Whites96 Limited v The Wheel Magician Limited
[2023] NZHC 3046
•31 October 2023
IN THE HIGH COURT OF NEW ZEALAND WHANGANUI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGANUI ROHE
CIV-2023-483-013
[2023] NZHC 3046
BETWEEN WHITES96 LIMITED
First Appellant
AND
JASON TREVOR WHITE and KATRINA LOUISE WHITE
Second Appellants
AND
THE WHEEL MAGICIAN LIMITED
Respondent
Hearing: 2 October 2023 Appearances:
N L K Stone and G I Hannagan for First Appellant L M McKeown and P J M Gerard for Respondent
Judgment:
31 October 2023
JUDGMENT OF GRICE J
Introduction
[1] This is an appeal against an interim injunction prohibiting the former franchisee of a mobile wheel repairs system business from competing with the franchisor.1 The franchise agreement (Franchise Agreement) was between Whites96 Ltd (Whites96) and the directors of The Wheel Magician Ltd (Wheel Magician), Alan and Lisa Thomas. Whites96 is the franchisee and Wheel Magician is the franchisor. I refer to the appellants together as the Whites.
1 The Wheel Magician Ltd v Whites96 Ltd [2023] NZDC 5488.
WHITES96 LIMITED v THE WHEEL MAGICIAN LIMITED [2023] NZHC 3046 [31 October 2023]
[2] Wheel Magician uses the facilities in a mobile van to carry out repairs to customers’ car wheels at the customers’ premises. The Wheel repair systems are set out in a Manual available to members of the franchise. Magician entered the Franchise Agreement with Whites96 on 15 August 2017. The Whites, the second appellants, guaranteed Whites96’s obligations.
Factual background
[3] The Franchise Agreement was signed on 15 August 2017. It included a seven-day cooling off period which neither party invoked, and accordingly, it commenced on 11 September 2017, for a term of five years.
[4] Wheel Magician had provided the Whites of Whites96 with a disclosure document about the proposed Franchise Agreement. The document emphasised that franchisees should do their own due diligence and obtain expert advice before signing. The Whites raised several queries after receiving the document. The Whites’ solicitor provided a certificate of legal advice on 11 August 2017 certifying that he had explained the agreement and was satisfied that the Whites appeared to understand the nature of the Franchise Agreement. Clause 17.3 confirmed that the Whites had been given an opportunity to view the Manual and assess their obligations under it.
[5] Relevantly to this dispute, the Franchise Agreement included a restraint of trade provision in cl 9. It provided:
Restrictions on Competition
9.1 The Franchisee and the Guarantor each covenants that it will not during the Term compete with or be personally or financially directly or indirectly involved in any other business or undertaking that competes with the Business, the System or any Network Member.
9.2 The Franchisee and the Guarantor each covenants that after this Agreement expires or is earlier terminated for any reason whatsoever, it shall not whether in its own personal capacity, or jointly with or through or on behalf of any other person or entity which employs or contracts it, or with whom it is in partnership, joint venture or other business relationship
(including without limitation as a director, shareholders, beneficial owner of shares, creditor or advisor):
9.2.1 at any time within the Restraint Period and within the Restraint Area conduct or in any way be involved in a business or undertaking which by its nature is or could become competitive with the Business, the System or any Network Member; or
9.2.2 solicit Customers of the Business, the System or any Network Member with the intent of taking their custom away from the Business, the System or any other Network Member and/or for any other business that competes with the Business, the System or any Network Member; or
9.2.3 employ or contract or offer to employ or contract any person who was during the Term employed or contracted by the Wheel Magician Group, the Franchisee, any other Network Member or any other person or entity operating a business according to the System.
9.3 The Franchisee and the Guarantor each covenants that it will not at any time:
9.3.1 either in New Zealand or overseas, appropriate, use or duplicate the System, except as expressly permitted to do so in this Agreement for the purpose of operating the Business;
9.3.2 do anything intended to damage the goodwill or reputation of the Wheel Magician Group, the Business, the System, or any other Network Member.
[6] The clause defines the period to which the restraint of trade provision applies as being 12 months from the date of expiration or earlier termination of the Franchise Agreement. The area covered by the restraint provision is defined as the territory allocated under the Franchise Agreement and within 20 kilometres of the territory of any franchisee.
[7] While many issues are contention and will be determined at the substantive hearing of this matter, it appears that for the four years after the Franchise Agreement, the relationship between the parties was amicable. This relationship broke down in July 2021. The Wheel Magician says that Jason White was using his own extractor fan system in the Whites96 mobile van, and the Wheel Magician did not approve of this system.
[8] On 21 September 2021, WorkSafe inspected the vans operated by the appellants and issued Prohibition and Improvement Notices. These notices prevented the appellants from working for three months, with the prohibition period ending on 17 Dec 2021.
[9] On 24 September 2021, Wheel Magician’s lawyers sent a letter purporting to terminate the Franchise Agreement.
[10] The appellants defences to the Wheel Magician’s claims for breaches are summarised in the District Court judgment as follows:2
[7]The defences raised by the defendants are in summary:
(a)Certain key paragraphs of the Franchise Agreement, as relied on by TWM, are void and unenforceable because they breached provisions of the Health and Safety at Work Act 2015 and various regulations in the Health and Safety at Work (Hazardous Substances) Regulations 2017.
(b)TWM misrepresented the lawfulness of the System under the Franchise Agreement.
(c)TWM itself breached its obligations under the Franchise Agreement by failing, in respect of health and safety, to provide ongoing training and support and advice to franchisees on the safe use of hazardous substances and that
2 The Wheel Magician Ltd v Whites96 Ltd, above n 1, at [7]–[9].
TWM failed to improve and develop the system in respect of the safe use of hazardous substances.
[8] The defendants counterclaim against TWM for damages, costs and interest based on alleged contractual misrepresentation, breach of the franchise agreement and negligence. The counterclaim is largely based on alleged breaches of the Health and Safety at Work Act 2015 and the Health and Safety (Hazardous Substances) Regulations 2017.
[9] The defendants say that it was TWM which repudiated the Franchise Agreement and that Whites96 lawfully cancelled the Franchise Agreement on 22 September 2021.
Procedural history
[11] In mid-May 2022, the respondent became aware of Whites96 allegedly breaching the restraint of trade clause and post-termination obligations in four ways:
(a)continuing to operate a mobile wheel repair business in the area prohibited by the restraint of trade clause;
(b)soliciting and providing services to Wheel Magician’s customers;
(c)appropriating, using or duplicating Wheel Magician’s systems; and
(d)continuing to employ Jakob White, a former employee of Wheel Magician.
[12] On 1 June 2022 Wheel Magician applied to the District Court for an interim injunction to restraint the then-defendants, Whites96 and the Whites, from breaching the Franchise Agreement.
[13] The Judge interpreted cls 9.2.2 and 9.2.3, which restrict non-solicitation of customers and employees, as being governed by the references to the restraint area
and restraint period in cl 9.2.1.3 The Judge considered the 12-month term applied to all three areas of breach. On 24 March 2023, the District Court delivered its reasons. The Judge applied the three-pronged test for an interim injunction as follows.
(a)whether there is a serious question to be tried: the Judge concluded there was a protectable proprietary interest in the goodwill developed through Wheel Magician’s business operating model and system for carrying out repairs. A franchisor who has built a successful business model is entitled to protect that model by prohibiting franchisees from exploiting it for their own advantage and in competition. Evidence established that Whites96 continued after 17 December 2021 to provide mobile wheel repair services in two vehicles it previously used as a Wheel Magician franchisee, and to some of the same customers. The restraint period of 12 months was a reasonable timeframe. The Judge found there was a reasonably strong case that the defendants breached the restraint of trade and other post-termination obligations under the Franchise Agreement. His Honour concluded there was a serious question to be tried;
(b)the balance of convenience: the Judge found that the then-plaintiff’s case was reasonably strong, but the then-defendants’ was not. His Honour noted that damages are generally not an adequate remedy for breach of restraint of trade.4 His Honour considered there was no delay that would tip the balance of convenience by the plaintiff. The Judge had regard to the significant negative financial impact and hardship for the Whites, and their son Jakob if the interim injunction was granted. However, the Judge concluded the balance of convenience favoured granting the injunction. The Judge concluded that if Whites96 was permitted to continue operating its mobile wheel repair business, and the injunction was not granted, then customers would lose loyalty or brand recognition for Wheel Magician by the time of trial;
3 The Wheel Magician Ltd v Whites96 Ltd, above n 1, at [22].
4 In support, the District Court referred to Mad Butcher Holdings Ltd v Standard 370 Ltd [2019] NZHC 589 at [40].
(c)the final element of the test the overall justice of the case: the Judge concluded this favours the grant of an interim injunction pending trial.
[14] The Judge made orders with effect from 1 April 2023 to restraint the now- appellants from operating a mobile wheel repair business in the territory and 20 kilometres outside the territory until trial. In broad terms, the injunction prohibits the defendants from competing with Wheel Magician, soliciting Wheel Magician’s customers, employing Wheel Magician’s staff, appropriating Wheel Magician’s systems, and doing anything that damages the goodwill or reputation of Wheel Magician.
[15] There are now three interlocutory applications by the Whites which must be dealt with in the District Court before the substantive matter can be heard. These are applications related to discovery including a third-party discovery application against Worksafe.
[16] The District Court refused the request by the Whites to delay the setting down of the discovery matters to a date after March 2024. The Judge directed the interlocutory applications be brought on for hearing as soon as possible.5 Even so it is likely to be late 2024/early 2025 before this matter reaches a substantive hearing. Counsel also indicate there may be negotiations between the parties in the meantime.
Submissions
For the appellants
[17] The points on appeal are: the length of the interim injunction made in the District Court; the alleged imprecision in the terms of the interim injunction; and the overly restrictive nature of the interim injunction. The appellants argue the District Court erred in law by: failing to take into account the hardship to the second appellants that granting an interim injunction would cause, and its effect on third parties; in its assessment of how health and safety legislation affects the enforceability of the Franchise Agreement; failing to take into account relevant public policy
5 The Wheel Magician Ltd v Whites96 Ltd HC Whanganui CIV-2022-083-117, 28 March 2023 (Minute of Judge Carter) at [11].
considerations; and relying on materially incorrect findings of fact. In terms of relief, the appellants ask this Court to quash the interim injunction orders.
[18] Mr Stone, for the Whites submits that the orders will be in place until late 2024 or early 2025. When taking into account the three-month period when the appellants were prevented from working due to the WorkSafe Prohibition Notices, the Whites will have been prevented from working for 10 months by the date of this appeal hearing. The restraint of trade period under the Franchise Agreement is only for 12 months, so an interim injunction lasting until trial could mean the appellants are prevented from working for a period of over twice that of the period of the restraint of trade period agreed to in the Franchise Agreement.
[19] In addition Mr Stone submits the appellants are not sure of the area in which they are prohibited to operate as they have not been personally allowed to look at the “Manual” since the alleged breach of the Franchise Agreement. More broadly, counsel submits the injunction being framed in terms of non-disclosed documents including the Manual gives the injunction an unduly restrictive character. At present, disclosure of the full Manual contents is limited to counsel-to-counsel by direction of the District Court.
[20] Further the Whites submit through their counsel that the injunction covers too great an area. White96 will have to relocate from Whanganui to at least Wellington, Taupo or the Hawke’s Bay to find work. The first appellant cannot work in Whanganui, New Plymouth or Palmerston North under the terms of the injunction.
[21] Mr Stone refers to Mike Pero (NZ) v Exact Solutions Ltd6 where the High Court ordered that an injunction apply until further notice. He says that that case is unlike the present case, as in Mike Pero the respondent had not established a successful business model, the interim injunction covered a smaller geographic area — within 15 kilometres of the existing offices — and the matter was due to be called in the next available chambers list to set a fixture.
6 Mike Pero (NZ) Ltd v Exact Solutions Ltd HC Auckland CIV-2007-442-66, 17 April 2007.
[22] Mr Stone also refers to Health Club Brands v Colven Botany Ltd.7 In that case the franchisee argued the breach by the franchisor was the failure to provide ongoing support. In contrast, Mr Stone argues that in this case the matter involves the franchisor using an illegal ventilation system which resulted in WorkSafe issuing Prohibition Notices. The further difference that Mr Stone points to is that although the period here is 12 months, in Health Club Brands, there were two periods — one comprising 12 months and the other comprising 24 months.
[23] Mr Stone submits the District Court erred in fact in its finding that Jason White completed the fitout of the second van when it was in fact the respondent who fitted out both vans. In any event, counsel submits it was not open to the District Court to make factual determinations in an interim decision.
[24] The appellants do not take issue with the District Court’s characterisation of the relevant principles that apply to interim injunction applications but rather its assessment using those principles. Counsel submits a proper interpretation of the appellants’ case tips the balance of convenience in favour of lifting the injunction and that the restraint of trade is unreasonable and contrary to public policy.
[25] The appellants seek that the interim injunction be set aside. In the alternative, the appellants seek Court orders that the respondent release relevant undiscovered documents, particularly the Manual referred to in the District Court.
For the respondent
[26] Ms McKeown, for the respondent, submits the Court should dismiss the appeal because the District Court Judge did not err in law nor fact. Further, the Judge correctly applied the test for an interim injunction and concluded that the duration, geographical area and scope of the restraint is reasonable in the circumstances.
[27] Ms McKeown notes that Wheel Magician served a notice on 8 September 2021 on the appellant detailing three breaches of the Franchise Agreement. The breaches included the installation of the unapproved extractor fan system; creation of an
7 Health Club Brands v Colven Botany Ltd [2013] NZHC 428.
unapproved WhatsApp group to communicate with other franchisees; and causing Wheel Magician to incur legal costs. The appellants failed to remedy the breaches by
22 September 2021 as the notice required. Based on this failure, paired with Whites96’s repudiation and failure to make payments required by the Franchise Agreement, Wheel Magician terminated the Franchise Agreement.
[28] The respondent submits the post-termination obligations and the restraint of trade clause were reasonable in the circumstances. Counsel says that the circumstances include the subject matter, area, duration and need to protect goodwill for the benefit of all network members. Further, the appellants knew what they were signing. They even received legal advice before entering into the Franchise Agreement.
[29] The respondent disagrees with the appellants’ submission that the District Court made material errors of law.
[30] Insofar as the appellants’ defences to the substantive claim are concerned, Ms McKeown points out that the respondents to date have not identified how the Franchise Agreement conflicts with the Health and Safety at Work Act 2015 and the Health and Safety at Work (Hazardous Substances) Regulations 2017 such that the Franchise Agreement could be unenforceable. The appellants merely point to s 28 of the Act which prohibits contracting out or excluding or modifying the provisions. There is no such exclusion or modification of the Franchise Agreement. In any event, s 28 specifically provides the offending term has no effect but the agreement is not rendered illegal.8 The respondent submits there is no evidence that the appellants were induced to enter the Franchise Agreement by misrepresentations about Wheel Magician’s health and safety compliance.
[31] The respondent submits it was open to the District Court to grant the injunction until trial even if the consequence of that would be that the restraint period lasts more than the 12 months contemplated under the Franchise Agreement. In addition, the respondent submits it had been unable to operate free of the appellants’ competing business until the injunction was granted. Therefore, the restraint period properly
8 Health and Safety At Work Act 2015, s 28(3).
starts to run after the grant of the injunction, instead of from the date of termination of the Franchise Agreement. The respondent says that it was also open to the District Court to disregard the period through which the appellants were unable to work in consequence of the WorkSafe Prohibition Notice.
[32] The respondent submits Mike Pero (NZ) Ltd v Exact Solutions Ltd and Health Club Brands v Colven Botany Ltd are not helpful because they involved injunctions granted until further order of the Court, which is a different circumstance to the interim injunction here.
[33] The respondent submits that hardship to the employee (and relation of the Whites) Jakob White who has been unable to work as a result of the injunction must be balanced against the hardship to Wheel Magician if Whites96 were permitted to continue operating in competition with Wheel Magician. Moreover, the hardship to the appellants may have been overstated. The respondent says Whites were not vulnerable employees, and they have other skills. The resolution of the substantive proceeding has been delayed because the appellants are dragging the proceedings to the extent that they sought a direction that interlocutories not be heard until a date after 1 March 2024.
Relevant law
[34] This appeal is a general appeal. It is therefore determined by way of rehearing,9 considering the merits of the test for an interim injunction afresh, according to the standard principles.10
[35] The courts’ approach to determining interim injunctions is a well-settled three– step test. The Court considers:11
(a)whether there is a serious question to be tried;
9 High Court Rules 2016, r 20.18; and Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 (SC).
10 For use of this approach, see for example Skky Holdings 2015 Ltd v Bolter Management Group Ltd [2017] NZHC 2641.
11 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142, cited in Intellihub Ltd v Genesis Energy Ltd [2020] NZCA 344; [2020] NZCCLR 29 at [23].
(b)the balance of convenience; and
(c)where the overall justice lies.
[36] Given this application for an interim injunction is of an interlocutory nature, the Court need not resolve conflicts or evidence or resolve complex questions of law.12 In On-Line Digital Solutions Ltd v Riddick, the principles informing the courts’ grant of interim injunctions to enforce a restraint of trade within a franchise relationship were summarised as follows:13
(a)Contractual provisions that constitute a restraint of trade are prima facie void and therefore unenforceable. Nevertheless, where a party seeking to enforce the provision establishes that the restriction is reasonable, it may be enforced. Reasonableness is assessed at the time of the contract.
(b)The first enquiry is whether the franchisor has “an interest which in all the circumstances was protected”. In this respect, the courts have frequently found that in the franchise context a franchisor has a legitimate interest in protecting goodwill after termination.
(c)A further consideration is whether the restraint is reasonable in light of the public interest. This inquiry is concerned to ensure that the restraint is properly referable to the protection of interests which the law regards as legitimate. Generally, if the restraint is properly limited, it will not be contrary to the public interest to give effect to it. The policy interest underpinning this principle is that the market for goods and services should not be distorted by the unreasonable diminution of consumer choice arising from private restrictions on those willing to offer their goods and services to the market. This is likely to lead to monopolies and negative economic consequences.
(d)Where the grant of an interim injunction will have the practical effect of becoming a final judgment or putting an end to an action, the Court should bear in mind that it does so without permitting the
12 See On-Line Digital Solutions Ltd v Riddick [2021] NZHC 3199 at [59].
13 At [60] (footnotes omitted).
defendant the right of trial. In such cases, the Court should be slow to decide the entire contest between the parties on what is in effect a summary basis. It may be more appropriate to require the applicant to meet the threshold for the grant of summary judgment, rather than ask whether there is a serious question to be tried.
(Footnotes omitted).
Analysis
Serious question to be tried
[37] The first prong is whether there is a serious question to be tried. I am satisfied that the District Court was correct in finding that there was a serious question. The respondent has a protectable proprietary interest — it has built a successful business model and accumulated goodwill pursuant to that model. The protectable interest is primarily goodwill, but it also encompasses confidential information, operating processes and other intellectual property. It is entitled to protect its investment in that.
[38] I am also satisfied the Judge made no error in finding that for the purposes of the interim hearing the restraint of trade provision was reasonable at the time the parties entered into the Franchise Agreement. The appellants received legal advice, had the advantage of a cooling period and entered into the Franchise Agreement on an informed basis. This case is therefore one where evidence before the Court supports the conclusion by the District Court Judge that the restraint of trade, for the purposes of the interim injunction, was likely to be enforceable. That of course may change at trial after hearing the evidence.
[39] I recognise, as did the District Court, that there will be factual disputes to resolve at trial.14 It is not the role of the Court in at the interlocutory stage to consider the merits of the substantive dispute. What the District Court was entitled to do was to consider the evidence before it to satisfy itself on whether there is a serious question to be tried. I consider the Judge was correct in finding that the evidence does establish a serious question to be tried. There is evidence suggesting the appellants may have
14 The Wheel Magician Ltd v Whites96 Ltd, above n1 at [47].
acted in breach of the restraint of trade clause in the Franchise Agreement. In a similar vein, there is also evidence that the appellants may have breached their post- termination obligations in the period between the termination of the Franchise Agreement and the District Court granting the interim injunction. In view of the evidence the appellants focussed on whether the restraints were enforceable and the facts leading up to the purported termination of the breach, rather than disputing that it had undertaken the work complained of. The defence lies in the area of whether that work was in breach and the legal enforceability of the restraints and prohibition. The District Court made no error in its finding in this regard.
Balance of convenience
[40] The Judge was satisfied that the respondent’s claim was strong. The appellants’ defences are largely based on non-compliance with health and safety requirements by the respondent and misrepresentations by it at the time of entry into the Franchise Agreement. The respondent says the obligations under the Franchise Agreement require the franchisee to maintain compliance with the health and safety requirements. It says that the regulations that Whites say were breached were obligations on the franchisee, such as labelling hazardous substances, and keeping an inventory of substances. Wheel Magician said it provided training to both Jason and Jakob White. It said no other franchisees have been the subject of a Worksafe Prohibition Order. The respondent noted that and a franchisee associated with it had received improvement notices, but they did not prohibit operations and those notices were subsequently withdrawn. Wheel Magician says that the appellant was non-compliant with the health and safety requirements, not it.
[41] The disputed evidence concerning the experimental extractor fans referred to above is relevant to this issue. The respondent says the experimental fan installed by Whites96 should not have been used. The appellants say this as a red herring and acted to divert the Judge’s attention from the fact that it was the franchisor’s obligation to appropriately fit out the vans at the outset and it did not. The respondent acknowledges that in the case of Jakob White’s van it had previously belonged to another franchisee and therefore parts of the fitout were in place when purchased by Whites96. It however says that the van was modified by Mr White who admitted
installing a caravan vent in August 2021. The respondent says the installing of roof vents lay with the franchisee. The Judge was not in error in assessing the strength of these arguments for the purposes of the interim application.15
[42] The detail supporting the allegations concerning misrepresentations made by the respondent before the appellants entered the Franchise Agreement concerning the health and safety compliance of the wheel repair franchise system has not yet been provided. In view of the provisions of the Franchise Agreement saying that the agreement constituted the entire agreement and that the franchisee did not rely on any representation, the evidence supporting the representation would need to be clear before misrepresentation could be established. A further hurdle for the appellants is that they received independent legal advice before entering the Franchise Agreement.
[43] Mr Stone argued that the Judge went too far in his determination of the factual basis for the interim injunction. He said the evidence which the Judge referred to, in particular in relation to who had fitted out one of the vans was contested. He said the respondent had fitted out the van and the issues about experimental ventilation systems were “red herrings”. Mr Stone carefully went through the evidence that he relied on in this regard. However, as Ms McKeown pointed out, there was evidence in favour of the respondent’s position on that point. The factual contest will be a matter for trial. However it was open to the Judge to prefer the respondent’s version of events to that of the appellants’ which was part of his assessment as to whether there was a serious question to be tried and the likelihood of success of the claim at this interim stage. As the Judge said:16
[47] While there are numerous areas of disputed fact arising out of the affidavit evidence filed on behalf of TWM and Whites96, the Court cannot resolve conflicts of evidence at this interlocutory stage. It is rather a matter of assessing the relative strength or otherwise of the case put by each party.
[44] Mr Stone also submitted that the restraint term and geographical ambit breached public policy. I do not consider that the Judge made an error in concluding
15 At [61].
16 At [47].
that for the purposes of the interim injunction the restraint of trade provision was reasonable in the public interest. On its face it is for only 12 months and sufficiently limited to a small geographic area surrounding the franchisor’s customer base where it has goodwill, albeit this includes three urban centres.
[45] Mr Stone argued that the wording of the geographical boundaries was such that, because there were franchise holders all parts of New Zealand (and the appellant was not sure where) the wording of the formal order mentioned that the appellant could not carry on similar business which might be seen to be competing with the respondent system, anywhere in New Zealand, because it could be in competition with any number of franchise holder. The respondent noted that the intent of the order, and the restraint of trade, was to limit the restraint to the geographical territory which was delineated and described in the Franchise Agreement plus the surrounding 20 km. There was no intention to extend it beyond that area to the rest of New Zealand. If an amendment was needed to the formal order, there would be no opposition to this.
[46] However the appellants’ argument that the restraint was too wide as it could be construed as included the whole of New Zealand is not borne out by the Judge’s rejection of that argument as follows:17
[78] The Restraint Area is within the Territory and within 20 kilometres of the territory of any franchise business similar to the Business using the System. The defendants make the point that this effectively means Whites96 could not work within New Zealand for 12 months as there are franchises in most regions. I consider that this would make the Restraint Area too wide. It would be unreasonable on the basis that such a wide area covering most of New Zealand that would be unnecessary to achieve the key purpose of allowing the franchisor time to set up competing operation in the Manawatu/Whanganui/Horowhenua/Rangitikei area without competition from a former franchisee. At the interlocutory stage, if an interim injunction were granted, I would limit the area covered to the Territory and 20 kilometres outside of the Territory, but not elsewhere in New Zealand.
17 At [78].
[47] The order set out in the judgment says in the orders at [98](a) that the limitation is within the “territory” (which is defined in the Franchise Agreement) and 20 kilometres outside the “territory”, but not “elsewhere in New Zealand”. It does appear however because of the numbering used in the order that the limitation to the territory and 20 kilometres is only intended to apply to sub-paras (i) to (iii) rather to the sub-paras (iv) to (vi) which relate to ongoing breaches such as using or duplicating the “system” and use of the intellectual property.
[48] A further matter that Mr Stone raised in relation to the formal order was that given the inevitable delay until there is a full hearing of this matter the interim injunction would likely last beyond the period of the restraint of trade. The Judge noted that the period of the restraint in the Franchise Agreement would have expired in September 2022, but he said that the respondent had not been able to operate free of the defendants since September 2021. The appellants had continued to trade using what the Judge had accepted for the purposes of the interim decision was the respondent’s system and so had competed contrary to the restraint provisions.18 The Judge said if the interim injunction were granted:19
having regard to the period since September 2021 when [the appellant] has been operating in the Territory, it should be allowed a short notice period to enable it to advise customers of the date from which it will be unable to provide mobile wheel repair services. For that reason, any interim injunction should not take effect until 1 April 2023.
[49] It is apparent that the Judge did not intend that the interim injunction last longer than the restraint period. For the purposes of the interim injunction the Judge was satisfied that the appellants had competed with the respondents beyond September 2021 and were doing so at the time of the hearing.
[50] The Judge rejected the appellants’ arguments that the 12 months restraint period should be shortened due to the appellants being unable to operate during the COVID-19 lockdown and the period when they were prohibited from operating due to the Worksafe Prohibition Order placed on the operations. Mr Stone in his submissions on appeal indicated that the whole period in which the Whites were not
18 At [79].
19 At [80].
operating due to COVID-19 restrictions and the prohibition was 79 days. Of those 79 days, it appears that the COVID-19 lockdown accounted for one-and-a-half months and preceded the Worksafe-imposed prohibition. The prohibition lasted from 21 September to 4 November 2021.
[51] These times had been identified by Ms McKeown following the hearing in the District Court. The period in which the Whites did not operate was for a shorter period than had been put before the District Court.
[52] Mr Stone was unable to point to anything in the Franchise Agreement that would support an argument, at this stage, that either the lockdown or the prohibition period should be taken into account to shorten the non-competition period. That is not to say that at trial the appellant may not successfully argue that the prohibition period was brought about by the default of the respondents not that of the appellants. However the Judge made no error on this matter for the purposes of the interim injunction.
[53] On the material before the District Court, the appellant continued to operate up to the judgment delivered in March 2023. To enable an orderly transition for customers, the Court further allowed the continuation of the appellants’ operations, until 1 April 2023. The Judge took the view that the restraint of trade operates for 12 months from 1 April 2023. He was also of the view that the substantive matter would be heard before that date. This now may not be the case. Therefore, I consider that in order to clarify the term of the formal order, it should be varied to apply until 1 April 2024 or further order of the Court, whichever is the earlier.
[54] That clarifies that the grant of the interim injunction will not have the practical effect of extending beyond the restraint period. The Judge intended that the injunction preserve the position until trial but contemplated that the trial would occur earlier than the expiration of the restraint period. The appellants are entitled to choose how they conduct the litigation, but it appears largely due to their interlocutory applications that the case has taken some time to bring to a hearing. The Court has refused to postpone the interlocutory hearing until after March 2024 as was sought by the appellants.
Disclosure of the content of the Manual
[55] One of the issues between the parties is that while the respondent has provided the franchise system manual to the appellants, it is on a counsel-to-counsel basis only. It claims that the Manual is confidential as it sets out the system that is protected by the Franchise Agreement and is important to the interests being protected by the respondents.
[56] The appellants were familiar with the Manual as they had access to it when they were operating under the Franchise Agreement. However Mr Stone says it is changed from time to time so the appellants may not be fully aware of what is in it at the present time. Copies of the clauses concerning the terms of the restraint and the prohibitions lasting beyond the agreement have been provided. Excerpts of the Manual were produced for the District Court hearing, in affidavits. It is the parts of the Manual that relate to the systems that are at issue. Ms McKeown has proposed arrangements for the provision of the confidential parts of the Manual. She suggests that an expert or third party be nominated by the appellants to look at the manual for the appellants. She indicated she was willing to discuss an arrangement which would allow the material in the Manual to be considered by or for the appellants but at the same time ensure confidentiality.
[57] Mr Stone says the suggested arrangements are unusual in cases which do not involve extremely confidential material. Mr Stone has a copy of the Manual, which was provided after the District Court hearing. He says and he requires the input of the appellants personally to properly consider the contents of the Manual. He says the respondents cannot be expected to know what the restraint covers if they do not have the Manual.
[58] In my view the limited disclosure of the material in the Manual has been sufficient for the interim injunction purposes. It may not be sufficient for the purposes of the substantive hearing. However the extent of discovery and disclosure is the subject of existing directions in the District Court. It is seized of the management of
the substantive proceeding and has made directions relating to disclosure of confidential documents. It is not appropriate that this Court intervenes.20
[59] Given my conclusion that there is evidence establishing a protectable proprietary interest, potential breaches and the reasonableness of the restraint of trade clause, I find there is a serious question to be tried.
Balance of convenience
[60] I consider that the balance of convenience favours the interim injunction remaining in force.
[61] Damages would not be an adequate remedy in this case given the respondent is entitled to enforce the reasonable restraint of trade clause.21 I note damages would be difficult to quantify in any event. The respondent has produced the usual undertaking as to damages.
[62] In terms of the prejudicial effect of the interim injunction on third parties, I accept the appellants and Jakob White may face hardship as a result of the restraint of trade. However, I note they have already traded within the territory and in competition with the respondent until the District Court decision. I consider this hardship is adequately mitigated by the limited terms of the restraint. I also note that Katrina White has full-time employment in another business.
Overall justice
[63] Stepping back and considering the overall justice of this case, I do not consider that the Judge made an error in finding that the overall justice of this case supports the interim injunction.
[64] The Judge made no error in finding that damages would not be an adequate remedy. The protection of it is trade secrets gives the respondent the ability to
20 See Minute of Judge Carter dated 6 April 2023 which sets out comprehensive case management directions including for documents over which confidentiality is claimed and tailored discovery.
21 See Mad Butcher Holdings Ltd v Standard 370 Ltd, above n 4.
franchise. Failure to protect the network of franchisees from competition in breach of the Franchise Agreement would undermine the respondent’s entire business model and no doubt cause concern among the Wheel Magician franchisees. Also important in consideration of the overall justice at this stage is that the appellants had the benefit of legal advice before entering the Franchise Agreement.
[65] It is consistent with the overall justice of this case to restrain the appellants from trading as agreed in the Franchise Agreement until trial. The interim injunction does not restrain the appellants from trading outside the prohibited territory if they so wish.
[66] The appellant also queried the use by the Judge of “permanent” injunction. The Judge considered whether the interim injunction would have the effect of a final injunction. He said when considering whether the respondent had established a serious question to be tried:22
[82] I have considered whether the grant of an interim injunction would have the practical effect of becoming a final judgment, or put an end to an action. There is some authority suggesting that this would require the applicant to meet the threshold for the grant of summary judgment, that is, that the defendants have no arguable defence. In this case, both the plaintiff and the defendants have multiple heads of claim and defence, the defendants have brought a counterclaim and each party claims against the other damages and costs under numerous different headings. An interim injunction would not have the practical effect of determining the proceeding. In these circumstances, the correct approach is to ask whether there is a serious question to be tried.
[67] In other passages he referred to “permanent injunction” and it is apparent from the context of those comments that he meant “final injunction”.23 Nothing turns on the use of “permanent” as opposed to “final” in the context of the Judge’s comments.
22 The Wheel Magician Ltd v Whites96, above n 1, at [82].
23 At [84], [87] and [96].
[68] The appellants also pointed out some comments by the Judge which are said to be factually incorrect. Most are issues which are contested or require further context such as the exchange of messages to do with training. However I do note that one error made by the Judge was the attribution of a quote to a ChemSafely report which was in fact a quote from a summary of the ChemSafely report.24 These are minor issues and not material to the outcome of the interim injunction.
Conclusion
[69] The appeal is allowed to the extent of the amendments to the numbering of the order as set out in [70] below. The appeal is otherwise dismissed. I have concluded for the purposes of the interim injunction that the restraint of trade provision is reasonable such that it is enforceable. The respondents have a serious question to be tried, supported by my assessment of the balance of convenience and the overall justice of this matter.
[70] The interim injunction will continue to apply, on the same terms as imposed in the District Court, except:
(a)the interim injunction will apply from 1 April 2023 until 31 March 2024 whichever is the earlier, in relation to [98](a)–(iii) until the determination of the substantive proceeding at trial.
(b)The numbering used in the order should be amended to make it clear that the interim orders made in [98](a)(i)–(iii) are limited in application to the territory and 20 kilometres outside the territory but that limitation is not intended to apply to sub-cls (iv)–(vi) which relate to ongoing breaches.
[71] Leave is reserved to either party to apply for any consequential orders as a result of those amendments such application to be made in terms of the timetable set out below for any costs application.
24 At [39](s)(iv).
Costs
[72] Any application for costs should be made by memorandum including authorities filed and served on or before five days of the date of this judgment. Any response should be filed and served by way of memorandum together with authorities within a further five days. Any reply to that should be filed and served within a further three days.
Grice J
Solicitors:
Cowan Law, Auckland
Duncan Cotterill, Wellington
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