Legal Matters
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Stewart Germann and Khushbu Sundarji review three recent cases where franchisors and franchisees went to court seeking legal injunctions – and weren’t successful
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erious disputes between franchisors and franchisees are relatively uncommon in New Zealand, which is why they tend to make headlines when they do occur. But when something serious happens, it may need to end up in court action. That can be a lengthy process, though, which is why one of the parties will sometimes seek what’s called an interim injunction to stop any further perceived damage to their business before trial. Three recent cases show that this won’t always be granted.
How serious is it? A hotel is a significant investment, so when things aren’t going right then you need to put them right fast. The case of Prominent Investments Ltd v Quest Apartment Hotels (NZ) Ltd suggests that both franchisors and franchisees need to act in a timely manner. Background Trade Show Displays | Neon & 3D Letters | Illuminated Signs | Banners Vehicle Graphics | Building Signage | Digital Signs | Retail Signs | Safety Signs
Prominent Investments Limited (Prominent) is a Quest franchisee in Ponsonby under a franchise agreement from Quest Apartment Hotels (NZ) Limited (Quest). The agreement was dated 28 September 2012 for an initial term of 5 years with three rights of renewal of 5 years each. Any renewal request had to comply with clauses 5.1.1 to 5.1.6 of the franchise agreement, including: providing notice as required under those clauses; not to default; and that Prominent had substantially complied with the terms of the franchise agreement during the term. In March 2017, Quest sent Prominent a list of compliance issues to be rectified before renewal could be considered, including that Prominent had to acknowledge by a certain date that Quest’s approval depended on the rectification of the compliance issues raised in the letter. There was various correspondence (and meetings) in March 2017 between the parties recording that Prominent had to comply with the list of issues.
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The franchise agreement was not renewed and continued on a holdingover basis. After discussions between the parties, on 25 June 2018 the parties entered into a Deed of Variation which extended the term of the agreement to 1 April 2019, allowing Prominent more time to meet the renewal requirements. However, Prominent did not request a renewal of the franchise agreement, so it continued on a holding-over basis from 1 April 2019. On 26 June 2020 Quest wrote to Prominent saying that it had no confidence that Prominent would comply with the requirements and the letter also indicated that a third party offered to purchase the business and it offered Prominent time to negotiate directly with the third party. Subsequently on 9 July 2020, Quest forwarded Prominent a further increased offer from the third party but before that could be acted upon Quest issued a Notice of Termination of Franchise Agreement. Prominent sought an interim injunction preventing Quest from terminating the franchise agreement and arguing that Quest had breached the franchise agreement by not providing renewal documentation in a timely manner prior to 28 September 2017 – in effect, Quest denied Prominent’s rights to a renewal by issuing a one month notice of termination. Prominent also alleged misleading and deceptive conduct.
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The Issues and the Law Renewal of the franchise agreement was conditional on Prominent meeting the requirements contained in clause 5.1.1 of the agreement, including the requirement that Prominent could not be in default. Quest argued that it could terminate the franchise agreement under this clause, as Prominent had not complied with its renewal requirements and these issues were raised well before 2017, which was acknowledged by Prominent. However, Quest continued to work with Prominent and acknowledged that some issues were beyond its control. Accordingly, Prominent was never told that its request for renewal was declined.
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Franchise New Zealand 2/11/2022 11:47:36 am
Spring 2023
Year 32 Issue 03