INTERIM INJUNCTIONS - A POWERFUL TOOL FOR FRANCHISORS

An interim injunction is a means of getting urgent relief from the court where the legal rights of one party have been infringed by another. A restraining interim injunction is a court order preventing a party from taking any further action to breach those legal rights and as such is a very powerful legal remedy. It is granted sparingly because the consequences of granting the remedy could be dire in the event it later transpires that no legal rights had been infringed at all. It is designed to give an immediate remedy where “irreparable damage” will flow if the remedy is not granted. In other words, if the party wanting to obtain such a remedy can be properly compensated in damages, an injunction will not be granted. The potential damage has to be sufficiently serious that an immediate court order preventing the other party from taking any further action is required.

It is a key feature of applications for interim injunctions that Judges weigh the needs of protection for the applicant party against the needs of the other party; and, in doing so, Judges determine where “the balance of convenience” lies. It is also essential for the applicant party to convince a Judge that there is a serious question for trial or, in other words, a strong arguable case on the part of the applicant party.

When applying these remedies to the context of franchising, it is clear that the Courts in New Zealand will grant interim injunctions where they are convinced that delinquent franchisees have stepped out of line to the extent where the relevant franchisor is seriously affected by such delinquent conduct. Two such recent injunctions have been successfully obtained by Deirdre Watson, a Barrister with considerable experience in franchise law. The first example was Window Maintenance Network Ltd v D. & F. Macdonald Limited and others. The plaintiff company had developed a system of effecting window and door repairs under the name “Exceed Window Maintenance”. The action was initiated by the company which now operates the Exceed Window Maintenance system.

The Franchisee had signed an agreement which, typical of any franchise agreement, contained a restraint of trade clause. It meant, therefore, that the franchisee could not, on a whim, abandon the franchise system and the obligations that go with being a franchisee. In particular, the franchisee could not simply leave the system and continue to trade as before, but under a different name. That is exactly what D. & F. Macdonald Limited and its two directors set about doing and this action had a potentially serious consequence for the franchisor, both in the sense that it damaged the goodwill and brand name of the franchisor as well as allowing the franchisee to take with it valuable know-how of the Exceed Window Maintenance system and use that know how to set up its own business in the same field.

The Judge hearing the application was satisfied that there were serious consequences for the Franchisor unless an Order granting an interim injunction was made in favour of the Franchisor. The effect of such Order was that D. & F. Macdonald Limited and its two directors personally were forced to cease all further trading as a window maintenance business in the Tauranga area.

The other successful application for interim injunction was applied for in the Rotorua District Court in November 2004 in the matter of Focus-on-Food NZ Limited v H.B. Turnbull. In that case, Focus-on-Food, trading as “Hey Joe”, sought and obtained an Order to restrain Mr Turnbull from setting up a business in competition with the Franchisor in circumstances where Mr Turnbull had made inquiries about becoming a franchisee, signed a Confidentiality Agreement, gained valuable information about the Hey Joe franchise system and then, contrary to the terms of the Confidentiality Agreement, had gone ahead and set up his own business, allegedly adopting many of the features of the Hey Joe franchise system. The order was obtained, notwithstanding that Mr Turnbull had been in operation in his own business for several months and had spent many thousands of dollars establishing and running that business.

It is relevant to note that Mr Turnbull has applied to the High Court seeking to overturn the granting of the interim injunction but, for the time being, the Order of the District Court is effective and any breach of that Order entitles the Franchisor to issue Contempt of Court proceedings which is a very serious matter for any party who contravenes a Court Order. Quick action by Focus on Food was justifiable and it will be both difficult and expensive for Mr Turnbull to succeed in having the District Court Order overturned, with no certainty that he will be successful.

Any application for an interim injunction should not be undertaken without careful consideration of the consequences. It is important to select a barrister who has adequate Court experience and a sound understanding of the intricacies of franchise law. Judges are unhappy about such proceedings being issued without due consideration of the threshold expected to be met if the application is to be successful. A claim for damages or using the dispute resolution procedure in a Franchise Agreement is often the better alternative to follow. However, if a breach of the Franchise Agreement is sufficiently flagrant then, as has been demonstrated in the above decisions, remedies can be obtained from Courts which protect the integrity and value of a franchise system.

Indeed, failure to take such protection by a Franchisor sends a loud message to its franchisees that the Franchisor is lax and uncaring of its franchise system. That sort of approach can only serve to undermine the relationship between the Franchisor and all of its franchisees who conform to the system and who rely on the Franchisor to maintain and protect the system.