'HARSH CONSEQUENCES' for Club Physical franchisee as injunction granted

The decision means that former franchisee Stuart Holder and his Colven companies, trading as Jolt Fitness, must stop operating with immediate effect. They may not operate a health and fitness business at or within 5kms of the Three Kings branch until further order of the High Court, or from the existing Botany and Westgate premises (although no geographical limitations were imposed in those locations.

The judgment, delivered by Justice Helen Winkelmann at 2pm today, will be welcomed by those who saw the case as a test of whether franchise agreements in general could be upheld in a Court (see http://www.franchise.co.nz/article/1617).

Club Physical franchisor Paul Richards told Franchise New Zealand, 'We’re relieved that franchise law has been upheld. Tina, I and the team were greatly buoyed by the support of other business people, members and public. Our focus now needs to be on the members and getting those branches open as Club Physical.'

The judgment was:

‘Health Club Brands’ application for an interim injunction restraining the defendants from operating a health and fitness business is granted, but on modified terms to those sought as follows:

 

(a) In respect of the Three Kings franchise, the second and fourth defendants are restrained from trading at, and within five kilometres of, the Three Kings premises formerly operated as a Club Physical gym until further order of the Court.

 

(b) In respect of the Botany and Westgate franchises the first, third and fourth defendants are restrained from trading at the Botany and Westgate premises formerly operated as Club Physical gyms until further order of the Court.

 

The defendants’ cross-application to restrain Heath Club Brands from accessing contact details of the franchisee defendants’ gym members, and from contacting those members, is declined.

 

I ask the registry to list this proceeding before me for a telephone conference to decide how it is to be managed through to trial. Costs are reserved.’

Restraint of Trade Enforceable

Franchisee Stuart Holder and his Colven companies were the four defendants in the case. They had claimed that the restraints of trade in the franchise agreements were unenforceable on three grounds:

(a) Because crucial elements of the restraint of trade clauses were not completed by the parties, the agreements do not operate to restrain the defendants as contended.

(b) To the extent that the restraints do impose obligations upon the defendants, those obligations should not be enforced because they are unreasonable.

(c) In any case, Health Club Brands is in breach of the franchise agreements, releasing the defendants from any contractual obligations which remain unperformed at the date of cancellation.

The judge found that the restraint of trade provisions were enforceable and that ‘the defendants’ case that breaches of contract by Health Club Brands justified cancellation is poorly supported. Mr Holder’s evidence is, in significant part, confused and contradictory.’

She also comments, ‘Mr Holder might not have liked the business development assistance and advice, but it seems he received it.’

Harsh Consequences For Defendants

The defendants had argued that the balance of convenience which must be taken into account in an injunction to stop trading must favour them, noting that ‘The grant of an injunction will terminate the defendants’ business with catastrophic effect. The fourth defendant (Mr Holder) would lose his $2.1 million capital investment in the business, and the first three defendants (the Colven companies) would be rendered insolvent.’

The judge accepted ‘It is true that granting the injunctions sought is likely to have a catastrophic effect on the defendants’ businesses. Nevertheless I have concluded that the overall justice of this case favours the grant of an injunction restraining the defendants from operating gym businesses from any of the business premises, and further, in the case of the Three Kings gym, within five kilometres of the business premises, until further order of the Court.’

In particular, she noted that ‘Other franchisees will be damaged by the actions of the defendants, as the value of the business model they pay franchise fees for will be diminished by the reduction in number of Club Physical gyms.’

She goes on to say. ‘There will undoubtedly be harsh consequences for the defendants which flow from the issue of this injunction. However, given the relative strength of each party’s case, this consideration does not outweigh those which tend to support the grant of an injunction.’

Customer Details Can Be Used By Franchisor

Justice Helen Winkelmann also declined the defendants application for an injunction preventing Club Physical  from contacting  the franchisee defendants' gym members. This is because a clause in the franchise agreement 'contemplates that on termination “for any reason” the franchisee will immediately cease carrying on the business at the premises, co-operate in the assignment of the lease to Health Club Brands and will co-operate with Health Club Brands to ensure a smooth transition so as not to disrupt the customers of the business.'

'This plainly contemplates that Health Club Brands will simply step into the shoes of the franchisee defendants and carry on the business with the existing customers. To do this, Health Club Brands would need access to the client details and it would have to be free to contact them. Moreover, the franchisee defendants accept an obligation to co-operate with Health Club Brands to ensure a smooth transition so that the customers of the business are not disrupted.'

The full judgment can be read here - see case number [2013] NZHC 428

See Jolt Fitness's response here.

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