Video Ezy International Pty Limited v Red Bond Limited
[2015] NZHC 1636
•14 July 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-412-66 [2015] NZHC 1636
BETWEEN VIDEO EZY INTERNATIONAL PTY
LIMITED First Plaintiff
VIDEO EZY INTERNATIONAL (NZ) LIMITED
Second Plaintiff
AND
RED BOND LIMITED First Defendant
CHRISTOPHER PAUL WHELAN Second Defendant
PAULA LENORE WHELAN Third Defendant
Hearing: 10 July 2015 Appearances:
J K Goodall for Plaintiffs
V M Heward for DefendantsJudgment:
14 July 2015
JUDGMENT OF MANDER J
[1] The plaintiffs, Video Ezy International Pty Ltd (VEI) and Video Ezy International (NZ) Ltd (in liquidation) (VENZ) have filed proceedings against Red Bond Limited (RBL) and its shareholders, Christopher and Paula Whelan (the Whelans). They seek to exercise an option under franchise agreements to purchase RBL’s stores and to enforce a two year restraint of trade provision. As an interlocutory step, they have applied for an interim injunction to enforce the restraint of trade. It is with that application that this judgment is concerned. RBL opposes
the application.
VIDEO EZY INTERNATIONAL PTY LIMITED & ANOR v RED BOND LIMITED & ORS [2015] NZHC
1636 [14 July 2015]
Background
[2] VEI holds the worldwide rights to the Video Ezy franchise. In 1992, it established the franchise in New Zealand by licensing VENZ as the master franchise under a master licence agreement (the master licence).
[3] RBL purchased three Video Ezy stores, in Mosgiel, Kaikorai Valley, and South Dunedin, in 2007. As part of that purchase, RBL entered into three identical franchise agreements with VENZ. These franchise agreements ended on 31
December 2014.
RBL’s franchise agreements with VENZ
[4] In August 2014, VENZ wrote to all its franchisees, including RBL, enclosing a new franchise agreement for execution by those intending to renew their franchise agreements from 1 January 2015. In the absence of RBL giving notice of renewal, VENZ’s solicitors wrote to RBL and the Whelans on 5 December, noting its failure to respond to the invitation from VENZ to enter into new franchise agreements. VENZ advised that it assumed RBL did not wish to continue trading after the termination date. VENZ requested written confirmation from RBL and the Whelans that they would comply with its obligations on, and from, the termination date under the franchise agreements. The letter reminded RBL and the Whelan’s of their two year restraint of trade obligation under the franchise agreements. The relevant clause of the franchise agreements provides:
3.16.1
During the Term of this Agreement the Franchisee and the Shareholders must not, either directly or indirectly, for itself or on behalf of or in conjunction with any other person, partnership or corporation, own, maintain, engage in, support, participate or have any interest in the operation of any other business which directly or indirectly competes with the Franchised Business, any part of the Franchisor’s business or with the franchised business of any of the Franchisor’s franchisees. For a period of two (2) years after the termination of the Franchise, regardless of the cause of termination, the Franchisee and the Shareholders must not, either directly or indirectly, for itself, or on behalf of or in conjunction with any other person, partnership or corporation, offer competing products or services, own, maintain, engage in, support, participate in or have any interest in the operation of any business similar to the Business within the Territory.
[5] It is apparent that for some period VENZ and RBL had been in dispute. On
23 December 2014, emails were exchanged between RBL and VENZ where it appeared all terms of renewal of the franchise agreements were agreed, except in relation to the franchise fee percentage. VENZ wanted 4 per cent, RBL wanted 3 per cent.
[6] Although the formal franchise agreement expired on 31 December 2014, RBL continued to trade at the three stores up until June 2015. It kept using the Video Ezy brand, and kept ordering stock through VENZ. The business effectively continued as before. Mr Whelan’s evidence was that he was expecting the dispute to be resolved, following which written franchise agreements would be executed.
The master licence agreement
[7] During this period, there were also contractual difficulties between VENZ and VEI which were coming to a head. On 3 March 2015, VEI gave notice to VENZ of breach of the master licence, as a result of it being owed some $280,000. On
2 April, VEI gave notice to VENZ of termination of the master licence, effective from 8 April, and, on 15 April, gave notice to VENZ of its exercise of an assignment option under the master licence.
[8] Under the master licence VEI could take an assignment of all VENZ’s rights in the franchise, including rights under franchise agreements entered into between VENZ and franchisees, including RBL. Effectively, this allowed VEI to “step into the shoes” of VENZ for the purpose of those franchise contracts.
[9] On 17 April VEI emailed all Video Ezy franchisees, including RBL, to advise VEI had, with immediate effect, become the holder of the rights of the franchisor, VENZ, under the franchise agreements. All payments would in the future be made only to VEI. On 22 April, VENZ was placed into voluntary liquidation.
[10] A week later, on 29 April, VENZ assigned to VEI by way of deed, all its rights and interests in all franchise agreements arising prior to the date of assignment, with effect from 8 April. The deed made express reference to the provisions of the master licence, which provided for the assignment of the interests
in the franchise agreements from VENZ to VEI. A copy of the deed of assignment was again emailed to all franchisees on 1 May.
The actions of RBL
[11] Around this time, it came to VEI’s attention that RBL was rebranding with a competitor and had commenced trading under that competitor’s brand. This had been without notice to VEI or VENZ.
[12] On 15 June, inquiries were made of RBL regarding the rebranding of its three stores. In the absence of a satisfactory reply, the following day it had its solicitors write to RBL and the Whelans. The letter noted that the franchise agreements prohibited RBL and its shareholders from competing with VEI, either during the duration of the franchise or for a two year period after termination. The letter offered the opportunity to RBL to enter into new franchise agreements with VEI.
[13] On 19 June, RBL’s solicitors disputed that RBL was captured by the
assignment from VENZ to VEI, as its franchise agreements had expired on
31 December 2014. In the absence of any existing franchise agreement between VENZ and RBL at the time of the assignment, it claimed VENZ had no interests at that time capable of being assigned. In order to avoid a contest on the point, VEI arranged for the liquidators of VENZ to execute a further assignment by deed, dated
26 June 2015, framed in broad terms to cover all of VENZ’s rights (including present and future rights of action), title and interests relating to or arising from all franchise agreements, with specific reference to the franchise agreements entered into between RBL and VENZ. A copy of the deed was forwarded to RBL’s solicitors the same day.
[14] In subsequent correspondence between the parties’ solicitors, RBL continued to dispute any obligation not to compete with VEI. This culminated on 26 June with VEI and VENZ executing a notice of termination of franchise agreements and a notice of exercise of an option to purchase RBL’s businesses, said to be provided by the franchise agreements. The notice required immediate delivery of possession of the stores to VEI and compliance with the restraint of trade clause.
Relevant principles
[15] There is no dispute regarding the principles that apply. The traditional test for an interim injunction is that the applicant must establish there is a serious question to be tried, and that the balance of convenience favours the granting of the relief sought. Those threshold questions are not exhaustive and are subject to the overarching consideration of where the overall justice of the case lies. In Klissers
Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, the Court of Appeal observed:1
… in every case the Judge has finally to stand back and ask himself [where the overall justice lies]. At this final stage, if it is found the balance of convenience is 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.
[16] Another formulation of this overriding consideration is “the balance of the risk of doing injustice”.2 Wild J, in adopting that test, set out a four step approach to determine the “balancing of the injustice” that could arise, either as a result of an interim injunction being refused to a party whose case ultimately succeeded, as compared to the injustice to a party that may result if an injunction is granted yet subsequently discharged after trial.
[17] Firstly, the Court needs to consider whether damages would adequately compensate a plaintiff denied an interim injunction who is ultimately successful at trial, in comparison to the loss incurred by a defendant against whom an interim injunction is granted but subsequently vindicated at trial.
[18] Secondly, the status quo is of considerable importance. The difficulty, however, is to identify what the status quo is in the particular circumstances of the individual case. The status quo has sometimes been referred to as “the last peaceable
state between the parties”.3 A useful description of the approach to this
1 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
2 Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV-2007-405-1756,
30 July 2008 at [4], citing Cayne v Global Natural Resources Plc [1984] 1 All ER 225 (CA) at
237.
3 R & M Wright Ltd v Ellerslie Gateway Motels Ltd HC Wellington CP188/90, 11 July 1990 at 8.
consideration was provided by Lord Diplock in American Cyanamid Co v Ethicon
Ltd:4
Where other factors appear to be evenly balanced it is a counsel of prudence to take such measures as are calculated to preserve the status quo. If the defendant is enjoined temporarily from doing something that he has not done before, the only effect of the interlocutory injunction in the event of his succeeding at the trial, is to postpone the date at which he is able to embark upon a course of action which he has not previously found it necessary to undertake; whereas to interrupt him in the conduct of an established enterprise would cause much greater inconvenience to him, since he would have to start again to establish it in the event of his succeeding at the trial.
[19] A third consideration is the relative strength of each party’s case. There is, however, an inherent limit to the examination of the merits of the argument based on the affidavit evidence supplied and the interlocutory nature of the application. In that regard, Lord Diplock further observed:5
… and if the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party’s case as revealed by the affidavit evidence adduced on the hearing of the application. This, however, should be done only where it is apparent upon the facts disclosed by evidence as to which there is no credible dispute that the strength of one party’s case is disproportionate to that of the other party. The Court is not justified in embarking upon anything resembling a trial of the action upon conflicting affidavits in order to evaluate the strength of either party’s case.
[20] Finally, the question of where the overall justice lies, to which I have earlier referred is to be applied as an overarching consideration. Other relevant matters include the conduct of the parties, the wider public interest, and whether the interim relief sought will have the effect of a final judgment.
[21] The mandatory requirement providing an undertaking as to damages has been provided by VEI and its parent company, Video Ezy Australasia Pty Ltd, although RBL has raised questions regarding the sufficiency of the information provided to
gauge the worth of the undertaking.
4 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 408.
5 At 409.
A serious issue to be tried
RBL and the Whelans’ arguments
[22] RBL submitted there is no serious question to be tried between the parties, however, I doubt that is a sustainable submission. RBL alleged VENZ’s reliance on the restraint of trade clause was flawed, and that VENZ had no existing right to restrain RBL or the Whelans from competing against Video Ezy at the time such rights were purported to be assigned to VEI by VENZ.
[23] Firstly, RBL submitted the covenants relied upon by VEI were contained in franchise agreements between itself and VENZ. The restraint of trade clause expressly applied only during the term or after the termination of the franchise agreements. RBL submitted the restraint of trade clause only had application upon “termination” and was of no effect on the expiration of the agreement, which is what occurred in the present case.
[24] RBL further submitted that even if the restraint was enforceable on expiration, because VENZ lost the sole and exclusive rights to the intellectual property of Video Ezy in New Zealand to VEI on 8 April 2015, when VEI terminated the master licence, any right or interest that VENZ had as franchisor to enforce the restraint had come to an end. It followed therefore that VENZ had no extant right or interest under the relevant clause of the franchise agreements to assign to VEI at the time it executed the first deed of assignment on 29 April 2015.
[25] Furthermore, it submitted no cause of action had accrued to VENZ by 8 April when the master licence was terminated, because there was no present rights of action under the franchise agreements to assign to VEI, and therefore the second deed of assignment on 26 June was also ineffective. Any cause of action the plaintiffs may have had against RBL for breach of the restraint of trade clause had not yet triggered and only accrued on 1 June when RBL began trading its three stores under the competitor’s brand.
[26] RBL and the Whelans’ position was that, in the absence of any agreement between RBL and VENZ after 31 December 2014, they were free to enter into a new
arrangement with a competitor, without notice to VEI. There was no extant option available to VEI to exercise to purchase RBL’s three stores as alleged.
[27] RBL also sought to argue that even if VENZ had any rights or interest under the franchise agreements to assign to VEI, neither deed of assignment executed by VENZ and VEI were effective. Arguments in that regard included inadequacies in documentation identifying the franchise agreements said to have been assigned and failures to effectively serve the deeds of assignment on the three defendants.
[28] RBL and the Whelans disputed the franchise agreements had been extended or renewed beyond the expiry date of 31 December 2014. However, it is not necessary to consider the merits of these arguments further, because VENZ and VEI expressly disavowed any reliance on this legal analysis for the purpose of their application.
VEI and VENZ’s arguments
[29] Originally, in its written submission, VEI and VENZ argued that, although the franchise agreements expired on 31 December 2014, by continuing to trade as Video Ezy stores in conformity with the franchise contracts, RBL had extended the existing franchise agreements on an open-ended basis subject to termination by either party at its will. Alternatively, new franchise agreements had been entered into as from 31 December 2014 on identical terms, subject to either party being able to terminate on notice. In effect, that the franchise agreements continued after the stipulated expiry date of 31 December. As mentioned, however, that analysis was expressly not relied upon for the purposes of the present application.
[30] VEI and VENZ relied upon the restraint of trade contained in the original franchise agreements, which it submitted bound RBL and the Whelans personally. They argued the reference in the restraint of trade clause to the term “termination” includes the expiration of the franchise agreements, and that no other position is reasonably tenable on the construction of the agreement. They submitted it would be “nonsensical” from a business perspective to require a two year restraint of trade on an early termination but for it not to apply upon expiry of the franchise agreement. It
described RBL and the Whelan opposition to be principally based on a raft of technical arguments which had no merit.
[31] RBL sought to argue the restraint of trade clause, clause 3.16.1, did not extend to include the situation where the franchise agreement has expired. Reference was made to expressions used in the clause prohibiting competitive conduct either “during the term” of the agreement or after the “termination” of the franchise agreements, and not on “expiration”. This was to be contrasted with other clauses in the franchise agreement, in particular clause 6.3 which sets out the “rights and duties of the parties upon expiration”. That clause expressly referred to “upon termination and expiration” of the agreement. It followed, submitted RBL and the Whelans, that “termination” and “expiration” were different terms, and the latter did not encompass the former. While this is an available argument, in my view, it does not compare strongly with the alternative submission available to VEI and VENZ.
[32] It is inappropriate to come to any absolute position on the merits of the construction of the contract, however, in my view, they strongly favour VEI’s and VENZ’s position that the restraints of trade operate upon expiry as they do on any earlier termination. Clause 3.16.1 refers expressly to “termination of this franchise regardless of the cause of termination”. This restraint of trade clause directly links with the preceding clause 3.16.2, which provides that the restraint survives termination of this agreement by the effluxion of time or otherwise. The reference to “the effluxion of time” would be redundant if the restraint did not apply upon expiry.
[33] The expiry clause setting out the rights and duties of parties upon expiration (clause 6.3) is situated in Part VI of the franchise agreement, which itself is entitled “Termination and Defaults”. Clause 6.3 treats both termination and expiration as a termination. It reads:
Upon termination or expiration of this Agreement for any reason, all rights of the Franchisee under this Agreement will immediately terminate, but the Franchisee has the following duties, which survive termination of this Agreement…
[34] There is similar treatment of the term “expiration” as a form of termination throughout the franchise agreement. An example provided was clause 6.2.1 which
referred to “such termination caused through the effluxion of time or otherwise”; and clause 6.4.1 which provided “upon the termination of this Agreement whether by the effluxion of time or otherwise”.
[35] Finally, it was submitted, and I accept, that clause 6.3, which applies on expiration, envisages that the franchisee will not continue to trade the business due to the restraint. It requires all telephone numbers and business records to be handed over to the franchisor, with no copies being retained by the franchisee (clause 6.3(f) and (g)).
[36] I accept that given the purpose of the restraint is to protect the franchisor at the end of the relationship, there is no discernible reason why it would not apply upon the effluxion of time; that is upon the expiry of the franchise agreement, just as it would upon an earlier termination.
[37] I also do not find RBL and the Whelans’ argument relating to the efficacy of the assignment of VENZ’s rights under franchise agreements in furtherance of the process provided by the master licence to be convincing. The master licence clearly provides that upon termination of the master licence, at VEI’s election, the rights and interests of VENZ are available to be assigned to VEI. The undisputed evidence is that VEI has taken the appropriate steps to have those interests and rights assigned to it.
[38] RBL and the Whelans attempted to argue that no cause of action had accrued at the time of the assignment because it was not until 1 June at the earliest that it commenced trading under the competitor’s brand, and therefore potentially in breach of the restraint of trade clause. In my view, however, this is something of red herring. The point is that VEI, by that time, as a result of the earlier assignment of VENZ’s interests and rights under the franchise agreements had obtained the right to enforce the restraint clause and was free to do so in the same manner that would have otherwise have been available to VENZ.
[39] In regard to the technical arrangements made by RBL and the Whelans regarding the accuracy of particulars included in documentation and service
requirements, I have not found those arguments to be convincing. This is particularly so in comparison to the strength of VEI and VENZ’s available argument on the substantive legal dispute between the parties.
[40] In respect of the balance of the case required to be established by VEI and VENZ to enforce the restraints of trade, the formal legal position is that such restraints are prima facie void in the absence of proof they are reasonable. I accept that in seeking the enforcement of the restraints of trade the Video Ezy companies have a legitimate interest, which is capable of, and in need of protection. Video Ezy has been operating in New Zealand for over two decades and has developed a substantial amount of goodwill, having invested many millions of dollars on marketing and advertising. The period of the restraint sought to be enforced is limited, as is its geographical application.
[41] I also acknowledge that the market is tight, and that it is unlikely that VEI could realistically enter the market while RBL remains trading, either in its own name or under the banner of a competitor. This is evident from RBL having itself earlier purchased a competing store in Mosgiel and then immediately closing it down to preserve its existing business.
The balance of convenience
[42] VEI and VENZ submitted the balance of convenience and the overall justice of the case favours the granting of an interim injunction. They refer to the strength of their case to enforce the restraint of trade clause. Secondly, that RBL and the Whelans were on notice regarding the restraints when written to in December 2014 by its solicitors. It was submitted that Mr Whelan has opportunistically moved to a competitor without advising Video Ezy, knowing the risk and having been formally advised of VEI and VENZ’s position regarding enforcement of the restraint of trade clause.
[43] Until the financial difficulties of VENZ became apparent and it was placed into liquidation, RBL had continued to trade as it previously had. That is as a Video Ezy outlet, utilising the resources and services available to a franchise holder and ordering product through VEI. It was submitted Mr Whelan took the risk of taking
advantage of the situation to move to a competitor and he cannot avoid the consequences of doing so.
[44] VEI and VENZ submitted that in the unique circumstances of the present situation, marked by the transitioning of the Video Ezy franchise agreements from VENZ to VEI pursuant to the terms of the master licence, there is a wider concern that VEI is vulnerable to other franchisees acting in a similar fashion to RBL, and a perception that franchisees can walk away from their restraint obligations without consequence, and simply rebrand. To be added to this concern is the submission that VEI is facing an active competitor in the market which is said to be approaching existing franchise holders, necessitating it to send a cease and desist letter to the competitor in May.
[45] RBL and the Whelans contested the validity of VEI and VENZ’s concerns regarding their actions creating a precedent for other franchisees to ignore the restraint of trade obligation. They submit VEI and VENZ have overstated the consequences of not granting an interim injunction in terms of the wider consequences for Video Ezy in the Dunedin market, and the precedent that may be set for other franchisees. They argued that RBL’s situation was unique, the present dispute arising against the background of an expired franchise agreement, and the unique circumstances of the timing of the assignment of rights under the master licence. The vast majority of franchise agreements are current and would be unaffected by any outcomes from the present litigation. They also observe that the concerns relating to potential actions of other franchisees are speculative, and not based on any direct evidence, but rather the opinion of VEI employees.
[46] RBL and the Whelans submitted that if VEI and VENZ’s claim is ultimately substantiated, damages are capable of providing adequate compensation in the absence of an interim injunction being granted. They submitted this would be limited to the franchise fees that would otherwise have been payable and perhaps some profits had VEI taken over the running of the businesses during the interim period.
[47] RBL and the Whelans submitted that, in comparison, if they are restrained from continuing with their business, the consequences will be severe and irreversible. It was submitted such repercussions could not adequately be compensated, notwithstanding any success at trial. In that regard, RBL observed that it employs some 21 employees who would lose their jobs, and RBL would be in default of its obligations under three leases and a bank loan if the injunction was granted. It submitted it would effectively amount to having VEI’s claim determined against it.
[48] In response, it was submitted that such consequences could be mitigated by VEI undertaking assignment of the three leases and making best efforts to retain as many employees as possible. This was rejected by RBL and the Whelans. They submitted this would effectively result in VEI obtaining possession of the three businesses, and substantially put into effect one of the remedies sought by VEI on the substantive proceeding.
Previous cases
[49] VEI and VENZ placed some emphasis on a number of authorities in support of their argument that the Courts have regularly considered and upheld franchisors’ claims to enforce restraints of trade.6 They submitted the Courts have in the past been robust in upholding restraints in the context of franchise agreements. RBL and the Whelans also made reference to the approach taken by Lang J in Green Acres Franchise Group Ltd v Reube, where injunctive relief was declined in the context of a restraint of trade dispute involving a franchisor.7
[50] In oral submissions, VEI and VENZ emphasised the observations made in P5
Holdings, which involved a restraint of trade provision for a two year period.8 While a party cannot be restrained indefinitely from engaging in competitive activity, the
Court in that case emphasised the need to allow a reasonable time to afford a new
6 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428; Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007; P5 Holdings v Elisha’s Well Ltd HC Auckland CIV-2006-404-04067, 27 September 2006; Safety Step (New Zealand) Ltd v Safety Step Auckland Ltd HC Auckland CP466/01, 14 September 2001; Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC).
7 Green Acres Franchise Group Ltd v Reube [2014] NZHC 402.
8 P5 Holdings v Elisha’s Well Ltd HC Auckland CIV-2006-404-4067, 27 September 2006.
franchise holder to come into the locality, develop their business and place it on a viable basis before facing competition from the previous franchise holder. That opportunity to become established as a business should not be denied to the new franchisee. In that regard, reference was also made to the observation in Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd, that if a franchisor could not protect its interests after termination, the franchising industry generally
would collapse.9
[51] It was also emphasised in P5 Holdings that in the circumstances of that case the defendant should be prevented from “simply appropriating the plaintiff’s good will, effectively appropriating its system, products and machinery, and allowing them to continue to operate in the same manner they had previously operated with a
simple name change”.10
[52] It was submitted on behalf of VEI and VENZ that similar considerations applied in the present case. An analogy was drawn with the observations of Randerson J in Safety Step (NZ) Ltd, where the defendants had issued notices of termination on legal advice and were well aware of their restraint of trade and confidentiality obligations, and the potential likely consequences for them in taking
the step they did.11 It was submitted that RBL and the Whelans are similarly placed,
having been put on notice of their obligations in respect of the restraint of trade clause.
[53] Finally, reliance was placed on the judgment of Winkelmann J in Health Club Brands Ltd, where the Court granted an interim injunction to enforce a non- competition restraint against three former franchisees who had rebranded their gyms.12 While the Court recognised that an injunction could have “a catastrophic effect on the defendants’ businesses”, the strength of the franchisors case justified the injunction. It was considered the restraints in that case were reasonable because they
were designed to protect the franchisor’s legitimate interest in the good will that had
9 Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 (HC)
at [275].
10 P5 Holdings v Elisha’s Well Ltd HC Auckland CIV-2006-404-4067, 27 September 2006 at [70].
11 Safety Step (NZ) Ltd v Safety Step Auckland Ltd HC Auckland CP466-01, 14 September 2001 at
[74].
12 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428.
been developed over a number of years, and to ensure the transfer of that good will to an incoming franchisee.
[54] Inevitably, each case must turn on its own facts and circumstances, and while I have had regard to a number of the principles and considerations discussed in those cases, the present application requires to be determined on the basis of its own individual circumstances and those of the parties involved.
Undertaking as to damages
[55] A concern was raised by RBL regarding the adequacy of the undertaking as to damages provided by VEI and its parent company, Video Ezy Australasia Pty Ltd. This centred on the fact that both were non-resident Australia companies, and potential enforcement difficulties relating to whether there would be sufficient assets within New Zealand to discharge the obligation. Evidence, however, has been filed of the sound financial position of the two companies and, in particular, that VEI is generating approximately $580,000 per annum in franchise fees in New Zealand, against which an attachment order could be made if necessary.
Decision
[56] The relative merits of each party’s case, at least on a preliminary assessment based on the limited inquiry available in the context of the interlocutory application, in my view, points in favour of allowing the application for interim relief. However, there is also a need in the circumstances to focus on identifying the status quo and minimising any potential injustice that may otherwise arise from granting interim relief.
[57] VEI and VENZ submitted that Mr Whelan has overstated the consequences for him, and I heard competing submissions regarding representations said to have been made by Mr Whelan about whether he could extract himself without difficulty from leases, and the income available to him to meet debt. In any case, it was submitted on behalf of VEI and VENZ that recent authorities indicate that financial
consequences ought not prevent granting injunctive relief if the applicant has a strong case available to it.13
[58] While VEI and VENZ have disputed the extent of the financial impact on RBL and the Whelans from being forced to stop trading, it is an important consideration that I am obliged to take into account. Mr Whelan’s evidence was that there would be substantial financial repercussions for him if he had to close the businesses.
[59] I am concerned that requiring RBL and the Whelans to desist from trading could create very serious difficulties for them. Should they ultimately succeed at trial, these may prove irreversible. RBL and the Whelans considered they were within their rights to enter into a new arrangement with a competitor, and that they were no longer bound by the franchise agreements with Video Ezy. VEI and VENZ have cast doubt over whether Mr Whelan has acted appropriately, and I accept there are some grounds upon which to base that submission. However, it is very difficult to arrive at any concluded position, given the evidential limitations of the present application. It is not open to me on the affidavit evidence alone to draw any sound inferences as to Mr Whelans motivations at that time.
[60] I acknowledge, however, that VEI sought to resolve or, at least, mitigate the present impasse by providing RBL and the Whelans the opportunity, last month, to rebrand to Video Ezy and enter into new franchise agreements. The Whelans did not consider they were obliged to do so, and refused.
[61] RBL and the Whelans sought to emphasise that in each of the suburbs where the stores are located and across the wider area there is only a very limited market for such a business. Reference was made to only one other store in the greater locality encompassing the areas of the three stores. It followed therefore that VEI’s position would not be imperilled by allowing RBL to continue to trade in the interim, as the store would revert back to VEI without any encroachment into this market if it was successful at trial. However, as submitted on behalf of VEI, the fact that it
presently enjoys that level of market share, akin almost to a monopoly, highlights the
13 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428.
importance, or seriousness, of RBL’s actions in terms of the value of the franchises to VEI.
[62] In my view, an important consideration is the status quo and the need to return the parties to the “last peaceable state”, or at least relatively peaceable state. RBL submitted that would be the current position, whereby it would continue to trade under the competitor’s brand.
[63] There was an absence of evidence regarding the negative consequences to RBL and the Whelans from requiring them to return to trading as Video Ezy. Mr Whelan’s evidence on this point is vague. I am unsure as to the nature and extent he has committed himself to the new brand. No agreement has been sighted and the contractual consequences of requiring him to give up the new brand are not clear. Apart from a reference to acquiring greater sales as a result of trading under the competitor’s brand, and not having to pay the same level of fees or costs by remaining with Video Ezy, no other disadvantages were identified. There will obviously be the cost of having to change signage and labelling should it be a condition of RBL continuing to trade that it does so ostensibly as Video Ezy stores.
[64] In comparison, only until very recently was RBL trading as a Video Ezy franchisee. Notwithstanding the expiry of the franchise agreements at the end of December 2014, the company continued to conduct its business and trade as normal. Indeed, documentary evidence suggests, apart from the dispute about the franchise fee (3 or 4 per cent), Mr Whelan intended to remain with VEI. In those circumstances, it seems apparent the status quo, or “last peaceable state” was when the three stores were trading as Video Ezy franchises under that brand.
[65] Weighing all the considerations and competing factors that I have reviewed, I have concluded that VEI and VENZ are entitled to relief on the alternative basis set out in its application. I therefore make an order that pending further order of the Court, the defendants, RBL and the Whelans, are required to:
(a) Rebrand to Video Ezy the stores located at:
(i) 164 Gordon Road, Mosgiel; and
(ii) the corner of Kaikorai Valley Road and Mellor Street, Kaikorai
Valley; and
(iii) 381 Andersons Bay Road, Dunedin; and
(b) Trade the stores pursuant to the terms of the franchise agreements. [66] The parties are likely to need to consult regarding practical arrangements to
put these orders into effect. Such details as deadlines by which the rebranding must be completed and other terms and conditions will need to be addressed. It will also be necessary for RBL and the Whelans to sever their current relationship with VEI’s competitor. I also note that, whatever negotiation is required to put satisfactory interim arrangements in place, there remains an obvious responsibility on RBL and the Whelans to abide by the orders.
[67] I grant leave to VEI and VENZ to seek any further orders or directions as may be considered necessary to give effect to the injunctive relief that has been granted.
Costs
[68] As VEI and VENZ have been successful they are entitled to costs. It may, on the other hand, be more appropriate for any award of costs to follow the outcome of the substantive hearing of this matter. If counsel cannot reach agreement regarding costs, they may file brief memoranda (not more than five pages in length) addressing the issue, which I will determine on the papers.
Solicitors:
ASCO Agmen-Smith & Co, Christchurch
Anderson Lloyd, Christchurch
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