Lessons for business from rogue gym stoush

The owner of popular Club Physical gym franchise got more than he bargained for when three of the Auckland gyms were rebranded suddenly in February.

Fitness clubs at Three Kings, Botany Downs and Westgate were converted to Jolt Fitness by their former franchise owners – companies associated with Stuart Holder. 

Club Physical took the franchisees to Auckland High Court last month wanting an interim injunction restraining the franchisees from conducting or having an interest in any health and fitness business at or within a 5km radius of the former Club Physical premises.

First, Chief High Court Judge Helen Winkelmann granted Club Physical owner Health Club Brands an interim injunction that effectively prevented the Jolt Fitness gyms from operating from the existing premises. 

Health Club Brands reclaimed the gyms late last month.

The widely-reported dispute illustrates how the remedy of an injunction can be used to protect legitimate business interests.

Here’s how:

The franchisees had given notices terminating each of their franchise agreements with Health Club Brands, operator of the Club Physical gyms. 

They asserted, among other things, that Health Club Brands had not complied with its obligations in the agreements to give ongoing business development support and assistance. They immediately rebranded the gyms as Jolt Fitness and continued to trade under that name. 

Health Club Brands took the position that the franchisees did not have the right to terminate, and themselves gave notice of cancellation before taking the matter to the Auckland High Court.

Helpfully for Health Club Brands, in the franchise agreements, the franchisees had agreed that they would not carry out any health or fitness business at or within a certain distance of the (now) Jolt Fitness gyms. 

Health Club Brands asked the High Court to grant an interim injunction to enforce this obligation.

Initially, an injunction was sought to cover competing operations within a distance of 5km of each of the gyms. In respect of two of the gyms, this was ultimately limited to restricting operation of a competing business from the existing premises.

Restraint of trade considered by judge

One of the issues the judge had to consider was whether this kind of contractual obligation, a form of "restraint of trade", was (at least arguably) enforceable. The courts recognise that restraints of trade are contrary to public policy and therefore, as a starting point, likely to be of no effect. 

However, that is not the end of the story. Restraints commonly appear in a variety of contracts, ranging from employment agreements to agreements for the sale and purchase of a business. 

The courts are willing to enforce restraints if they are no wider than the circumstances reasonably require and if there is a legitimate interest to be protected by the restraint.  

In the Club Physical case, the judge recognised (as the courts have previously) that a franchisor has a legitimate interest in protecting the goodwill it has developed in a particular business model.

The franchisees argued that they no longer had to comply with the obligations in the franchise agreements because, they said, Health Club Brands had breached the agreements itself. 

The franchisees contended that Health Club Brands had not done enough to offer business development support and assistance, notably against the backdrop of the competition Club Physical gyms face from the very low-cost "no-frills" gyms opening across Auckland. 

The judge accepted it was arguable that if Health Club Brands had committed a breach of the agreements, which justified the franchisees terminating the agreements, Jolt Fitness would not have to comply with the restraint of trade clauses. 

However, the franchisees were not able to persuade the judge that Health Club Brands had breached the agreements by not providing support and assistance. The judge observed that while the franchisees may not have liked the business development assistance and advice provided, it seems they received it.

Health Club Brands' stronger legal position carried the day. Even though the interim injunction would have harsh consequences for franchisees, the court was still willing to grant it. 

Obstacles to obtaining an injunction

One of the key obstacles to obtaining an injunction is often perceived to be the argument that the loss the party was seeking to be protected from could be adequately compensated by an award of damages.  However, this case illustrates that factor is by no means decisive. 

The judge recognised that the damage suffered by Health Club Brands might ultimately be capable of being adequately compensated in damages. However, the franchisees had not provided sufficient evidence that they would have the means to meet a substantial damages award.

This case serves as an example and reminder of the value of an injunction to business. Health Club Brands argued that there is a limited demand for gyms, which meant it would be impossible for a Club Physical franchisee to re-establish itself in the relevant areas.

Similar principles apply to a number of businesses. 

An injunction is a unique remedy in that it can give businesses the chance to continue operating under the circumstances they are entitled to as a matter of law, rather than a remedy like damages, which seeks to compensate, often imperfectly, after the damage has been done.

Polly Pope is a partner of Russell McVeagh and specialises in financial, corporate and regulatory litigation.