WESTERN WORK BOATS LTD & ANOR v KELLY & ANOR [2016] NZHC 2577 [28 October 2016]

IN THE HIGH COURT OF NEW ZEALAND

TAURANGA REGISTRY

CIV-2016-470-000140

[2016] NZHC 2577

BETWEEN

WESTERN WORK BOATS LIMITED

First Plaintiff

SEAWORKS LIMITED

Second Plaintiff

AND

SEAN TANE KELLY

First Defendant

PACIFIC 7 LIMITED

Second Defendant

Hearing:

17 October 2016

(Heard at Rotorua)

Appearances:

A M Stevens for Plaintiffs

M S King for Defendants

Judgment:

28 October 2016

JUDGMENT OF PALMER J

This judgment is delivered by me on 28 October 2016 at 11 am

pursuant to r 11.5 of the High Court Rules.

.....................................................

Registrar / Deputy Registrar

Solicitors: Izard Weston Lawyers, Wellington Sharp Tudhope Lawyers, Tauranga Matt King, Barrister, Tauranga

Summary

[1] The parties operate work-boat businesses in Tauranga and around New

Zealand. They used to be in business together but have fallen out. Mr Sean Kelly

sold his interest in Western Work Boats Ltd to Seaworks Ltd. Western Work Boats

and Seaworks say Mr Kelly, and his new company Pacific 7 Ltd, breached a restraint

of competition obligation. They seek an interim injunction restraining Mr Kelly and

Pacific 7 from breaching the restraint of competition obligation and restraining

disposition of Lot 4 in the Tauranga Marine Precinct. There is a serious question to

be tried. I consider the balance of convenience and overall justice of the position

does not favour granting an interim injunction regarding the restraint of trade

obligation, which would add to the enforceability of the restraint which is currently

disputed. However, I do grant an interim injunction restraining disposition of Lot 4,

with leave to apply for its variation or removal if a change in circumstances

materially alters the balance of convenience imposed by the injunction.

Facts

Western Work Boats

[2] In July 2000 Mr Kelly established Western Work Boats Ltd as a family

business. With the global financial crisis came financial difficulties. In May 2010

Mr Kelly sold 50% of the shares to a competitor, Seaworks Ltd, who appointed a

director. He remained as a shareholder and director. The shareholder agreement

included clause 11.1:

11.1 Restraint on competition: No Shareholder shall, while it is a

Shareholder or employee of the Company, or within 2 years after it

ceases to be a Shareholder or employee of the Company, within New

Zealand (Territory) directly or indirectly in any capacity:

(a) be directly or indirectly interested, engaged or concerned, or

participate, whether on its own account or as a consultant to or

partner, trustee, beneficiary under a trust, shareholder, director,

agent, employee or in any other way whatever, in the conduct of

any business, venture or other activity which competes or may

compete with the Company’s or Seaworks’ business; or

(b) be interested in any other way in, or assist financially or in any

other way, any such person, business, venture or other activity;

provided that this clause 11.1 shall not apply to any Shareholder’s

involvement with Seaworks or an entity that is a Related Party of

Seaworks.

Sale of Western Work Boats to Seaworks

[3] Mr Kelly says the Seaworks director caused difficulties with decision-making

in Western Work Boats, by favouring the interests of Seaworks over those of Western

Work Boats. He says Seaworks acquired its initial interest in Western Work Boats in

order to obtain marketplace control over Mr Kelly. Seaworks says this perception

reflects Mr Kelly’s unfamiliar position of having someone additional involved in

decision-making. In any case, Mr Kelly eventually wanted to separate his interests

from Seaworks. From August 2015 there were negotiations between Mr Kelly and

Seaworks to separate their interests. The negotiations took some time. Agreement

was not reached until April 2016.

[4] In March 2016, in the negotiations, Mr Kelly was persuaded to take

ownership of a ship, the Karen D, and the mooring, dredging and piling part of

Western Work Boats’ business as part payment for his shares.

[5] In April 2016 Mr and Mrs Kelly and the trustees of the M & S Kelly Trust

(the Kellys) agreed to sell their shares to Seaworks. The parties, including Pacific 7

and Western Work Boats, executed the sale and purchase agreement on 16 April

2016 and it became unconditional on 28 April 2016. Clause 7 of the Agreement is a

restraint on competition clause similar to that in the shareholders’ agreement. It

contains two additional exceptions in relation to work by Mr Kelly with Seaworks

and operation of the Karen D in specified passenger-related commercial activities:

7 RESTRAINT ON COMPETITION

7.1 The [Kellys] agree, that while any of them are a shareholder

or employee of [Western Work Boats], or within 2 years

after any of them ceases to be a shareholder or employee of

[Western Work Boats], within New Zealand (Territory),

they will not directly or indirectly in any capacity:

(a) be directly or indirectly interested, engaged or

concerned, or participate, whether on its/his/her own

account or as a consultant to or partner, trustee,

beneficiary under a trust, shareholder, director,

agent, employee or in any other way whatever, in the

conduct of any business, venture or other activity

which competes or may compete with [Western

Work Boats] or [Seaworks’] business; or

(b) be interested in any way in, or assist financially or in

any other way, any such person, business, venture or

other activity;

Provided that this clause 7.1 shall not apply to: (i) any of

[the Kellys’] involvement with Seaworks or an entity that is

a Related Party of Seaworks, and (ii) the [Kellys’] or

Pacific 7’s use and operation of the vessel KAREN D for the

following passenger related commercial activities:

(a) scenic/sightseeing trips;

(b) recreational fishing charters;

(c) recreational dive charters; and

(d) a scheduled passenger ferry service.

This exception (ii) to the application of clause 7.1 is limited

exclusively to the vessel KAREN D.

7.2 Application to Related Parties: Each of the parties

comprising the [Kellys] must ensure that each of its/his/her

Related Parties complies with clause 7.1.

[6] Clause 6.1 of the Sale and Purchase Agreement contains a vendor’s warranty

that their obligations under the Agreement constitute legal and binding obligations

enforceable on them in accordance with their terms.

Tenders for Lot 4

[7] During the negotiations, in early 2016, the Tauranga City Council had put up

for tender lots on the wharf in the Tauranga Marine Precinct. Western Work Boats

bid for Lots 12 and 13. In February 2016, at Mr Kelly’s instigation, Western Work

Boats also bid for Lot 4. Mr Kelly says the bid for Lot 4 was primarily for Western

Work Boats’ mooring, dredging and piling business. Mr Kelly was involved in the

tender process on behalf of Western Work Boats. In March 2016 the Council

rejected Western Work Boat’s bid for Lot 4.

[8] On 31 March 2016, when it looked like he would be taking on the mooring,

dredging and piling business but while he is still at Western Work Boats, Mr Kelly

made his own bid for Lot 4.

[9] On 22 April 2016, after the sale and purchase agreement was signed,

Mr Douglas from Western Work Boats heard from the Council about Mr Kelly’s bid

for Lot 4. Mr Kelly confirmed he was bidding since he was taking over the mooring,

dredging and piling business. The day after the sale and purchase went

unconditional Western Work Boats and Seaworks objected to Mr Kelly’s bid and

asked him to withdraw it. He did so. It appears Western Work Boats’ tender was

also withdrawn though there is a conflict in the evidence about whether that was

done by Mr Kelly or not.

[10] On 1 June 2016 the Council issued a new tender for Lot 4. Mr Kelly

considered this to be a fresh opportunity and lodged a bid which was successful.

[11] Mr Stevens, for Western Work Boats and Seaworks, submits Mr Kelly was

precluded from acquiring Lot 4 because it was his position with Western Work Boats

that led to that as a business opportunity irrespective of which tender round was

involved. Mr King, for Mr Kelly, submits the second tender round was a fresh start

and was therefore not a business opportunity to which his position with Western

Work Boats led.

Karen D activity

[12] From 29 April to 2 May 2016 the Karen D was chartered by navy interests,

through a broker company AAL associated with the navy, to transport VIPs.

Mr Kelly says this fell within the exception to the restraint on competition as a

“scheduled passenger ferry service”. Mr Kelly says “scheduled” means “planned”

which these visits were. Western Work Boats and Seaworks say they were not

“scheduled” in the sense meant by the exception. And they say Mr Kelly arranged

the initial charter while he was still working at Western Work Boats so this was a

breach of the shareholder restraint as well as of Mr Kelly’s fiduciary obligations.

[13] Over 14 days between early July and mid September 2016 Pacific 7 also

chartered the Karen D to carry scientific researchers from the University of Waikato

to take samples from the Astrolabe reef, Motiti Island and Mayor Island. Mr King,

for Mr Kelly, says that fell within the exception too, as a “recreational fishing

charter”. He says fishing charters that are not commercial are recreational and this

was not commercial. Western Work Boats and Seaworks say it was a commercial

fishing charter and it was not recreational.

[14] There is also some suggestion the Karen D has been used by Pacific 7 to

repair another boat, which may belong to a potential competitor of Western Work

Boats. But the evidence on that is far from clear. There were other complaints about

advertising by Pacific 7 about the Karen D’s capabilities. They have now fallen

away, since Pacific 7 has sold the Karen D since the commencement of these

proceedings.

[15] However, there is now dispute about the terms of sale. The Karen D was sold

to AAL. At the hearing Western Work Boats submitted that, too, breached the

restraint of competition obligation. That is said to be because the acquisition turned

AAL into a competitor and the Karen D is still operating under the Maritime

Transport Operator Certificate (MTOC) of Pacific 7. Mr Stevens submits this

constitutes Pacific 7 assisting a competitor inconsistently with the restraint of

competition clause. More evidence about this will no doubt have to be discovered.

[16] In their substantive proceeding Western Work Boats and Seaworks submit

Mr Kelly’s and Pacific 7’s actions amount to a conspiracy by unlawful means and

that Pacific 7 knowingly assisted and/or knowingly received the benefit of

Mr Kelly’s breaches of fiduciary duties.

Litigation

[17] On 7 September 2016 Western Work Boats and Seaworks commenced

proceedings against Mr Kelly and Pacific 7 alleging breach of the restraint of

competition. They sought an interim injunction. The terms of the injunction sought

changed after Pacific 7 sold the Karen D. What is now sought is an injunction:

(a) restraining Mr Kelly directly or indirectly through others, including

Pacific 7, from breaching the restraint in clause 7;

(b) restraining Mr Kelly and Pacific 7 (directly or indirectly through

others) from taking steps, further to or as part of their wrongful

combination, in breach of the terms of the restraint in clause 7;

(c) restraining Mr Kelly (through Pacific 7 and otherwise) and Pacific 7,

on completion of the transfer of Lot 4 to Pacific 7, from taking any

steps to sell, alienate or otherwise in any way dissipate their

respective interests in Lot 4, and requiring them to preserve their

interests in Lot 4 in all respects pending:

(i) a substantive outcome in the underlying proceedings; or

(ii) further order of the Court.

[18] The applicants also seek such further orders as the Court thinks just and the

costs of and incidental to this application.

Law

[19] There is no real difference between the parties about the legal test to be

applied in considering whether to grant an interim injunction. As Arnold J

summarised for the Court of Appeal in NZ Tax Refunds v Brooks Homes Ltd:1

The applicant must first establish that there is a serious question to be tried

or, put another way, that the claim is not vexatious or frivolous. Next the

balance of convenience must be considered. This requires consideration of

the impact on the parties of the granting of, and the refusal to grant, an order.

Finally, an assessment of the overall justice of the position is required as a

check.

[20] Or, as Asher J summarised it in Cabco Group Ltd v Bartlett:2

The approach to interim injunction applications in New Zealand is now well

settled. The Court first considers whether there is a serious question to be

tried in respect of any of the causes of action pleaded or available to the

plaintiff. The Court then goes on to consider whether the balance of

convenience is in favour of the granting of an injunction, or against it. In

considering the balance of convenience the Court will pay particular

attention to the question of whether damages would be an adequate remedy.

1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12].

2 Cabco Group Ltd v Bartlett (2009) 6 NZELR 500 (HC) at [30].

If damages would be an adequate remedy for the plaintiff, it will generally

follow that the balance of convenience does not require any interim

intervention by the Court. Finally, after considering matters under these

heads the Court will on overview consider where the justice of the case lies.

[21] Here, the parties agree there is a serious question to be tried. The issues to be

considered are the balance of convenience cross-checked by assessing the overall

justice of the case. I treat the orders sought in relation to the restraint of competition

obligation, and Lot 4, in turn. I then assess the overall justice of the case.

The restraint of competition obligation

Law of restraint of competition

[22] There is not significant difference between the parties on the law relevant to

restraint of competition. The courts cite “reasons of public policy” for a long-

standing common law proposition that restraint of trade provisions are, prima facie,

void and unenforceable.3 They require those seeking to enforce a restraint of trade

clause to establish that it is reasonable. The “reasons of public policy” are rarely

scrutinised closely but appear to derive from an Elizabethan concern that restraint of

trade tended to create monopoly.4 The exception for restraints judged “reasonable”

was developed by the House of Lords in the early twentieth century.5

[23] New Zealand courts scrutinise restraints of trade more closely in the context

of employment than in acquisition of a business. The Court of Appeal in Brown v

Brown and Fletcher Aluminium Ltd v O’Sullivan has recognised the value of a

restraint of trade clause may be factored into the consideration over which parties

with relatively equal bargaining power have negotiated commercially at arms’

length.6 The courts will be reluctant to hold such an arrangement unreasonable and

therefore void.7 As Katz J summarised, in AMP Services (NZ) Limited v Visser, “in

assessing the overall reasonableness of the non-compete clause, the ‘bargain’

3 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5

th ed,

LexisNexis, Wellington 2015) at [13.9]. 4 At [13.9.2].

5 Nordenfeldt v Maxim Nordenfeldt Guns and Ammunication Co [1894] AC 535; Mason v

Provident Clothing and Supply Co Ltd [1913] AC 724. 6 Brown v Brown [1980] 1 NZLR 484 (CA) at 502-503; Fletcher Aluminium Ltd v O’Sullivan

[2001] 2 NZLR 731 (CA) at [42]-[45]. 7 Fletcher Aluminium Ltd v O’Sullivan, above n 6, at [42].

negotiated by the parties must be looked at in its totality, with reference to the

contract as a whole and the broader factual matrix”.8

Balance of convenience

[24] The first two elements of the injunction sought do not appear particularly

coercive. They simply repeat the restraint obligation Western Work Boats and

Seaworks say Mr Kelly and Pacific 7 are under anyway. But that cuts two ways. On

the one hand, it would not constitute great hardship to be bound by something they

are already bound by. On the other hand, there’s not much point in requiring

something that is already required.

[25] Mr Stevens, for the Western Work Boats and Seaworks, says there is a

difference between the contractual obligation that derives from the restraint of

competition obligation and the obligation to comply with a court order. That is

because Mr Kelly and Pacific 7 will dispute that they are subject to the contractual

obligation. They wish to argue at trial that the obligation was not reasonable and

therefore it is not an enforceable obligation at law.

[26] If Mr Kelly and Pacific 7 were to succeed with this argument at trial an

interim injunction would have significantly altered the rights of the parties in the

interim. Instead of being allegedly bound by a contractual obligation they dispute,

and could ignore if they have the courage of their convictions, they would be bound

by a court order they cannot dispute or ignore for the term of the interim injunction.

Correspondingly, the Western Work Boats and Seaworks would be put in a better

position than they would be otherwise.

[27] I do not consider the balance of convenience favours such a change in

position. At present, in deciding whether to continue to engage in activities that

Western Work Boats and Seaworks say breach the restraint of competition clause,

Mr Kelly and Pacific 7 have to assess their chances of success in the substantive

proceedings. I consider that is the appropriate set of incentives on them: to make

their business decisions consistent with their best assessment of their legal

8 AMP Services (NZ) Limited v Visser [2016] NZHC 134 at [45].

obligations. If they proceed on the basis the restraint is unenforceable and it turns

out it is enforceable, they will be liable for damages.

[28] I do agree with, and regard as a significant point, Mr King’s submission that

it would be easier to quantify the loss accruing to Western Work Boats and Seaworks

from breach of the restraint than it would to quantify the loss accruing to Mr Kelly

and Pacific 7’s new business of lost opportunities due to an unjustified interim

injunction. Damages are an adequate remedy for the applicants but less so for the

respondents.

[29] My decision to decline the application for an interim injunction should not be

taken to indicate that the substantive proceedings by Western Work Boats and

Seaworks will necessarily fail. This is an acquisition-of-business context, not an

employment context. The term of the restraint, two years, is not particularly lengthy.

The geographical scope is broad, covering all of New Zealand, but these competitors

are all are based in Tauranga. The restraint was the subject of a negotiated exception

to recognise Mr Kelly’s intentions in taking over ownership and operation of the

Karen D as part of the deal. The value of the restraint seems highly likely to have

been factored into the consideration. Mr Kelly’s submission that the bargaining

power was unequal will need to be demonstrated by evidence. And Mr Kelly and

Pacific 7 will have to mount convincing legal argument that the terms of “scheduled

passenger ferry service” and “recreational fishing charter” do not mean what they

say, in order to succeed in defending those claims of breaches of the restraint. The

other claims clearly require further discovery for their prospects to be assessed.

[30] A sensible commercial negotiation over what has occurred, and agreement on

the applicability and interpretation of the restraint clause over its remaining term,

may be more profitable for all concerned than continuing expensive litigation. But

that should not be taken to indicate any judicial view of the likely result of

proceedings where the substantive evidence has yet to be discovered, let alone put

before the court.

Sale of Lot 4

[31] The injunction sought in relation to Lot 4 is also relatively benign. But

different considerations apply. At this stage of the proceeding the merits of the

argument regarding Lot 4 appear relatively finely balanced. The business

opportunity of acquisition of Lot 4 did initially arise while Mr Kelly was at Western

Work Boats. But it arose again after he had left. Resolution of the issue will be

informed by the evidence, perhaps including third party discovery from the Council.

[32] The proposed injunction would restrict disposal of Lot 4 in order to preserve

it as a source of potential relief if the substantive proceedings succeed. Western

Work Boats and Seaworks submit that it would be difficult to substitute for the value

of that relief with damages, and I agree.

[33] Mr King, for Mr Kelly, says the sale and purchase agreement for Lot 4

involves the Council having a first right of refusal which will be registered and run

with the land. For that reason he submits the relief sought in the substantive

proceedings is not possible without impinging on the rights of the Council and so is

unlikely to be ordered by a court. Whether that is correct or not is a matter for the

substantive hearing. I do not regard it as a sufficient reason to deny the injunction

sought on an interim basis.

[34] Mr Kelly and Pacific 7 have no plans to dispose of Lot 4. Mr King says the

detriment to them of the injunction is that it would restrict the potential to restructure

the business. The likelihood of such inconvenience does not currently appear to be

material. I propose to grant the injunction sought in this respect. If circumstances

change so that the terms of the injunction are materially inconvenient then the

respondents have leave to apply for variation or removal of the interim injunction.

Overall justice

[35] I consider the overall justice of the position is preserved by Mr Kelly and

Pacific 7 being subject to an interim restriction on disposing of Lot 4 but not having

a court order change the enforceability of the restraint on competition clause, even

on an interim basis. Mr Kelly and Pacific 7 may make their own assessment of how

a court will view the enforceability and interpretation of the clause. If they are

wrong they will face damages claims. Western Work Boats and Seaworks will have

their interest in Lot 4 as a source of relief preserved. And the parties can proceed

with the litigation, or settle, as they wish.

Result

[36] I grant an interim injunction restraining Mr Kelly (through Pacific 7 and

otherwise) and Pacific 7, on completion of the transfer of Lot 4 to Pacific 7, from

taking any steps to sell, alienate or otherwise in any way dissipate their respective

interests in Lot 4, and requiring them to preserve their interests in Lot 4 in all

respects pending:

(i) a substantive outcome in the underlying proceedings; or

(ii) further order of the Court.

[37] Mr Kelly and Pacific 7 have leave to apply to the Court for variation or

removal of the interim injunction if a change in circumstances materially alters the

balance of convenience imposed by the injunction.

[38] Western Work Boats and Seaworks have succeeded in obtaining an interim

injunction but only regarding part of what they sought. Mr Kelly and Pacific 7 have

succeeded in responding to the application but only regarding part of what was

sought. To recognise that both sides succeeded and failed I am inclined to let costs

lie where they fall.9 If, despite that indication, either party wishes to pursue costs

they have leave to file and serve brief submissions within ten working days of this

decision. The other parties then have ten working days to file and serve their

responses, if any.

Palmer J

9 Deliu v Connell [2016] NZHC 1080 at [6].