Hungry Jack's v Burger King (No 2)

[2000] NSWSC 241

CITATION:	Hungry Jack's v Burger King (No 2) [2000] NSWSC 241
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50258/96
HEARING DATE(S):	24/03/00
JUDGMENT DATE:	30 March 2000
PARTIES :	Hungry Jack's Pty Limited - Plaintiff Burger King Corporation - First Defendant The Shell Company of Australia Limited - Second Defendant Burger King Australia Pty Limited - Third Defendant
JUDGMENT OF:	Rolfe J

COUNSEL :	Mr N.C. Hutley SC/Mr T.D. Castle - Plaintiff Mr M.R. Ellicott - First and Third Defendants
SOLICITORS:	Mallesons Stephen Jaques - Plaintiff Corrs Chambers Westgarth - First and Third Defendants
DECISION:	Parties to bring in Short Minutes of Order.

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

ROLFE J

THURSDAY, 30 MARCH 2000


50258/1996 - HUNGRY JACK’S PTY LIMITED v BURGER KING CORPORATION & ORS (NO 2)

JUDGMENT

HIS HONOUR:

Introduction

1    On 5 November 1999 I published my reasons for judgment. One of the conclusions to which I came was:-

“(d) HJPL is entitled to rely upon the terms of the Franchise Agreements for the successor restaurants in relation to the renewal of those Agreements for a further period of fifteen years from the date of renewal, and BKC is not entitled to rely on the various Extension Agreements as in any way defining the rights in relation to the options contained in the Franchise Agreements.”

2    In those reasons I referred to Hungry Jack’s Pty Limited as “HJPL” and Burger King Corporation as “BKC”, and I shall do so in these reasons.

3    I invited the parties to bring in Short Minutes of Order to reflect my conclusions, and I subsequently made orders conformably with the Short Minutes of Order presented by the parties. Although there was some argument about some of them, there was none about Order 4, which gave effect to the conclusion to which I have just referred as follows:-

“Within 60 days of the making of these orders, BKC offer HJPL a franchise agreement permitting the use of the Burger King System and the Burger King Marks for each of the Burger King Restaurants situated at Fulham, Strathpine, Claremont, Ipswich, Springwood, Balga, Barrack St Perth, Beak House Brisbane, Bunbury and Bull Creek, in the form currently being used by BKC in the United States and otherwise in compliance with clauses 6.2, 6.3 and 9.1 of the Development Agreement, or in such other form as may be agreed between HJPL and BKC, for a further term of 15 years from the date of renewal, subject to:
(a) In the case of Springwood, Barrack Street Perth and Bull Creek restaurants, HJPL advising BKC of its agreement to make such capital expenditures as may reasonably be required to renovate and modernise the restaurant buildings, premises, signs and equipment so as to reflect the current image of Burger King Restaurants, as agreed between the parties or as determined by arbitration pursuant to clause XIII of the franchise agreement for that restaurant; and
(b) HJPL having the right to remain in possession of the premises, or other premises acceptable to BKC, for the new term.”

4    On 17 January 2000 I ordered, by consent, that the time within which BKC was required to offer HJPL the Franchise Agreements pursuant to Order 4 be extended until 5 pm on Monday, 31 January 2000.

5    On 31 January 2000 I ordered, by consent, that that time be extended until 5 pm on Friday, 11 February 2000 and, on 11 February 2000, I made an order by consent that that time be extended for a further period ending at 5 pm on Friday, 18 February 2000.

The Present Application

6    By a Notice of Motion dated 9 March 2000, HJPL sought an order that:-

“1. The Registrar in Equity or the Deputy Registrar in Equity be appointed pursuant to s.100 of the Supreme Court Act 1970, or alternatively Part 42 rule 9 of the Supreme Court Rules , to sign and deliver an offer for and on behalf of the Burger King Corporation to Hungry Jack’s Pty Limited, in the form which is annexed and marked ‘A’, to enter into a franchise agreement for a Burger King Restaurant to be situated at Murray Street, Perth.”

7    By an Amended Notice of Motion filed in Court on 24 March 2000 HJPL sought, in the alternative, that:-

“.. the time within which the first defendant is required to offer the plaintiff the franchise agreement in relation to a Burger King Restaurant to be situated at Murray Street Perth, pursuant to Order 4 made by the Court on 19 November 1999, be extended with effect from 18 February 2000, for a further period ending 5 pm Friday 1 September 2000.”

8    HJPL does not wish to continue to carry on business at Barrack Street Perth. It seeks a Franchise Agreement in respect of premises at 158-160 Murray Street Perth in lieu of the Barrack Street premises. Mr M.R. Ellicott of Counsel, who appears on behalf of BKC, has stated that BKC has no objection to the Murray Street premises as such. BKC has submitted a form of Franchise Agreement in respect of those premises. It provides for the grant of a licence to HJPL to use the Burger King System and the Burger King Marks in the operation of a Burger King Restaurant at Murray Street, the term to commence “on the date of this Agreement” for a term of fifteen years, unless sooner terminated.

9    Clause 3 is concerned with the Standard and Uniformity of Operations, sub-clause A providing that the “building will be constructed and the premises improved in the manner authorised and approved by BKC ..”; sub-clause B providing for the method of display of marks; and sub-clause C for the type of equipment to be used.

10    The furnishing of this agreement would tend to indicate that BKC accepts that all things necessary have been done to entitle HJPL to a franchise of the Murray Street premises, save for one matter, namely HJPL’s satisfying BKC that it has the right to remain in possession of the premises for the period of fifteen years. However, that was not the way in which the matter was argued.

11    To understand the present dispute it is necessary to consider Order 4 in the light of clause IX of the Standard Franchise Agreement, which provides:-

“IX Option at End of Term.
Provided that Franchisee shall have substantially complied with all the terms and conditions of this agreement and any other agreement between Franchisee and Company, and shall have substantially complied with the operating standards and criteria established for Burger King Restaurants, then at the expiration of the term hereof, Company will offer Franchisee the opportunity to remain a Franchisee hereunder for one additional period of fifteen (15) years, provided that:
A. Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernise the restaurant building, premises, signs and equipment so as to reflect the then current image of Burger King Restaurants.
B. Franchisee must have the right to remain in possession of the premises, or other premises acceptable to Company, for the new term. If Franchisee elects (or is required) to relocate, then Franchisee shall pay Company’s reasonable expenses in relocating, developing or evaluating the new premises. Company shall not be required to extend its credit or resources in obtaining financing for premises or equipment.
C. Franchisee shall execute a new Franchise Agreement on the form then being used by Company in the United States, which may differ from this Franchise Agreement as to royalty. The rate of royalty shall be re-negotiated at the time taking into account the Burger King rate of royalty then prevailing in other countries of the world.
D. Franchisee shall give Company written notice of its desire to exercise its option to continue as a Franchisee not less than fifteen (15) months prior to the expiration of the term of this agreement.”

“Franchisee” and “Company” mean respectively HJPL and BKC.

12    The original Franchise Agreement expired in 1996, but HJPL has continued to trade under various arrangements and whilst awaiting the outcome of the litigation.

The Principal Issue

13    The principal issue raised by the present application is whether BKC’s obligation to offer HJPL the opportunity to remain a franchisee for one additional period is subject to conditions precedent in sub-paragraphs A and, more particularly, B. It is not in issue, nor was it in issue on the hearing, that HJPL had not given BKC written notice as required by sub-paragraph D, but the parties accepted that BKC had never required compliance with this clause, and it was not suggested that the right to a further agreement was defeated by reason of the failure to give that notice.

14    In its written submissions, BKC contended that at issue is the true construction of Order 4, HJPL contending that the matters referred to in Order 4(b) are conditions subsequent to the making of the offer of a Franchise Agreement, whereas BKC asserted that the subject matter of that part of the offer was a condition precedent to that occurring. The parties thus chose to argue the matter on the basis that they are remitted to the position at the time when the offer is to be made. Accordingly, BKC submitted that it had not made the “relevant offer” because HJPL intends to open the restaurant in Murray Street, but cannot assure security of tenure because the agreement for lease, which HJPL has negotiated, states that the lease shall not commence until 90 days after receipt of all approvals, including council approvals, which has not occurred as yet.

15    BKC accepted that Order 4 is in substantially the same terms as clause IX, and that in substance that clause provided HJPL with the opportunity to remain a franchisee provided there was compliance with sub-clauses A, B, C and D, each of which provided for matters with which there had to be compliance “prior to the making of an offer to HJPL by BKC”. The written submission continued:-

“Therefore it is submitted that given that sub-paragraphs (A), (C) and (D) are all matters which HJPL would need to attend to prior to the making of the offer by BKC, it is consistent to treat Clause IX(B) in the same manner. It follows that as Order (4)(b) of the Orders is modelled upon Clause IX(B) a similar construction ought be applied.”

16    Paragraph 8 of BKC’s written submissions stated:-

“That Order 4(b) of the orders gives rise to a condition precedent to the making of an offer is also clear for considerations of practicality.”

There is elaboration on this, including the submission that before BKC is obliged to make an offer it must be aware of the premises and HJPL’s entitlement to remain in them throughout the term. They continued:-

“It would be a strange construction which required BKC to make an offer of a franchise agreement where it potentially did not know the site, had no knowledge of the entitlements of HJPL to occupy the site and had no control over the type of building to be erected at that site. The agreement itself requires the premises to be opened on a daily basis and it would be a strange construction which required that BKC make an offer in respect of which HJPL would be immediately in breach if it executed the agreement because of an inability to open the specified premises during the specified hours. …….. Therefore, in a practical sense BKC must know at the time it makes the offer that HJPL is entitled to be in the premises the subject of the offer for the further term of 15 years.”

17    I have referred to these matters at some length to show that the parties’ submissions focussed on the making of the offer. The submission of BKC continued:-

“For all the above reasons BKC contends that Your Honour should prefer the construction requiring HJPL to satisfy BKC prior to the offer of a franchise agreement that it is entitled to remain in possession for the term of the franchise agreement to be offered i.e. that it is a condition precedent to the obligation to make the offer.”

18    Mr N.C. Hutley of Senior Counsel, who appeared with Mr T.D. Castle of Counsel for HJPL, submitted that on its proper construction Clause IX did not make sub-clause B a condition precedent to the making by BKC of the offer. His submission was that the requirements for substantial compliance with all the terms and conditions of the agreement, any other agreement between the parties and the operating standards and criteria were conditions precedent to the making of the offer. It was not in issue that these conditions had been met. He continued that notwithstanding that sub-clauses A, B, C and D were introduced by the words “provided that”, they did not, on their proper construction, constitute conditions precedent to the making of the offer.

19    Inherent in his submissions, and, as I have said, Mr Ellicott did not contest this, was the proposition that Order 4 was drafted to give effect to clause IX, so that that to which attention had to be paid was the correct construction of that clause.

20    Mr Hutley submitted that the scheme of clause IX was, first, that before BKC was obliged to make an offer there had to be compliance with the matters firstly stated. That, of course, could in given circumstances be the subject of controversy and, obviously enough, BKC could not be required to make the offer until the end of the term. Mr Hutley submitted that sub-clause D contemplated, although it was not enforced in the present circumstances, that HJPL should give fifteen months’ written notice so that during that period the parties could arrange for the extension by dealing with matters such as securing premises and their set-up.

21    However, he submitted, that the making of the offer was not subject to BKC’s being satisfied in relation to the matters set out in sub-clauses A and B, it being obvious that sub-clause C, which is of critical importance, was not a condition precedent to the making of the offer. Mr Ellicott, as I understood it, did not submit that sub-clause C was a condition precedent to the making of the offer.

22    Mr Hutley submitted that the correct approach was that upon BKC’s making the offer, HJPL had a reasonable time within which to consider whether it would accept it, during which time it would have to determine whether it would agree to make the capital expenditures referred to in sub-clause A, and whether it would commit itself to premises as required by sub-clause B. These two requirements, of course, have to be read in the light of the fact that at the time the initial agreement was entered into it was contemplated that BKC would make an offer pursuant to HJPL’s advising its desire to exercise the option and, accordingly, of its being, at least fifteen months’ earlier, desirous of complying with sub-clauses A and B. However, many things can happen in that period.

23    The problem is also complicated, in my view, by the fact that sub-clause C provided that in relation to royalty there was an agreement to agree, the rate being considered by taking into account the royalty rates prevailing in other countries at that time. Also there was room for debate about the applicable terms.

24    It seems clear, however, that there was no requirement for the execution of a new Franchise Agreement until the offer had been made and accepted. The chronology was that BKC would make an offer, subject to compliance with the conceded conditions precedent, and provide a new Franchise Agreement pursuant to sub-clause D if there was compliance with sub-clauses A and B. HJPL would then have the opportunity of accepting the offer and, as no time was specified, it is implied by law that that would be done within a reasonable time. If that happened the parties would negotiate for a new Franchise Agreement. The issue is whether sub-clauses A and B were conditions precedent to it or the original offer.

25    The submission continued that upon the acceptance of the offer the parties would then consider the terms of the new Franchise Agreement on which they may or may not reach consensus and that, in doing so, it would be necessary for HJPL to agree in terms of sub-clause A, which I have held to mean that it was not necessary for HJPL to enter into a concluded agreement in relation to capital expenditures, “but an agreement to carry out such works as may be agreed to be, or be held by arbitration to be, necessary”: paragraph 661 of my original reasons.

26    Also, before entering into the new Franchise Agreement HJPL must satisfy BKC that it has the right to remain in possession as required by sub-clause B.

27    In short Mr Hutley’s submissions were that BKC would make an offer, which, if accepted by HJPL, would lead to the further agreement between the parties contemplated by sub-clause A, and HJPL’s satisfying BKC of its right to remain in possession as required by sub-clause B and, upon those matters being attended to and agreement as to the royalty being reached, the entry into a new Franchise Agreement. Thus, he submitted, sub-clauses A and B were not conditions precedent to the making of the offer, but conditions precedent to the entry into the new Franchise Agreement. I have pointed out that the argument was presented by both parties on the basis that that with which I was concerned was the making of the offer to afford the opportunity, and not with the acceptance of the new Franchise Agreement proffered by BKC.

28    Mr Ellicott submitted that the conditions in sub-clauses A and B must be satisfied before the offer of the opportunity is made, it being essential for that to be done to give content to the opportunity being offered. His submission was that the renewed term had no content unless BKC knew what HJPL proposed to expend, or at least to what it was prepared to agree in that regard, and where it proposed to carry on its business. He further submitted that the continuity of the term was expressly contemplated by clause XIIB, which precluded HJPL from utilising BKC’s marks and set-up upon termination by lapse of time. However, it seems to me that that cannot be correct because the offer contemplated by clause IX was not to be made until the end of the term and the steps then required to be carried out, whatever the proper construction of the clause is, must necessarily take some little time.

29    Mr Ellicott submitted that as the agreement for possession of the Murray Street premises was conditional and would not come to fruition unless, importantly for present purposes, the necessary council consent was obtained, BKC was entitled to maintain that it was not satisfied that there is a right to remain in possession of those premises. In those circumstances, so the submission ran, a condition precedent to the making of the offer contemplated by the clause had not been fulfilled. I should add that Mr Ellicott submitted that devoid of the content to which he referred the offer could be accepted without BKC’s knowing what HJPL intended to do.

30    The submissions were set out in some greater detail in writing, but, for present purposes, I have said sufficient to point up the matter in issue.

Conclusions

31    In my opinion the submissions made by Mr Hutley should be accepted. Clause IX falls into two, or perhaps three, parts. Firstly, there is the requirement to give notice pursuant to sub-clause D. For present purposes the failure to do so is irrelevant, but that sub-clause indicates that the parties had in contemplation a lengthy period in which to consider the position. One can understand commercial reasons why this would be desirable, but the failure to give notice is not a matter upon which BKC has sought to rely.

32    Secondly, there are clearly conditions precedent to the making of the offer, and it is not in issue that there has been compliance with these. After providing for the specific conditions precedent, there are then a series of conditions, sub-clause D of which constitutes a further condition precedent to the making of the offer, but sub-clause C of which is, obviously enough, a condition subsequent. At that point the parties are necessarily in negotiation as to the terms of the new Franchise Agreement and, in those circumstances, it seems to me that sub-clauses A and B relate to that, rather than to the making of the offer or, to put it another way, are matters to which attention has to be given before entry into the new Franchise Agreement.

33    It may be that sub-clause A, on its own, would not point irresistibly in that direction. However, sub-clause B demands that HJPL has the right to remain in possession of premises which, of necessity, means that it has bound itself either to acquire or lease premises for fifteen years. In my opinion, it is commercially unthinkable to construe the agreement as requiring HJPL to have entered into such an obligation prior to receiving the offer and having the opportunity to accept it. HJPL may find itself with the obligations imposed by meeting this requirement without being able to derive the perceived benefit from having such premises because the negotiations in other areas for the new Franchise Agreement do not come to fruition.

34    This point becomes the more compelling when it is appreciated that the premises must, of necessity, be ones in which it is appropriate to conduct a business of the specified type.

35    Once that conclusion is reached any possible ambiguity in relation to sub-clause A becomes less powerful, as the capital expenditure is necessarily referable to the premises in which that business is conducted.

36    I do not think that Mr Ellicott’s submission that the offer could be accepted without the parties knowing what is to happen thereafter can be accepted. Once the offer has been accepted, a condition subsequent is the entry into the new Franchise Agreement, when its terms have been agreed, which entry, in itself, is dependent upon compliance with sub-clauses A and B.

37    I am not satisfied that because there may be some delay after the acceptance of the offer by virtue of the need for further negotiations that that leads to the conclusion that sub-clauses A and B should operate as conditions precedent to the making of the offer.

38    In his written submissions Mr Ellicott stressed that there would be a position of uncertainty, but I think that that arises as much from the need to negotiate the new Franchise Agreement and to agree upon the capital expenditure to be made as from any other cause. It would occur in any event.

39    Mr Ellicott, in his written submissions, stated that if I found against BKC in respect of the condition precedent, it would make an offer in accordance with clause IXB in the terms settled between the parties, but requested that it be allowed fourteen days to do so as the offer needs to be executed by a BKC officer in the United States. The written submission further stated that if I so found, I should order that the commencement date of the new Franchise Agreement should be no later than seven days after BKC makes the offer to HJPL.

40    It seems to me that the first step is, of necessity, for BKC to make the offer. The question may then arise as to the time, which is a reasonable time within which HJPL must respond to that offer.

RESULT

41    In my opinion the appropriate course, at the moment, is for me to state that in my opinion the requirements of sub-clause B do not constitute a condition precedent to the requirement of BKC to make an offer within the terms of clause IX. As I have said BKC accepted that if I came to that conclusion, without accepting the correctness of it, it will make an offer. Accordingly, I think the appropriate course is to publish my reasons and to invite the parties to bring in Short Minutes to give effect to them.

*****

Last Modified: 09/25/2000