Green Acres Franchise Group Ltd v L & K Ferrick Ltd

• Jurisdiction: New Zealand
• Judge: Gwyn J
• Judgment Date: 05 May 2021
• Neutral Citation: [2021] NZHC 997
• Docket Number: CIV-2020-441-000090
• Court: High Court

Between

Green Acres Franchise Group Limited

Plaintiff

and

L & K Ferrick Limited

First Defendant

Kathryn Mary Ferrick

Second Defendant

Lloyd Harvey Ferrick

Third Defendant

L & K Ferrick (2021) Limited

Fourth Defendant

[2021] NZHC 997

Gwyn J

CIV-2020-441-000090

IN THE HIGH COURT OF NEW ZEALAND

NAPIER REGISTRY

I TE KŌTI MATUA O AOTEAROA

AHURIRI ROHE

Commercial, Contract — application for an interim injunction to prevent the defendants from operating a new business — the defendant was a former franchisee of the appellant — upon expiry of the agreement the defendant company was placed in liquidation and a new company was formed providing similar services — restraint of trade and confidentiality provisions — applicable principles to interim injunctions — serious question to be tried — balance of convenience — overall justice — adequacy of damages to both parties — preservation of the status quo — relative strength of each party's case — conduct of the parties — the effect on innocent third parties

Counsel:

D Chisholm QC & J Ryan for the Plaintiff

J Bates for the Second, Third and Fourth Defendants

JUDGMENT OF Gwyn J

1 The plaintiff seeks an interim injunction arising from a sub-franchise agreement it had with the first defendant. The specific orders sought by the plaintiff are at “Appendix A” to this judgment.

2 The defendants oppose the orders sought.

Factual background

3 The plaintiff, Green Acres Franchise Group Limited (Green Acres), is a nation-wide franchisor. It operates a three-tier franchise system (franchisor, franchisee and sub-franchisee/contractor 1) for the marketing and operation of lawn-mowing, gardening and property maintenance services.

4 The second defendant, Katherine Mary Ferrick, and the third defendant, Lloyd Harvey Ferrick, are the directors of the first defendant, L & K Ferrick Limited (the Company). They are also the shareholders of the Company, together with Gerard Searle.

The contractual background

5 In 2007, D R and C Lay Ltd was the Green Acres franchisee in the Hawke's Bay. On 6 December 2007, the Company entered into a sub-franchise agreement with D R and C Lay Ltd (the original sub-franchise), to operate a lawn and garden care business in Hawke's Bay (including Napier, Hastings and Havelock North), using Green Acres' franchise system, know-how and intellectual property.

6 On 24 May 2010, Green Acres, as the franchisor, granted Royssa Enterprises Ltd (Royssa), as the franchisee, the right to operate the Green Acres franchise in Hawke's Bay (the Master Agreement), in place of D R and C Lay Ltd.

7 In mid-2010, the Company sold the original sub-franchise. On 4 October 2010, the Company entered into a new sub-franchise agreement with Royssa (the Agreement). 2 This Agreement is the subject of the current proceedings.

8 In late 2012, Mr Ferrick and other Green Acres contractors raised concerns regarding the performance of Royssa as the Green Acres franchisee in Hawke's Bay. Among their concerns were that Royssa had not met its obligations regarding advertising, had provided insufficient referral work to the contractors to allow them to

achieve the guaranteed turnover, was under-pricing jobs, and was ignoring or failing to respond to communications from the contractors

9 On 4 February 2013, the Master Agreement was assigned to Green Acres from Royssa through a Deed of Assignment and Settlement. At that point Green Acres became both the franchisor and the franchisee in relation to the Company.

10 On 31 October 2020, the term of the Agreement expired. No new agreement was signed between Green Acres and the Company, but the Company continued to operate in accordance with the terms of the Agreement.

The 4 October 2010 sub-franchise agreement (the Agreement)

11 The Agreement was for an initial term of ten years, with a right of renewal for a further ten years. It took effect from 27 September 2010. The second and third defendants signed as directors of the Company but did not sign as guarantors.

12 The provisions of the Agreement relied on in this application are:

• (a) Clause 4.1, which makes the Agreement subject to the Master Agreement.

• (b) Clause 32, which grants Green Acres (as Franchisor) a right to enforce the Agreement. In any event, in this case, Green Acres is itself a party to the Agreement — as a result of the Deed of Assignment and Settlement between Green Acres and Royssa, Green Acres was both franchisor and franchisee with effect from 4 February 2013.

• (c) Clause 1.1, which contains relevant definitions including the definitions of “Business”, “Contractor's Business”, “Franchise”, “Franchise Agreement”, “Intellectual Property”, “Know How”, “Trade Mark”, and “System”. “Intellectual Property” is defined as “all intellectual property relating to Green Acres services and the System including the Know How, confidential information, copyright and Trade Mark relating to the business”. “System” is defined as:

  … the total concept created by Green Acres in relation to the creation, development and maintenance of the Business as is operated by a number of contractors and incorporates the comprehensive system for the conduct of the franchised business in accordance with the uniform standards of operations, identification, design and merchandising of goods and services;

• (d) The Master Agreement (in sch 3) defines Business as:

  The Business shall mean those: Commercial Cleaning, Lawnmowing, Domestic Cleaning services which have been granted within the designated Territory to the Franchisee by this Agreement and shall require the implementation of the System and its operation through the allocation, sale and maintenance of Sub Franchise Agreements throughout the Term. For the avoidance of doubt, the Franchisee is to conduct the Business on the terms and conditions contained in the Agreement.

• (e) Clause 2.1, which provides a non-exclusive grant of the right to “use and apply the System and Know How of Green Acres within the Territory”.

• (f) Clause 20.1, which provides that the grant to the Company of the right to undertake the business included the non-exclusive use of the “Trade Mark, Intellectual Property and Know How” of Green Acres.

• (g) Clause 9.7(b), which Green Acres relies on as confirming its continuing interest in the customers, provides:

  The Contractor shall immediately report to the Franchisee details of any customers that cancel their contracts with the Contractor including the name and address of the customer, any complaints or problems that arise between the Contractor and the Contractor's customers and the reason given to the Contractor by the customer for such cancellations.

• (h) Clause 9.2, which required the Company to operate the Business in accordance with the Green Acres Operations Manuals or instructions.

• (i) Clause 6.3, whereby the Company acknowledges Green Acres' proprietary rights in the System and Operations Manual.

• (j) Clause 9.6(a), which provides:

  The Contractor shall not do or be a party to the doing of any act matter or thing whereby the goodwill of the Business or the Contractor's Business (including the Intellectual Property, the Trade Mark and the Know How) may be prejudicially affected.

• (k) Clause 9.17, which provides that the Company can service customers other than those referred to it by the Franchisee and/or Green Acres, subject to the payment of the royalty.

• (l) Clause 15, which sets out the consequences of termination of the Agreement, whether for cause or expiration of the term. On termination, cl 15.1 requires the contractor to return the “Intellectual Property and all customer details including addresses, keys and codes for properties and all other notes. Clause 15.5 requires the Contractor to cancel all telephone numbers used in connection with the Contractor's Business, or assign them to Green Acres.

• (m) Clause 15.7 which required the contractor to cease using the “Trade Mark, Intellectual Property or the Know-How” on termination of the Agreement.

• (n) Clauses 9.13 and 19.1(b), which provide that the Intellectual Property relating to the Green Acres System is commercially sensitive property and imposes an obligation on the company to maintain strict secrecy about Green Acres' System and Know How.

• (o) Clause 16.1, which is a non-competition or restraint of trade clause, provides:

  … the Contractor … will not at any time during the Term (or any renewed term) or for a period of two years following the expiration or termination of this agreement be interested in any business the same as, or similar to or in competition with the Business within New Zealand …

  • a. Protection: the restrictions in this clause protect both the Business and any other similar business in which Green Acres or the Franchisee is interested (whether because it ultimately owns and/or operates the business, or has granted a franchise to that business or in any other way and whether branded as a Green Acres business or otherwise).

  • b. Restrictions Reasonable: the restrictions set out in this clause are reasonable and the Contractor and the Guarantor waive any right of defence against strict enforcement of this clause by the Franchisee or Green Acres.

The dispute

13 Following expiry of the Agreement in October 2020, on 29 November 2020 the solicitors for the Company wrote to Green Acres alleging breaches of the Agreement which it said were issues raised previously by the Company and others nine years earlier. It also alleged misrepresentation in relation to the marketing of the Green Acres franchises. The letter noted that the Agreement ended on 1 November 2020, but the Company was confirming that it would not renew its franchise and would “cancel any residual holding over by the franchisee in relation to the now expired franchise agreement.”

14 Green Acres' solicitors responded on 1 December 2020, rejecting the allegations that it had breached the Agreement and...