements. He sought written assurances from franchisees that they were not in breach and did not intend to breach the terms of their franchise agreements. He warned that injunctive relief would be sought if any breaches were not cured. Franchisees were not sent copies of breach notices which Supatreats had served on Cone.
[22]Mr Lovejoy did not receive a reply from either Grace & Glory or Redneps.
[23] On 17 February 2018, Grace & Glory opened new premises in Mt Maunganui trading as a Shake Shed & Co store. On 28 February 2018, a Wendy’s Supa Sundae store in Whanganui also opened as a Shake Shed & Co store. On 1 March 2018, Redneps rebranded its store under the Shake Shed & Co banner.
[24] Supatreats had served Cone with a termination notice effective as from 1 December 2017. The termination date was however extended to 1 March 2018 to give the parties the opportunity to try and negotiate a settlement. Those attempts were unsuccessful and Supatreats alleges that Cone continued to breach the terms of the master franchise agreement over this period. The master franchise agreement was ultimately terminated as at 1 March 2018.
[25] On 2 March 2018, pursuant to a power of attorney provided to the secretary of Supatreats Asia by Cone, Supatreats Asia assigned the various franchise agreements to itself. All Wendy’s franchisees were notified of the assignment on 9 March 2018. By agreement between Supatreats Asia and Supatreats NZ, Supatreats NZ has replaced Cone as the master franchisee in New Zealand, and it now has the benefit of the franchise agreements.
[26] On 9 March 2017, Cone’s and Mr Chang’s solicitor wrote to Supatreats advising that all of the Wendy’s Supa Sundae stores in New Zealand had surrendered their franchise agreements.
[27] In mid-March, Mr Lovejoy travelled to New Zealand from Australia. He visited the premises operated by Grace & Glory and the premises operated by Redneps. Both were trading under the Shake Shed & Co banner. He ascertained that a number of other franchisees were then still trading under the Wendy’s Supa Sundaes banner, but he noted that their owners were guarded when he tried to strike up a conversation with them about Cone and Shake Shed.
The pleadings
[28] Supatreats’ statement of claim relies on the terms of the master franchise agreement with Cone, and of the franchise agreements with Grace & Glory and Redneps. It raises four causes of action.
(a)First, Supatreats claims against Grace & Glory, Redneps, Mr Zhe and Mr and Mrs Spender, based on alleged breaches of their respective franchise agreements. It asserts that Supatreats Asia has suffered, and that Supatreats will continue to suffer, damage to the Wendy’s Supa Sundaes brand image, as well as financial loss. Supatreats seek a permanent injunction, together with damages, to be quantified at trial.
(b)Under the second cause of action, Supatreats claims against Mr Chang, Shake Shed, and Mr Zhenyu. They allege that Mr Chang was familiar with the franchise agreements and that he induced Grace & Glory and Redneps to breach their franchise agreements. They also allege that Shake Shed and Mr Zhenyu either knew of the franchise agreements, or turned a blind eye to their existence, and that they also induced the breaches of the franchise agreements by Grace & Glory and Redneps. Again, Supatreats seeks a permanent injunction, as well as an account of profits and damages.
(c)Under the third cause of action, Supatreats claims against Shake Shed for passing off and/or for breach of s 9 of the Fair Trading Act 1986. They seek the same remedies as are sought in the second cause of action.
(d)Finally, under the fourth cause of action, Supatreats claim against all defendants for misappropriation of confidential information. They seek the same remedies as are sought in respect of the second and third causes of action.
[29]The defendants, in their statement of defence, say that:
(a)both the Grace & Glory and Redneps franchise agreements have been terminated;
(b)relevant clauses in the agreements relied on by Supatreats are an unreasonable restraint of trade and are therefore unenforceable;
(c)in relation to the master franchise agreement, Supatreats was in breach in respect of the ice cream supply issue; and
(d)while various Wendy’s franchisees have rebranded as Shake Shed & Co, the systems, images, menus, recipes and general get up used in Shake Shed & Co stores are not derived from Wendy’s Supa Sundaes, but rather are distinctive.
Each of the causes of action relied on by Supatreats is denied. There is an affirmative defence – namely, that the restraint of trade provisions contained in the franchise agreements are unreasonable and contrary to public policy, because they are excessive in terms of their geographical scope and duration, and because they go further than can reasonably be required or justified for the protection of any legitimate commercial interest. They assert that the restraint of trade provisions are unenforceable and they seek an order pursuant to s 83(1)(a) of the Contract and Commercial Law Act 2017 that the restraint of trade provisions in both franchise agreements be deleted.
Relevant law
[30] The approach to an application for an interim injunction is well settled.1 The Court must consider:
(a)whether there is a serious question to be tried;
(b)the balance of convenience; and
(c)the overall justice of the case.
Serious question to be tried
[31] Whether there is a serious question to be tried normally requires an applicant for interim relief to show that his or her case is “not frivolous or vexatious”.2 Ultimately, the question is whether there is “a tenable resolution of the issues of fact and law on which the plaintiff may be able to succeed at the trial”.3
[32] Here it was conceded by the defendants that, for the purposes of the interim injunction application, there is a serious question to be tried.
[33]Notwithstanding this concession, I have considered the issue for myself.
[34] In relation to the first to fourth defendants, Supatreats relies on the restraint of trade provisions in both the Grace & Glory and Redneps franchise agreements.
[35] A franchisor that has established a successful business model is normally entitled to protect its investment by means of a restraint of trade provision.4 This is so even for franchised services that do not have a high barrier to entry in terms of expertise and know how – for example, video stores, car washing outlets, book shops, mortgage brokers and businesses supplying and applying anti-slip products.5 The
1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12]; American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL); Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA) at 142.
2 NZ Tax Refunds Ltd v Brooks Homes Ltd, above n 1, at [12].
3 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 133.
4 Mike Pero (NZ) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [22].
5 Skids Programme Management Ltd v McNeill [2012] NZCA 314 at [47].
provision of franchise benefits is seen to give rise to a reasonable interest on the part of the franchisor to protect its investment in its brand, its business model, its systems and its written material from exploitation by franchisees following termination of the franchise agreement.6
[36] It may be, as the defendants submit, that the breach notices issued by Supatreats failed to recognise that there are differences between the Grace & Glory and Redneps franchise agreements, and/or that Supatreats repudiated the franchise agreements by insisting on its franchisees using its nominated ice cream supplier. If there was repudiation, it may be arguable that Grace & Glory and Redneps validly cancelled their franchise agreements as at the end of 2017. There may be an argument that the restraint provisions are unenforceable, or that, to the extent any restraint was enforceable, it is now spent. These are all matters which will have to be determined at the substantive trial.
[37] This matter is at an early stage and it is difficult to assess the strengths and weaknesses of the respective cases. It can be said that the wording of both franchise agreements appears on the face of it to be relatively clear. The defendants do not assert to the contrary. It can also be said that Supatreats, Grace & Glory and Redneps are all commercial parties, who negotiated and entered into comprehensive franchise agreements. There may well be a reluctance by the Court to intervene by holding one term (the restraint of trade provisions) of what are comprehensive overall agreements to be unreasonable.
[38] For the purpose of the present application, I accept that there is a serious question to be tried as between Supatreats and the first to fourth defendants.
[39] The primary cause of action against Mr Chang, Shake Shed and Mr Zhenyu is the assertion that they induced the first to fourth defendants to breach their franchise agreements.
[40] Where one person intentionally induces another person to commit a breach of contract with a third person, or prevents or hinders the performance of that contract,
6 Skids Programme Management Ltd v McNeill, above n 5, at [49].
the first mentioned person commits a wrong actionable at the suit of the third person if that third person suffers damage.7 The tort of inducement to breach of contract has following elements:8
(a)there must be a legally enforceable contract in existence;
(b)the defendant must have engaged in conduct which in fact induced a breach of the contract;
(c)the defendant must have known that his or her conduct would induce the breach;
(d)the defendant’s conduct inducing the breach must have caused loss or damage to the plaintiff; and
(e)the defence of justification may arise.
[41] Here there were legally enforceable franchise agreements in place between Supatreats and the first to fourth defendants. This is not in dispute.
[42] Supatreats point to the formation of Shake Shed, to the role they assert Mr Chang played, to what they say is the marked similarity between Shake Shed & Co branding and Wendy’s Supa Sundaes branding, and to various elements in the branding they assert have been taken directly from Wendy’s Supa Sundaes branding, in some cases without alteration. The defendants do not deny Mr Chang’s role, or the parts played by Shake Shed and Mr Zhenyu. They do deny using or copying Wendy’s Supa Sundaes branding. They say their branding and their systems are different.
[43] The materials put in evidence by Supatreats support the assertion that there is a marked similarity between a Wendy’s Supa Sundaes store and the stores run by Grace & Glory and Redneps. Mr Chang’s role is not in dispute and it seems that Shake Shed, and to a limited extent, Mr Zhenyu, are offering a competing business model to that
7 Philip Moore & Co Ltd v Surridge [2018] NZHC 562; Dargaville Farms Ltd v Webster [2017] NZHC 1790 at [37]-[38].
8 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC1 at [38].
offered by Supatreats. On the limited materials filed to date, I am satisfied that it is arguable that Mr Chang, Shake Shed and Mr Zhenyu have each engaged in conduct that induced the first to fourth defendants to breach their franchise agreements.
[44] Supatreats alleges that there were duties of good faith contained in the master franchise agreement. For example, it points to provisions that the master franchisee must honestly and diligently perform its obligations; it must not close a store without the prior written approval of Supatreats; it must conduct the Wendy’s Supa Sundae business in accordance with the systems and standards set out in the agreement and it must promote the mutual business interests of the parties to the agreement. The master franchisee must not engage in conduct which reflects unfavourably on the operation of the Wendy’s business, the franchise, or the reputation of the system, and it must maintain the franchise in compliance with the image prescribed in the store manuals from time to time for the duration of the term. The master franchisee agrees that after the expiration of the master franchise agreement, it will not use the franchisor’s confidential information without the prior written consent of the franchisor. It agrees that on expiration, it will offer to the franchisor an assignment of its rights, title and interest in the franchise agreements. The master franchisee also covenants that it will not compete, engage or be in any way involved in any competitive business or any other business or other activities that would be detrimental to or interfere with the Wendy’s business, the system, the image and the network without the franchisor’s prior written approval. There is a restraint of trade provision.
[45] It is not disputed that as the principal behind Cone, Mr Chang knew of these provisions. He had access to Supatreats business systems, image, intellectual property and franchise network. Supatreats argues that Mr Chang’s knowledge can be imputed to Shake Shed and Mr Zhenyu, who they say, were his vehicles used to establish the competing Shake Shed & Co business. It is argued for the fifth to seventh defendants that they were not in a contractual relationship with Supatreats. This assertion is correct, but the cause of action brought against them is based in tort, and not in contract.
[46] For present purposes, I am satisfied that it is arguable that each of the fifth to seventh defendants knew or ought to have known that his or its conduct would induce the breaches of the franchise agreements that seemingly have occurred.
[47]I deal with the issue of damages below.
[48] It was not directly asserted that there was a defence of justification open to the defendants. It was however argued that Supatreats repudiated the franchise agreements by its conduct in stipulating a new ice cream supplier. As I have noted, that issue will have to be resolved at trial.
[49] Again, on the limited materials currently before me, I am satisfied that there is a serious question to be tried as between Supatreats, Mr Chang, Shake Shed and Mr Zhenyu, namely as to whether or not they induced breaches of contract by Grace & Glory and Redneps.
[50] Given my findings in this regard, and the defendants’ concession, it is unnecessary to go further in relation to this issue.
Balance of convenience
[51] Where damages would be an adequate remedy, the balance of convenience will normally tell against interim intervention by the Court. In addition to enquiring into the adequacy of damages, the Court will also have regard to the status quo, the circumstances of the case, the relative strength of each party’s case, the conduct of the parties, the effect on innocent third parties and the like.
[52] Supatreats assert that the balance of convenience strongly favours them. They say that the defendants’ actions have been deliberate and clandestine, and, if left unchecked, have the potential to substantially, if not completely, undermine Supatreats long term investment in its Wendy’s Supa Sundae brand in New Zealand.
[53] The defendants for their part assert that damages are an adequate alternative remedy and that their calculation is a relatively easy exercise. They point to the master franchise agreement and note that under that agreement, Supatreats derived an ongoing
franchise service fee of 2 per cent of the gross revenue from its New Zealand franchisees. They argue that it will be a simple matter for a forensic accountant to put a net value on that income stream. They proffered an undertaking from Mr Chang, both personally, and on behalf of Shake Shed, to arrange for two per cent of the gross revenue from all Shake Shed & Co stores in New Zealand to be paid into Mr Chang’s and Shake Shed’s solicitors trust account, to be held pending further order of the Court. The undertaking was offered on the basis that the first to fourth defendants are not injuncted or otherwise prevented from carrying on business as Shake Shed & Co stores, and on the basis that the fifth to seventh defendants are similarly not injuncted or otherwise prevented from operating or managing the Shake Shed & Co network of stores.
[54] I do not accept that damages will be relatively easily calculated, in the event that this case is ultimately decided in favour of Supatreats. On the materials available to date, it is arguable that the defendants have undermined the plaintiffs’ New Zealand franchise operation. It is difficult to see how a damages figure can readily be put on that. Further, if the undermining continues unchecked, there will likely be significant loss to Supatreats. That loss is likely to extend to the loss of goodwill built up over the last 30 years. There is evidence from Mr Lovejoy, and from a Ms Wallace, that there is already considerable confusion in the marketplace as a result of the first to fourth defendants rebranding as Shake Shed & Co stores. In my view, there is a risk of significant damage to Supatreats’ franchise business model, its ability to re-establish a presence in the New Zealand marketplace, and its ability to attract future potential franchisees in this country. In my judgment, damages could be very difficult to establish.
[55] Further, there is no evidence as to the defendants’ ability to meet any damages award that might ultimately be made against them. It appears that the first to fourth defendants are in a relatively parlous financial position. Indeed, they claim that Supatreats actions in changing the ice cream supplier was going to make their respective businesses unviable. There is no direct evidence as to Mr Chang’s ability to meet a damages award. Shake Shed was only incorporated relatively recently, and there is no evidence as to its ability to meet any damages award that may ultimately be made against it.
[56] I am not satisfied that damages are an adequate alternative remedy for Supatreats in this case. Conversely, Supatreats have given an undertaking as to damages in the event the matter is decided against them. There is no issue about their ability to meet that undertaking.
[57]I turn to the status quo.
[58] The defendants allege that the roll out of Shake Shed & Co stores is largely complete and they argue that, on this basis, the status quo favours them.
[59]I do not accept this argument.
[60] On the limited evidence before me, it seems that the conversions by the first to fourth defendants from Wendy’s Supa Sundae stores to Shake Shed & Co stores took place in the face of express notice and warning from Supatreats as to the consequences of breaching the franchise agreements. Allowing the defendants to benefit from a status quo argument in these circumstances would be to allow them to profit from their own wrongdoing (if that is what it is ultimately found to be). It would also compound the risk that other franchisees who may have more recently made the choice to rebrand, or who may be contemplating doing so, will take misguided comfort in the defendants’ actions and thus further damage Supatreats’ franchise business.
[61] There is little to suggest that there will be negative consequences for the first to fourth defendants if they are required to cease trading as Shake Shed outlets. Supatreats has not purported to terminate their franchise agreements and is prepared to take them back into the Wendy’s Supa Sundae fold. If the interim injunctions are granted, the first to fourth defendants will be able to retain their respective businesses, albeit under a different banner, reduce their potential liability to Supatreats for any breaches ultimately found, and maintain their own businesses and incomes. The effect of the interim injunctions will be to temporarily enjoin the first to fourth defendants from doing something they were not doing until relatively recently. The interim
injunctions if granted, will simply postpone the date at which they are able to embark upon their chosen course of action of becoming Shake & Shed & Co stores.9
[62]I now turn to the circumstances of the case.
[63] In addition to the matters already discussed, the first to fourth defendants claim that they will be put to significant cost if they are required to rebrand as Wendy’s Supa Sundae stores. They say that they have expended considerable sums of money on the change to Shake Shed & Co stores, and that it is “impossible” for them to return to operating as Wendy’s Supa Sundae stores.
[64]Again, I do not place much weight on this argument.
[65] Reinstating the stores as Wendy’s Supa Sundae stores is not the only option if the interim injunctions are ordered. The effect of the orders sought by Supatreats would be to either require the first to fourth defendants to reinstate their Wendy’s Supa Sundae stores, or alternatively, to cease business selling ice cream related products in accordance with the restraint of trade provisions in the franchise agreements until the matter is decided at a substantive hearing. The choice will be with the first to fourth defendants.
[66] Supatreats has offered support in respect of the first option – rebranding as Wendy’s Supa Sundae stores. Further, the claim of considerable expenditure and impossibility is in my view significantly overstated. Grace & Glory has spent considerable sums of money setting up a new shop. However, it was required by its landlord to change its premises in the mall it trades in. It seems likely that, in part at least, the costs it incurred were necessitated by termination of its store lease and the need to move to new premises, and not by its decision to rebrand alone. No breakdown has been provided of the amount Grace & Glory paid to rebrand as opposed to de-fit the old store and fit out the new store. Further, there is no evidence of what it will cost Grace & Glory to rebrand as a Wendy’s Supa Sundae store. Nor is there any evidence of what it will cost Redneps to rebrand.
9 Video Ezy International Pty Ltd v Red Bond Ltd [2015] NZHC 1636 at [18] citing American Cyanamid Co v Ethicon Ltd, above n 1, at 408.
[67] It cannot be said that it is “impossible” for Grace & Glory and Redneps to change their branding. They have already done so and there is nothing to stop them doing it again.
[68] I also take into account the argument advanced by Supatreats – namely that the first to fourth defendants have proceeded with their eyes wide open. They rebranded in the face of formal written notice from Supatreats, including a warning as to the possible consequence of injunctive relief being sought if they proceeded. Their position is analogous to that of the defendants in Wholesale Distributors Ltd v Songle Supermarket Ltd, where the Court of Appeal noted:10
[34] … While the grant of the injunction will undoubtedly result in personal difficulties for the [the defendants], we have reached the conclusion, contrary to that of the Judge, that this state of affairs is largely of their own making and could be remedied if they were to accept the offer from [the plaintiff] that remains open to them.
[69] It was argued for the defendants that the effect of any interim injunctions will be felt not just by the first to fourth defendants, but also by all other franchisees who have rebranded their stores to Shake Shed & Co stores.
[70] The first to fourth defendants are the only franchisees before the Court. It is only their franchise agreements which have been exhibited, and the interim orders sought will only bind them. Indeed, this was acknowledged by the defendants in the submissions made on their behalf. It was there noted that there can be no certainty as to what other franchisees will do, and that there is no guarantee that they will rebrand as Wendy’s Supa Sundae stores. This is clearly correct. There is very little information before the Court about other franchisees and they will not, as a result of the making of interim orders against the first to fourth defendants, be subject to any Court order.
[71]The defendants allege that Supatreats has delayed.
[72]In my judgment, this argument cannot be made out.
10 Wholesale Distributors Ltd v Songle Supermarket Ltd [2014] NZCA 565.
[73] Supatreats only became aware of the rebranding in February 2018. It took prompt steps to try to rectify the situation by sending out formal notices to Cone and to the New Zealand franchisees on 9 February and then again on 27 February 2018. Shortly thereafter, on 20 March 2018, it filed these proceedings. It could not have done so much more promptly, because it had to allow reasonable time for the breaches to be cured by the franchisees. It responsibly sought the interim injunctions on notice.
[74] In any event, delay is not of itself fatal. Rather, its consequences depend upon the circumstances of any given case. Any alteration of position and any resulting prejudice is normally critical.11
[75] Here, the first to fourth defendants have been on notice that Supatreats intended to enforce what they say are their rights under the franchise agreements. I do not consider that there has been any unreasonable delay by Supatreats. Rather, in my view, the first to fourth defendants altered their position in the knowledge that they might well face proceedings such as these.
[76] It is also relevant that the evidence to date suggests that Mr Chang was throughout working in the background to engineer the situation that has arisen, and then to present the revolt by franchisees as a fait accompli. As Mr Chisholm put it, it is arguable that the defendants have acted deliberately and opportunistically in the face of unequivocal notice from Supatreats, and that they have continued to do so even after the proceedings were filed and served. There is force in Mr Chisholm’s argument that it can be surmised that, even if Supatreats had filed its proceedings earlier, it is likely that the defendants would have pursued the same course of conduct.
Overall justice of the case
[77] In Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, the Court of Appeal stated:12
Marshalling considerations under them is an aid to determining, as regards the grant or refusal of an interim injunction, where overall justice lies. In every
11 Parker Hannifin (NZ) Ltd v Moran HC Rotorua CIV-2003-463-504, 27 February 2004 at [43]- [44].
12 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, above n 1, at 142.
case the Judge has finally to stand back and ask himself that question. At this final stage, if he has found the balance of convenience overwhelmingly or very clearly one way … it will usually be right to be guided accordingly. But if the other rival considerations are still fairly evenly poised, regard to the relative strengths of the cases of the parties will usually be appropriate. We use the word ‘usually’ deliberately and do not attempt any more precise formula: an interlocutory decision of this kind is essentially discretionary and its solution cannot be governed and is not much simplified by generalities.
[78] I accept that the granting of the interim injunction will result in some difficulty for the defendants. For the first to fourth defendants the practical difficulties can be mitigated, at least in part, by giving them time to comply.
[79] As I have made clear, I regard it as significant that the defendants have rebranded with their eyes open, and despite express notice from Supatreats. The situation they have placed themselves in now appears to be of their own making. On the materials available to date, there is a serious issue to be tried, and there are legitimate concerns that the defendants might not be able to satisfy any damages award which might ultimately be made against them. The balance of convenience is very clearly in favour of Supatreats.
[80] I am satisfied that the overall justice of the case favours Supatreats. In this regard, I consider that the comments of the Court of Appeal in Wholesale Distributors Ltd are apposite:13
… A franchisor is entitled to expect that its franchisee will comply with the terms of the franchise agreement and to seek injunctive relief if it does not …
As has been noted, such agreements are made to be kept.14
Result
[81]I grant interim injunctions in favour of Supatreats in the following terms:
(a)As from the date six weeks after the date of this judgment, and pending further order of the Court, the first to fourth defendants are prohibited from competing with, engaging in or being in any way involved in a
13 Wholesale Distributors Ltd v Songle Supermarket Ltd, above n 11 at [32].
14 Fuel Espresso Ltd v Hsich [2007] NZCA 58, [2007] 2 NZLR 651 (CA) at [21].
business or activity in competition with, detrimental to or interfering with the plaintiffs’ Wendy’s Supa Sundaes business;
(b)As from the date six weeks after the date of this judgment, the first and second defendants are required to immediately remove all signage, branding and other paraphernalia which identifies their premises, merchandise and business as Shake Shed & Co;
(c)Pending further order of the Court, the fifth to seventh defendants, whether directly or indirectly and whether themselves or through agents, employees or otherwise, are prohibited from:
(i)inducing or encouraging any Wendy’s Supa Sundae franchisee to compete, engage in or be any way involved in a business or activity which involves the selling of retail ice-cream and associated foodstuffs in competition with, detrimental to or interfering with the plaintiffs’ Wendy’s Supa Sundaes business, in breach of the franchisee’s franchise agreement;
(ii)operating, controlling or offering any business, franchise or otherwise that utilises the plaintiffs’ intellectual property or confidential information;
(iii)using or replicating the first plaintiff’s confidential information or intellectual property in any way.
(d)As from the date six weeks after the date of this judgment, and pending further order of the Court, the first to fourth defendants are prohibited from:
(i)using or replicating the first plaintiff’s confidential information or intellectual property other than for the purpose of carrying on business as Wendy’s franchisees under their agreements with the plaintiffs;
(ii)engaging in or being in any way involved in a business or activity which uses or replicates the first plaintiff’s confidential information or intellectual property other than for the purpose of carrying on business as Wendy’s franchisees under their agreements with the plaintiffs;
(iii)carrying on an ice cream business other than under the Wendy’s brand and in accordance with the terms of their franchise agreements with the plaintiffs.
(e)Leave is reserved to the parties or any of them to come back to the Court on three days’ notice in writing for an amendment to or variation of these orders.
Order for delivery up of records
[82] Supatreats at an early stage requested that Cone should deliver up its documents. This request was declined by Cone’s solicitors.
[83] There can be no doubt that the master franchise agreement requires that the information be delivered up. Supatreats needs the information so that, inter alia, they can carry out their roles as master franchisee. The information should have been delivered by Cone on termination. Cone is not a party to these proceedings, but Mr Chang is its principal and he did not seek to hide behind Cone’s corporate veil.
[84] As I have noted, Mr Chang did, at the hearing, agree to provide the material identified in [6(a)-(c)] above. Supatreats sought additional information – namely that identified in para 17.1.1. of the master franchise agreement. It provides as follows:
Upon the expiration or earlier termination of this Agreement for whatever reason the Master Franchisee must:
17.1.1. immediately deliver to the Franchisor all Store Manuals, stationery, forms, business cards, computer records, files and programs, advertising material other printed matter used in the operation of the Wendy’s Business, which bear the business name and/or the Marks and computer software provided to the Master Franchisee by the Franchisor;
[85] I can see no good reason why this obligation should not be met. It is material made available by Supatreats to Cone and Cone has no ongoing entitlement to the same.
[86]I make the following orders in this regard:
(a)The fifth defendant is to provide, within 10 working days of the date of this judgment, copies of all Wendy’s franchise agreements and leases in his possession and control as at 1 March 2018;
(b)The fifth defendant is to provide, within 10 working days of the date of this judgment, copies of all documents in his possession and control relating to the surrender or termination of the Wendy’s franchise agreements;
(c)The fifth defendant is to provide, within 20 working days of the date of this judgment, any and all documents in his possession or control evidencing the arrangements and agreements between the fifth and/or the sixth defendants on the one hand, and the Shake Shed franchisees on the other hand; and
(d)The fifth defendant is to provide, within 10 working days of the date of this judgment, all store manuals, stationery, forms, business cards, computer records, files and programs, advertising material and other printed matter used in the operation of the Wendy’s Supa Sundaes Business, which bear the business name and/or the Marks and computer software provided to Cone by Supatreats.
Costs
[87] Supatreats are entitled to their reasonable costs (one party only) and disbursements.
[88] It is my preliminary view that costs should be awarded on a 2B basis. If counsel accept this view, they should be able to agree costs between themselves. If
they do not accept this view, or if there are other complications, then I make the following directions:
(a)any memorandum seeking costs and/or disbursements is to be filed and served within 10 working days from the date of release of this judgment;
(b)any memorandum in response is to be filed and served within a further 10 working days;
(c)memoranda are not to exceed five pages in length.
I will then deal with the issue of costs and/or disbursements on the papers, unless I require the assistance of counsel.
Other directions
[89]The Registrar is to place this matter in the mentions list on a date not less than
21 days after the date of the release of this judgment, so that the substantive proceedings can be timetabled through to trial.
Wylie J
Solicitors/counsel:
Burton Partners, D Chisholm QC, Auckland Stewart Germann Law Office/K Quinn, Auckland
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