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High Court of New Zealand Decisions |
Last Updated: 1 June 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-1696
BETWEEN SKIDS PROGRAM MANAGEMENT LIMITED
First Plaintiff
AND SKIDS HOLDINGS LIMITED Second Plaintiff
AND SAFE KIDS IN DAILY SUPERVISIONS LIMITED (FORMERLY KNOWN AS SKIDS NEW ZEALAND LIMITED) Third Plaintiff
AND BARBARA WINSOME MCNEILL First Defendant
AND MCNEILL ENTERPRISES LIMITED Second Defendant
AND NATASHA MAY-BABETTE MCNEILL- O'KEEFFE
Third Defendant
AND AATA BAYKIDS LIMITED Fourth Defendant
AND KIDS CHOICE LIMITED Fifth Defendant
Hearing: 29 and 30 November, 1 and 2 December 2010
Counsel: M Karam and R Griffin for the Plaintiffs
K Quinn for the Defendants
Judgment: 20 April 2011 at 4:45 PM
JUDGMENT OF WOODHOUSE J
This judgment was delivered by me on 20 April 2011 at 4:45 p.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
SKIDS PROGRAM MANAGEMENT LIMITED V MCNEILL HC AK CIV-2010-404-1696 20 April 2011
..........................................
Counsel:
Mr M Karam, Barrister, Auckland
Mr K Quinn, Barrister, Auckland
Instructing Solicitors:
Mr P Kemps, Kemps Weir, Solicitors, Auckland
Mr S L Germann, Stewart Germann Law Office, Solicitors, Auckland
Cont ...
AND BARBARA WINSOME MCNEILL First Defendant
AND MCNEILL ENTERPRISES LIMITED Second Defendant
AND NATASHA MAY-BABETTE MCNEILL- O'KEEFFE
Third Defendant
AND AATA BAYKIDS LIMITED Fourth Defendant
AND KIDS CHOICE LIMITED Fifth Defendant
Table of Contents
(Para No)
Introduction [1]
The claims and the issues [5]
The facts
Skids franchise : origins and structure [10]
2004 : Mrs McNeill’s master franchise agreement [17]
2005 : Mrs McNeill-O’Keeffe takes over at Pinehill [25]
The written Pinehill sub-franchise agreement [29]
2009 : Termination of Mrs McNeill’s master franchise agreement [37] Meeting on 2 December 2009 : Mrs McNeill and Skids [38] Meeting on 2 December 2009 : Mrs McNeill-O’Keeffe and Skids [45] December 2009 : correspondence between Skids and Mrs McNeill [48] Murrays Bay Intermediate School committed to
Mrs McNeill-O’Keeffe and Mrs McNeill [52]
Controversy over the defendants’ plans [55]
Kids Choice new programme at Murrays Bay School :
February 2010 and following [59]
Application for interim injunction [63]
Sales of Skids franchises [64]
Discussion : restraint of trade claims
Introduction [67] Mrs McNeill-O’Keeffe : restraint of trade claim [68] Mrs McNeill : restraint of trade : introduction [76] Mrs McNeill : waiver of the restraint of trade? [80] Mrs McNeill : restraint of trade provision : is it enforceable? [84] Mrs McNeill : restraint of trade : modification of the restrictions? [104] Mrs McNeill : restraint of trade : does Kids Choice compete
with Skids? [109]
Mrs McNeill : restraint of trade : loss and quantum [115]
Discussion : Skids documents : breach of confidence :
breach of copyright [123]
Discussion : enrolment information : failure to deliver to Skids : use [134] Result [141] Costs [147]
Introduction
[1] The plaintiffs, in different capacities, operate a child care franchise. It will generally be sufficient and convenient simply to refer to the plaintiffs as a group, either as “Skids” or the plaintiffs.
[2] The first defendant, Mrs McNeill, and the third defendant, Mrs McNeill- O‟Keeffe, are mother and daughter respectively. They were involved in operating child care programmes under Skids franchises, either directly or through the second and fourth defendant companies. One of these franchises was known as the Pinehill- Northcross franchise (“Pinehill” or “the Pinehill franchise”). In late 2009 the Pinehill franchise was being operated by Mrs McNeill-O‟Keeffe from Murrays Bay Intermediate School on the North Shore, Auckland.
[3] In February 2010 the fifth defendant, Kids Choice, began operating a child care programme based at Murrays Bay Intermediate. In broad terms it took over the programme that had been run by Mrs McNeill-O‟Keeffe under the Skids name. Kids Choice is a company owned by Mrs McNeill and Mrs McNeill-O‟Keeffe.
[4] Skids claims that, in setting up and operating the Kids Choice programme, one or more of the defendants has acted in breach of restraint of trade provisions in favour of Skids, was in breach of either contractual or equitable obligations of confidentiality, and infringed Skids‟ copyright in Skids‟ documents. Skids further claims that, on termination of the Pinehill franchise, there was a wrongful failure to “return” enrolment information.
The claims and the issues
[5] There are 10 causes of action in a statement of claim which runs to 41 pages. [6] There is a claim against the second defendant, McNeill Enterprises Ltd,
alleging wrongful retention and use of confidential information of the plaintiffs. There are two claims against the fourth defendant, Aata Baykids Ltd. One alleges
breach of contract in respect of provisions relating to non-competition, confidentiality, and matters related to confidentiality. The second alleges breach of equitable obligations of confidence. These three claims were not pursued to any real extent, were not made out, and do not require further consideration.
[7] There are three causes of action against Mrs McNeill. These are as follows:
a) A claim that Mrs McNeill is in breach of provisions of what is called a “master franchise agreement” in the following respects: (1) Mrs McNeill‟s involvement in the Kids Choice programme constitutes breach of a restraint of trade provision in the master franchise agreement. (2) In setting up the Kids Choice programme, Mrs McNeill misused confidential information contained in documents provided to her by Skids. (3) Mrs McNeill failed to comply with obligations on expiry of the master franchise agreement by failing to return documents, provide information, and do other things stipulated in the agreement. (1) and (2) remained in issue. (3) was not pursued to any material extent, except for the alleged breach by failing to provide enrolment information for Pinehill.
b) There is a claim of equitable breach of confidence in respect of the information which is also the subject of the contractual claim for breach of confidence.
c) There is a claim for breach of a sub-franchise agreement between Mrs McNeill‟s company, McNeill Enterprises, and Mrs McNeill- O‟Keeffe‟s company, Aata Baykids. This claim is founded on the fact that Mrs McNeill, as well as signing the agreement as director on behalf of her company, signed a schedule containing a guarantee of the obligations of the other party to the agreement, Aata Baykids. This claim stood or fell with the claims against Aata Baykids and, as with the claims against that company, this claim against Mrs McNeill in her personal capacity was also not pursued to any real extent. This cause of action, described in the second amended statement of claim
as the third cause of action against the first defendant, does not require further consideration.
[8] There are two claims against Mrs McNeill-O‟Keeffe, as follows:
a) There is a claim that Mrs McNeill-O‟Keeffe is in breach of contractual obligations. These are contractual obligations said to arise under the sub-franchise agreement just described, at [7]c) above; the agreement between McNeill Enterprises and Aata Baykids. Mrs McNeill-O‟Keeffe signed the agreement as a director of Aata Baykids. The plaintiffs contend that Mrs McNeill-O‟Keeffe is also personally bound and has: (1) acted in breach of a restraint of trade provision by becoming involved in the business of Kids Choice; (2) breached contractual obligations of confidentiality; and (3) breached some other provisions. This claim has a marked bearing on other claims and, in particular, the claims against Mrs McNeill for breach of the restraint of trade provision said to be binding on her. If Mrs McNeill-O‟Keeffe was not subject to a contractual provision preventing her from being involved in the Kids Choice programme, much of the plaintiffs‟ overall claim falls away. This is because, in essence, Mrs McNeill- O‟Keeffe would then have been able to establish Kids Choice without liability, she could and would have done so irrespective of Mrs McNeill‟s involvement, so that any wrongful acts of Mrs McNeill would not have been causative of most of the losses claimed by the plaintiffs.
b) There is a second claim against Mrs McNeill-O‟Keeffe alleging breach of equitable obligations of confidentiality, essentially the same as the claim in equity against Mrs McNeill.
[9] The two remaining causes of action are against the fifth defendant, Kids Choice. There is a claim of breach of confidence, again relating to use of the plaintiffs‟ documents. There is a second claim of breach of copyright.
The facts
Skids franchise : origins and structure
[10] The Skids programme began in 1996 with an after school programme established at Albany Primary School, north of Auckland, by Mrs Christina van Hof. By August 1998 Mrs van Hof had established a franchise structure for her programme. Mrs van Hof operated her business through a company called Safe Kids In Daily Supervision Ltd. This name was subsequently acquired by one of the plaintiff companies and I will generally refer to Mrs van Hof‟s company by its new name, Van Hof Ltd.
[11] Mrs Dawn Engelbrecht is a principal of the plaintiff companies. She explained that the Skids franchise structure has two types of franchise arrangement, as follows:
a) Master Franchises: These are allocated particular areas, and the Master Franchisees are expected to sell sub-franchises within their designated areas. The territories for Master Franchises are based on agreed boundaries.
b) „Standard‟ Franchises: These are allocated to a specific primary school, and the franchisee‟s territory is the school‟s enrolment zone as set by the Ministry of Education and any other agreed area.
[12] On 4 July 2006, Van Hof Ltd sold its child care business to the first plaintiff for $20,000. The shareholders and directors of the first plaintiff were two existing master franchisees, Mrs Engelbrecht and Mrs Beverly Parsons. Mrs McNeill was also a master franchisee, pursuant to an agreement made with Van Hof Ltd on 12
December 2004. I will discuss that agreement in more detail below.
[13] It is apparent from evidence for the plaintiffs that an important aspect of their overall franchise arrangements is the franchise attached to a specific primary school; what was described in Mrs Engelbrecht‟s evidence, noted above, as a standard franchise. Associated with this, and part of what Skids obviously had to offer to franchisees, was a lease with the primary school, or some other form of security of tenure, coupled with a school roll effectively providing a ready source of business.
[14] It is also apparent that Skids, under the ownership of the plaintiffs from July
2006, has developed systems which are of assistance to franchisees and also to parents whose children are in one of the programmes. Amongst other things, Skids has developed standard documentation for approval to be obtained from the Child, Youth and Family Service (CYFS) of the Ministry of Social Development under a scheme called “OSCAR (Out of School Care and Recreation Foundation)”. OSCAR approval enables parents to seek subsidies for fees and a franchisee to seek a grant, both provided through the Ministry of Social Development.
[15] Although systems have been developed since the purchase from Van Hof Ltd in 2006, this was not the case when the plaintiffs took over. Mrs Engelbrecht said:
When Bev and I took over the SKIDS business in July 2006, the base model was in place as a concept but significant development work has since been undertaken. For example, when we took over there was only very limited materials relating to policies and procedures, and employment documents were out of date. Many new measures were implemented in order to gain accreditation with the Franchise Association of New Zealand.
Bev and I initiated significant development of procedures in relation to the operations of the business and the franchise model. Specific procedures were implemented for the acquisition of new franchisees, and also the operations of the franchisee‟s businesses, as well as support services that are provided to franchisees.
[16] This evidence therefore indicates that the systems and documents developed by the plaintiffs, and which are of importance in this case, were not in place when Mrs McNeill purchased her franchise in December 2004, the topic to which I now turn.
2004 : Mrs McNeill’s master franchise agreement
[17] On 12 December 2004 Mrs McNeill entered into a master franchise agreement with Van Hof Ltd. She paid $20,000 for the franchise. The agreement was for an initial term of 5 years, expiring on 11 December 2009, with a right of renewal for a further 5 years. Mrs McNeill‟s master franchise territory was called “North Shore/Rodney”. In broad terms this territory was the northern half of the North Shore of Auckland (north of Wairau Road/Forrest Hill Road to an ill-defined
northern boundary). At this time there were three other master franchise areas, all in the greater Auckland area.
[18] Mrs McNeill‟s agreement is in two parts. The first part is a short form agency agreement by which Mrs McNeill was appointed the agent of Van Hof Ltd (then known as Safe Kids In Daily Supervision Ltd) for the franchise area just described. The agency agreement records the term of 5 years, with a right of renewal on payment of “$15,000 plus or minus CPI”. Clause 6 of the agency agreement is as follows:
The Agent may negotiate the lease agreements concerning premises provided however SKIDS approve and execute such agreements.
There is provision in the agency agreement for the payment of royalties, being 3% “of total gross income generated from the business of SKIDS within the Rodney North Shore Franchised Area”.
[19] Attached to the agency agreement, and forming part of it, is a standard form, blank agreement containing the terms by which a master franchisee, such as Mrs McNeill, was required to grant franchises as agent of Van Hof Ltd. The provisions referred to in the following paragraphs are in this attached standard form document.
[20] Relevant introductory provisions are as follows:
WHEREAS
A. Skids is engaged in the business of after school care, holiday care and before school care of children and has developed the system and procured contracts with schools.
B. The Franchisee wishes to use the system for the operation of a business.
Skids has agreed to grant the Franchisee a Franchise to use the system subject to the terms and conditions of this agreement.
...
1.1 Definitions
“Business” means the business of performing after school care of children (including the initial contracts) under franchise in accordance with the system.
...
“Franchise” means the Franchise granted by Skids to the Franchisee under this Agreement to use the system for the conduct of the business.
...
“Total Gross Revenue” means the entire gross receipts of every kind and nature from the conduct of the business, without reserve or deduction for inability or failure to collect, including bona fide [sic] refunds and credits and GST or other [sic].
[21] Clause 7.1 deals with documents provided by Skids to the franchisee, as follows:
Skids shall provide to the Franchisee written material in the form of a manual outlining the rules, standards and guidelines for operation of the franchise in accordance with the system. All such material shall at all times remain the property of Skids and upon termination or expiry of this agreement, shall be returned to Skids together with any copies made. The franchisee shall not copy or reproduce the manual without Skids‟ prior written consent.
[22] The relevant confidentiality provision is as follows:
16. CONFIDENTIAL INFORMATION
16.1 System
The Franchisee acknowledges that the system shall be regarded by the parties as confidential and shall remain the sole property of Skids. The Franchisee shall not during this agreement or afterwards use, divulge or communicate to any person any confidential information concerning the practice, dealings, transaction or affairs of Skids which may have been acquired by the Franchisee pursuant to the performance of its responsibilities under this agreement.
The “system” referred to in clause 16.1 is not defined in the agreement.
[23] The relevant restraint on competition provision in Mrs McNeill‟s master franchise agreement is clause 24.2. This clause refers twice to a schedule to the agreement for matters of detail. It is convenient to remove the references to the schedule and insert the relevant provisions from the schedule into the primary clause, as indicated below by the words in square brackets. Apart from these amendments, the clause is set out below as drafted, including drafting errors. Restraint on the franchisee during the term of the franchise is provided for in clause 24.1. This
clause is also reproduced because of the differences between it and the restraint upon termination in clause 24.2.
24 RESTRAINT ON COMPETITION
24.1 Restraint during term of Franchise
The Franchisee covenants that it shall not during the term (or any period in renewal or extension of it), except with the prior written approval of Skids, be concerned or interested in any capacity whatsoever in the business of after school child care, or any other associated activity within New Zealand. The Franchisee‟s interest in the franchise granted pursuant to this agreement shall not constitute a breach of this clause.
24.2 Restraint upon termination
The Franchisee covenants that it shall not for [24 months] following the expiration or termination of this agreement (or any period in renewal or extension of it) either solely or as director, manager, employee, advisor or agent or otherwise howsoever for any person or corporation directly or indirectly:
(a) Can‟t operate or be concerned or interested in any business conducted in competition with the business of Skids (or its other Franchisees) within [a 15 km radius of the perimeter of each Skids franchise operation];
(b) approach or solicit or endeavour to obtain the custom of any existing customer of Skids.
[24] There is an issue as to the reasonableness of the restraint of trade provision. Clause 21.1 has relevance in that regard. This clause, and its heading, are as follows:
21. NON-EXCLUSIVE FRANCHISE INTRODUCTIONS
21.1 Skids shall be at liberty to acquire, commence or perform such after school childcare contracts as Skids shall so desire provided that the acquisition or performance of such contracts by Skids shall not substantially detract from the business conducted by the Franchisee.
2005 : Mrs McNeill-O’Keeffe takes over at Pinehill
[25] When Mrs McNeill acquired the master franchise there were two Skids programmes in her area, both of which were being operated by one person. One programme was based at Albany Primary School and the other at Northcross Community Hall. The programme at Northcross Community Hall is the Pinehill
programme. The Pinehill programme was at the Northcross Community Hall, then another location, before it moved to Murrays Bay Intermediate School in 2007.
[26] In February 2005 Mrs McNeill considered closing the Pinehill programme. This was because it was almost moribund. There had been no more than four children attending. However, with Mrs van Hof‟s consent, Mrs McNeill offered Pinehill to her daughter, Mrs McNeill-O‟Keeffe, on the basis that Mrs McNeill- O‟Keeffe did not have to pay an initial fee. As Mrs McNeill-O‟Keeffe put it:
5. Barbara [McNeill] asked me if I would like to take over the programme and try to make a go of it. She was offering to gift it to me, so I agreed to give it a go.
6. I remember the first day after I took over. I had no idea whether any of the original four children would even turn up. The previous owner of the programme, Margaret Clarke, had told the parents of those children that the programme was going to close down. I had phoned the parents to tell them that the programme was continuing, but I really didn‟t know whether anyone would turn up.
7. As it turned out, one boy turned up on the first morning. I remember sitting with him and having breakfast. That same afternoon, I picked up a couple of kids, and took them to the hall. It was a very, very modest operation.
8. There was clearly no money in it at all. That is why Barbara simply gave it to me. I didn‟t have to pay any franchise fee to her, and nor did I have to pay any royalties. The agreement or understanding we had was that when the five years were up, if the programme was still going and I wanted to continue, then I would have to pay a $5,000 franchise fee at that point. As for royalties, our arrangement was that I would pay those to Barbara only if the programme started making a profit.
There was no material challenge to this evidence.
[27] Mrs McNeill and Mrs McNeill-O‟Keeffe recorded the terms, as outlined above, in an informal document in February 2005. They have not been able to locate the document. I am nevertheless satisfied that, in the agreement between Mrs McNeill and her daughter, there was no restraint of trade provision binding on Mrs McNeill-O‟Keeffe, nor any provisions relating to confidentiality.
[28] In September 2006 Mrs McNeill incorporated the second defendant, McNeill Enterprises Ltd, and Mrs McNeill-O‟Keeffe incorporated the fourth defendant, Aata Baykids Ltd. To an extent both women conducted their respective child care programmes through their companies. However, in most respects of relevance in this proceeding it is not necessary to distinguish between the individual and the company. The focus of the claims was on the actions of Mrs McNeill and Mrs McNeill-O‟Keeffe.
The written Pinehill sub-franchise agreement
[29] There is one central issue where the separate identities of companies, shareholders, directors, and individuals acting in other capacities, is important. This is the issue, noted at [8]a), as to whether Mrs McNeill-O‟Keeffe is bound by the written agreement between McNeill Enterprises and Aata Baykids and, in particular, the restraint of trade provision. The facts in this regard are as follows.
[30] On 19 July 2006, soon after purchase of the Skids business from Van Hof
Ltd, Mrs Engelbrecht, on behalf of Skids, wrote to Mrs McNeill saying:
I do not seem to have copies of Margaret & Tasha‟s Franchise agreements –
please can you post me copies?
Margaret is the person who at that time was running the Albany school programme. Tasha is Mrs McNeill-O‟Keeffe.
[31] Mrs McNeill replied in an e-mail of 21 July 2006 saying that she never had a
copy of Margaret‟s agreement and then said:
As for Natasha – The Pinehill programme had 1 child attending at the time I took it over. As it was a toss up whether I kept the programme or gave it away I offered it to Natasha free of charge as an opportunity for her to either make or break it as a business venture. Officially I do not have a Franchise Agreement with Natasha. Only a statement signed between the two of us stating that I had gifted her the programme free of charge. She agrees to pay royalties as soon as the programme starts to cover its own expenses (currently I am still “topping up the till” for her.)
[32] On 14 November 2006 Mrs Engelbrecht sent an e-mail to Mrs McNeill saying that, as had been discussed previously, it was imperative that Mrs McNeill and Mrs McNeill-O‟Keeffe complete an “official Franchise Agreement”. A sub- franchise agreement, drafted by Skids‟ solicitors, appears to have been forwarded with that e-mail. There were further discussions and correspondence between Mrs Engelbrecht and Mrs Parsons for Skids, and Mrs McNeill and Mrs McNeill- O‟Keeffe, including agreement on amendments to the sub-franchise agreement sought by Mrs McNeill or Mrs McNeill-O‟Keeffe. It is apparent from the evidence as a whole that Skids was insistent on having a fully documented agreement relating to Pinehill and was taking legal advice as negotiations proceeded.
[33] The sub-franchise agreement was signed on 23 February 2007 by Mrs McNeill on behalf of McNeill Enterprises and Mrs McNeill-O‟Keeffe on behalf of Aata Baykids. McNeill Enterprises is defined as “the Franchisor” and Aata Baykids as “the Franchisee”. The first plaintiff is referred to as “the Head Franchisor”. Aata Baykids, effectively as sub-franchisee, acknowledges and agrees that its “promises and undertakings” are also for the benefit of Skids and enforceable by Skids.
[34] A range of obligations was imposed on Aata Baykids, including a “restraint on competition provision”. It is unnecessary to set these out. There is also a provision by which shareholders and directors of Aata Baykids, as franchisee, can be required to be personally bound. This provision is as follows:
18. Personal Guarantees
18.1 Where the Franchisee is a company the Franchisee will at the time of entering into this agreement procure the execution by such of its shareholders and directors as are required by the Franchisor of a personal guarantee of the Franchisee‟s obligations under this agreement, in the form set out in Schedule 3, and to be delivered to the Franchisor duly executed by all such guarantors.
[35] Schedule 3, referred to in clause 18.1, is headed “deed of guarantee and indemnity” and is addressed, in its original typewritten form, to McNeill Enterprises and Skids. The “guarantor”, as well as providing a guarantee in respect of obligations of the franchisee, “covenants and agrees to be bound personally” by the restraint of trade provision, as well as protection of intellectual property and
confidentiality provisions. Schedule 3 was signed by Mrs McNeill. It was not signed by Mrs McNeill-O‟Keeffe, the shareholder and director of the franchisee, Aata Baykids.
[36] The signing of the sub-franchise agreement on 23 February 2007 appears to have been prompted by a somewhat insistent e-mail of that date from Mrs Engelbrecht to Mrs McNeill, noting that Mrs McNeill had undertaken to get the document back to Mrs Engelbrecht by 23 February 2007. This followed a similar request the week before. The signed document was returned to Skids. No issue was taken with the manner in which the “guarantee” was signed. There was also no requirement then, or at any later date, pursuant to clause 18.1 of the sub-franchise agreement, by McNeill Enterprises as “franchisor”, or Mrs McNeill, or Skids as head franchisor, that Mrs McNeill-O‟Keeffe execute the “guarantee”; that is to say, the covenants in schedule 3.
2009 : Termination of Mrs McNeill’s master franchise agreement
[37] By letter of 11 August 2009 Mrs Engelbrecht for Skids advised Mrs McNeill that it was not prepared to grant a renewal of the master franchise agreement from its expiry on 11 December 2009. Reasons for this decision included the following:
During the five years you have been a master franchisee, you have failed to develop your territory by opening and establishing new sites. All you have done is operate two sites yourself, and provide minimal support to Natasha.
What were said to be failures by Mrs McNeill to comply with her obligations were set out at some length. Mrs Engelbrecht then said:
You may continue to operate three sites at Stella Maris, Albany and Kristin. A new direct franchise agreement will need to be entered into in respect of each site. You must comply with all of your obligations under these agreements on an ongoing basis.
Natasha may continue to operate the Pinehill / Northcross site, under a new direct franchise agreement to be entered into with us.
New direct franchise agreements will follow shortly.
Drafts of proposed new agreements for Mrs McNeill and for Mrs McNeill-O‟Keeffe
were subsequently sent.
Meeting on 2 December 2009 : Mrs McNeill and Skids
[38] There was a meeting between Mrs McNeill, Mrs Engelbrecht and Mrs Parsons on 2 December 2009. There is an issue whether, at the meeting, Skids agreed to waive the restraint of trade provision in the master franchise agreement.
[39] Some time before that meeting the Skids programme run by Mrs McNeill at Albany Primary School came to an end when the Board of Trustees of the school awarded the child care programme at that school to another operator. Apart from Pinehill, there were two other Skids programmes in Mrs McNeill‟s franchise area. These were at Stella Maris and Kristin schools. The evidence establishes that, before the meeting on 2 December 2009, Mrs Engelbrecht (and I assume Mrs Parsons) was anticipating that Mrs McNeill would at least complete the programmes at Stella Maris and Kristin through to the end of the school year on 17 December 2009, and also run holiday programmes through late December and January, notwithstanding the fact that her master franchise agreement came to an end on 11 December 2009. This is apparent from an e-mail from Mrs Engelbrecht to Mrs McNeill of 20
November 2009. Mrs McNeill replied, but without saying anything in relation to what she intended after 11 December 2009.
[40] Towards the beginning of the meeting, Mrs McNeill told Mrs Engelbrecht and Mrs Parsons that she had decided not to enter into new agreements relating to Stella Maris and Kristin. This surprised Mrs Engelbrecht and Mrs Parsons. Mrs McNeill explained her reasons. She said that she was nevertheless willing to continue to run the Stella Maris and Kristin programmes after the termination date of
11 December, until the end of the school holiday programme on 2 February 2010, provided Skids agreed to a complete waiver of the restraint of trade provision. Waiver of the restraint of trade provision was sought because, Mrs McNeill said, she wished to continue working to supplement her superannuation and that she wanted to continue to work with children. Mrs McNeill said that there would have been
difficulties for Skids if she had simply ceased running the programmes on 11
December. She said that Mrs Engelbrecht and Mrs Parsons accepted her offer.
[41] Mrs McNeill went to the meeting with her grand-daughter Alisha, who is the daughter of Mrs McNeill-O‟Keeffe. Alisha is also a director of and 50% shareholder in McNeill Enterprises. Mrs McNeill said that she asked Alisha to come to the meeting with her as a witness. Alisha McNeill-O‟Keeffe confirmed Mrs McNeill‟s evidence. There was no direct challenge by cross-examination of the evidence-in- chief of Alisha McNeill-O‟Keeffe.
[42] Mrs Engelbrecht gave the detailed evidence for Skids about this meeting. Mrs Parsons said she agreed with Mrs Engelbrecht‟s evidence. Mrs Engelbrecht noted Mrs McNeill‟s advice that she did not wish to continue as a franchisee then said:
She did however state that she had discussed the situation with Natasha, and that as Natasha then wished to remain as a franchisee, Barbara sought our approval for her restraint of trade restrictions to be relaxed to allow her to work as Natasha‟s employee. We were agreeable to a limited relaxation of her restraint of trade provision on this basis (if Natasha renewed her franchise agreement).
[43] Mrs Engelbrecht said:
programme until end of term, 17 December 2007.
(b) Barbara was permitted to work on in the Kristin holiday programme until after the summer holidays (2 February
2009); and
(c) The terms of Barbara‟s restraint of trade would be relaxed only to the extent that she would be permitted to work for Natasha as an employed manager of the SKIDS Pinehill- Northcross territory (if Natasha elected to enter into a new direct franchise agreement from SKIDS).
[44] The witnesses therefore agreed that there was a discussion about some sort of modification of the restraint of trade provision and that an agreement was reached, but the evidence conflicted on the terms of that agreement. Some of the correspondence that follows is relevant to determination of the question whether
there was an agreement – a meeting of minds – and if so the terms of it. I will note the meeting with Mrs McNeill-O‟Keeffe, before outlining some of the correspondence that followed the meetings.
Meeting on 2 December 2009 : Mrs McNeill-O’Keeffe and Skids
[45] The purpose of the meeting was to discuss whether Mrs McNeill-O‟Keeffe would continue with the Pinehill programme and, if so, the terms. There was a good deal of debate in evidence and submissions as to whether the negotiations related to a proposed renewal of an existing contract, subject to possible modifications, or entry into a new contract. Skids contended that it was merely a renewal, and it was obviously presented on that basis to seek to lend weight to the argument that Mrs McNeill-O‟Keeffe was bound by a restraint of trade provision and to seek to
diminish a defence argument relating to losses claimed by Skids.[1] It is clear beyond
reasonable argument that Skids was proposing to Mrs McNeill-O‟Keeffe that she enter into a new agreement. The terms proposed by Skids were significantly different from the preceding arrangement with her mother. It was proposed that there be a direct agreement between Skids and Mrs McNeill-O‟Keeffe compared with Mrs McNeill-O‟Keeffe‟s existing agreement with her mother. And Skids‟ own letter of 11 August 2009 accurately described what it was proposing as being a “new direct franchise agreement”.
[46] The parties discussed a range of matters without reaching agreement. It is unnecessary to go into the detail of most of this. However, what is relevant to the question whether Mrs McNeill-O‟Keeffe was already bound by a restraint of trade provision is that, at this meeting, Mrs McNeill-O‟Keeffe made clear that she did not consider herself to be already bound by any restraint of trade provision and expressed concerns about the provision to that effect in Skids‟ proposal for the
future.
[47] Following the meeting with Mrs McNeill-O‟Keeffe there was correspondence between her and Skids‟ solicitors. In broad terms this correspondence covered possible amendments to the agreement to make it acceptable to Mrs McNeill-O‟Keeffe. In the event, no new agreement was entered into between Skids and Mrs McNeill-O‟Keeffe and her sub-franchise agreement came to an end in February 2010.
December 2009 : correspondence between Skids and Mrs McNeill
[48] Following the 2 December meetings, on the same day, Mrs Engelbrecht sent an e-mail to the plaintiffs‟ solicitors reporting the outcome of the meetings. In respect of the meeting with Mrs McNeill, Mrs Engelbrecht said that Mrs McNeill would not be renewing the master franchise agreement. She said it had been agreed that:
a) Mrs McNeill would work at Stella Maris until the end of the school term on 17 December after which she would hand everything over to Skids.
b) She would work at Kristin until the end of the January 2010 holidays after which she would hand everything over to Skids.
c) Mrs McNeill would be allowed to work for Mrs McNeill-O‟Keeffe as a programme manager at Pinehill notwithstanding the restraint of trade provision binding on Mrs McNeill.
[49] On 9 December Mrs Engelbrecht, on behalf of Skids, wrote to Mrs McNeill recording that, because there had been no renewal, the master franchise agreement would terminate on 11 December 2009. Mrs Engelbrecht then recorded her summary of what was agreed at the 2 December meeting. It was essentially in the same terms as the advice to Skids‟ solicitor.
[50] On 10 December 2009 there was a letter from Mrs McNeill‟s solicitors to Skids‟ solicitors. This records that the partner of the firm advising Mrs McNeill had been away since 1 December 2009 and then says:
The writer has little background information on the matter but understands from our client that your client, the franchisor, regards the Franchise Agreement to expire on 11 December 2009. There appears to have been correspondence between the parties regarding the possible extension of the franchise term but terms have not as yet been agreed.
Mrs McNeill confirmed that she gave instructions in respect of this letter.
[51] There was a reply by e-mail on the same day from Skids‟ solicitors. They said that the agreement had been recorded in the letter from Skids to Mrs McNeill of
9 December, and sent a copy of it and there was no immediate challenge to Skids‟ record of the meeting as contained in the 9 December letter. There was a challenge in an e-mail from Mrs McNeill on 25 January 2010, which I will come to in chronological sequence (at [57]).
Murrays Bay Intermediate School committed to Mrs McNeill-O’Keeffe and Mrs
McNeill
[52] On 16 December 2009 the principal of Murrays Bay Intermediate School, Mr
Colin Dale, wrote to Skids as follows:
Dear Dawn
I am the Principal of Murrays Bay Intermediate School.
Currently Natasha McNeill-O‟Keeffe and her mother, Barbara McNeill, provide excellent service in relation to the after-school care and holiday programmes for children of this school and other nearby schools. However, I have never signed a contract with SKIDS nor do I intend to.
Natasha and Barbara have advised me that their current agreements with you expire on 17 December 2009. They would very much like to continue to provide their services to Murrays Bay Intermediate School, and I would like to continue to have them here. I understand that they will provide you with a letter if necessary confirming that they will not use the SKIDS name, the intellectual property or any other property of SKIDS.
I confirm that I would like to keep using the services of Natasha and Barbara and I write this letter in support of their willingness to continue to be associated with this school. Please confirm that you are agreeable to the above arrangements.
[53] Mr Dale gave evidence. He said that this letter had been drafted by either Mrs McNeill or Mrs McNeill-O‟Keeffe – he could not remember who – and presented to him for signature. He made clear that the letter reflected his own views and I am satisfied that it did. The genesis of this letter was a discussion Mrs McNeill-O‟Keeffe and Mrs McNeill had with Mr Dale following the meetings on 2
December 2009. Mr Dale was told that the Pinehill after school programme might not be continuing with Mrs McNeill-O‟Keeffe and that Mr Dale could contact Skids if he wanted to put in another programme. Mr Dale said that he was not interested in contacting Skids.
[54] Mr Dale also said, in essence, that he considered the commitment of the particular person running the programme, and that person‟s relationship with parents and children, to be of central importance. This was based not only on Mr Dale‟s experience as a school teacher and principal, but also on his direct experience in setting up an after school care programme at a primary school in Mt Albert, Auckland which he then ran for 10 years. He set it up in 1992 and it was Mr Dale‟s understanding that it was the first after school programme. Mr Dale impressed me as a thoughtful school principal with a good deal of experience in matters relating to younger school children.
Controversy over the defendants’ plans
[55] Mr Dale‟s letter resulted in an e-mail from Mrs Engelbrecht to Mrs McNeill and Mrs McNeill-O‟Keeffe on 22 December 2009. She noted that she had received Mr Dale‟s letter and then said:
Despite all of your verbal assurances to the contrary it appears that you have approached the School with the intention of establishing a non-SKIDS service to replace SKIDS Pinehill-Northcross. This would be in breach of your agreements with SKIDS, i.e. the restraint of trade and non-competition covenants you are both subject to. I strongly suggest that you contact your lawyer immediately and discuss your actions with him to enable you to understand the legal ramifications of your actions.
Natasha, we have already made it very clear that SKIDS are willing to grant you a new franchise agreement for SKIDS Pinehill-Northcross, and we have even varied the restraint provisions to accommodate your wishes regarding your employment as a paediatric nurse.
[56] Mrs McNeill replied in a letter of 23 December saying, amongst other things:
Colin Dale of Murrays Bay Intermediate School has always said to Natasha and me that he would not sign a contract with SKIDS. He has only been happy to have SKIDS there because Natasha and myself have been involved but this arrangement could not continue as you did not want it to. Colin Dale said that he wished to continue with the services of Natasha and myself and I only want to work for a short period of time as I am getting older.
...
Murrays Bay Intermediate School wishes to have Natasha and myself continuing to provide a similar service and I cannot see how it will affect you since the school will never be signing a contract with SKIDS and you have my assurance that none of your documents, systems, policies etc will be used at Murrays Bay Intermediate School, nor do we have any intention of attempting to encourage any of your current SKIDS children to use our service.
Under the circumstances I ask you to let the matter lie and allow us to work at that school as that is what Colin Dale wants. If you do not believe me then I invite you to talk to Colin Dale in the New Year.
I am currently in the process of collecting all the SKIDS documentation, current enrolments etc together, these will be couriered to your office in the New Year.
... We do not intend to steal your property or your secrets and we only wish to look after the children and Murrays Bay Intermediate School.
[57] Correspondence followed from or on behalf of Skids strongly objecting to the proposal that Mrs McNeill and Mrs McNeill-O‟Keeffe commence a new programme at Murrays Bay Intermediate School. On 21 January 2010 Mrs McNeill responded to one of the letters from Skids‟ solicitors and said, amongst other things:
Please note that on 2 December 2009 I met with Dawn and Bev and put forward the following proposal to them:
“Head office to remove the restraint of trade completely and in return I would continue to work until the end of the school year and also operate the holiday programmes until beginning of the new school year”.
I suggest that you ask Dawn and Bev about that proposal as they both verbally agreed to it at the meeting and Dawn advised me she would be requesting you to send me a letter waiving the restraint of trade under the circumstances. She has obviously never told you that fact or conveniently forgotten so I suggest you obtain proper instructions.
Natasha and I have no intention of damaging SKIDS in any way. We will not use any intellectual property belonging to SKIDS and I have previously told Dawn that. I suggest that everyone gets on with doing more productive things.
[58] The correspondence continued, but it is unnecessary to record the content. The parties did not reach any agreement.
Kids Choice new programme at Murrays Bay School : February 2010 and following
[59] On 2 February 2010 a new school care programme based at Murrays Bay Intermediate School commenced in the name of the fifth defendant, Kids Choice Limited. Mrs McNeill and Mrs McNeill-O‟Keeffe are the directors of and shareholders in Kids Choice. Approximately 40 children who had been in the Pinehill programme in 2009 were enrolled in the Kids Choice programme in 2010. In the first school term there were 54 children enrolled in the Kids Choice programme. The parents of children enrolled at the end of 2009 were advised in January that the Skids programme at Pinehill was coming to an end and were given an 0800 number to contact Skids if they wished to do so.
[60] In the first term of the Kids Choice programme it had children attending from
12 different schools. To provide this service it was necessary for Kids Choice to collect many of these children in three vehicles owned by Mrs McNeill-O‟Keeffe and which she had bought for that purpose. On occasions a fourth vehicle was required.
[61] In August 2010 Kids Choice had to move from Murrays Bay Intermediate because the school hall they were using was no longer available. Kids Choice rented a church hall in another location on the North Shore. Mrs McNeill said that the rent was very high, compared with what they were paying at Murrays Bay Intermediate,
and the premises were very old. She anticipated a further move before the end of the year.
[62] Mrs McNeill was responsible for preparing documents to obtain CYFS approval of the Kids Choice programme. These documents were submitted to CYFS on 16 April 2010. Approval was obtained in July 2010. The claims by Skids of breach of confidentiality obligations and breach of copyright relate to the documents submitted to CYFS by Kids Choice. I will outline the broad nature of these documents and deal with the evidence of breach when I come to discuss these claims.
Application for interim injunction
[63] On 19 March 2010 Skids applied for an interim injunction against all defendants. The orders sought ran to three pages, but the essence was to restrain all defendants from operating a child care programme at Murrays Bay Intermediate School. Asher J held that there was a serious question to be tried on the principal
claims against Mrs McNeill, Mrs McNeill-O‟Keeffe and Kids Choice.[2] In assessing
relevant balance of convenience matters he concluded (based, of course, on the information then available), that the quantum of any loss that might ultimately be established by the plaintiffs was likely to be “limited” and it was further likely that a “modest damages award can be met by the defendants”.[3] The likelihood that the defendants could meet a modest award of damages was based, at least in part, on the defendants‟ undertaking to make payments into their solicitor‟s trust account of 11%
of the gross earnings of Kids Choice. In the result, the Judge declined the application for an interim injunction and other interim orders, but on the basis that the undertaking continued. At 15 November 2010 the defendants had paid a total of
$9,004.14 into their solicitor‟s trust account.
Sales of Skids franchises
[64] Ms Christine Bartels gave evidence for Skids of “recent” sales by Skids of seven franchises based at schools. The schools and prices are as follows, with the number in brackets being the number of children enrolled in the programme: Northcote $50,000 (30); Stella Maris $50,000 (30); Kristen $35,000 (6); Remuera
$65,000 (50); Burnside $40,000 (22); Browns Bay $42,000 (20-25); Onehunga
$50,000 (30).
[65] The Browns Bay franchise is based at Browns Bay Primary School. This was a new franchise established by Skids in the middle of the area in which Kids Choice was operating. Skids was able to secure a lease from Browns Bay Primary School for a term of 2 years commencing on 20 December 2010 with a right of renewal for a further 5 years. The agreement to lease is dated 8 November 2010 and Skids was able to enter into a franchise agreement on 19 November 2010, with the purchase price for the franchisee being the sum of $42,000 noted above. The sum of $42,000 included a documentation fee of $2,000. (All these figures are exclusive of GST.)
[66] Mrs Bartles‟ evidence provided the foundation for expert evidence called by Skids from Mr Andrew McKay, a chartered accountant and director of a financial and business advisory firm. I will discuss Mr McKay‟s evidence when considering the quantum of loss.
Discussion : restraint of trade claims
Introduction
[67] There is the claim against Mrs McNeill-O‟Keeffe, summarised at [8]a), that she was subject to a restraint of trade provision in the sub-franchise agreement between McNeill Enterprises and Aata Baykids and that she acted in breach of the provision when Kids Choice started in February 2010. In my judgment, for reasons which follow, this claim is not made out. I will consider this claim first because my conclusion that it is not made out has a significant bearing on other claims.
Mrs McNeill-O’Keeffe : restraint of trade claim
[68] The reason why the restraint of trade claim cannot succeed against Mrs McNeill-O‟Keeffe is that she is not bound by any contractual provision to that effect and an obligation not to compete does not arise in any other way.
[69] The claim against Mrs McNeill-O‟Keeffe is founded on the proposition that she is in some way bound by the “deed of guarantee and indemnity” contained in the sub-franchise agreement (described at [34]-[35] above), notwithstanding the fact that she has not executed the deed of guarantee and indemnity.
[70] In my judgment, the fact that Mrs McNeill-O‟Keeffe has not executed the deed is determinative of this issue. Execution by her, in order to be bound, was not merely a matter of form. Clause 18.1 of the sub-franchise agreement (recorded at [34] above) provides, in effect, that “the Franchisor” (McNeill Enterprises) may require shareholders and directors of the franchisee (Aata Baykids) to execute the deed of guarantee and indemnity. On the face of it, execution of the deed was a pre- requisite to liability. That would normally be the case in relation to a guarantee in any event. The deed of guarantee and indemnity contains a provision by which the person executing the deed would also be personally bound by provisions in the deed relating to protection of intellectual property, confidentiality and the restraint on competition. Obligations of that nature might arise without a signature in writing. But in this case that is precluded by clause 18, apart from anything else. Clause 18 expressly provides for execution of the deed. It also provides, by negative implication, that the shareholders and directors of the franchisee will not be personally bound at least until they have been required to execute the deed. Not only has Mrs McNeill-O‟Keeffe not executed the deed, she was not required to execute it by anyone. In particular, there was no requirement by Skids, at any time, that Mrs McNeill-O‟Keeffe execute the deed. This state of affairs existed for three years, from execution of the agreement in February 2007 to its expiry in February 2010.
[71] Skids pleaded, in its second amended statement of claim:
97. Viewed as a whole and objectively, it is clear that the third defendant [Mrs McNeill-O‟Keeffe], being the sole director and shareholder of the fourth defendant [Aata Baykids], agreed to be bound by the personal guarantee in Schedule 3 of the Sub-Franchise Agreement.
98. In addition, the conduct of the parties evidences a mutual assumption that the third defendant had executed the guarantee and was bound by its terms.
[72] Neither contention is borne out by the evidence. There is no evidence that Mrs McNeill-O‟Keeffe evinced an acceptance of personal obligations in any way. The evidence from Mrs McNeill-O‟Keeffe‟s meeting with Mrs Engelbrecht and Mrs Parsons in December 2009, and subsequent correspondence between Skids and Mrs McNeill-O‟Keeffe, shows an unwillingness on the part of Mrs McNeill-O‟Keeffe to be bound by a general restraint of trade provision. Although this relates to a proposed provision in a new agreement, it is the only direct evidence on Mrs McNeill-O‟Keeffe‟s attitude to restraint of trade provisions, and it is contrary to the Skids‟ contentions in the statement of claim.
[73] Mr Karam submitted that no challenge was made by Mrs McNeill-O‟Keeffe when it was first alleged that she was bound by the restraint of trade provision in the sub-franchise agreement. He referred to Skids‟ contentions to that effect in correspondence from and after 22 December 2009. A failure to respond proves nothing in favour of Skids. These contentions were made long after the agreement was executed and returned to Skids in February 2007. They were made just before the sub-franchise agreement was due to come to an end. An unanswered allegation does not give rise to a contractual obligation. And, as just noted, over this period Mrs McNeill-O‟Keeffe was resisting a general restraint of trade provision proposed by Skids for the new agreement.
[74] Mr Karam pointed to the fact that Mrs McNeill-O‟Keeffe had executed the sub-franchise agreement. This does not assist Skids. The document records that Mrs McNeill-O‟Keeffe signed as a director of Aata Baykids. There was then a presumption that she was signing solely in that capacity. Clear words in the document itself, or clear extrinsic evidence, would be required to rebut the presumption and establish that she had signed in a dual capacity – in her personal capacity as well as in her capacity as a
director.[4] Having regard to the matters already discussed, I am satisfied that the presumption was not rebutted.
[75] The result is that when Mrs McNeill-O‟Keeffe started the Kids Choice programme in February2010 she was not acting in breach of any restraint of trade provision in favour of Skids.
Mrs McNeill : restraint of trade : introduction
[76] If there was a valid restraint of trade provision binding on Mrs McNeill, and if her involvement in the Safe Kids operation constituted breach by her of that provision, in my judgment there would nevertheless be no material loss to the plaintiffs. This is because I am satisfied that the Safe Kids programme would have got underway under the direct and active management of Mrs McNeill-O‟Keeffe irrespective of any involvement of Mrs McNeill. Mrs McNeill was involved in preparing documents required for the Safe Kids operation and issues in that regard, arising out of the plaintiffs‟ breach of confidentiality claims, and related claims, require consideration in due course. But that is not involvement connected in any significant way to the questions that arise in relation to restraint of trade.
[77] This conclusion, following from the conclusion that Mrs McNeill-O‟Keeffe was not bound by a restraint of trade provision, is of itself sufficient to dispose of the plaintiffs‟ restraint of trade claim against Mrs McNeill. It is nevertheless appropriate to consider other aspects of the claim against Mrs McNeill and my conclusions on them. It is appropriate to do that for at least two reasons. Firstly, in case I am wrong in my conclusion that there was no restraint of trade provision binding on Mrs McNeill-O‟Keeffe. Secondly, if I am wrong in my conclusion that the absence of restraint on Mrs McNeill-O‟Keeffe means, in effect and in broad terms, that Mrs McNeill‟s involvement is irrelevant because there was no loss to the plaintiffs from
Mrs McNeill‟s assumed breach.
[78] The further aspects of the restraint of trade claim against Mrs McNeill to be considered are as follows:
a) At the 2 December 2009 meeting, did Skids waive the restraint of trade provision to which Mrs McNeill was subject under the master franchise agreement?
b) Is a restraint of trade provision in the master franchise agreement valid as a matter of principle?
c) If the restraint provision is unenforceable as it stands, should it be and can it be modified pursuant to the Illegal Contracts Act 1970, s 8?
d) Does Kids Choice compete with Skids?
e) If there was breach by Mrs McNeill has Skids established the quantum of any loss?
[79] These issues are discussed by reference to the claim against Mrs McNeill. However, the conclusions on at least some of these issues will also apply to the same issues that would arise if there was a restraint of trade provision binding on Mrs McNeill-O‟Keeffe. The two principal exceptions are the question whether the restraint on Mrs McNeill was waived and issues which turn on provisions in Mrs McNeill‟s master franchise agreement which are different from the provisions in the sub-franchise agreement.
Mrs McNeill : waiver of the restraint of trade?
[80] The parties opened broadly on the basis that, at the meeting on 2 December
2009, either there was an agreement as contended for by the plaintiffs, involving very limited waiver for a specific purpose, or there was complete waiver – effectively cancellation of the provision – as contended for by Mrs McNeill. However, there is a third possibility, which I raised with counsel during the course of
the hearing; that is that no agreement was reached on either basis, or on any other basis.
[81] In closing, both counsel maintained their respective clients‟ positions, but both responsibly acknowledged that the evidence was such that there was a possible basis for concluding that there was no agreement. Counsel did not put it precisely in those terms, but that is the gist of the submissions from Mr Karam and from Mr Quinn.
[82] I am satisfied, from all of the evidence, some of which is summarised earlier, that there was no agreement because there was no meeting of minds. Or, even if Mrs Engelbrecht and Mrs Parsons had at the meeting given Mrs McNeill and her grand- daughter the impression that Skids agreed to a complete waiver, the correspondence that immediately followed from Skids made clear that that was not what had been intended. On this basis also there would be no effective waiver in favour of Mrs McNeill.
[83] The result at this point is, therefore, that the terms of the agreement between Mrs McNeill and Skids remained as recorded in the agreement. In particular, the master franchise agreement came to an end on 11 December 2009 as provided for in the written agreement, apart from an ad hoc arrangement for the remaining week or so of the school year, and to cover the holiday period at Kristin school.
Mrs McNeill : restraint of trade provision : is it enforceable?
[84] The provision in question is clause 24.2, recorded at [23] above. It was not in issue between the parties, and I agree, that this is a restraint of trade provision and therefore subject to the principles applied in such cases.
[85] A classic statement of the general principle is that of Lord Macnaghten in
Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Co:[5]
All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade ... may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
[86] The general rule is succinctly summarised in Burrows, Finn & Todd, Law of
Contract in New Zealand[6] as follows:
The general principle is that all contractual provisions in restraint of trade are prima facie void, and therefore unenforceable, but where the party seeking to enforce the restrictive provision establishes that the restriction is reasonable it may be enforced.[7]
[87] As Mr Karam pointed out, the common law rules relating to restraints of trade developed with particular reference to restraints of trade in employment contracts and those in contracts for the sale of a business. Mr Karam submitted that “franchise cases are considered to be closer to restraints in an agreement for sale of a business ... (to which the Courts take a more benevolent attitude) than employer/employee agreements to which a more hostile or rigid approach is taken”.
He referred to Video Ezy International (NZ) Ltd v Cameron.[8]
[88] The submission that there may be a “more hostile” approach to restraints on employees has good authority. In Mason v Provident Clothing and Supply Co Ltd[9] confirmed earlier decisions “that a restraint may be imposed more readily and more widely upon the vendor of a business in the interests of the purchaser, than upon an employee in the interests of the employer”.[10] However, I do not consider that it is appropriate to treat restraint of trade provisions in franchise agreements as falling into any particular category, or generally being regarded with more or less favour by
the Courts.
[89] The point was made by Lord Fraser of Tullybelton in Bridge v Deacons[11] as follows:
The agreement in the present case, being one between partners, does not conform exactly to either of the types to which reference has just been made [employer-employee and vendor-purchaser], although it had some resemblance to both. Their Lordships are of opinion that a decision on whether the restrictions in this agreement are enforceable or not cannot be reached by attempting to place the agreement in any particular category, or by seeking for the category to which it is most closely analogous. The proper approach is that adopted by Lord Reid in the Esso Petroleum case ...:
“I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.”
What were the respondent‟s legitimate interests will depend largely on the nature of their business, and on the position of the appellant in the firm. Their Lordships therefore turn to consider the evidence on these matters.
[90] What is required is the application of the general principles of law, which are well established, to the particular restraint of trade provision in question, with that provision to be considered having regard to all relevant circumstances of the particular case. These circumstances are, in general, those existing at the time the agreement was entered into. Subsequent events cannot be ignored, but the reasonableness of the provision cannot be determined by applying hindsight.
[91] In my judgment, in this case the plaintiffs have not met the onus on them of establishing that the provision in this case is reasonable. This is not a case where a franchisor has passed on to a franchisee confidential information relating to a sophisticated business involving some form of technical know-how which would not be available without the agreement between the franchisor and the franchisee. This was acknowledged by Mrs Engelbrecht in cross-examination. There was the
following:[12]
Q. I‟m going to suggest to you that – and this is with all due respect and I‟m not trying to be mean or anything like that, but there is not any great magic in running an out of care school care programme, is there?
A. No, there isn‟t.
Q. All the programmes follow pretty much the same format in terms of what the kids do?
A. Within variances, but yeah, very similar.
Q. Well, if we think about after school care as an example, it can‟t start really before 3 o‟clock, can it?
A. You start when the school bell goes.
Q. Sure. And it is overwhelming typical, isn‟t it, that the first thing the kids do is have a bit of a snack?
A. Hopefully they wash their hands first, but yes.
Q. And then there is often some provision for some homework time and playing time and maybe some special activity, et cetera?
A. Yes.
Q. Yes. They all follow pretty much the same format? A. Yes.
Q. There‟s no – let me put it this way, I mean, there‟s no special education that is required in terms of qualifications or anything like that to be an after school care provider?
A. No.
[92] And the following:[13]
Q. It‟s actually a pretty low barrier to entry in this business activity, isn‟t it? For the reasons which I gave earlier, it‟s not exactly rocket science?
A. It‟s a reasonably low barrier to entry, yes, definitely.
Q. The reality is that you‟ve got lots of people who fancy themselves and their skills with children having a go at providing after school care?
A. You tend to get groups of providers, but yes, there are quite a few.
[93] The points was made in a slightly different way, and related more specifically to the defendants, by Mr Dale. He said:
In February this year, Barbara and Natasha commenced running a programme called Kids Choice based at our school. It offered pretty much the same activities and routine as their Skids programme had, but this is not surprising. All after school care programmes follow more or less the same
routine. Any difference in quality between programmes is mainly due to the personalities, attitudes and abilities of the people running them.
[94] Mrs Parsons, on behalf of Skids, referred to the process that needs to be gone through to obtain approval of an after school programme from the Child, Youth and Family Service of the Ministry of Social Development. If approval is obtained under a scheme called OSCAR (Out of School Care and Recreation) parents or caregivers of children attending the programme may be entitled to apply for a subsidy to help in payment of fees. Programmes may also be eligible for an OSCAR grant to assist in running the programme. OSCAR approval is not mandatory, but it is obviously of assistance for those operating programmes. Mrs Parsons, in her evidence, said that approval from CYFS may also provide “a level of credibility to a programme” because the approval will show that particular standards have been met.
[95] I am satisfied that Skids can provide benefits to franchisees in relation to CYFS approval. Skids developed standardised documents which have been accepted by CYFS as suitable. However, the documentation which is provided does not require a high degree of sophistication. It might take a bit of time for a new operator to produce the documents, but these are produced having regard to detailed requirements set out in CYFS‟s own documents designed for the very purpose of assisting applicants to get approval. There is a 19 page document entitled “OSCAR Standards for Approval”. This is an introductory booklet, but it is fairly detailed. There is also a 55 page booklet entitled “Provider Guide to the OSCAR Standards for Approval”. The latter goes into the requirements in great detail. „
[96] Mrs Parsons in her evidence-in-chief said that obtaining CYFS approval for a new provider “can be arduous and lengthy” and could take up to six months. As to the time required, she acknowledged in cross-examination that it could be less than six months. In any event, the time required is a common feature of applications to a government department for public funding and not, in my judgment, indicative of an activity requiring some specialised skill. One of the CYFS documents indicates that the OSCAR assessor will, in effect, provide guidance to assist applicants in
developing an adequate programme. This was directly acknowledged by Mrs
Parsons in cross-examination. There was the following:[14]
Q. – you see that it says there that if CYFS wants you to do further work before your programme can be approved they‟ll tell you and also tell you what it is that you need to do and when it needs to be done by?
A. Mhm.
Q. I mean, it can end up being a reasonably, an almost collaborative process can‟t it, to, to get the documentation to the appropriate stage where it can be approved?
A. Yes, that‟s what I was referring to in my brief, that there can be some toing and froing between the, um, assessor until the standards provided are, um, are appropriate.
Q. So that even if you put in documentation –
A. Mhm.
Q. – that initially wasn‟t approved, that doesn‟t mean you‟re not going
to get approval? A. No, that‟s right.
Q. It‟s not like an exam that you either pass or fail is it?
A. No, no it isn‟t, they give you, um, as many opportunities to get it right as possible and we just keep working with them until you, you reach that standard. That‟s basically what I was referring to in the up to six month, um, timeframe.
Q. Right, so that logically, unless you are completely inept, you‟re going to get there eventually aren‟t you?
A. Oh, eventually, yes, on the paperwork.
[97] The documents that may result in subsidies and grants also cover a range of matters relating to the operation of programmes. This is something which, as a matter of general principle, might justify restraint, but whether it in fact justifies restraint would depend in considerable measure on whether the documents contain confidential information dealing with know-how, or other technical matters, not otherwise generally available. But that is not the case here for reasons made reasonably clear by the evidence in cross-examination of Mrs Engelbrecht and Mrs
Parsons. What is more, Mrs McNeill paid Skids $20,000 to be entitled to receive
copies of the operating documents and to take advantage of the grants and subsidies that would then become available. She was also obliged to pay a royalty based on gross income, or gross revenue, which was very widely defined (see [18] and [20] above).
[98] In considerable measure, in my judgment, what this agreement seeks to restrain is not Mrs McNeill taking unfair advantage of something passed on to her by Skids. There is certainly nothing that I can discern which was not fully paid for by Mrs McNeill. And what she did pay for was, on the basis of Mrs Engelbrecht‟s evidence, not a great deal (see [15] above). The mere fact of payment by Mrs McNeill would not be decisive, but it is important when weighed with the other matters I have referred to and the further considerations discussed below. This is given some emphasis by clause 21 of the agreement, recorded at [24] above. This is the provision which entitles Skids to compete with its own franchisee subject to a somewhat vaguely worded proviso that Skids should not “substantially detract” from Mrs McNeill‟s business. There is no evidence that Skids did in fact seek to compete with its own franchisee during the term of Mrs McNeill‟s franchise, but that is not the point. The primary concern is with the provisions of the agreement when it was made and what Mrs McNeill received when she entered into it.
[99] There are other provisions of the agreement which in my judgment provide adequate protection for Skids without need for a restraint of trade provision. There are the provisions earlier noted imposing contractual obligations of confidentiality, including confidentiality in relation to information which would not be subject to an equitable obligation of confidentiality. There are the contractual obligations to return documents and not to use documents. And importantly there are, in the standard Skids arrangement, provisions relating to leases of premises from which programmes are run.
[100] As required by the agreement Mrs McNeill entered into, leases of premises from which programmes operated were required to be taken in the name of Skids. That is a means by which Skids could secure added protection on termination of a franchise; Skids would retain control through the lease. And this would be control consistent with the standard arrangement organised by Skids; a programme attached
to a particular school and secured by a lease, which programme is then sold to a franchisee operator. Protection by this means would not be available if a lease expired at the same time as the franchise. That would be avoided if a new lease could be acquired from the particular school. If the school was unwilling to grant a new lease, then a restraint preventing the existing operator from running a new programme at the same school would not be consistent with the public interest. And the public interest is a further important consideration in this case indicating that the restraint of trade is not justifiable.
[101] Programmes of the type offered by Skids and, it appears from the evidence, a large number of other operators, provide a valuable social service. That is indicated sufficiently by the fact that subsidies and grants are available from the Ministry of Social Development and by Mr Dale‟s evidence. This is a service to help parents who cannot themselves care for their children before or after school, or during school holidays. Most importantly, it is a service which involves care of children. The relationship between the caregivers and the children is important. This was made clear by the evidence of Mr Dale. Parents, children through their parents, and school principals, should in my judgment be able to continue to use the services of out of school programme providers of their choice, unless they, or at least the school, have already been constrained by entering into an exclusive arrangement. The exclusive arrangement could come from the lease from a particular school, as earlier discussed.
[102] The public interest, as just described, might not by itself be sufficient to render the restraint of trade provision unenforceable, but it is certainly a factor of weight when added to the other considerations bearing on the relationship between Skids and Mrs McNeill. In broad terms, the public interest elements mean that the “client base” – the parents and the children who are being cared for – cannot be assessed solely in the terms that would occur when dealing with other commercial arrangements involving services provided to clients.
[103] For all of these reasons I consider that the restraint of trade provision in the agreement between Skids and Mrs McNeill is unenforceable. In Skids‟ interest, bearing in mind that it now has a large number of franchise agreements containing restraint of trade provisions, I emphasise that my judgment relates solely to this particular agreement in the light of the relevant facts arising in this case.
Mrs McNeill : restraint of trade : modification of the restrictions?
[104] If it is assumed, contrary to the conclusion in the preceding section, that some restraint is justified, there is a question whether the terms of the restraint are reasonable and, if not, whether terms should be modified pursuant to the Illegal Contracts Act 1970, s 8.
[105] The geographical limit, within which Mrs McNeill could not operate, is a “15 kilometre radius of the perimeter of each Skids franchise operation”. As with some other drafting in this agreement, the provision is difficult to construe. However, as Mr Quinn acknowledged, it is unnecessary to analyse the geographical constraint, because, in effect, the Kids Choice operation would fall within any assessment of a reasonable geographical limit. The important consideration in terms of reasonableness is the two year duration of the restraint on Mrs McNeill.
[106] In my judgment a restraint of two years is unreasonable. The onus was on Skids to demonstrate that a restraint of this length was reasonably needed, but there was no significant evidence directed to this at all. From all of the evidence that was provided, on both sides, I consider that a restraint of three months would be sufficient to protect the interests of Skids which at this point are assumed to require some protection by a restraint of trade provision. I consider that three months would be a sufficient period of time to enable Skids to secure its position if it wished to do so.
[107] Because of my conclusions that the claim fails for other reasons, it is unnecessary to analyse this point in any great detail. One important consideration comes from Skids‟ own evidence as to the relative ease with which it was able to build up and sell existing programmes within Mrs McNeill‟s former franchise area,
and also, importantly, to develop a new programme from scratch at a school not far from the Pinehill programme.
[108] A further important consideration in relation to the duration of the restraint is that, in considerable measure, what someone like Mrs McNeill is seeking to do, following termination of a franchise, is to use an employment skill to obtain new employment. It probably would not be reasonable to impose any restraint on her if she sought employment in an after school programme run by a completely independent operator – that is to say independent of Mrs McNeill and of Skids. If there is to be some restraint on her being involved in running a programme, directly or through a company, this factor relating to using what amount to employment skills also points to limited duration of a restraint. The low threshold to entry into this area of work, confirmed in the evidence of Mrs Engelbrecht, is also a reason for a restraint of limited duration.
Mrs McNeill : restraint of trade : does Kids Choice compete with Skids?
[109] If it is again assumed that the restraint of trade provision is enforceable, there is a question whether the Kids Choice operation is in competition with Skids; is the Kids Choice operation caught by the provisions of clause 24.2 of Mrs McNeill‟s master franchise agreement with Skids? This question requires determination of the nature of the particular business conducted by Skids and an assessment as to whether the particular business operated by Kids Choice is the same.
[110] The reason why a careful assessment of this nature is required arises not solely from the terms of clause 24.2. It also arises because of the difference between the wording of clause 24.2 and clause 24.1 (see [23] above). Clause 24.1, dealing with the restraint during the term of the franchise, prohibits involvement “in the business of after school child care, or any other associated activity”. Clause 24.2(a) is considerably narrower. It refers to a business which is “in competition with the business of Skids”. In my judgment Kids Choice is not a business in competition with the business of Skids. Clause 1.1 of the agreement defines “Business”. Although the expression “business” in clause 24.2(a) has a lower case “b” it may be
assumed that it has the same meaning as the defined term. The definition is recorded at [20] but I will repeat it:
“Business” means the business of performing after school care of children (including the initial contracts) under franchise in accordance with the system.
[111] By reference to the definition alone, it seems reasonably clear that the Kids Choice business is different from the Skids business. Firstly, the Kids Choice business has no lease for the premises from which the operation is run. The Skids business, by definition, includes “the initial contracts”. Although that expression does not appear to be separately defined, reference to other provisions in the agreement indicates that this is reference to “initial contracts” with schools: see, in particular, recital A at [20]. It is not apparent what “initial contracts” there might be other than agreements to provide the services at a school for an agreed period of time, which would include premises for the purpose. This conclusion is reinforced by the provision in the agency agreement between Mrs McNeill and Skids which provided that Mrs McNeill was entitled to negotiate leases, but they had to be approved by Skids and executed by Skids. There are other provisions in the agreement supporting this conclusion. The conclusion is also supported by the direct evidence as to the way in which Skids has generally operated. I consider that this evidence is admissible evidence for the purposes of interpreting the clause in question. It is clear, in my judgment, that a standard aspect of the Skids business is to secure a lease for a reasonable term, or some other form of security of tenure for each programme.
[112] The definition of “Business” also refers to “the system”. This expression is used in a number of clauses in the agreement. It is obviously used as a term of art but, as with a number of expressions or provisions in this agreement, there are problems with the drafting; in this case because the expression “the system” is not anywhere defined. It is therefore necessary to look to other evidence to understand what is meant by the expression. There are two important considerations bearing on the question as to whether Kids Choice is in competition. These are that the Skids “system” involves securing leases with particular schools and the Skids system does not, in its general form, involve transporting children from numbers of different
locations, or numbers of different schools, to the single location from which a particular programme is operated. Putting this in abstract commercial terms, which are not entirely apt for child minding services, the Skids system operates with a captive client base. I consider that that is one of its particular advantages and one of the things that has enabled Skids, under its new owners, to expand rapidly since Mrs Engelbrecht and Mrs Parsons took over the business from Mrs van Hof. The Kids Choice business provides an out of school care programme for school children, but the way Kids Choice operates is not in competition “with the business of Skids”.
[113] This conclusion is reinforced by the fact that there is no evidence that Skids made any attempt, of any consequence, to take over the Pinehill operation from Mrs McNeill-O‟Keeffe. My conclusion is that Skids simply was not interested in the business because it was not the sort of business that Skids operated. Even if Skids had been interested in seeking to attract parents of children at the Pinehill programme to a Skids programme at another location, that would not assist Skids on the present issue as to whether Kids Choice was a competing business. But even in that regard the evidence is against Skids; as noted below, there were no requests for enrolment details for the Pinehill programme.
[114] There is also clause 24.2(b) in the restraint of trade provision which, in essence, prohibited Mrs McNeill from soliciting “the custom of any existing customer of Skids”. It is not clear whether the expression “customer” is a reference to a school, or to a parent (or even to a child), or both. This provision did not receive any particular attention during the case. If “customer” means a school, there was no soliciting by Mrs McNeill. Murrays Bay Intermediate School was positively not a customer of Skids, as Mr Dale‟s evidence made clear. If “customer” means a parent, the evidence does establish that approximately 40 children who had been enrolled when Skids was the head franchisor joined the Kids Choice programme. There is evidence of soliciting the parents of these children, but the only clear evidence of soliciting at a time when each of the parents was, in terms of clause 24.2(b), an “existing customer of Skids”, is soliciting by Mrs McNeill-O‟Keeffe. Liability of Mrs McNeill under this head is also not sufficiently made out.
Mrs McNeill : restraint of trade : loss and quantum
[115] The question of loss has already been dealt with, but is briefly noted again as it would normally be considered at this point of analysis. As earlier recorded, it is my conclusion that, if there was breach of the restraint of trade provision by Mrs McNeill, it was not causative of any loss because there was no restraint on Mrs McNeill-O‟Keeffe and the Kids Choice business would have been established by her in any event.
[116] The remaining issue, if there was breach of a restraint of trade provision by Mrs McNeill, or by Mrs McNeill-O‟Keeffe, would be whether Skids had satisfactorily established the quantum of the loss it claimed it had suffered.
[117] The statement of claim did not include any quantification of damages for the alleged breaches of the restraint of trade provisions by Mrs McNeill and Mrs McNeill-O‟Keeffe. There nevertheless was a claim for $120,183. This was based on figures contained in the evidence of Skids‟ expert witness Mr McKay. It is a calculation said to represent the present value (date of hearing value) of the sum Skids would have got for the Pinehill franchise had this not been wrongfully taken over by Mrs McNeill and Mrs McNeill-O‟Keeffe, through Kids Choice, in breach of the restraint of trade provisions said to be binding on them.
[118] This evidence fell well short of evidence required from Skids to establish quantum. In saying that, I am not making any criticism of Mr McKay in terms of his general expertise. It appears that he simply provided the evidence required by his instructions and was not asked to undertake the sort of enquiry that should have been undertaken to establish the quantum of loss of the sort claimed by Skids.
[119] Mr McKay acknowledged that what he had done was, as it was put in the question to him, “a fairly straight forward mathematical exercise”. He said:[15]
It is. It‟s basically take a sales price, whatever that sales price is determined to be, work out a series of cash flows which we‟ve done, discount them back to today‟s present value and that based on a series of range of attendees and that would form the loss if the allegations are proved.
[120] In broad terms the exercise undertaken by Mr McKay amounted to little more than taking, for example, an assumed sale price of $50,000, with that price further assumed to be achievable because of a particular number of students, and then applying some standard factors to that figure. There was no evaluative analysis of any particular assumed sale price. The base figures came solely from sales by Skids of other franchises, of the sort dealt with in Mrs Bartels‟ evidence (see [64]-[66] above). Significantly, there was no analysis of the value of the Pinehill business applying the range of valuation techniques and principles that are generally applied to the valuation of a business. This was not even undertaken at the elementary level of analysis of the financial statements for the Pinehill operation. The financial statements for the 2009 year recorded a loss of $19,064. In the following year (which was not a full year) there was a loss of $16,368. Without some expert analysis of the financial statements to suggest otherwise, I agree with Mr Quinn‟s submission to the essential effect that there was no reason to suppose that anyone with a modicum of sense would pay anything for a business recording losses in successive years, with further evidence indicating losses in earlier years. That is a reasonable conclusion without considering any other factors. There are some further important factors which were not considered in Mr McKay‟s assessment. In this regard, and perhaps most significantly, there was no lease for the Pinehill programme. All of the sales figures provided by Skids to Mr McKay were sales for programmes with leases from a school. In answer to a question that I felt bound to put to Mr McKay, because of some preceding answers from him, he acknowledged, in effect, that the absence of a lease was a fundamental consideration. But it was not taken into account in Mr McKay‟s assessment of the quantum of loss.
[121] A further significant difference between the programmes on which Mr McKay‟s evidence was based and the Pinehill programme is the fact that the Pinehill programme was dependent on the programme provider collecting most, if not all, of the children attending the programme. For that purpose Mrs McNeill-O‟Keeffe had
purchased and operated three vehicles and a further vehicle was provided by Mrs
McNeill when required.
[122] There was a range of further difficulties with Mr McKay‟s evidence, but it is unnecessary to go into them. The result is that there was no satisfactory evidence of the quantum of any loss sustained by the plaintiffs as a consequence of what at this point is assumed to have been a breach of a restraint of trade provision. In those circumstances, if liability has been established, a Court will endeavour, as best it can, to make an assessment of the quantum of loss, provided that is not speculative. The positive evidence that is available indicates that there was no loss at all. It is sufficient to refer to two related matters only. Firstly, I agree with Mr Quinn‟s submission that the best evidence is that Skids had no interest in taking over the Pinehill programme. Mrs Parsons acknowledged that at no point did Skids make any attempt to take over the programme. That may be contrasted with Skids‟ immediate assumption of responsibility for two other programmes within Mrs McNeill‟s franchise area; the programmes at Stella Maris and Kristin schools and which were subsequently sold for $50,000 and $35,000 respectively. The reasonable inference from this, by itself, is that Skids saw no value in the Pinehill programme. Skids knew in December 2009 that Mrs McNeill-O‟Keeffe would not be entering into a new franchise with Skids, but did nothing of any practical significance to take over. The conclusion that Skids did not see any significant value in the Pinehill programme tends to be confirmed by the fact that Skids offered Mrs McNeill- O‟Keeffe a new franchise for Pinehill for $5,000, to be paid over 5 years. As recorded in the factual narrative, this was a new contract, not a renewal of an existing contract. This is to be contrasted with contentions for Skids, divorced from any analysis of the operation itself, that the Pinehill programme could have been sold for a figure between $70,000 to $100,000. The explanations from Mrs Engelbrecht and Mrs Parsons as to why they would grant a new contract to Mrs McNeill- O‟Keeffe for $5,000 when they could sell the business for $70,000 to $100,000 were not convincing.
Discussion : Skids documents : breach of confidence : breach of copyright
[123] There are claims of breach of contractual obligations of confidence against Mrs McNeill and Mrs McNeill-O‟Keeffe. There are claims of breach of confidence in equity against Mrs McNeill, Mrs McNeill-O‟Keeffe and Kids Choice. The contractual claim against Mrs McNeill-O‟Keeffe is based on the same premise upon which the restraint of trade claim was made against her – that she was bound by the terms of the sub-franchise agreement between McNeill Enterprises and Aata Baykids. This claim cannot succeed for the reasons the restraint of trade claim against Mrs McNeill-O‟Keeffe cannot succeed and it requires no further consideration.
[124] Mr Karam said in his closing submissions that the breach of confidence and copyright claims fall into two broad categories:
a) “Misuse” of what were defined as Skids‟ “policies documents”.
These are documents produced to seek CYFS‟s approval under the OSCAR scheme. The particular documents subject to claims by Skids are the Policies and Procedures Manual, the Staff Recruitment Policy and the Code of Conduct for staff. In opening and evidence there was also reference to a Police vetting form used for the engagement of staff. A claim in this regard was not made out.
b) The second category related to enrolment information for the Pinehill programme. There were two main aspects to this claim: misuse of the enrolment information by Mrs McNeill, Mrs McNeill-O‟Keeffe and Kids Choice in setting up the Kids Choice programme and a failure to “return” the enrolment information to Skids when the Skids final programme came to an end. I will deal with this under a separate heading.
[125] In my opinion, the policies documents are not confidential information as defined in equity.[16] In particular, the information contained in these documents does not have “the necessary quality of confidence”.[17] Although production of the documents may have taken some time, they simply set out in a bit more detail, and using the particular words chosen by Skids, the matters which are set out in the CYFS manuals for the OSCAR programme. These comments are not made to
denigrate the work undertaken by Skids to produce the documents, but simply to explain briefly why I do not consider that the information contained in the documents has the necessary quality of confidence as that expression, and similar expressions, are used in this area of the law.
[126] There is the further claim against Mrs McNeill for breach of contractual obligations under her master franchise agreement. And there is the claim against Kids Choice for breach of copyright. These claims are conveniently dealt with together. The essential factual basis for both claims is Skids‟ contention that Mrs McNeill copied portions of all three policy documents. That claim was fully borne out by the evidence and as tabulated in the helpful schedules produced by Mr Karam in closing. For the defendants, Mr Quinn responsibly acknowledged this when he said that “on any view, [copying] is proved on the balance of probabilities”. Because this concession was made and, as I have indicated, properly made, it is unnecessary to go into the detail of the copying. It is sufficient simply to record that there was verbatim copying of reasonably substantial portions of the documents.
[127] Although Mr Quinn‟s concession was made in respect of the copyright claim, the conclusion also applies in respect of breach by Mrs McNeill of contractual obligations. Under clause 16.1 (see [22] above) Mrs McNeill was not entitled to “use, divulge or communicate to any person any confidential information”. Although I have concluded that Skids‟ documents do not contain confidential information in the sense used in equity, that would not prevent contractual protection
being provided by defining documents as “confidential information” in the contract.
But there is no definition of “confidential information” in the master franchise agreement. The difficulty for Skids in this regard, arising from another drafting omission, does not require further investigation because there is a separate provision which may reasonably be taken to apply, and notwithstanding further drafting infelicities. Clause 7.1 (see [21] above) prohibits Mrs McNeill from copying or reproducing “the manual”. Although “the manual” is not defined, it may be taken to include the policies documents developed by Skids.
[128] The plaintiffs‟ submissions on liability for copyright infringement were largely confined to the question of copying. Nevertheless, I am satisfied that liability for breach is made out. Similarly, Mrs McNeill is liable for copying in breach of the master franchise agreement. The principal remedies sought by the plaintiffs are damages and injunctions. As with the claims for damages for breach of the restraint of trade provision, the statement of claim simply sought an enquiry as to damages, or simply claimed damages, without any quantification. And there was no evidence directed to the quantum of any damages under these heads. It is not apparent that the copying caused any loss to Skids. Nor is there clear evidence that Kids Choice or Mrs McNeill derived a profit by copying parts of the documents and using them. What is reasonably clear is that, by copying portions of Skids documents, Mrs McNeill saved herself some effort.
[129] The only evidence of a quantified sum which has any bearing on quantification of damages in this context is the evidence that Skids charges new franchisees $2,000 for the documents. In the absence of any other guide I assess damages for the contractual breach and for breach of copyright at $2,000. This is the total recoverable for basic damages under both causes of action against Mrs McNeill and Kids Choice.
[130] Mr Karam submitted that Skids is further entitled to additional damages against Kids Choice for infringement of copyright pursuant to s 121(2) of the Copyright Act 1994. Section 121(2) provides that the Court may award additional damages “as the justice of the case may require” having regard to all the circumstances and, in particular (amongst other things), the “flagrancy of the infringement”. Mr Karam submitted that the infringement in this case was flagrant.
I agree that it was flagrant. Mrs McNeill knew what she was doing and she did it in the face of her assurances to Skids, when the controversy arose over Mr Dale‟s letter, that she would not “steal” Skids‟ property or secrets and would “not use any intellectual property belonging to Skids”.[18] Although the flagrant actions were those of Mrs McNeill, and the infringement of copyright claim is against Kids Choice, I do not consider that the legal distinctions between the two justify any refined analysis in
the circumstances of this case. The flagrant actions of Mrs McNeill are to be treated as flagrant actions of Kids Choice. On the other hand, the extent to which basic compensatory damages might be increased needs to be assessed by bearing in mind the rough and ready nature of the basic assessment of $2,000, and by bearing in mind the fact that the onus of proof of the quantum of loss was on Skids. In addition, as discussed below, there is to be an order directing Kids Choice to change the documents. Taking all these matters into account I assess the total damages payable by Kids Choice for infringement of copyright at $3,000.
[131] Mr Karam submitted, in closing, that there should also be an award of exemplary damages against Mrs McNeill (as well as against Mrs McNeill- O‟Keeffe). There was no pleaded claim for exemplary damages against Mrs McNeill. The established claim against Mrs McNeill is for breach of contract in respect of which exemplary damages are not recoverable.[19] In any event, the point has no practical significance for Skids because, as earlier indicated, the $3,000 is the total recoverable, with Mrs McNeill and Kids Choice being jointly and severally liable, and the damages award can be paid in full from the sum presently held
pursuant to the defendants‟ undertaking.
[132] The plaintiffs also seek an injunction to restrain Kids Choice from continuing to use the copied portions of the documents. The damages of $2,000 were effectively assessed, in the absence of any other evidence, as the sum that would have been payable by Kids Choice to Skids to use Skids‟ documents. But those who are authorised to use Skids‟ documents, by becoming franchisees, make additional
payments to Skids during the term of the franchise. For this reason an award of
damages does not necessarily mean that there should not also be an injunction. In my judgment there should also be an injunction.
[133] There will be an order that Kids Choice, within six weeks, submit to CYFS amended documents replacing the copied text identified in the three schedules produced by the plaintiffs in closing submissions. Once Kids Choice has CYFS approval of the amended documents all copies of the existing documents are to be destroyed. Kids Choice has leave to apply to extend the time if there are reasons beyond its control, and the control of shareholders and directors, resulting in failure to meet the time limit.
Discussion : enrolment information : failure to deliver to Skids : use
[134] There are two categories of claim relating to the enrolment information for children in the Pinehill programme. The first is claims of breach of confidence against Mrs McNeill, Mrs McNeill-O‟Keeffe and Kids Choice. As with the restraint of trade claims, I will deal first with the claim against Mrs McNeill-O‟Keeffe because I am satisfied that Mrs McNeill-O‟Keeffe has no liability and that conclusion is determinative of the claims against Mrs McNeill and Kids Choice.
[135] The essence of the allegation against Mrs McNeill-O‟Keeffe was that she misused the enrolment information, for the purposes of enrolments with Kids Choice, in breach of obligations of confidence owed to Skids. Mrs McNeill- O‟Keeffe was not under any contractual obligation to Skids, in respect of matters of confidence or otherwise. And I am satisfied that there was no equitable obligation of confidence owed by Mrs McNeill-O‟Keeffe in respect of the enrolment information. The enrolment information was acquired by Mrs McNeill-O‟Keeffe as she built up the Pinehill programme. It was not information put together by Skids and then passed on by Skids to Mrs McNeill-O‟Keeffe, in circumstances of confidence or otherwise. From the evidence in this case, there was no contribution of any relevance by Skids to the compilation of the enrolment information.
[136] In consequence I am satisfied that Mrs McNeill-O‟Keeffe was entitled to use the enrolment information and, through Mrs McNeill-O‟Keeffe, Kids Choice was entitled to use the enrolment information. That leaves the claims against Mrs McNeill in contract and in equity. The claim in equity fails for the same reason that it fails against Mrs McNeill-O‟Keeffe. There is also no clear basis for a contractual claim. In any event, this question does not require further investigation because, even if there was breach of contract, it would not have been causative of any loss to Skids because of Mrs McNeill-O‟Keeffe‟s entitlement of use the information.
[137] The second category of claim relating to enrolment information is a contention that there was an actionable failure by Mrs McNeill and Mrs McNeill- O‟Keeffe to deliver the enrolment information to Skids when the Pinehill programme came to an end. This was the main focus of the plaintiffs‟ claims relating to enrolment information and in turn directed principally to alleged breach by Mrs McNeill of obligations under the master franchise agreement. For a number of reasons I am satisfied that this claim cannot succeed.
[138] In the first place, there is no clear obligation under the master franchise agreement requiring Mrs McNeill to deliver enrolment information to Skids, either generally or in relation to sub-franchises, such as that at Pinehill. Clause 23 of the master franchise agreement (which has not earlier been recorded) sets out in some detail the obligations on the franchisee on termination of the franchise, by the effluxion of time or otherwise. There is no obligation to deliver enrolment information. Nor is such an obligation implied by what is expressly recorded. What is recorded indicates that such an obligation is not implicit. What is expressly required to be delivered to Skids is information provided in the first place by Skids to Mrs McNeill as the franchisee. The information in question here – the enrolment information – was not provided by Skids to Mrs McNeill.
[139] There was no request from Skids to Mrs McNeill that she deliver the enrolment information to Skids. There was evidence that Skids‟ solicitor asked Mrs McNeill to comply with her “disengagement obligations”. That somewhat cryptic requirement could only be taken to be obligations on termination recorded in the contract. If Skids, on termination, was entitled to expressly require delivery of the enrolment information, the evidence is that it did not do so. And this may be contrasted with express requests for delivery of the enrolment information for Stella Maris and Kristen schools, which request Mrs McNeill met.
[140] Assuming, contrary to the conclusion just recorded, that there was breach by Mrs McNeill of an obligation to deliver the enrolment information, no loss flowed from the failure to do so for reasons already addressed in relation to Mrs McNeill- O‟Keeffe‟s freedom of action.
Result
[141] There is judgment for the plaintiffs against the first and fifth defendants jointly and severally in a sum of $2,000.
[142] There is judgment for the plaintiffs against the fifth defendant in a further sum of $1,000.
[143] The total recoverable by the plaintiffs against the first and fifth defendants is
$3,000 and that sum is to be paid from the moneys paid into the trust account of the defendants‟ solicitors pursuant to the defendants‟ undertaking.
[144] The balance of the sum held by the defendants‟ solicitors is to be retained in trust pending determination of any question of costs.
[145] There is an order against the fifth defendant on the terms set out at [133]
above.
[146] The claims against the second, third and fourth defendants are dismissed.
Costs
[147] Any party seeking costs should file and serve a memorandum within four weeks and any memorandum in opposition should be filed and served two weeks
later.
Peter Woodhouse J
[1] On the latter point see [122] below.
[2] Safe Kids In Daily Supervision Limited V McNeill And Ors HC AK CIV-2010-404-1696, 14 April 2010.
[3] See at [62] and [58].
[4] See Vuletic v Contributory Mortgage Nominees Ltd unreported Court of Appeal, CA250/05, 31 July
2006 and cases cited at [13].
[5] [1894] AC 535 at
565.
[6]
3rd ed 2007 at
13.9.1.
[7]
Blackler v New Zealand Rugby Football League [1968] NZLR 547
(CA).
[8]
(2004) 8 NZBLC 101,550 (HC) at [49]. See also Dymocks Franchise Systems (NSW)
Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 at
[274]-[275].
[9]
[1913] AC
724.
[10] See
Burrows, Finn & Todd, Law of Contract in New Zealand at 13.9.3.
[11] [1984] AC 705 (PC) at 714.
[12] Notes of evidence p 36, l 1-22.
[13] Notes of evidence p 47, l 14-19.
[14] Notes of evidence p 79, l 20 – p 80, l 8.
[15] Notes of evidence p 111, l 1-5.
[16] See, for example, Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47 followed in, for example, AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515 (CA) at 520; A-G v Wellington Newspapers [1988] 1 NZLR 129 (CA) at 141; and, generally, Butler, Equity and Trusts in New Zealand, 2nd ed, 2009, chp 20
[17] Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47 per McGarry J.
[18] See Mrs McNeill‟s letters of 23 December 2009 and 21 January 2010, reproduced at [56]and [57].
[19] Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 at [166]-[183]. An appeal was allowed in part, but not on this point : [2007] 3 NZLR 169 (SC).
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