The Carpet Barn Hamilton Limited v Jobe

[2017] NZHC 2608

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA

KIRIKIRIROA ROHE

CIV-2017-419-168 [2017] NZHC 2608

IN THE MATTER

of an appeal against the decision of the

District Court at Hamilton

BETWEEN

THE CARPET BARN - HAMILTON - LIMITED

Appellant

AND

BIANCA HELGA MARIA JOBE Respondent

Hearing:	29 August 2017
Counsel:	M D Branch and K F Shaw for Appellant T M Braun and L H Hunt for Respondent
Judgment:	25 October 2017

JUDGMENT OF BREWER J

This judgment was delivered by me on 25 October 2017 at 4:00 pm pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Harkness Henry (Hamilton) for Appellant

Whitfield Braun (Hamilton) for Respondent

THE CARPET BARN HAMILTON LTD v JOBE [2017] NZHC 2608 [25 October 2017]

Introduction

[1]      The appellant (“Carpet Barn”) appeals a refusal by Judge RLB Spear1  to grant it an interim injunction restraining Ms Jobe from:

(a)       soliciting or diverting any clients, customers or employees of Carpet

Barn; and

(b)      being concerned with any business that is in competition with Carpet

Barn including, without limitation, Flooring Design Ltd.

[2]      In brief, Ms Jobe used to be employed by Carpet Barn as a sales manager. She is now employed by Flooring Design Ltd (“Flooring Design”) as a business manager.  Flooring Design competes with Carpet Barn.  Carpet Barn does not want Ms Jobe to assist Flooring Design with such competition.  It brought its application for interim injunction in reliance on a shareholders’ agreement to which Ms Jobe is party and which prohibits Ms Jobe from assisting a competitor such as Flooring Design.

[3]      Ms Jobe’s  response  has  been  that  the  provisions  of  the  shareholders’ agreement upon which Carpet Barn relies are unenforceable because they are unreasonable.

Background

[4]      Ms Jobe began working for Carpet Barn in 1999 when she was 21 years old. Her employment agreement (signed by Ms Jobe on 25 February 2014)2 provided for a three months non-competition period within a radius of 50 km from Carpet Barn’s premises.3

[5]      Carpet Barn is controlled by Mr Josephus Lenssen as the sole director and controller of the majority of its shares.  In 2014, shares in Carpet Barn were offered

1      The Carpet Barn Hamilton Ltd v Jobe [2017] NZDC 9711.

2      Ms Jobe had not previously entered into any formal employment agreement with Carpet Barn.

3      There is no issue over Ms Jobe’s compliance with the employment agreement. She commenced

her employment at Flooring Design after the three months non-competition period expired.

to Ms Jobe and four other employees.   They all accepted the offer having first obtained independent legal advice.  In summary, the purchase price of the shares was calculated in accordance with a formula which did not include a discount on fair value.  However, the purchase price was to be settled by way of an interest-free loan which was repayable by the application of dividends (net of tax).  Any outstanding balance, up to $100,000, would be paid on the fifth anniversary of the settlement date.

[6]      The agreement for sale and purchase by which Ms Jobe bought her shares is dated 7 May 2014.  She paid $349,760 for 800 shares.  By the time she resigned her employment with Carpet Barn at the end of 2016, the dividends received ($222,103

– net of tax) had reduced the amount owed to $127,747.4   The value of her shares, as

per the formula, had risen to $844,432.

[7]      The shareholders’ agreement has the following clause:

12.1Each Shareholder must ensure that neither that Shareholder or, if a Trust, the employee of the Company that established the Trust or who is a beneficiary of that trust, will during the term of this agreement (either alone or in partnership or as manager, consultant, partner, agent, director, lender, trustee, beneficiary or in any other way), directly or indirectly commence or operate or be concerned or interested in any business which competes with the Company, or solicit, or divert away from the Company, any clients, customers or employees of the Company.

[8]      The  shareholders’ agreement  contains  pre-emptive  rights  which  required Ms Jobe,  upon  leaving  the employment  of Carpet  Barn, to  offer her  shares  for purchase by the other shareholders.  She did that, but none of them wanted to buy the shares at the price she proposed.  That means she is free to sell her shares to third parties, provided that the majority shareholders (in reality, Mr Lenssen) accept the third party as a shareholder.  Any third party purchasing the shares must also enter into a deed of accession binding it to the shareholders’ agreement.

[9]      Ms Jobe has taken no steps to try to sell her shares to third parties.

4      I  take these  figures from the  uncontested evidence. I  note,  however, a  $90  puzzle  in  the mathematics.

The law

[10]     An application for interim injunction is an application to the discretion of the Judge hearing it.  The law that Judge Spear had to take into account in exercising his discretion is well known and was acknowledged by the Judge.5   The first question to be considered is whether the applicant has established that there is a serious question to be tried.   If there is, then the Judge must consider the balance of convenience between the parties. This requires looking at the impact on the parties of granting, or refusing to grant, an interim injunction.  A factor to be considered is the question of whether damages would be an adequate remedy for the applicant.  The final part of

the consideration is an assessment of the overall justice of the case.   This is, essentially, a check on whether the preliminary position reached on the analysis is a proper one.

[11]     On appeal, my task is to examine whether Judge Spear erred in the exercise of his discretion by failing to take relevant considerations into account, by taking into account irrelevant considerations, by making an error of law, or by reaching a conclusion that was plainly wrong.6

Judge Spear’s decision

[12]     Judge Spear found that Carpet Barn had established that there is a serious question to be tried.7    That is now not disputed by Ms Jobe, and I agree there is a serious question to be tried.   Carpet Barn is seeking to enforce provisions of a commercial  agreement  entered  into  by  Ms Jobe  who  did  so  having  received independent legal advice.  Whether, in all the circumstances, a Court would refuse to enforce the provisions – in whole or in part – is certainly a serious question for determination at trial.

[13]     The argument on this appeal is that Judge Spear erred in his consideration of the balance of convenience.

5      NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12]; American Cyanamid Co v

Ethicon Ltd [1975] AC 396 (HL).

6      May v May (1982) 1 NZFLR 165 (CA) at 170; Novartis New Zealand Ltd v Aktiebolaget Hassle

[2004] 2 NZLR 721 (CA) at [53].

[14]     Judge Spear considered the arguments put forward by Carpet Barn as to the tilt of the balance of convenience.8    The first was that Ms Jobe had been asked to provide an undertaking that she would not solicit or divert any clients, customers or employees of Carpet Barn.   Judge Spear found that should not count against her given Ms Jobe’s challenge to the enforceability of that aspect of the shareholders’ agreement.9

[15]     The next argument was that damages would not be an adequate remedy for Carpet Barn if it succeeds in its substantive proceeding because of the difficulty of quantifying them in a case such as this.   However, Judge Spear considered that a letter from Carpet Barn’s lawyers to Ms Jobe’s lawyers on 5 April 2017 advising that loss of profits would be claimed gives the appearance of a case where damages

would not “be that difficult to ascertain”.10

[16]     The basis of Judge Spear’s decision is apparent from the following:

[36]      I do  not  accept,  for  one  minute,  that The Carpet Barn’s  national business could be seen to have been put at risk of significant damage to a degree that it would not be compensatable by way of recovery of damages from a former employee now working for a local rival.  It appears far more likely that the motivation for this application for interim relief flows from the breakdown of the relationship between Mr Lenssen and Ms Jobe and that Mr Lenssen, as effectively the person in total control of this business, is now endeavouring to continue to restrict her employment prospects by use of the shareholder’s agreement.

[37]      There is, and must be, a significant difference between someone who has the ability to harm his or her former employer by misuse of intellectual property as against somebody who acquired a working knowledge of a particular   industry  but  which   knowledge  is   not  particularly  rare  or specialised such that it cannot be replaced.  The employment contract clearly identified that a period of three months’ restriction was a fair restraint on Ms Jobe from seeking work from a competitor or soliciting clients from a competitor.  So, how does the transference of the restraint effectively into the shareholder’s  agreement  change  this  in  any  significant  way?    I  do  not consider that it does.

[38]      If Ms Jobe does indeed breach the no competition clause other than by working for Flooring Design, then damages would be assessable and should be capable of being met given that Ms Jobe’s shares are now worth in excess of $800,000.  I record for completion that Ms Jobe has offered her shares back not only to Mr Lenssen but also the other shareholders at a

8 At [24].

9 At [25].

discounted rate from a recent valuation. I do not consider that there is any real likelihood of risk to The Carpet Barn’s business.

[39]      Indeed, I am left with the clear impression that this case points to an oppressive and unjustifiable stance taken against a former mid-level staff member who ran afoul of the principal of this company. I find that the balance of convenience here clearly favours the defendant.  The application is accordingly declined.

The Appeal

[17]     First, Carpet Barn has filed four affidavits which it wants me to take into account as fresh evidence.  I expressed the view to counsel that I did not think that much could turn on them.   Three are in the nature of updates as to the effect of Ms Jobe’s work for Flooring Design.  They do no more than give an account of what is to be expected when a person works in sales for a company which is a competitor of another company in the same city for which the person previously worked in sales.  The person will naturally assist his or her current employer in its competition with his or her previous employer.

[18]     The fourth affidavit, that of Ross Eliot Hughey sworn on 30 June 2017, is to similar effect, although it contains hearsay and, at one point, hearsay upon hearsay to which I would not pay regard.

[19]     In the end, Mr Braun for Ms Jobe did not continue his opposition to my looking at the affidavits so long as that would not have an impact in costs against his client.   Mr Branch, for Carpet Barn, agreed with that and, given the nature of the affidavits, so do I.

[20] For completeness, I have also had regard to an affidavit of Ms Jobe “in support of notice of opposition”, sworn 19 July 2017, which replies to the four affidavits to which I have referred, as well as to the flurry of reply affidavits which it provoked. The nett effect of these affidavits is to reinforce the view I gave to counsel set out at [17].

[21]     Carpet Barn submits that Judge Spear erred in law in holding, effectively, that a period of restraint in an employment contract is no different to a non- competition/non-solicitation  provision  in  a  shareholders’  agreement.     I  agree.

Whereas the Courts will scrutinise both for reasonableness, the latter is viewed through the lens of commercial law:11

The modern tendency is to treat the consideration received by the covenantor in return for the restraint as relevant to reasonableness … The value of a covenant cannot be nicely weighed, nor can a purchase price for a share in a business as a going concern be precisely apportioned. Still, it seems to me safe to say in general the higher the price that is attributable to goodwill, the slower the Court will be to release the covenantor from his side of the bargain.

[22]     Where the parties have, with relatively equal bargaining power, negotiated commercially at arm’s length, the Courts will be reluctant to hold a restraint of trade unreasonable and therefore void.12

[23]     One  of  the  factors  a  Court  considers  when  assessing  the  balance  of convenience is the apparent strength of the applicant’s case.  Here, that goes to the reasonableness of the covenant Carpet Barn wishes to enforce in its substantive proceeding.  Judge Spear appears to have found the covenant unreasonable because it exceeds the restraint period in Ms Jobe’s employment contract.

[24]     In  my  view,  the  restraint  period  in  the  employment  contract,  while  not irrelevant, distracted Judge Spear from the need to assess the overall reasonableness of the non-competition/non-solicitation covenant.  As Katz J said in AMP Services (NZ) Ltd v Visser,13 “… the ‘bargain’ negotiated by the parties must be looked at in its totality, with reference to the contract as a whole and the broader factual matrix”.

[25]     For Carpet Barn, the following factors go to the covenant being reasonable as between the parties:

(a)       It was negotiated as part of an arm’s length commercial agreement in the  sense  that  entering  into  it  was  not  a  condition  of  Ms Jobe’s

employment.

11     Brown v Brown [1980] 1 NZLR 484 (CA) at 490.

12     Fletcher Aluminium Ltd v O’Sullivan [2001] 2 NZLR 731 (CA) at [42]-[45].

13     AMP Services (NZ) Ltd v Visser [2016] NZHC 134 at [45].

(b)Ms Jobe, in concert with the other employees who bought shares, had independent legal advice.

(c)      It  was  commercially  advantageous  to  Ms Jobe  to  enter  into  the agreement.   While she did not acquire her shares at a discount, the price was advanced by way of an interest-free loan.  It was to be paid, and largely has been paid, by nett dividends.  Essentially, it was to be a cash free deal for Ms Jobe.  Of course, there was the risk that Carpet Barn  would  not  prosper  in  which  case,  after  five  years,  Ms Jobe would have to pay up to $100,000.  But Carpet Barn did prosper, and at the time Ms Jobe resigned as an employee her debt was $127,747 and the shares were valued, pursuant to the agreement, at $844,432.

(d)      The  covenant  restrains  Ms Jobe  only  while  she  owns  her  shares.

There is no period of restraint extending beyond the date she sells the shares.

[26]     For Ms Jobe, the factors going to the covenant being unreasonable are: (a)    The restraint is unlimited geographically.

(b)The  pre-emptive  rights  provisions  have  the  potential  to  make  it difficult for her to sell the shares and end the period of restraint.

(c)      The restraint applies to her even though she does not have, as a local sales person, the ability to seriously damage Carpet Barn’s nationwide business.

(d)The restraint applies to her even though being employed in carpet sales is the only job she knows, and the only one in which she has been engaged since 1999.

[27]     In  my  view,  Carpet  Barn  has  a  good  argument  that  the  covenant,  with reference to the agreement as a whole, and the broader factual matrix, is reasonable. The restraint on Ms Jobe can be argued to be reasonable given its tie to continuing

shareholding, and the commercial benefit Ms Jobe received in exchange for the restraint.

[28]     Carpet Barn submits also that Judge Spear erred in concluding that damages would be an  adequate  remedy for Carpet  Barn  if  it  succeeds  in  its  substantive proceeding.   The Judge should not have placed weight on the lawyer’s letter of

5 April 2017.  I agree.  The letter was no more than advice that damages would be sought.

[29]     In  cases  such  as  this,  damages  for  a  successful  plaintiff  are  notoriously difficult to quantify.  Carpet Barn would have to show the extent to which Ms Jobe’s breaches of the covenant had cost it customers and their business.  Identifying the customers and establishing the causal nexus would be a Sisyphean task.   On the other hand, if Carpet Barn were unsuccessful, damages to Ms Jobe in accordance with Carpet Barn’s undertaking would be a straightforward calculation: loss or diminution of income. This favours the grant of an interim injunction.

[30]     Another factor to which a Court will have regard in assessing the balance of convenience is the conduct of the parties in relation to the agreement which is sought to be enforced.  There is a number of aspects of conduct which were before Judge Spear.  I will consider them individually before looking at them collectively when I consider the overall justice of the case.

[31]     The first is Ms Jobe’s refusal to provide an undertaking that she will not solicit or divert any of Carpet Barn’s clients, customers or employees.  Carpet Barn submits  that  Judge  Spear  erred  in  law  in  holding  that  no  inference  adverse  to Ms Jobe can be drawn from such failure.14    Mr Braun for Ms Jobe submits that the Judge did not err; the undertaking sought was unreasonable and would have caused Ms Jobe to breach her obligations to her current employer.

[32]     I find that Judge Spear erred in deciding that  in this case the refusal to provide an undertaking was not to be held against Ms Jobe.   There is no legal requirement that a defendant in an injunction case give an undertaking not to breach

the obligation in respect of which enforcement action is being taken.  It is just that, when considering the balance of convenience going to whether an interim injunction should be granted, the  existence of an undertaking is  a factor to be taken into account.  The weight to be given to an offer or refusal to give an undertaking will depend on the nature of the particular case.

[33]     In this case, Ms Jobe has taken employment with a competitor of Carpet Barn in the same city in which she worked previously for Carpet Barn.  There is no doubt she is in breach of her contractual obligation not to compete.   I would be very surprised, from the various affidavits and from the evident situation, if Ms Jobe is not also in breach of her obligation not to solicit or divert.  Ms Jobe’s position is that she is not bound by those obligations.  So, there is no undertaking that would tend to tilt the balance of convenience away from granting an interim injunction.  I do not, however, think it is a factor that has much weight in the circumstances of this case.  I heard argument as to how Ms Jobe could carry on her work for Flooring Design while complying with an interim order requiring her not to solicit or divert.  I do not think it would work in practice because of the uncertainties around what would be a solicitation or diversion.

[34]     The second aspect of conduct of the parties which Judge Spear addressed was Mr Lenssen’s response to Ms Jobe’s resignation.  Carpet Barn submits that the Judge erred in assessing the evidence as pointing “to an oppressive and unjustifiable stance taken against a former mid-level staff member who ran afoul of the principal of this company”.15

[35]     The relevance of this point to the assessment of the balance of convenience is that if a party seeks to enforce a restraint of competition clause for an ulterior purpose, in this case to punish Ms Jobe for resigning, rather than because there is a true apprehension of damage if the restraint is not enforced, then that goes against making an interim injunction.

[36]     Ms Jobe deposes to her belief that Mr Lenssen (my paraphrase) is trying to punish her.  Mr Lenssen deposes that he is not.  I get an impression (largely from the

slowness with which Mr Lenssen gave effect to the procedures in the shareholders’ agreement for valuing Ms Jobe’s shares and the exercise of pre-emptive rights) that enforcing the restraint may have an element of personal animus.   However, that could not be decided and weighed without oral evidence.  Judge Spear should not have given this factor the heavy weight in the balance of convenience which he evidently did.

[37]     The final aspect of conduct is Ms Jobe’s failure to attempt to sell her shares to third parties.  Carpet Barn submits that since the restraint applies only while Ms Jobe owns the shares, the fact that she has not taken all reasonable steps to sell them favours the granting of interim relief.  It is submitted that Judge Spear erred in not taking this factor into account.

[38]     Ms Jobe’s position is that she sees little point in trying to find a third party

buyer when Mr Lenssen can block any sale.

[39]     I find that Judge Spear erred in not taking into account that Ms Jobe could sell her shares and release herself from the restraint.   The pre-emptive rights provisions in the shareholders’ agreement do not prevent negotiating to sell below the price calculated in accordance with the prescribed formula.  Ms Jobe deposes she has offered a discounted price, but it has not been accepted.  That implies that rather than offer a lower price, Ms Jobe has elected to challenge the validity of the restraint. That is her right.  But it weighs on the balance of convenience.

[40]     Likewise, the failure to seek a third party buyer weighs on the balance of convenience.  If one were found, and rejected by Mr Lenssen, then that would be a factor in Ms Jobe’s favour.  It cannot be presumed. As it is, the failure to seek a third party  buyer  so  as  to  release  herself  from  the  restraint  weighs  heavily  against Ms Jobe.

[41]     At this point, I have the view that Judge Spear erred in refusing Carpet Barn an interim injunction.   But I must stand back and consider the overall interests of justice.

[42]     Shorn of the entangled fleece of opposing arguments on the same evidence, I

find the lamb to look like this:

(a)      Ms Jobe   agreed   to   be   bound   by   a   shareholders’  restraint   of competition and solicitation.  She did so in the context of accepting a commercially advantageous offer on which she received independent legal advice.

(b)The offer she accepted has resulted in a present gain to her (depending on what price she gets for the shares) of around $700,000.

(c)      Ms Jobe   now   argues   that   she   should   receive   the   commercial advantage without being bound by the restraint.   Carpet Barn’s argument that the restraint is reasonable in all the circumstances has apparent merit.

(d)If an interim injunction is granted holding Ms Jobe to the restraint pending resolution of the substantive dispute then, I infer, she will be unable to continue in her present employment.

(e)      Ms Jobe’s employment experience is centred on selling carpet.  If she is restrained from selling carpet anywhere in New Zealand, then she will have to seek employment in an unfamiliar field.

(f)      Ms Jobe could end the restraint (or its prospective application) by selling her shares.

(g)Ms Jobe’s  position  as  a  business  manager  for  Flooring  Design  in Hamilton has obvious potential (which has probably been realised to an  extent  already) to  damage the  goodwill  of Carpet  Barn in  the Hamilton market.

(h)Mr Lenssen,   as   controller  of   Carpet   Barn,   has   no   interest   in facilitating the sale of Ms Jobe’s shares since sale will result in the release of the restraint.

(i)The governing principle is that any grant of interim relief to require compliance with contractual non-competition/non-solicitation covenants should be to the minimum extent necessary.

[43]     I have decided that the overall interests of justice require me to allow the appeal.  However, I will grant relief on terms that will encourage as short a period of interim restraint as possible; either because the shares are sold or because the substantive proceeding is determined with celerity.

Decision

[44]     The appeal is allowed.  I make the following interim interlocutory orders: (a)           Ms Jobe is restrained from:

(i)intentionally soliciting or diverting any clients, customers or employees of Carpet Barn; and

(ii)being concerned with any business that is in competition with Carpet Barn in a capacity that does, or might reasonably be expected to, assist such competition.

(b)The period of this restraint shall expire at 2:15 pm on 2 February 2018 unless  Carpet  Barn  has  previously  filed  an  application  for  its extension, in which case the restraint will continue until further order of the Court.

(c)      A condition for any extension of the period of this restraint is that Carpet Barn must satisfy the Court that it has, prior to its application, taken all reasonable steps to advance its substantive proceeding.

[45]     Leave is reserved to Ms Jobe to make application, on five days’ notice, to

rescind or vary the restraint on the grounds: (a)          of economic hardship; and/or

(b)of the unreasonable declining by the majority shareholders of a sale of her shares to a third party; and/or

(c)       of unreasonable delay by Carpet Barn in advancing its substantive proceeding.

Costs

[46]     It is usual for costs to follow the event.  In this case, I am minded to reserve costs.  I will receive submissions to the contrary until 15 November 2017.  If none

are received, costs will be reserved without further order.

Brewer J