Category: Dispute Resolution

Like any contract, your Franchise Agreement is likely to include a “Dispute Resolution” clause which sets out the process if things go wrong. While dispute resolution clauses can vary, the key features are typically the same.

The process will generally include a number of steps which escalate in terms of complexity and therefore cost. The intention is that it is in the parties’ best interests that the dispute is resolved as quickly and cheaply as possible.

Set out below is what you might see in a typical Dispute Resolution clause.

Good faith/mutual negotiation

This is often found as a first step in the process (including in the Franchising Association template clause). There are no hard and fast rules as to what this means but, if included, it generally means a party cannot simply escalate the dispute without first undertaking some sort of discussion or correspondence setting out the issues.

Mediation

Mediation is typically the first “formal” step. It is formal in that it requires the involvement of a third party whose job is to try and help the parties towards a resolution. Key features of mediation:

• It will start as a face to face meeting between the parties (and/or their lawyers) and the mediator;
• It is “without prejudice”. This means that unless you reach an agreement, any concession made at the mediation will be “off the record” and cannot be referred to at a later point;
• The mediator’s role is to facilitate discussion and ensure the parties have their say; and
• The mediator will not make a decision. It is up to the parties to reach an agreement if they can.

Arbitration

If the parties could not agree at mediation (or did not have to go through mediation), Arbitration is usually the next step. It is best thought of as a private Court proceeding. Key features are:

• The process can be tailored to suit the nature and complexity of the dispute;
• It is typically faster and more cost effective than a Court proceeding; and
• The arbitrator will make a decision that will be binding on the parties.

Things to look out for

Do you actually have a dispute? – While “dispute” is often not defined in franchise agreements, a common sense definition is typically applied. For example, if there is simply a debt owed by the franchisee to the franchisor, that is not in itself a dispute which would trigger the Dispute Resolution clause.

Are the steps compulsory? – Key words to look out for are “may”, “must” and “shall’. It is not uncommon to see a clause along the lines of “the parties may refer the dispute to mediation”. Therefore unless the parties agree, the mediation step may not occur. There is of course the ability for the parties to vary the dispute resolution process, if they both agree.

Summary

It is important to have an understanding of what your dispute resolution process is. There is a real risk that if you get it wrong (such as missing a compulsory step), you could significantly complicate the process and potentially compromise a later binding decision.

Daniel is an Director in our Dispute Resolution Team and can be contacted on 07 958 7477.

Introduction

A “phoenix company” is a company which has emerged from the collapse of another through insolvency. The new company is set up to trade in the same or similar trading activities as the former, and is able to present the appearance of “business as usual” to its customers. In this instance the owners and managers decide to abandon a failed company and start a similar business with a new company. Phoenix companies, as the name suggests, rise from the ashes of failed companies with similar names and similar or the same directors.

The provisions under the 1993 Act

The phoenix law provisions are set out in sections 386A to 386F of the Companies Act 1993 (“the Act”). In summary these provisions prohibit a director of a failed company from being a director of, or involved in the promotion, formation or management of a company that has a similar name to that of the failed company. The new company is referred to as “a phoenix company” in that it arises out of the ashes of the old company by virtue of it having many of the same personnel, and usually the key assets, of the former company.

Likewise, a director of a failed company may not be involved in the carrying on of a business that has the same or similar name to that of the failed company. Under a specific criteria, the law allows a liquidator to sell a business to a related party of the old company.

Section 386D of the Act

The phoenix law prohibitions mentioned cease to apply if the parties adopt the “successor company procedure” established under the Act.

Under this procedure, the “phoenix” or successor company must acquire the whole, or substantially the whole, of the business of the former company from a liquidator or receiver of it, or under a deed of arrangement made under the Act. The creditors of the former company must be notified of the acquisition and of the relevant other details including the proposal that the former directors become directors, or involved in the management of the successor company.

Creditors may be placed in an awkward position when they ask for payment from the phoenix company only to be told that their debts are owed by the former company only. Creditors are more likely to be misled by the directors starting a company with a new name than one with the old name. Yet, the regime has no application where a new name is used.

Alternatively, the purpose of the regime may be to deny the director and shareholders advantages that there might be in using the company’s name, otherwise the phoenix company would not want to adopt a similar name. It is not apparent that any difficulty arises where the relevant director has paid full value for the goodwill associated with the name. The Courts have noted that any goodwill must be provided for in the acquisition of the former company’s assets by the phoenix company. Even where it is only the name that is common to the former company, the law may allow the liquidator of the former company to recover payment for its use. However, the nature of the new provisions provides an incentive to ensure that adequate value is paid for the use of the name.

At the same time the successor procedure may slow down the restructuring of businesses because of the need to ensure that the transferring company goes into liquidation, receivership or voluntary administration before a transfer of the assets occurs.

Example from case law

In Sojourner v Robb [2008] 1 NZLR 751 (CA) the relevant company had a successful engineering business making fibreglass and other products, including small boats, bus bodies, and shower enclosures for bathrooms. It extended into building large catamarans on commission which proved uneconomic and led to a dispute with the plaintiff.

The defendants responded by causing the company to cease to trade, and by transferring most of its assets to a new company with a very similar name. While realistic prices were paid for the tangible assets, nothing of substance was paid for the goodwill of the old business. The directors and staff moved to the new company, and business returned to normal. In the High Court, Judge Fogarty found that the defendants were in breach of their duties of loyalty to the company by failing to obtain value for the company’s goodwill, a figure estimated to be in the region of several hundred thousand dollars.

It appears that as part of the restructuring the directors paid off the general creditors of the company, but left nothing for the claims of the plaintiff. It is suggested here that directors, even after insolvency, can pay some creditors ahead of others if there is good reason to do so. It is doubtful whether this is consistent with the general duties, after insolvency, for directors to preferentially pay some creditors, nor to withhold payment deliberately to shut out a particular claimant.

The Court decided that directors must ensure that they do not profit from the transfer of assets to the phoenix company. Where the assets have a greater value to them, as associates of the phoenix company, than to the market, they would be accountable for that difference. That obligation applies as much to the sale of the company’s goodwill as to its other assets. Where directors want the new company to continue to use the old company’s name is a strong indication that there is some goodwill attached to the old company’s business. The Court of Appeal affirmed that the onus lies on the directors to show that a sufficient amount was paid. Given that on the facts of this case nothing was paid, the defendants were vulnerable to a sum being awarded against them.

Conclusion

Both directors and creditors of companies need to be aware of the phoenix law provisions. Directors need careful legal advice to ensure their companies are not engaging in illegitimate phoenix activity. In addition, creditors of companies should take legal advice, as the new provisions open up potential liability against those who may be involved in such activity.

Jerome is a Senior Solicitor in our Māori Legal Team and can be contacted on 07 958 7427.

The recent case of Ingram v Patcroft Properties Limited [2011] NZSC 49 dealt specifically with one party’s right to cancel a lease agreement as a result of the other party’s breach.

This particular case dealt with a lease of commercial premises in Auckland. Ingram leased the premises from Patcroft. Under the lease, Ingram was to pay rent in advance on the first day of each month. Ingram failed to pay the rent owing on 1 June 2005. Under the lease agreement, this entitled Patcroft to re-enter the premises and terminate the lease 14 days after the rent had become due and remained unpaid.

Unfortunately, Patcroft miscalculated the timeframe and re-entered the premises only 13 days after the rent was due. The re-entry was therefore unlawful and at this stage, Ingram was therefore entitled to accept Patcroft’s repudiation of the lease by giving notice of cancellation. He did not do this. In fact very little was done, the lease was not cancelled, rent was not paid and Patcroft remained at the property. The matter then sat still for over a year until Patcroft demanded $1.3 million dollars in unpaid rent from Ingram. Ingram responded by filing proceedings seeking damages for the loss of business caused by Patcroft’s unlawful re-entry.

The issue for the Court to decide was whether Patcroft could have cancelled the contract validly because of Ingram’s breach in not paying the rent (when it became 14 days overdue). Where, in this instance, Patcroft was already in breach of the lease. The Supreme Court ultimately found that one party cannot cancel a contract because of the other party’s breach, if the cancelling party is itself already in breach. Here Patcroft’s breach made Ingram’s performance of the contract futile, and therefore Patcroft could not validly cancel the lease and was not entitled to damages.

Importantly, the Supreme Court also found that, not only is the cancelling party (in this instance, Patcroft) not entitled to damages for the other party’s breach, but that the cancelling party itself may also be liable for damages where a cancellation is invalid.

The lessons to be taken from the Supreme Court’s decision in this instance are important for those involved in commercial lease agreements and other contracts:

• Firstly, any party to a contract should very carefully consider their right to cancel a contract. In this instance, had Patcroft correctly calculated the date for re-entry (and rent remained unpaid on the correct day) such litigation would have been prevented.
• Secondly, parties should not leave a repudiation unaccepted. If one party is in breach of a lease agreement so as to repudiate the contract, the other party should cancel the lease agreement as soon as possible. Obviously where a party accepts a repudiation and cancels the agreement, then the issue of whether the cancelling party has breached the lease agreement in a manner that was directly caused by the other parties repudiation, is avoided. We note that, whilst not appropriate in this case, an innocent party may respond to a repudiation by affirming the lease rather than cancelling.

Renika is an Associate in our Dispute Resolution Team and can be contacted on 07 958 7429.

Creditors not being paid

The strain of the current economic climate is seeing more and more debtors (clients, customers or service users) being unable to meet their payment obligations and in turn making it difficult for creditors (companies or individuals) to stay financially afloat.

It is important to consider what the desired outcome is when trying to determine the most appropriate debt recovery method. These considerations may include:

• Who the debtor is – is it a new client, or an established company;
• What will be the impact on the relationship – does it matter;
• What the chances of recovery are – how much is known about the debtors financial situation; and/or
• Is it cost effective/economic to pursue – each recovery option has different costs associated with it).

If you decide to pursue the debt via the Court system, there are a number of steps to take to recover the debt.

Step one – obtaining a judgment

The initial step in a debt recovery action is to obtain a judgment. Depending on the situation, there are different ways to do this.

District Court process

The District Court is the most common court for civil dispute resolution. The District Court has jurisdiction to determine proceedings in relation to debt, demand or damages, or the value of chattels claimed for up to $200,000. There are strict timeframes which each party to the proceeding needs to adhere to once the claim has been filed. This ensures that the claim is resolved as swiftly as possible. The proceedings may be discontinued, if timeframes are not followed.

Summary judgment

The summary judgment process shortens and simplifies a District Court claim. It can be used where the debtor appears not to have an arguable defence to your claim. A common example would be pursuing an individual for an unpaid and undisputed invoice.

Disputes Tribunal

An alternative route is pursuing the debt in the Disputes Tribunal. The Disputes Tribunal jurisdiction is for disputed claims of up to $15,000 (or up to $20,000 if both parties agree). The tribunal process differs from a formal court process, whereby there are no judges, but rather a platform for parties to discuss the dispute, and for a referee to determine a ruling. Lawyers cannot attend, other than in limited circumstances. Filing fees depend on the amount of the claim.

Step two – enforcing the judgment

Just because you have obtained judgment, it does not mean you are going to get paid. Depending on the circumstances, an assessment needs to be made as to what the best next step is.

Statutory demand

A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with the Companies Act. Statutory demands can only be issued against a company where there is an undisputed and quantified debt of at least $1,000 owed. Once served, the debtor must apply to the Court within 10 working days to apply to set aside the statutory demand, and if no application is made, the debtor must satisfy the debt (by payment or arrangement acceptable to the creditor) within 15 working days after receiving the demand. If neither occurs, liquidation proceedings can be filed within 30 days.

Examination and attachment order

An examination is a court inquiry into the debtor’s assets in order to determine what you might be able to recover for the debt owed. The court order requires the debtor to attend and disclose their financial position in full. If the debtor fails to attend, they may be arrested. An attachment order can be obtained during the examination hearing. This results in a direct payment from the debtor’s employer or Work and Income (if they receive a benefit). The aim is to leave the debtor with enough money to support him/herself and his/her family whilst ordering payment towards the debt until it is fully paid.

Bankruptcy

A creditor can apply to make an individual debtor bankrupt where there is a judgment over $1,000. Once bankrupted, the official assignee will sell any assets of the bankrupt and distribute the proceeds amongst all creditors.

Charging orders

A charging order is a court order restraining dealings relating to a creditor’s property. A judgment creditor can, without notice, place charging orders on judgment debtor’s property. This is not a direct method of enforcement or debt recovery however, it can be strategically useful to prevent the debtor from dealing with their property without the creditor’s knowledge.

Company liquidation

As noted above, an application to liquidate must be filed within 30 days of the statutory demand expiring. The application must be served on the company and advertised publicly. As with bankruptcy, liquidation often does not result in recovery of the debt but can be used by creditors to set a precedent. One of the main reasons to pursue a company liquidation is to realise the assets of the company in order to apportion proceeds to secured creditors, who will take priority, and then to unsecured creditors (on a pro-rata basis).

Deciding on the appropriate method

There are a number of factors to be considered before deciding on the appropriate debt recovery option. Ultimately the creditor needs to take into account what is trying to be achieved by the recovery action. Considerations need to be given to the relationship between the parties, the public precedent that could be set, the recoverability of the debt and time it could take. Finally, a review of current creditor processes may need to be undertaken in order to prevent situations of debt recovery arising. Where this fails, seeking advice on a debt recovery method that is best suited to the relevant situation may be appropriate.

If you would like further information please contact Daniel Shore on 07 958 7477.

Purchasing a franchise usually provides the comfort of an established brand and structured business system. It does however come at a cost, both to buy into the system and with on-going marketing levies and royalties.

Like any business however, there is uncertainty and risk and when things do not go to plan, often the Franchisor is the first port of call.

What goes wrong?

As with any business, you can be impacted by the economic climate, but there are also a number of other complications which can occur between a Franchisor and Franchisee. Common issues which may arise include:

• The business does not meet the projections provided by the Franchisor at the outset;
• The marketing fund does not provide any real benefit;
• The impact of another Franchisee opening nearby;
• The Franchisor refusing to renew for a further term;
• The Franchisor issuing one or more default/breach notices.

What can be achieved?

The difficulty which invariably exists is that the Franchise Agreement is heavily weighted in favour of the Franchisor. The vast majority of Franchise Agreements will have disclaimers to try and avoid any potential liability, particularly in relation to financial projections.

Despite this, we can often negotiate on behalf of our clients to ensure their investments are protected and/or their losses are minimised. What can be achieved often depends on:

• The wording of the Franchise Agreement (including obligations of “good faith”);
• The paper trail with the Franchisor;
• Whether other Franchisees will support the position;
• How concerned the Franchisor is about public relations.

What should you do?

The starting point is to talk to your Franchisor. Ultimately the Franchisor wants you to do well as it is a reflection on their business model and your success results in a financial return to them. Depending on their response, there are a number of strategies to escalate the issues if necessary. Things to bear in mind from the outset:

• Take legal advice sooner rather than later. It is important from an early point that you have an understanding of your legal position and the potential consequences if you get the process wrong;
• Remember it is a relationship business. Once damaged, the relationship between the Franchisee and Franchisor is difficult to repair;
• Manage the paper trail and assume anything put in writing could be relied upon later;
• Be mindful of how you may have contributed to the issues. Have you complied with procedures. Have you accepted feedback from the Franchisor?
• Determine whether other Franchisees are facing the same issue/s. There is power in numbers and also the ability to share costs.

Summary

Overall, your Franchisor should be there to help. Regardless of the reasons, the failure or success of a Franchisee reflects on the brand and, in turn, the ability of the Franchisor to sell more franchises and maintain a sustainable and profitable model.

Daniel is a Director in our Dispute Resolution Team and can be contacted on 07 958 7477.

Discovery is a large part of litigation whereby one party lists, and makes available, relevant documents to the opposing side.

A recent amendment to the High Court Rules regarding the discovery process has meant that the steps for disclosing documents to the other parties in Court proceedings changed considerably from 1 February 2012.

The District Court has also adopted the High Court Amendment Rules (No 2) 2011 (“the new Rules”).

Principles of the new Rules

The key principles under the new Rules are:

• Co-operation;
• Proportionality;
• Practical arrangements;
• Use of technology;
• Case management.

Overall, the new Rules are designed to reduce disproportionate costs and delays caused by discovery as well as reducing the tactical use of disclosure.

Key changes

Co-operation

Parties must cooperate to ensure discovery is proportionate and as practical as possible. Parties are encouraged to agree on the arrangements, particularly how documents will be listed and the format for exchange.

Preservation of documents

As soon as litigation is “reasonably contemplated”, prospective parties must take all reasonable steps to preserve documents that are reasonably likely to be discoverable. This includes keeping all emails, correspondence and documents which relate to the issues.

Initial disclosure

A party must make “initial disclosure” of key documents when preparing a Statement of Claim, Notice of Defence or other originating document.

For example, where a contract is relied on in a Statement of Claim then it should be attached to that document when filed and served.

Exchange of documents

Previously, documents disclosed to the other party in Court proceedings were usually exchanged in hard copy. This led to considerable paperwork and finding specific documents could be like finding a needle in a haystack. The default position under the new Rules has now changed and documents are to be exchanged in electronic format.

This ties in with the focus on the use of technology under the new Rules. The general idea is that wherever technology can reduce costs and effort, and increase efficiency, then it is strongly encouraged by the Courts.

That said, given that the overarching goal of the new Rules is to make discovery as easy as possible for the parties, the parties can agree on whatever method of exchanging documents suits the proceedings.

Parties’ obligations

The result of these changes is that there are now a number of obligations on lawyers and parties to a dispute. Those obligations apply as soon as litigation is “reasonably contemplated” so this will generally be some time before Court proceedings are commenced.

Parties must keep all documents, both electronic and hard copy, from such time as litigation is “reasonably contemplated”. The definition of this is not set out in the new Rules and will no doubt be tested through the Courts.

A clear example of when litigation is reasonably contemplated is where one party formally records, in writing, an intention to take a dispute to Court if settlement cannot reached. This would clearly put the other party on notice that litigation is being considered. From that point onwards (at least), both parties would be required to keep all documents which may be relevant to the dispute.

The obligation to keep documents is ongoing throughout the Court proceedings for both parties and their legal counsel. It is also important to note that for companies or other entities who are parties to Court proceedings, the obligation applies to all employees or representatives of the entity (not just the person responsible for dealing with the dispute).

Consequences for breach

Where those obligations are breached, the consequences are dependent on the extent of the breach but include:

• Order for particular discovery;
• Costs order against the party in breach;
• Adverse evidentiary inference by the Court based on the failure to keep documents;
• Punishment for contempt under the Court’s inherent jurisdiction; and
• Criminal penalties under the Crimes Act.

Timeframes/transition

The new Rules came into force on 1 February 2012. From that point onwards the new Rules apply to:

• All new proceedings brought before the Courts; and
• Any proceedings currently before the Court with discovery orders made after 1 February 2012.

Matters that were already before the Court on 1 February 2012 with existing discovery orders continue under the old Rules unless and until new discovery orders are made.

Renika is an Associate in our Dispute Resolution Team and can be contacted on 07 958 7429.