Swisher Hygiene Franchise Corporation v Hi-Gene Limited HC Auckland CIV 2009-404-1573

[2010] NZHC 585

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-001573

BETWEEN  SWISHER HYGIENE FRANCHISE CORPORATION

Plaintiff

ANDHI-GENE LIMITED Defendant

Hearing:         29 March 2010

Appearances: A C H Clemow and N P Tetzlaff for the Plaintiff

W G C Templeton for the Defendant

Judgment:      31 March 2010

JUDGMENT OF DUFFY J

[Re Application for Stay of Execution]

This judgment was delivered by Justice Duffy on 31 March 2010 at 4.30 pm pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar
Date:

Counsel:     W G C Templeton P O Box 5444 Wellesley Street Auckland 1141 for the

Defendant

Solicitors:   Gaze Burt P O Box 91345 Victoria Street West Auckland 1142 for the Plaintiff Foley and Hughes P O Box 6829 Wellesley Street Auckland 1141 for the Defendant

SWISHER HYGIENE FRANCHISE CORPORATION V HI-GENE LTD HC AK CIV-2009-404-001573  31

March 2010

[1]      Following  an  arbitral  proceeding  in  North  Carolina,  United  States  of America, the plaintiff, Swisher, obtained an arbitral award against the defendant, Hi- Gene.  Proceedings were then commenced in this Court in respect of the recognition and enforcement of the arbitral award.  On 2 December 2009, I delivered a judgment in which I found that Hi-Gene had failed to make out the grounds of its application that the arbitral award should not be recognised and enforced.  I also found that Hi- Gene had failed to make out its opposition to Swisher’s application to this Court to recognise and enforce the same arbitral award as a judgment: see Swisher Hygiene Franchise Corporation v Hi-Gene Limited  HC Auckland CIV-2009-404-001573,

2 December 2009 (the result judgment).

[2]      The arbitral award required Hi-Gene to pay a sum of money to Swisher in excess of NZ$500,000.00.  Since the issue of the result judgment, Hi-Gene is facing demands from Swisher to pay the sum due under the arbitral award.

[3]      Hi-Gene is now appealing the result judgment.  The appeal has not got off to a good start.  On 21 December 2009, Hi-Gene filed an application in this Court for leave to appeal the judgment.  That application was to be heard on 29 March 2010. On 19 March 2010, Hi-Gene realised that, on its interpretation of its appeal rights, there was an appeal as of right available to it.   By the time Hi-Gene reached this view, it was out of time to commence such an appeal.  However, Hi-Gene has now filed an application in the Court of Appeal for leave to bring this appeal out of time. Regarding the application for leave to appeal that this Court was to hear on 29 March

2010, it was dismissed in this Court on that date: see Swisher Hygiene Franchise

Corporation v Hi-Gene Limited HC Auckland CIV-2009-404-001573, 29 March

2010.

[4]      Hi-Gene now applies for a stay of execution of the result judgment.  Swisher opposes the application.

[5]      The parties are agreed that the applicable rule authorising a stay of execution pending an appeal is r 12 of the Court of Appeal (Civil) Rules.

[6]      The test for applying r 12 requires balancing the competing rights of the party who obtained the judgment against the need to preserve the appellant’s position in the event of the appeal succeeding.  In Houghton v Saunders [Privilege] 19 PRNZ

476 (HC), French J at [79] commented that a court when applying r 12 “must adopt a flexible approach to meet the interests of justice in the circumstances of the case”. French J referred to this as the overarching principle behind the application of r 12. However, as with all such general principles, there are certain relevant factors to be taken  into  account  when  exercising  them.    This  was  noted  by  Hammond  J  in Dymocks Franchise Systems (NSY) Pty Ltd v Bilgola Enterprises Ltd (1999) 13

PRNZ 48 (HC) at 50:

It is routinely said that, at the end of the day, the test for a stay of execution is one of the justice of the given case.  In the broadest sense, that must be so. But a formula which, with respect more accurately indicates the essential nature of the balancing approach which must be adopted, is set out in the decision of Gault J in Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85. His Honour said (at p 87):

In applications of this kind it is necessary carefully to weigh all of the factors in the balance between the right of a successful litigant to have the fruits of a judgment and the need to preserve the position in case  the  appeal  is  successful.    Often  it  is  possible to  secure  an intermediate position by conditions or undertakings and each case must be determined on its own circumstances.

[7]      In Dymocks Franchise Systems, Hammond J listed the factors which courts conventionally address in order to find the appropriate balance in any given case. They are:

i)If no stay is granted, will the applicant’s right of appeal be rendered nugatory?;

ii)The bona fides of the applicants as to the prosecution of the appeal;

iii)      Will the successful party be injuriously affected by the stay?;

iv)      The effect on third parties;

v)       The novelty and importance of the question involved;

vi)      The public interest in the proceedings; and vii) The overall balance of convenience.

Impact on Hi-Gene’s right of appeal

[8]      Hi-Gene argues that if no stay is granted, its right of appeal will be rendered nugatory as it has no ability to pay the sum awarded to Swisher.   In this regard, Swisher has already made demand on Hi-Gene and has indicated that steps will be taken to wind up Hi-Gene if no payment of the sum awarded is forthcoming.

[9]      Swisher accepts that depending on the means of enforcement chosen, the appeal could be rendered nugatory.   However, it says that is not a determinative factor.  Furthermore, Swisher contends that this is a case where placing Hi-Gene in liquidation may bring a healthy dose of commercial realism to the conduct of the proceeding in the form of the liquidator.

[10]     I accept that rendering an appeal nugatory is not a determinative factor when considering the grant of a stay of execution.  However, here the refusal to grant a stay may very well lead to Hi-Gene being wound up.  Should this occur, it is not only the appeal right that will be rendered nugatory.   Therefore, in this case, the impact of a refusal to stay on Hi-Gene’s appeal right favours the grant of a stay.

Bona fides of Hi-Gene as to the prosecution of the appeal

[11]     Hi-Gene contends that it is serious, as demonstrated by its genuine opposition to the arbitration award, challenging it in this Court, seeking earlier mediation of the disputes from the outset, and erroneously seeking leave to appeal.

[12]     Swisher submits that Hi-Gene’s appeal is essentially weak and has limited chance of success.  Swisher also submits that the history of its dispute with Hi-Gene shows Hi-Gene to have been procedurally deficient in relation to the arbitral proceedings.   It sought adjournments of the arbitral proceedings without properly addressing this to the arbitrators, without properly giving reasons, and without evidencing the reasons it gave.   Swisher contends that Hi-Gene failed through its

own  negligence  to  participate  in  the  timetabling  conference  for  the  arbitral proceeding of which it was well aware, and could easily have attended.  When Hi- Gene did make an application to the arbitrators for adjournment, it did so only within one week of the hearing date, and it did not properly explain why it could not attend the hearing.  Swisher submits that the court should not reward the poor behaviour of a litigant by allowing further delay to Swisher’s right to enforce the result judgment where Hi-Gene has, by its behaviour, demonstrated an intention to delay matters through breaches of its obligations to Swisher, and by failing to participate in the process agreed between the parties.

[13]     I consider that when Hi-Gene’s past performance is considered, it has not acted in a timely and expeditious manner to pursue its rights.   Furthermore, the present confusion it has experienced over which appeal right is open to it to exercise does not engender confidence that it would progress an appeal expeditiously. However, those concerns can be dealt with by imposing conditions on the grant of a stay.

Will the successful party be injuriously affected?

[14]     Hi-Gene  contends  that  Swisher  will  not  be  injuriously affected.    In  this regard, Hi-Gene argues that Swisher could have cancelled the Master Licensing Agreement two years ago, but has done nothing about termination.   Had Swisher done so, it could then have contracted directly with the two sub-franchisees which currently owe obligations to Hi-Gene.

[15]     Swisher,  however,  contends  that  it  is  suffering  injury  and  the  loss  of  a benefit, being payment of the result judgment sum, the ongoing losses associated with Hi-Gene’s failure to pay franchise fees on an ongoing basis, and Swisher’s lost franchise fees that would otherwise have been paid to it by Hi-Gene’s franchisees. Swisher argues that it is self-evident that as long as the appeal process “drags out”, Swisher is in limbo in regard to its activities in New Zealand, as Hi-Gene has the master licence.  The sub-franchisees have expressed an eagerness to become Swisher franchisees as soon as their obligation to Hi-Gene is terminated.  Swisher contends that it would not be wise for it to terminate the Master Licensing Agreement it has

with Hi-Gene while the parties’ dispute is still subject to litigation.  In this regard, Swisher does not want to enter into contractual obligations with third parties in circumstances where there is the potential of a court decision in Hi-Gene’s favour.

[16]     Swisher’s submissions are contradictory, on one hand, Swisher asserts Hi- Gene’s appeal is weak, but on the other hand, Swisher asserts that it is too risky for Swisher  to  terminate  the  Master  Licence  Agreement.    The  only  potential  risk Swisher faces in this regard is Hi-Gene being successful in appealing the result judgment.   I consider that Swisher can take steps to protect its own position from prejudice, should it wish to do so.

The bona fides of applicants

[17]     Hi-Gene contends that it is bona fide.   Swisher points to Hi-Gene’s delays and failure to progress the arbitration process as reflecting poorly on its bona fides.

[18]     The  history of  Hi-Gene’s  conduct  is  not  helpful  to  it  when  it  comes  to assessing bona fides.  However, strict conditions requiring Hi-Gene to progress its appeal would resolve any concerns about its bona fides.

Effect on third parties

[19]     Swisher contends that the two sub-franchisees (Hi-Gene Solutions Ltd and Nasent Investments Ltd) are presently obliged to pay franchise fees to Hi-Gene, for which they receive no value.  Hence, those sub-franchisees would be prejudiced by a stay, as that would result in the continuance of this unsatisfactory circumstance.

[20]     Hi-Gene argues that Swisher can terminate the Master Licensing Agreement at any time, and then enter into fresh contracts with the two sub-franchisees.

[21]     I have already commented on how I see Swisher’s position regarding the potential risk to it in terminating the Master Licensing Agreement.   I accept that there is evidence that the sub-franchisees are or may be suffering prejudice, and that so long as the Master Licence Agreement remains on foot, that prejudice will continue.  However, a stay will not directly affect that circumstance.  It will only do

so indirectly because the refusal to grant a stay is likely to lead to Hi-Gene being wound up, which in turn will preclude an appeal so that Swisher will know with certainty that it can safely terminate the Master Licence Agreement.

[22]   The sub-franchisees are presently paying Hi-Gene under their franchise agreements.    Swisher  asserts  that  the  sub-franchisees  would  prefer  to  contract directly with Swisher, and that Hi-Gene is presently not performing its contractual obligations in return for the money it receives from the sub-franchisees.   Hi-Gene denies that it is not fulfilling its obligations to the sub-franchisees.

[23]     Any  prejudice  the  sub-franchisees  are  suffering  could  be  overcome  by making it a condition of the grant of a stay that all payments the sub-franchisees are obliged to make to Hi-Gene are instead paid into the trust account of a neutral solicitor who would hold the payments until such time as the stay is lifted.  There would also have to be some process for resolving how much, if anything, should be paid to Hi-Gene once the stay is lifted.

Novelty and importance of questions involved

[24]     Hi-Gene contends that the questions involved in its appeal raise matters of important public interest as to fundamental process and procedure in international arbitrations from New Zealand’s perspective, for which there appears to be no clear authority.

[25]     Swisher argues that the appeal raises no novel or important questions of law, so that this factor counts against a stay.   It argues the principles applying to the enforceability of international arbitral awards are well established.  It says that the only possible matter of interest is whether there is any significant precedent value relating to a defendant who failed to participate in an arbitral hearing.  It submits that the consequences of such failure are inevitable, the matter is fact specific, and it has little value as precedent.

[26]     Seen from Hi-Gene’s perspective, the argument is that it was constructively prevented from attending the arbitral hearing by the arbitrators’ refusal to adjourn the

hearing.   If that is so, there will have been a breach of natural justice.   I did not accept Hi-Gene’s view of what occurred.  But if I am wrong, and there has been a breach of natural justice, that raises an important, though not a novel, question of law.

Public interest in the proceedings

[27]     Hi-Gene  relies  on  the  submissions  it  made  in  relation  to  novelty  and importance of the questions involved, and further submits that there is a strong public interest in whether the enforcement of the award could be contrary to public policy involving the integrity of the arbitration process as assessed by New Zealand standards in an international arbitration context.

[28]     Swisher  contends  there  is  no  public  interest  in  a  matter  with  so  little precedent value and confined to its particular facts.  It contends the ultimate outcome of the appeal does not affect the public at large.  The most affected parties will be Hi-Gene and Hi-Gene’s franchisees.  Those franchisees have already indicated that they would prefer the application for appeal to be denied, and Swisher exercise its rights under the result judgment.

[29]     There  is  nothing  that  Hi-Gene  has  said  which  persuades  me  that  the proceeding raises matters of public interest.

Balance of convenience

[30]     Hi-Gene argues that the balance of convenience favours a stay as without the stay, the appeal will be rendered nugatory, and  they will be unable to  pay the judgment.   Swisher submits that the approach in Avowal Administrative Attorneys Ltd v District Court at North Shore (No 2) (2009) 24 NZTC 23,486 (HC) in which the balance of convenience was seen to reflect the first two factors, namely will the appeal be rendered nugatory, and will the successful party be injuriously affected, should be limited to its facts.

[31]     I consider this factor to require an assessment of where the balance of all the previous factors lies.

Balancing of relevant factors

[32]     When I stand back and carefully assess the relevant factors, the case for a stay is finely balanced.   On the one hand, the refusal of a stay will undoubtedly render Hi-Gene’s appeal nugatory.   On the other hand, the grant of a stay will prejudice Swisher.  The other issues that Swisher raise that tell against a stay can be dealt with through the imposition of conditions.

[33]     If a stay is granted, Swisher will suffer the prejudice of not receiving the amount awarded to it in the arbitral award.  However, that is likely to be the result whether or not a stay is granted.  Hi-Gene-will suffer prejudice if a stay is refused, as its appeal right will be rendered nugatory through Swisher taking steps to place Hi- Gene in liquidation.  In Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA), Gault J referred to the possibility of securing an intermediate position by conditions or undertakings.  I think an intermediate position is available in this case which will see the interests of justice satisfied.

[34]     In Hi-Gene’s case, much will turn on the Court of Appeal’s response to Hi- Gene’s application for leave to appeal out of time.  If that application is refused, the appeal will come to an end.  If it is granted, Hi-Gene will have the opportunity to pursue its appeal.  This issue is likely to be resolved in the near future.  It is in the interests of justice for a stay of execution to be granted for a limited period, and until the life of the appeal is determined.

[35]     I propose to grant a stay of execution for a period of three months, or when the Court of Appeal hears and determines the leave to appeal application, whatever period is the sooner.   If at the close of three months the leave application has not been heard, the stay is to be brought back before me by way of telephone conference for the purpose of reviewing it continuing in force.  Once the Court of Appeal has determined the leave application, if the Court of Appeal is persuaded to grant leave to appeal out of time, this Court can then revisit the stay of execution.  Alternatively,

Hi-Gene may be able to persuade the Court of Appeal to rule on an extension of the stay of execution at the same time as it determines the leave application.  If the Court of Appeal refuses to grant the leave application, that will bring the appeal to an end. This circumstance will remove any basis for the stay remaining in force.

[36]    As a condition of being granted a stay of execution, Hi-Gene must act expeditiously to  progress  the  application  for  leave  to  appeal  out  of  time.    The imposition of the three month limit should go some way to ensure that Hi-Gene does not take its time in pursuing the leave application.  Hi-Gene should be on notice that if close to the expiry of the three month period it becomes clear to the Court that Hi- Gene has not pursued its leave application expeditiously, that in itself will constitute a ground for refusing to extend the stay.

[37]     The stay of execution is to be subject to the following conditions:

a)       The stay of execution is for a period of three months, or whenever the Court of Appeal determines Hi-Gene’s application for leave to appeal out of time;

b)The parties are to liaise with the Registry to ensure that if the leave application  is  not  likely to  be determined  within the three month period, the stay of execution is brought back before the Court in the form of a telephone conference before me, at which time the need for an extension of the stay of execution will be considered;

c)       All monies that the sub-franchisees are currently paying to Hi-Gene are to be paid into the trust account of a neutral solicitor, and held there  until  such  time  as  the  Court  of  Appeal  determines  the application for leave to appeal, or for any other reason the stay of execution comes to an end;

d)If the parties are unable to agree on a neutral solicitor, that person is to be determined by the Registrar of this Court;

e)       When it comes to resolving how the monies which the sub-franchisees pay to the neutral solicitor are to be ultimately disbursed, the parties are to agree a process for resolving any dispute over how this is to be achieved;

f)        If the parties are unable to agree on a process, the matter is to be resolved by a neutral umpire in the form of an Associate Judge of this Court, or a Queen’s Counsel to be appointed by a Registrar of this Court; and

g)       Leave is reserved to the parties to return to Court should any matter relating to the stay require re-consideration, or there is a change of circumstance.

[38]     The grant of the stay of execution is conditional on Hi-Gene agreeing to all of the above conditions.

Duffy J