TMA Group of Companies Limited v Coleman HC Auckland CIV-2011-404-3208

[2011] NZHC 725

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-3208

BETWEEN  TMA GROUP OF COMPANIES LIMITED First Plaintiff

ANDPREMIER BUSINESS FORMS NZ LIMITED

Second Plaintiff

ANDKEITH ANDREW COLEMAN AND BRADLEY TRUSTEE COMPANY LIMITED

First Defendant

ANDLORNA MARY COLEMAN, DANIEL ANDREW COLEMAN AND PRINCE & PARTNERS TRUSTEE COMPANY LIMITED

Second Defendant

ANDKEITH ANDREW COLEMAN Third Defendant

ANDLORNA MARY COLEMAN Fourth Defendant

Hearing:         20 June 2011

Appearances: D G Hurd and S Stokes for the Plaintiffs

D S McGill and U V Schall for the Defendants

Judgment:      22 June 2011 at 1:03 PM

RESERVED JUDGMENT OF PETERS J

This judgment was delivered by me on 22 June 2011 at 1:30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ........................................

TMA GROUP OF COMPANIES LTD AND ANOR V COLEMAN AND BRADLEY TRUSTEE COMPANY LIMITED AND ORS HC AK CIV-2011-404-3208 22 June 2011

[1]      The first plaintiff (“TMA”) seeks an interim injunction to restrain Daniel Coleman, one of the second defendants (“Daniel”), from (allegedly) breaching restraint of trade provisions in an agreement for sale and purchase. The defendants oppose the application.

[2]      The issues which I have to determine are:

(a)      whether there is a serious issue to be tried that Daniel is bound by the restraint of trade provision in clause 11.1 of the agreement and, if so, whether he is in breach of them;

(b)      where the balance of convenience lies between the parties. [3]           The relief which TMA seeks in its application is as follows:

...   an   interim   injunction   restraining   the   second-named   second   defendant, Daniel Coleman, until the substantive determination of the plaintiffs’ claims herein or until 4 October 2012 (whichever comes first) from:

(i)        Serving as an employee of Sato New Zealand Limited (“Sato”) and/or from undertaking any other role for or in relation to Sato equivalent, or akin to, that of an employee;

(ii)      By himself, his servants, agents or otherwise howsoever from in any other way conducting any of the Restricted Activities (as defined in clause 11.2 of the Agreement) referred to below within Australia, New Zealand, China or the Philippines ...

[4]      The defendants oppose the application.   In their notice of opposition, they dispute that there is a serious issue to be tried and also contend that the balance of convenience lies with the defendants.

Background

[5]      TMA is a publicly listed company on the Australian stock exchange.   It produces  a  range  of  printed  products  including  tickets,  tags  and  labels.    TMA operates throughout Asia and the South Pacific.   TMA established a presence in New Zealand in 2005 by incorporating TMA New Zealand Limited (“TMA NZ”).

[6]      The third and fourth defendants, Mr Coleman and Mrs Coleman, commenced business in the printing industry in 1983.   They were married at the time but subsequently separated.  Daniel is their son.

Agreement for sale and purchase

[7]      By  an  agreement  dated  23 August  2010  (“agreement”),  TMA agreed  to acquire from the first and second defendants all of the shares in Premier Business Forms   NZ   Limited   (“Premier”)   and   Solstice Marketing   Services   Limited (“Solstice”).

[8]      The first and second defendants are the trustees of the K A Coleman Trust and the Lorniel Trust respectively.   The first and second defendants each owned

50 per cent of the shares of each of Premier and Solstice.   The first and second

defendants are the “Sellers” for the purposes of the agreement.

[9]      TMA  agreed  to  pay  $5,045,000  for  the  shares,  of  which  more  than

$2,700,000 was in respect of goodwill.  TMA paid $3,500,000 of the purchase price on 4 October 2010, being the completion date.  The balance of the purchase price is due in two further instalments, payable on 4 October 2011 and 4 October 2012.

[10]     The  defendants’  evidence  is  that,  although  the  sale  of  the  shares  was negotiated over a period of time, Daniel was not aware of the proposed sale until two days before the agreement was executed.  The defendants also state that Daniel has not received any part  of the purchase price,  directly or indirectly.    Daniel  is  a beneficiary of both trusts and, while some benefit might flow to him in the future, equally it might not.

[11]     Clause 15 of the agreement contains a dispute resolution provision.   For reasons it is unnecessary to address, the plaintiffs do not wish to proceed in accordance with that provision.   Given that, the defendants are willing to proceed without seeking to insist on that clause being invoked.

Daniel

[12]     Premier employed Daniel in July 2001.  Daniel worked his way up through the ranks and in early 2010 he became Premier’s Operations Manager.   Daniel continued in that role after TMA’s acquisition.

[13]     As Operations Manager, Daniel was on the manufacturing, rather than the sales, side of the business.  Mr Muirhead, who became general manager of Premier after the acquisition, states in his affidavit that Daniel was responsible for all types of product manufacture including tickets, labels, tags and business forms.   Daniel’s responsibilities included overseeing production and production planning, managing costing and estimating, and managing order processing.  Prior to TMA’s acquisition, Daniel  had  responsibility for managing contracts  with  material  suppliers  but  he ceased to have that responsibility after the acquisition.   Daniel did not deal with Premier’s customers or enter into contractual arrangements with them.

[14]   The employment agreement between Premier and Daniel (“employment agreement”) is in evidence.   That agreement contains its own restraint of trade/confidentiality provisions.  TMA does not seek to rely on these.  In summary, the relevant provisions in the employment agreement are that Daniel agrees to hold all confidential information in confidence following the termination of his employment.   Confidential information is defined to include information about Premier’s clients, customers, suppliers, financial affairs, business methods and management systems.  Daniel also agrees in the employment agreement that, for six months following termination, he will not solicit customers with whom he has dealt in the six months prior to termination of employment and nor will he solicit other employees.

Resignation

[15]     On 11 March 2011, Daniel resigned from Premier to take up a position at Sato New Zealand Limited (“Sato”).  Sato is itself a substantial company.  Premier’s evidence is that Sato competes with Premier in the production of particular products, including labels, tags and ticketing.   I should say at this point that the products in

which Sato and Premier compete is likely to be an issue at trial, given the relevant provisions of the agreement.

[16]     On resigning, Daniel advised Mr Muirhead that he would be employed in a sales role at Sato.   Mr Muirhead’s evidence is that he and Daniel discussed the restraint provisions in the employment agreement but not the restraint provisions in the agreement, as Mr Muirhead was unaware of them.  Mr Muirhead then spoke to Mr Anthony Karam, TMA’s managing director, and a decision was made that Daniel should not work out his notice but should be put on “gardening leave”, which he then was.  Mr Karam was aware of the restraint provisions in the agreement but did not inform Mr Muirhead of them.   Daniel’s evidence is that, at this time at least, Mr Muirhead gave him to understand he went to Sato with Premier’s best wishes.

[17]     On or about 7 April 2011 it came to TMA’s attention that the managing

director of Sato, Mr Ryan, had contacted Ticketek by email as follows:

I am pleased to announce that Daniel Coleman, formerly of Premiere [sic] Business Forms is joining SATO New Zealand.   He will join us in a specialist business development role.  This is part of our commitment to the ticketing market in New Zealand.

Once he has started, it would be good to engage again with Ticketek to see if there are areas we can work together on supply - perhaps even as a Plan B option to start with?

[18]     Mr Muirhead telephoned Daniel who denied all knowledge of the email.  Mr Ryan of Sato has sworn in an affidavit that he sent the email to Ticketek without any reference  to  Daniel.    Again,  Mr  Muirhead  did  not  raise  the  restraint  of  trade provisions in the agreement, because he was still unaware of them.

[19]     Daniel commenced work for Sato in mid April 2011.

[20]     TMA instructed its solicitors after receiving a copy of Mr Ryan’s email to Ticketek.  That led to correspondence between the parties’ legal advisers and then to TMA issuing  proceedings  and  making  an  application  for  interim  injunction  on

1 June 2011.

[21]     TMA’s case is that, by the very act of taking up employment with Sato, Daniel has breached the restraint of trade provisions in the agreement.  They are also concerned at the prospect of Sato instructing Daniel to solicit Premier’s customers, such as Ticketek, and of Daniel using the knowledge he has of the Premier business to advance Sato’s business, at Premier’s expense.

[22]     Mr Karam’s evidence (and Mr Muirhead’s evidence is similar) is that Sato might use Daniel’s knowledge of Premier’s costing and processes to help Sato produce products at more competitive prices.  Mr Karam’s evidence is that Daniel knows what margins Premier applies to its products and so could advise Sato to apply lower margins, enabling it to offer its products to the market at a lower price.

[23]     Mr Karam also expresses concern that Daniel would be able to give Sato the manufacturing capability to produce a greater range of products such as consignment notes and purchase order, receipt and invoice books.  Mr Karam’s evidence is that Sato already has the equipment to produce these products and now, with Daniel as an employee, Sato will have the knowledge and expertise to take advantage of that capability.

[24]     The defendants’ response is that TMA’s concerns are exaggerated.   They point out that Daniel had no direct contact with customers.   Daniel has sworn an affidavit to the effect that he has no intention of disclosing the names of Premier’s customers, or any of the information to which TMA refers.  Daniel’s evidence is that he has not had any contact whatsoever with any Premier customer.   Mr Ryan’s evidence on these points is that Sato is pleased to have employed Daniel but that Sato has been successful to date, has considerable expertise in its business already and particularly in the manufacturing process, and that Daniel’s future is in areas where Sato and Premier do not compete.  The defendants also point out that Premier itself employed Mr Muirhead as its sales and marketing manager until 2005, at which  time  TMA “headhunted”  him  to  manage  TMA NZ.    Premier’s  business continued, notwithstanding the loss of Mr Muirhead.  Given that, the loss of Daniel to Sato is not likely to be significant.

Serious issue to be tried

[25]     TMA’s case relies on clause 11 of the agreement.

Clause 11

[26]     Clause 11.1 of the agreement reads as follows:

In consideration for the Purchaser entering into this Agreement and the promises of the Purchaser in this Agreement, each of the Sellers agrees and undertakes that it will not:

(a)       directly or indirectly;

(b)       either alone, by itself or jointly with or on behalf of any other person, including with any Associates, joint venture, corporation or trust;

(c)       through an agent, independent contractor or employee; or

(d)       on any account or pretext or by any means whatsoever;

conduct  any  of  the  Restricted  Activities  within  the  Restricted  Area  for  the

Restriction Period.

[27]     Daniel is a “Seller”.   Accordingly,  on the face of it, he has agreed  and undertaken in the agreement that he will not conduct any of the Restricted Activities within the Restriction Area for the Restriction Period.  I do not refer further to the Restriction Area or the Restriction Period as it is not necessary to do so for the purposes of resolving this matter.

[28]     Clause 11.2 of the agreement is relevant as it sets out what are the Restricted

Activities.  Clause 11.2 reads as follows:

The Restricted Activities are:

(a)       engaging in, participating in or being concerned or interested directly or indirectly in any business or person that supplies products or services which are the same as or which compete with the Business or any material part of it, whether as a member, shareholder, optionholder, unitholder, director, adviser,  financier,  contractor,  manager,  employee,  Associate,  proprietor,

trustee, beneficiary, servant, consultant, agent, principal, partner or in any other capacity whatsoever;

(b)       canvassing, soliciting, inducing or encouraging any employee, contractor, supplier or customer of the Business to leave the employment of or to terminate their engagement, contract or dealings with the Business;

(c)       engaging or employing any person who at any time during the 12 months immediately preceding the Completion Date was employed or engaged in the Business; and

(d)       interfering with the relationship between the Business and its employees, contractors, suppliers or customers.

[29]     Each of 11.2(a) to (d) refers to the “Business”.  “Business” is defined in the

agreement as follows:

“Business” means the business conducted by the Group of manufacturing business forms, stationery, car park tickets and associated products and in relation to Solstice the supply of paper to Premier.

[30]     In turn, “Group” is defined to mean:

the Companies and any subsidiary of a Company, including the Subsidiary.

[31]     The Companies are Premier and Solstice.

[32]     TMA relies principally upon clause 11.2(a).  TMA’s submission is that Daniel is engaging as an employee in a business, Sato, that supplies products or services which are the same as or which compete with the Business or a material part of it.

[33]     TMA also  submits  that,  whatever  Daniel  intends,  the  implication  of  Mr Ryan’s email is that Sato intends to employ Daniel in a way which will put Daniel in breach of clauses 11.2(b) and (d).  Counsel for TMA acknowledged, however, that there is no evidence of an existing breach of those two clauses and I say no more about them.

[34]     The defendants’ case is that clause 11.2 does not apply to Daniel.  Although Daniel is a “Seller”, the defendants say it was never intended that he would be bound by clause 11.

[35]     In this respect the defendants rely on clause 17.16 of the agreement, which reads as follows:

Each Independent Trustee enters into this Agreement and the transactions contemplated by it only in its capacity as a trustee of the KA Coleman Trust or the Lorniel Trust (as the case may be).  So long as each Independent Trustee is acting for a proper purpose and has the ability, at law, to be indemnified from the assets of its respective trust, its liability under this Agreement is at all times limited to the assets of the relevant Trust.

[36]     Daniel is an  Independent Trustee.   The defendants contend that the first sentence of clause 17.16 makes it clear that Daniel personally is not to be bound by clause 11.

[37]     There was not full argument on this point at the hearing and it is not capable of resolution on this application.  My immediate impression, however, is that clause

17.16 does not render clause 11 ineffective as against an Independent Trustee but that it is intended to limit an Independent Trustee’s financial liability if, for instance, the purchaser were to make a claim under any warranty.

[38]     The defendants also filed extensive evidence as to how it was that clause 11 came to be included in the agreement.   I do not, however, put any weight on that evidence.  The defendants might wish to pursue a claim at trial that the agreement requires rectification but that matter cannot be determined on an application of this nature.

[39]     Counsel for the defendants also submitted that clause 11 was wider than necessary to protect any proprietary interest which TMA might have and he contrasted the provisions in the agreement with those in the employment agreement. Counsel submitted that the starting point with any restraint of trade provision is that prima facie it is unlawful and the court will not enforce it unless the provision is required to protect a proprietary interest.

[40]     Again, I think that is a point which will have to be argued at trial.  TMA has paid a substantial sum for goodwill and, for the purposes of determining this matter, the starting point must be that the clause applies at its widest.

[41]     Returning to the words of clause 11.2(a), Daniel falls within the definition of “Seller” in the agreement and he is an employee of Sato.  However, the issue which arises  (and  which  was  not  addressed  in  detail  in  argument)  is  whether,  as  an employee, Daniel is engaging in “any business that supplies products or services which are the same as or which compete with the Business or any material part of it”. The definition of Business in the agreement does not encompass the full range of Premier’s activities but is limited to the manufacture of “business forms, stationery, car park tickets and associated products”.   There is no evidence that Sato manufactures business forms or stationery.   There is evidence that Sato produces tickets.   It may be that this includes car park tickets, but at present there is no evidence on that point.  What is meant by “associated products” in the definition of Business is unclear.  There may be further evidence on the point and no doubt there will be an argument at trial as to the breadth of the definition.  I accept that there is a serious issue to be tried because of this, but only just, given the evidence.

Balance of convenience

[42]     The first issue I consider under this heading is the adequacy of damages available to both parties.

[43]     I have referred above to the consequences which TMA submitted might arise if Daniel continues with employment at Sato.  TMA submitted that it is inevitable that damage will be caused as a result of breach, but that damage is likely to be difficult to detect and quantify.  Also, TMA submitted that damages would not be an adequate remedy. TMA has paid a very substantial sum for the shares in Premier and Solstice and it must be entitled to enforce the provisions of the agreement to protect its investment.

[44]     Counsel for the defendants acknowledged that there is some force in this submission.    However,  as  I  have  said,  counsel  also  submitted  that  TMA  has

exaggerated the damage which Daniel is capable of inflicting.   In short, the defendants’ case is that Daniel’s employment at Sato could not and would not affect Premier’s business.

[45]     It is impossible to determine at this stage whether the defendants’ submission is correct.  Clearly, however, any damage which TMA suffers will be more difficult to detect and to quantify than any corresponding loss to Daniel.

[46]     Secondly, Daniel has only recently commenced employment at Sato.  He is not likely to have become entrenched in Sato’s business.  That said, Daniel has his own financial commitments to meet.  Mr Ryan does not say in his affidavit whether or not Sato will keep Daniel on if he cannot undertake any employment activities for them pending resolution of this matter.   The defendants also emphasise that TMA took no point about the restraint provisions in the agreement until after Daniel had started at Sato.

[47]     Thirdly, Daniel’s evidence is that he has not divulged and will not divulge any of Premier’s confidential information or the identity of Premier’s customers. Daniel’s evidence is that he has not had any contact with those customers since leaving Premier and nor does intend to have any such conduct.  If Daniel was not aware of the restraint provisions when he resigned, he is well aware of them now and knows that shortly he and others will have to give evidence and be cross-examined on oath as to his conduct since leaving Premier.

[48]     Fourthly, counsel estimate that it will take, at most, three days to determine the substantive issues between the parties.   The court is able to give the parties a three day fixture in the week of 19 September 2011.  Accordingly, the substantive issues are able to be determined promptly.

[49]     Lastly, although I have proceeded on the basis that there is a serious issue to be tried, on the evidence presently before me, I am not satisfied that TMA has a strong case that clause 11.2(a) has been breached.  In my view, that matter and the fact that there will be a prompt resolution of  the matter tip the balance in the defendants’ favour.

Result

[50]     I decline the first plaintiff’s interlocutory application for interim injunction dated 1 June 2011.  Costs are reserved.

[51]     There is to be a three day fixture in this matter commencing in the week of

19 September 2011.  The case is to be called in the Duty Judge’s list at 10:00 am on

Wednesday, 29 June 2011.  Prior to that time:

(a)      The defendants are to have filed and served a statement of defence; any pleading they propose as to rectification of the agreement, if that claim is to be pursued; and any pleading necessary to challenge the legality of, or to modify, clause 11;

(b)By  4:00  pm  on  Monday,  27  June  2011,  counsel  are  to  file  a memorandum or memoranda setting out the directions they propose to progress  this  matter  to  trial  in  the  week  of  19  September  2011. Ideally, a consent memorandum will be filed.  Failing that, counsel are to file separate memoranda.

...................................................................

PETERS J

Solicitors/Counsel:

Dawson Harford & Partners, Solicitors, Auckland – Email: [email protected]

Mr D G Hurd, Barrister, Auckland – Email:  [email protected]

Duncan Cotterill, Solicitors, Auckland – Email: [email protected]