INTERIM INJUNCTIONS

Khusbu Sundarji and Stewart Germann review recent franchising cases involving obtaining interim injunctions

Disputes between franchisors and franchisees where the Court is involved do not occur often. However, to protect a franchisor’s goodwill and brand, an interim injunction may be required to be issued against a

Top Ten Group New Zealand Limited v Tasman Tourism New Zealand Limited

Background

Coromandel Holiday Park Limited (‘Coromandel’) was a Top 10 franchisee in Coromandel under a franchise agreement from Top Ten Group New Zealand Limited (‘Top Ten’) from 17 December 2022. The nature of the franchise is that all Top 10 franchisees are also shareholders.

Coromandel also owned the land where the business operated. The directors of Coromandel incorporated another company, which owned a Top Ten Holiday Park in Cambridge, and wanted to sell the Coromandel Park to finance the development of Cambridge.

On 16 June 2023, Coromandel told Top Ten’s CEO to advise of its intention to sell the Coromandel Park. They were told that if Hampshire Holiday Parks Limited (another competitor) had been approached, it would be the franchisor’s preference to sell to Hampshire. The sale didn’t occur.

On 20 July 2023, Coromandel executed conditional agreements to sell the underlying property and business to Tasman Tourism New Zealand Limited (‘Tasman’). Settlement was scheduled for 29 May 2024. The agreements set out that Coromandel would first try to obtain Top Ten’s consent to terminate the franchise agreement. Or, alternatively, obtain consent to assign the franchise agreement. Top Ten saw Tasman as a competitor in the marketplace; it had previously acquired other former Top Ten holiday park businesses, rebranding them as Tasman.

Emails were exchanged between Top Ten and Coromandel in late July 2023, where Top Ten advised it wanted to speak to the incoming purchaser about staying in the network and it preferred to avoid termination. When Coromandel asked about the costs of early termination, it was told a rough amount. However, the Top Ten Board ultimately did not approve the early termination of the franchise agreement.

On 30 April 2024, Coromandel advised Top Ten that the sale and settlement were scheduled for late May. On 10 May, the Top Ten Board confirmed that it did not approve the sale. On 21 May, after various without prejudice correspondence between the parties, Coromandel’s solicitors wrote to Top Ten’s solicitors with an open letter stating that Coromandel was willing to pay $175,000 to terminate the franchise agreement. Alternatively, it would seek an assignment.

Top Ten’s solicitors said the company would commence proceedings against Coromandel and Tasman, due to a breach of Coromandel’s obligations under the franchise agreement. They sought undertakings that Coromandel and Tasman would not complete the sale for three months. No undertakings were provided, so Top Ten applied for an interim injunction restraining Coromandel from selling the park to anyone without Top Ten’s consent, and to only operate the park as a Top Ten. They also sought a similar injunction restraining Tasman from encouraging Coromandel to sell the business and acquiring any interest in the business or underlying property.

Issues and the Law

Top Ten argued that any sale of the business was subject to prior written approval of Top Ten under clauses that stated the franchisee must seek prior written consent of the franchisor. It said the sale could only occur subject to the franchisor’s requirements, and that any agreement must contain the franchisor’s further terms of sale.

It argued the proposed sale breached other clauses of its franchise agreement, including the obligation to promote the franchise, conduct the park as a franchised operation, not to prejudice Top Ten’s goodwill or affect the consistency or retention of the customers of the franchised operation, and to act in good faith.

Coromandel and Tasman argued the Top Ten franchise was a marketing co-operative and fundamentally different from more orthodox forms of franchise. There was no express provision barring Coromandel from selling its business or land without Top Ten’s consent, so long as it was not sold as a ‘franchised operation’. Finally, they argued the Top Ten franchise agreement was fundamentally concerned with protecting Top Ten’s intellectual property and gave no proprietary interest in land or the business.

The Court considered it seriously arguable that the sale would amount to a breach of a franchise agreement and Coromandel could not sell the business without the consent of Top Ten. However, it agreed the Top Ten franchise agreement was not a franchise in the traditional sense and Top Ten was able to quantify its losses, given the emails from Top Ten setting out the proposed costs of an early termination. The Court heard there was another Top Ten holiday park in Coromandel, so Top Ten would continue to have a park in the area regardless. The Court dismissed Top Ten’s assertion that if Coromandel was permitted to sell, it would embolden other franchisees to breach their agreements, as ‘a step too far’. Top Ten objected to the sale to Tasman but would have agreed to a sale to Hampshire Holiday Park, another known competitor, the Court heard.

Coromandel had signed an agreement in principle to develop new buildings on the Cambridge site. To develop this, it needed the funds from the sale of Coromandel. The Court heard that if the injunction was granted, Coromandel would suffer serious losses as such. It would also be forced to stay in a relationship with a party with whom it had lost trust.

Relief

On 10 June 2024, the Court declined Top Ten’s application for an interim injunction. While it agreed that Coromandel and Tasman proceeded with open eyes, potential losses to Coromandel would be difficult to quantify and inadequately compensable through damages. Furthermore, the Court decided Top Ten did not provide adequate evidence to establish that it could make good its undertaking as to damages. The Court said it could not infer whether Top Ten’s shareholders or directors had agreed with an arrangement for Top Ten to honour its undertaking as to damages.

One New Zealand Group (formerly trading as Vodafone New Zealand Limited) v Redfone Limited

Background

Grant and Linda Knox (‘the Knoxes’) were employed by GSM Retail Limited, a franchisee with Vodafone (now One New Zealand Group). GSM managed stores at airports in Auckland, Wellington, Christchurch and Queenstown airports. Vodafone did not renew the franchise agreement with GSM and, on 2 February 2017, entered into a franchise agreement with Redfone Limited, of which the Knoxes were directors and guarantors under the franchise agreement.

In March 2017, Vodafone employees were told the directors of GSM were looking into potentially serious issues with the Knoxes that could lead to termination of their employment with GSM. Then, in April, Vodafone’s retail channel manager said he received a call from Linda Knox saying that she used Prezzy cards belonging to GSM for her own purposes.

By mid-May, Vodafone had received a letter from GSM confirming the results of an employment investigation into the Knoxes’ conduct and that GSM intended to pursue the matter with the police.

The GSM agreement was close to expiring, however Redfone did not seem suitable to be a successor franchisee. According to Vodafone’s distribution strategy manager at the time, the admission from Linda Knox, along with the letter from GSM intending to report the matter to police, meant Vodafone had no reasonable choice other than terminate the Redfone Franchise Agreement.

A meeting took place between Vodafone and the Knoxes on 18 May 2017. In the meeting, Linda Knox did not refute the allegation but said Grant Knox was not involved. Nothing at the meeting led Vodafone to doubt the need to terminate. The Knoxes were provided with a letter terminating the Franchise Agreement.

Vodafone’s distribution strategy manager said the Knoxes were excellent candidates, until Vodafone was made aware of the dishonesty allegations. The termination occurred due to potentially significant damage to Vodafone’s reputation if it chose to continue the franchise agreement.

The Knoxes were convicted of dishonesty offences in criminal proceedings following the termination of this agreement. The couple then brought proceedings against Vodafone. They alleged breach of contract by Vodafone and breach of duty owed to them as franchise principals, due to this termination. Vodafone, in turn, brought summary judgment proceedings, seeking orders that none of Redfone‘s claims could succeed, and the proceedings should end.

Issues and the Law

Vodafone argued it had the right to terminate immediately if there was any conduct by the franchisee principal, franchisee or its directors that it considered ‘fraudulent, unethical or may cause the loss of reputation to the Franchisor’. It said it was reasonable to consider that Linda Knox’s actions could cause damage to Vodafone’s reputation and would be subject to criminal investigation. It considered the actions fraudulent and unethical, therefore, the termination was valid and there was no breach of good faith or contract on its part.

Redfone argued Vodafone had acted unreasonably by terminating the franchise agreement. It said that the agreement had not come into effect and Vodafone had failed to consider the conflict of interest between GSM and the Knoxes. It claimed GSM was motivated to remove the Knoxes as competition.

Redfone also argued GSM waited ‘until the last minute’ to raise issues regarding the Knoxes’ conduct and there was no proper investigation by Vodafone, nor right of reply for the Knoxes. It claimed there was no credible evidence of fraudulent or unethical behaviour, nor any contemporaneous notes. It also argued statements about the offending conduct were made two and a half years after the event and the letter of termination was prepared before the meeting on 18 May 2017 took place, suggesting pre-determination on Vodafone’s part.

Vodafone stated it could rely on Linda Knox’s confession and the GSM letter. It said the meeting on 18 May 2017 was to provide her with an opportunity to reply to allegations and she did not. It said it would have a significant impact on Vodafone’s reputation to enter into an agreement with a party that was investigated for criminal conduct.

Relief

In March 2024, the Court agreed with Vodafone and granted its application. It ruled the termination was valid, and, at the time of the termination, Vodafone had acted reasonably.

The Court also doubted whether Vodafone owed a duty to the franchisee principal. This cause of action failed as it was found Vodafone did not breach the franchise agreement.

About the authors

Khushbu Sundarji and Stewart Germann are partners of Stewart Germann Law Office, a specialist franchising commercial law firm in Auckland with over 40 years of franchising experience.