Colville v Colville
| Jurisdiction | New Zealand |
| Judge | Mander J |
| Judgment Date | 22 September 2023 |
| Neutral Citation | [2023] NZHC 2659 |
| Court | High Court |
| Docket Number | CIV-2021-418-17 |
[2023] NZHC 2659
IN THE HIGH COURT OF NEW ZEALAND
GREYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA
MĀWHERA ROHE
Mander J
CIV-2021-418-17
A R B Barker KC and H P Short for Plaintiff
First Defendant in Person
A D Marsh for Second Defendant
A Barker QC and J Palairet, Barristers, Auckland
Anthony Harper, Auckland
Contract — claim for breach of restraint of trade in a sale of business agreement and inducement to breach a contract — building companies — legal principles relating to a claim in contract for damages for breach of a restraint of trade — elements of the tort of inducing a breach of contract
This judgment was delivered by me on 22 September 2023 at 3.30 pm pursuant to Rule 11.5 of the High Court Rules 2016
Registrar/Deputy Registrar
Date:
The plaintiff, Mathew Colville (Mathew), and the first defendant, Adam Colville (Adam), are brothers who for a number of years owned and operated a G J Gardiner Homes franchise on the West Coast. After a breakdown in their relationship, Mathew, by mutual agreement with his brother, purchased Adam's share of this business in October 2020. In accordance with the terms of that agreement, Adam executed a deed in restraint of trade (the restraint) that prevented him from competing with Mathew's business. The second defendant, Peter Blight (Peter), is also a builder based on the West Coast. Adam, after selling his share in the G J Gardiner franchise, went to work for Peter as a builder's labourer.
In May 2021, Peter acquired a Stonewood Homes franchise for the West Coast area. Mathew claims that, in breach of the restraint, Adam was closely involved in the establishment and development of this new franchise and that Peter, who was aware of the restraint, knowingly induced and encouraged Adam to do so. Mathew sues Adam for the alleged breach of the restraint, claiming it has caused him loss, and Peter for having induced this breach of contract. Adam and Peter deny Mathew's claims.
While this case requires the determination of various important factual issues, much of the preliminary background to the dispute is not in issue.
In around 2003, Mathew went into business for himself as a builder. He and his stepfather incorporated a company for the purpose of engaging in property development and the construction of spec houses. Adam came to work for Mathew and completed his building apprenticeship while in his employ.
Because of increasing competition from larger national home building franchises, the two brothers approached G J Gardiner Homes, one of the largest residential building companies in the country, wanting to secure a franchise for the West Coast. Mathew and Adam successfully purchased a franchise for this region in January 2013. They formed Housing West Coast Ltd (HWC) to own the franchise. The two brothers were equal shareholders in the company, and Adam the sole director.
By using G J Gardiner Homes proprietary designs, systems and supply relationships, Mathew and Adam were able to develop a successful franchise business that over the years continued to grow. 1 After some five years, Mathew and Adam formed a new company to house the commercial leases they had acquired and to keep the debt for the business separate from HWC. This company, Colville Developments Ltd (CDL), which was primarily a landholding company, was incorporated in April 2018. Both brothers were equal shareholders.
Notwithstanding the success of the franchise, the relationship between Adam and Mathew began to deteriorate. By the middle of 2020, Adam's personal difficulties attracted some publicity. These issues were believed to reflect poorly on the reputation of the franchise and came to the attention of G J Gardiner Homes' head office. These developments resulted in Mathew buying out Adam's interest in the business. Mathew agreed to purchase Adam's 50 per cent share in HWC. A professional valuation was obtained that valued the shares of HWC as between $1.885 million to $2.215 million. The goodwill component was valued as between $1,543,734 to $1,783,734. On the basis of this valuation, Mathew purchased Adam's shares for $1,062,000. 2
The agreement for the sale and purchase of Adam's shareholding in HWC was signed on 19 October 2020, and Adam ceased being a director of the company. An explicit term of the agreement required Adam, upon receipt of the purchase price, to execute a Deed in Restraint of Trade in the form attached as an annexure to the agreement. The executed restraint relevantly provided:
OPERATIVE PART
1. THE Vendor covenants with the PURCHASER that he will not directly or indirectly be engage [sic], participate in or have any direct or indirect interest whether as an owner, partner, director, shareholder, officer, employee, agent, consultant, representative, contractor or sub-contractor or in any other capacity in the business detailed in the schedule in competition with Housing West Coast Limited.
2. This restraint as outlined in point 1. above will relate to the area and until the end of the term detailed in the in the [sic] schedule and the schedule forms part of this deed.
3. Notwithstanding the restraint the Vendor is permitted to be employed as builder's labourer and to build his own home.
SCHEDULE
BUSINESS the design, sales, marketing, management, accounting, estimating and construction of any houses, commercial or industrial buildings, units or duplexes.
AREA Buller, Grey and Westland Districts.
TERM from 19 October 2020 until 1 February 2023
Prior to the execution of the restraint, Adam asked Mathew if he could be permitted to be employed as a builder's labourer. This was agreed and provided for in the terms of the restraint.
In March 2022, the brothers reached agreement regarding the sale of Adam's 50 per cent shareholding in CDL. Mathew paid Adam $1,705,357 for his shares. There was no requirement to enter into a restraint of trade regarding that buyout as CDL was primarily a landholding company.
Peter had known both Mathew and Adam for many years. They were fellow builders and Mathew had completed his building apprenticeship under Peter's direction in Hokitika before setting up his own building business. Between 2007 and 2014, Peter and his wife had owned and operated a Stonewood Homes franchise on the West Coast and thereafter, after its dissolution, ran his own building business. 3 In January 2021, Peter became aware through a mutual friend that Adam had left HWC and was looking for work. Adam told him he had signed a restraint of trade but that he was allowed to work as a building labourer. It is Peter's position that he engaged Adam in that capacity, in accordance with the terms of the restraint.
On 20 May 2021, Adam and Peter incorporated a company together called Hammer Down Developments Ltd (HDD). Adam was a director and 50 per cent shareholder and Peter also a director with a 25 per cent shareholding. The other 25 per cent was held by Peter's wife. Adam and Peter maintain this company was formed to purchase and subdivide land for the purpose of sale, either solely as parcels of land or as a “land and build” package. Because HDD would not be building houses nor selling them, it was their understanding that the company's activities would not breach the restraint.
A week earlier, on 13 May 2021, Peter had incorporated another company, West Coast Residential Ltd (WCR), which he used to enter into a new franchise agreement with Stonewood Homes that covered the West Coast region. Peter and his wife each hold a 50 per cent shareholding in this company of which he is the sole director. Unlike his involvement in the activities of HDD, it is both Peter and Adam's position that Adam has no business interest in WCR or the Stonewood Homes franchise, other than working for Peter as a builder's labourer. The Stonewood Homes franchise was purchased by WCR on 18 May 2021 and the franchise fee paid on 9 June that year.
Mathew has brought two causes of action against Adam and Peter respectively. The first is a claim against Adam for breach of the restraint on the basis he failed to act in accordance with its terms. The second is a claim against Peter, that he knowingly induced or encouraged Adam to undertake the activities that constituted a breach of the restraint. Mathew maintains the activities in which Adam engaged in breach of the restraint and Peter's intentional inducement and encouragement of Adam to do so caused him loss for which he seeks damages.
The applicable legal principles as they relate to a claim in contract for damages for breach of a restraint of trade are not in issue. Nor is there any dispute regarding the elements of the tort of inducing a breach of contract that are required to be proved in order for such an action to succeed. However, should liability be established, an issue arises regarding the correct approach to the assessment of any loss and the calculation of damages.
A party seeking to enforce a restraint of trade carries an onus to demonstrate that such a restraint, which would otherwise be considered invalid, is no wider than is reasonably necessary to protect the legitimate interests it is intended to protect. 4 The assessment of reasonableness requires weighing the interests and freedom in enforceability of contract against the wider public interest in preserving freedom of trade. The longer the period of the restraint and the wider the geographical area sought to be the subject of it, the greater the infringement on the public interest. However, regard must be had to...
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