Krazy Enterprises Pty Ltd v BB Australia Pty Ltd (formerly Blockbuster Australia Pty Ltd)
[2015] VCC 1382
•12 October 2015
My
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case No. CI-13-01496
| KRAZY ENTERPRISES PTY LTD (ACN 084 473 772) | Plaintiff | |
| v | ||
| BB AUSTRALIA PTY LTD (formerly BLOCKBUSTER AUSTRALIA PTY LTD) (ACN 058 986 673) | Defendant | |
| AND BETWEEN | ||
| BB AUSTRALIA PTY LTD (formerly BLOCKBUSTER AUSTRALIA PTY LTD) (ACN 058 986 673) | Plaintiff by Counterclaim | |
| v | ||
| KRAZY ENTERPRISES PTY LTD (ACN 084 473 772) | First Defendant by Counterclaim | |
| and | ||
| MARK ELIOT KENNETH HOLLIER | Second Defendant by Counterclaim | |
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JUDGE: | HIS HONOUR JUDGE LACAVA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6, 7, 8 and 9 October 2014 | |
DATE OF JUDGMENT: | 12 October 2015 | |
CASE MAY BE CITED AS: | Krazy Enterprises Pty Ltd v BB Australia Pty Ltd (formerly Blockbuster Australia Pty Ltd) | |
MEDIUM NEUTRAL CITATION: | [2015] VCC 1382 | |
REASONS FOR JUDGMENT
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Subject: CONTRACT
Catchwords: BREACH OF CONTRACT – plaintiff franchisee of the defendant – plaintiff sought to end franchise agreement – defendant exercised the option in the agreement to purchase all of the assets of the store – defendant required the plaintiff to close the store – closure of store was in breach of the plaintiff’s lease agreement and arrears in rental and other charges accrued – defendant refused to pay rental arrears and other charges – defendant then refused to purchase all assets of the store – the plaintiff lost the bank guarantee it gave to the landlord – Court satisfied that the defendant was in breach of the agreement – defendant breached the agreement by not acquiring all of the assets of the store and also by failing to indemnify the plaintiff in respect of ongoing liability under the lease from the time it required the plaintiff to close the store – plaintiff entitled to damages – sum of bank guarantee recoverable by the plaintiff
Cases Cited: Bytan Pty Ltd & Ors v BB Australia Pty Ltd [2012] VSCA 233
Judgment: Judgment for the plaintiff on the claim in the sum of $62,299.40. Defendant’s counterclaim is otherwise dismissed. Claim against second defendant by counterclaim dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M P Guthrie | Marque Lawyers |
| For the Defendant | Mr D Harrison | M + K Lawyers |
HIS HONOUR:
1 This is a limited claim. By its Amended Statement of Claim dated 24 February 2014, the plaintiff claims damages in the sum of $95,936.00 which it claims is the fair market value of the assets of a Blockbuster Video Store formerly operated by it as a franchisee of the defendant at Shop 61, Park Beach Plaza, Coffs Harbour, New South Wales (“the store”). The plaintiff’s claim against the defendant is for damages for breach of a franchise agreement for failing to acquire all of the assets of the store at fair market value.
2 The plaintiff also claims damages for the loss of a bank guarantee in the sum of $9,331.00, together with interest and costs.
3 The defendant denies that it breached the franchise agreement and has counterclaimed. It pleads that if it did breach the agreement, the plaintiff is entitled to damages of no more than $280.00. There are two defendants to the counterclaim, namely, the plaintiff in the principal proceeding and, Mr Elliot Kenneth Holier, who is a director of the plaintiff. The defendant/plaintiff by counterclaim, claims a sum of $13,323.60 against the plaintiff/first defendant by counterclaim for marketing and licensing fees unpaid by it as franchisee between 10 May 2011 to 11 February 2012. The plaintiff/defendant by counterclaim admits it owes this amount. The agreement itself provides a mechanism for how any amounts owing by the plaintiff to the defendant at the time of its expiry are to be treated. If the defendant purchases all of the assets of the store, then any sum owing by the plaintiff to the defendant at the time of expiry of the agreement is to be set off against the purchase price for the assets.[1] Therefore if I find the plaintiff is entitled to damages, as I do, the sum of $13,323.60 will be set off against the amount of damages the defendant will be ordered to pay to the plaintiff.
[1]Clause 18.1
4 The defendant also claims $2,750.00, being the cost of obtaining a valuation report relating to the assets of the store which it requested. This was not the subject of an amended counterclaim. Under the terms of the agreement, the defendant was liable for this cost in any event. The costs of obtaining any valuation report by the defendant does not arise from any breach of the agreement by the plaintiff and even if the defendant had amended its counterclaim to include this amount, it follows that it must fail in any event.
5 The claim against the second defendant by counterclaim is made on the basis that Mr Holier personally guaranteed the performance of the plaintiff/first defendant by counterclaim. In finding for the plaintiff, as I do, and the amount of the defendant’s admitted counterclaim being set off against the amount the plaintiff is entitled to recover in damages, it follows that the defendant’s claim against Mr Holier must fail and will be dismissed.
6 This modest claim and, counterclaim, occupied the Court for four days of hearing and, voluminous court books were prepared by both parties, doubtless at great cost. I set out my reasons why the plaintiff succeeds on its claim for damages for breach of contract.
7 The dispute between the parties relates to the termination of a franchise agreement entered into in writing between the plaintiff and the defendant on 9 January 2002 (“the agreement”).[2] Pursuant to the agreement, the plaintiff operated the store as a “Blockbuster Video Store” as a franchisee of the defendant. The agreement was for a period of ten years, expiring at midnight on 9 January 2012. By the terms of the agreement, the defendant gave to the plaintiff a non-exclusive licence to operate the store.[3]
[2]Exhibit “A”. Plaintiff’s Court Book (“PCB”) 187 – 323
[3]Agreement, clause 2.1
8 In order to understand the issues to be decided, the chronology of events leading up to the matter coming to the Court need to be understood. The following is a chronology of events as revealed by documents in the respective court books that went into evidence, and the oral evidence. Except of the issue of valuation of assets to which I shall later refer, the evidence as to what occurred in this case is mostly not in dispute and is recorded in the documents and correspondence between the parties and their respective legal advisors.
9 In December 2009, the store was re-fitted with new fixtures and fittings and this was done with the knowledge and approval of the defendant. This followed a flood at the store the previous month. During the re-fit, a representative of the defendant visited the store and assisted with its re-design and the re-fit was approved by one, Hamilton, a representative of the defendant.[4] Whilst the plaintiff operated the Blockbuster franchise at the store, the defendant did not at any time advise it that any of the assets used by the plaintiff in the store did not meet with its operating standards.
[4]Evidence of Hollier – Transcript (“T”) 11 – 12
10 On 2 August 2011, about five months before the agreement was due to expire, the defendant wrote to the plaintiff offering to negotiate a renewal of the franchise agreement.[5] But the plaintiff had decided to part ways with Blockbuster.
[5]Defendant’s Court Book (“DCB”) 39 – 40; Holier T13 and 22
11 By late 2011, the plaintiff was having dealings with a chain of video stores that traded as “My Video Store”. This was a buying group of video store operators with a common interest.[6] It did not operate as a franchise.
[6]Exhibits 1 and 2; DCB 404 and 411-413
12 On 14 December 2011, the defendant, by its solicitor, Alex Au, wrote to the plaintiff, it having been advised by email on 12 December 2011 from My Video Store, that the defendant intended to operate the store as a My Video Store when the franchise agreement expired.[7] The letter warned the plaintiff of consequences to it should it close the store and, drew its attention to various clauses in the agreement including clauses restricting the plaintiff from competing with Blockbuster and other clauses. The letter specifically drew attention to clauses 18.3, 18.4 and 18.5 of the agreement and, reminded the plaintiff that upon termination or, expiration of the agreement, the plaintiff was to cease using and, remove all exterior and interior signage displaying Blockbuster trademarks et cetera. Referring to clause 18.3 of the agreement, the letter drew attention to the fact that upon termination or, expiration of the agreement, the defendant had the option, to be exercised by written notice within sixty (60) days of the termination or expiration of the agreement, to purchase various assets used in the store including leasehold improvements, furniture, fixtures, signs, inventory and lease or sub-lease of the premises occupied by the business as the defendant selects.
[7]Exhibit “C” and exhibit 9; PCB 388
13 The letter of 14 December 2011 concluded, inter alia:
“We understand that Andrew Bourke (Franchise Business Manager – QLD) will be attending your store on Tuesday 20 December 2011 at 10am to discuss the above and to collect a list of the various assets of the store.
If BBA exercises the option to acquire the various assets used in the Store in accordance with the terms of the Franchise Agreement, then pursuant to clause 18.18 BBA is entitled to appoint a manager to the business or require you to close the Store pending finalisation of the purchase of the various assets of the Store. No goodwill is payable on any of these assets by BBA”.
14 Clause 18 of the agreement is central to the issues that I must decide here. It provides a mechanism setting out the agreed rights and obligations of the plaintiff and, relevantly, the defendant, upon termination of the agreement. It will be necessary to give consideration to the correct interpretation of this clause in the agreement. This agreement has previously been the subject of interpretation by the Court of Appeal of this State in Bytan Pty Ltd & Ors v BB Australia Pty Ltd.[8] Mr Guthrie of counsel, who appeared on behalf of the plaintiff here, submits and, I agree, that much assistance can be gained from a reading of that decision. I return to the relevant parts of clause 18 a little later.
[8][2012] VSCA 233
15 On 19 December 2011, the defendant again wrote to the plaintiff[9] noting that it had not received a response to its letter of 14 December 2011. The store was located in a shopping centre and, the plaintiff occupied the premises as a sub-lessee. The letter reminded the plaintiff that under the terms of the agreement, clauses 17.6 and 3.7 required the plaintiff to remain in lawful possession of the premises where the store was conducted.
[9]DCB 66
16 On 21 December 2011, the defendant sent a further letter to the plaintiff.[10] This letter recorded Mr Bourke as having attended the store on behalf of the defendant on 19 December 2011. The letter noted that various financial information requested in the letter could not be provided to Mr Bourke when he attended and, went on as follows:
“We put you on notice that the Franchisor may exercise its right in accordance with clause 18.18 of the Franchise Agreement and therefore request that the Franchisee provide the abovementioned documents in order for consideration for the purchase of any assets of your store, and that you do not remove those assets from the site.
We advise again, in accordance with clause 14.1(g) the Franchisee agrees to co-operate fully with the Franchisor in relation to any request for inspecting and copying any books, records and documents relating to the operation of your Store.”
[10]Exhibits 8 and 16; DCB 70 – 71
17 The letter of 21 December 2011 also threatened legal action should the plaintiff not comply with its contractual obligations.
18 The plaintiff continued to prepare to change to My Video Store through December 2011.[11]
[11]DCB 70 – 71 and 468
19 On 5 January 2012 (four days before expiration of the agreement), the defendant again wrote to the plaintiff through its solicitor, Alex Au.[12] The letter confirmed that the plaintiff had advised that it would not be renewing the franchise agreement and proposed to trade as “Network Video” from the date of expiry. The letter also took the opportunity to remind the plaintiff of its obligations under the terms of the agreement and pointed out that the defendant was awaiting documents and information from the plaintiff. The letter said, inter alia:
[12]Exhibit “O” and exhibit 10
“Therefore, Colin Rigley (Franchise Business Manager) will be attending your Store on Tuesday, 10th January 2012 at 8.30am to collect the items listed below, along with confirming the following matters have been attended to by you.
They include as follows:
· Production of a list of various assets in the Store
· Completed tax return and balance sheets for the past 2 financial years
· Telephone numbers and emails used by the Store to be assigned and transferred to the Franchisor
· De-Badge all exterior and interior trademarks and logos in relation to the brand ‘Blockbuster’
· Collection of the stores database of members and titles along with any other Confidential Information as defined in clause 1.13 of the Franchise Agreement. Further, no copies of the database (or any data in it) can be kept.
We again, put you on notice that the Franchisor may exercise its right in accordance with clause 18.13 of the Franchise Agreement. Therefore, the collection of the list of assets in your Store is necessary, so that the Franchisor can give proper consideration as to the purchase of any assets in your Store.
We advise again, if the Franchisor exercises the option to purchase the various assets in your Store, then pursuant to clause 18.18, the Franchisor is entitled to appoint a manager to the business or require you to close the Store pending finalisation of the purchase of the various assets of the Store. No goodwill is payable on any of these assets by the Franchisor.
… .”
20 The letter from the defendant to the plaintiff of 5 January 2002 was a clear recognition by the defendant that the plaintiff intended to terminate the agreement and, it was an instruction to the defendant to de-badge the store as a Blockbuster store, both inside and out. The plaintiff was entitled to act on the instruction of the defendant to commence de-badging the store inside and out.
21 In my view, this letter from the defendant proceeded on a false premise. The agreement only gave the defendant the option to purchase all of the assets of the store. In my view, on a proper construction, the defendant could not pick and choose which assets it would purchase.[13] If it exercised the option to purchase assets of the store, it had to purchase all of them, save and except any of which it had previously disapproved. I will also return to this aspect later.
[13]Bytan (supra), paragraph [3] per the Chief Justice
22 On 9 January 2012, the agreement expired.
23 On 10 January 2012, the defendant’s solicitor again wrote to the plaintiff.[14] This letter referred to the earlier correspondence and, referred to various obligations on the plaintiff as a consequence of expiry of the agreement. In a reference to what had been said in its letter of 5 January 2012, the letter referred to the issue of “de-badging” and, acquisition of the assets of the store, as follows:
[14]Exhibit “C”; PCB 392 – 394
“(iv)De-badging
Although BBA has requested that you remove all BBA signage, BBA has exercised its option under clause 18.13 of the Franchise Agreement to purchase from the Franchisee all assets used in the store. You are therefore required to cease trading and leave all signage in place pending acquisition of assets used in the store.
(v) Franchisor’s right to purchase assets of the store
We refer to clause 18.13 of the Franchise Agreement and confirm that BBA has exercised its option to purchase from the Franchisee all assets used in the store which shall include, without limitation, leasehold improvements, equipment, furniture, fixtures, signs, inventory and the lease or sub-lease of the store. Please see attached Notice dated 10 January 2012.
… .”
24 In a separate document attached to the letter of 10 January 2012,[15] the defendant enclosed a Notice in which it exercised the option it had in clause 18.13 of the agreement to purchase all of the assets used in the store. It said:
“BB exercises its option under Clause 18.13 of the Agreement to purchase from Krazy all the assets used in the STORE …”.
[15]Exhibit “C”; PCB 396
25 The letter correctly adopted and, applied the terminology in clause 18.13 of the agreement. The problem in this case arises because after this letter and Notice were given by the defendant to the plaintiff, the defendant changed its mind. Having exercised the option to purchase all of the assets of the store, it subsequently sought to limit what assets it would purchase and also ignored the fact that some of the assets, the videos, had been “de-badged” because the plaintiff acted on the defendant’s instruction to “de-badge” those assets.
26 The letter went on to say:
“In accordance with clause 18.18 of the agreement BB is using its reasonable efforts to effect a termination of the existing lease for the site and enter into a new lease on reasonable terms with the landlord.”
27 The Notice also required the plaintiff to forthwith close the store. This was done in accordance with clause 18.18 of the agreement. This requirement of the defendant to the plaintiff produced the result that the store was not open when the shopping centre in which it was located was open, putting the plaintiff in breach of its lease with the landlord. In my view, any rent or outgoings or charges owing to the landlord under the lease from the time the defendant required the plaintiff to close the store were incurred as a direct result of the defendant’s actions in requiring the plaintiff to close the store.
28 The letter of 10 January 2012 was a clear change of position by the defendant and was inconsistent with the position it had adopted in the letter of 5 January 2012. When the plaintiff received this letter, it was entitled to assume, as it did, that the defendant was going to continue to operate the store as a Blockbuster video store and, for that purpose, it would purchase all of the assets then used in the store and, use reasonable efforts to terminate the existing lease and, enter into a new lease with the landlord of the store.
29 Indeed, the defendant acted as if it intended to head down this path. On 10 January 2012, Colin Rigley, a representative of the defendant, attended the store and photographed a number of the assets within the store.[16] He also prepared a report which went into evidence as exhibit 11.[17] He reported that on his inspection, the store had been completely de-badged. He also reported that the video discs had the “Blockbuster wording blacked out on the doughnuts” (a reference to the immediate area around the centre circle of the CD discs). The report also said:
“Mark has confirmed that they will be out of the premises at cob Wednesday 11th Jan. The keys will be handed back to the Landlord. Franchisee indicated on the 11th Jan that they would hold the keys until confirmation that BB was responsible for the premises.”
[16]Exhibit 12; DCB 331-341
[17]DCB 215
30 On 11 January 2012, the defendant wrote again to the plaintiff. The letter referred to the lease of the premises, saying, inter alia:
“We also confirm in accordance with clause 18.18, the Franchisor is currently negotiating with the Landlord, in order to effect termination of the existing lease for the site and entering into a new lease on reasonable terms with the Landlord”.[18]
[18]Exhibit 17; DCB 81
31 A letter of the same date was written by the defendant to the landlord.[19]
[19]Exhibit 21; PCB 589
32 On 11 January 2012, the plaintiff closed the store in compliance with the defendant’s requirement in writing the previous day. At this point, the defendant had the right under the terms of the agreement to appoint a manager to continue to operate the store whilst the questions of acquisition of the assets used in the store and the obtaining of a new lease were resolved.[20] It chose not to exercise that right and instead required the plaintiff to close the store. In my view, in so doing, it assumed possession of the store within clause 18.18 of the agreement, even though it did not enter into actual possession.
[20]Clause 18.18
33 On 12 January 2012, the landlord wrote to the plaintiff advising it was in breach of its lease by failing to trade during “core business hours”. It later sent a number of tax invoices charging fees under the lease based upon the plaintiff’s failure to trade during the core business hours of the shopping centre in which the store was located.[21]
[21]Exhibit “G”; PCB 566 – 576
34 On 13 January 2012, the defendant wrote to the plaintiff advising its general manager –
“… has attempted to contact the Landlord, however the Landlord has refused to enter into any discussions with the Franchisor as there is currently an active lease with your company ‘Krazy Enterprises Pty Ltd’.”
35 The letter requested the plaintiff provide written consent for the defendant to negotiate with the landlord. Consent was immediately given by the plaintiff.[22]
[22]Exhibit “D”; PCB 397
36 On 17 January 2012, the defendant wrote to the plaintiff and sought to limit the assets which it would acquire.[23] The letter said, inter alia:
“We note that settlement of the purchase of the selected assets shall take place no later than (90) days after service of the notice of exercise of the option to purchase. We confirm the franchisor exercised the option to acquire the assets used in the store in accordance with clause 18.13 on 10 January 2012.
The processes for determining fair market value are yet to be undertaken in accordance with clauses 18.15 and 18.16 of the Franchise Agreement. Please note, clause 18.15 specifically states that ‘the FRANCHISOR may exclude from the assets purchased hereunder any equipment, furniture, fixtures, signs and inventory that are not approved as meeting quality standards for BLOCKBUSTER Video Stores’. The franchisor is therefore not obliged to purchase any assets that fall within this category.
Pursuant to clause 18.18 where the franchisor exercises the option to purchase, pending the closing of such purchase, the franchisor may require the Franchisee to close the store during such time period without removing any assets from the site. We confirm the Franchisee closed the store on 11 January 2012 in accordance with clause 18.18.
In our view, any indemnity under clause 18.18 has not yet been triggered. We confirm the Franchisor is currently in negotiations with the Landlord as to entering a new lease.”
[23]Exhibit “E”; PCB 399
37 Again, in my view, this letter is based upon an incorrect premise. On a proper construction of the agreement, clause 18.15 does not give the defendant the right to disapprove of certain assets used in the store at the time it exercises the option to purchase or after. It only gives the defendant the right not to purchase assets which may previously have been found not to meet the quality standards for Blockbuster. In this case, there is no evidence that during the course of the agreement, the defendant had any quality standards for equipment, furniture, fixtures, signs and inventory or, that during the course of the agreement, any of the assets of the store had been found by the defendant not to have met its quality standards. In my view, the intended purpose of clause 18 in its entirety was to provide a mechanism for transition at the expiry of the agreement if the defendant decided it wanted to continue to operate the video store. It is not intended to serve as a mechanism whereby the defendant can buy some assets and disapprove of others. The defendant having, by its letter and separate notice dated 10 January 2012, exercised the option to purchase all of the assets of the store, was bound thereafter to proceed to purchase all of the assets in accordance with the mechanism provided for in the agreement. It could not thereafter seek to pick and choose which assets it would purchase, having given notice that it would purchase all of them.
38 The reference in the defendant’s letter of 17 January 2012 to an “indemnity” is a reference to what is contained in clause 18.18 of the agreement which provides, inter alia, as follows:
“… Alternatively, FRANCHISOR may require FRANCHISEE to close the STORE during such time period without removing any assets from the Site. FRANCHISEE shall maintain in force all insurance policies required pursuant to this Agreement, until the date of closing. If the Site is leased, FRANCHISOR agrees to use reasonable efforts to effect a termination of the existing lease for the Site and enter into a new lease on reasonable terms with the landlord. In the event FRANCHISOR is unable to enter into a new lease FRANCHISOR will indemnify and hold harmless FRANCHISEE from any ongoing liability under the lease from the date FRANCHISOR assumes possession of the Site.”[24]
[24]PCB 256
39 The alternative referred to in clause 18.18 is a reference to the defendant’s right to require the store be closed pending settlement of the purchase of all the assets as opposed to the appointment of a manager, which the defendant elected not to do. As I said earlier, I am of the view that the defendant is liable under the terms of the agreement to indemnify the plaintiff for rent and outgoings and charges under the lease from the time it required the plaintiff to close the store. That is when the defendant assumed possession. The agreement does not require the defendant to take actual possession, indeed the terms of the indemnity given by the defendant to the plaintiff contemplate it will operate “in the event the franchisor is unable to enter into a new lease”.[25]
[25]Clause 18.18
40 Also on 17 January 2012, the plaintiff wrote to the defendant by email enclosing an invoice from the landlord charging for the store not being opened during core trading hours.[26] The letter added:
“… The Plaza has informed us that you have not made any contact with them in regard to leasing arrangements.
Therefore, please inform us when this will be taking place?”
[26]Exhibit “F”; PCB 590
41 On 25 January 2012, the defendant applied to the landlord to lease the store.[27]
[27]Exhibit 22; PCB 592 – 600 admitted by paragraph [26A] of the Defence
42 On the same date, solicitors for the landlord wrote to the plaintiff claiming the landlord was then owed $16,270.73, being $6,425.73 for rent, promotions and outgoings, plus $9,845.00 in fees for failure to trade the core trading hours pursuant to the lease.[28]
[28]Exhibit “G”; PCB 569
43 On 27 January 2012, the defendant, through its solicitor, wrote to the plaintiff in response to an email from the plaintiff advising the plaintiff would oppose any exclusion of assets to be acquired by the defendant. The letter referred to clause 18.15, which I have referred to above, and stated:
“For the avoidance of doubt, quality standards for Blockbuster Video Stores are that of Blockbuster Corporate Standards.”[29]
[29]Exhibit “K”; PCB 402 – 3
44 On 30 January 2012, the solicitor for the defendant wrote to the plaintiff advising that the defendant would purchase “various assets used in the store”.[30] The letter again referred to clause 18.15 of the agreement but on this occasion also referred to clause 11.11 which required the franchisee to –
“… comply with all mandatory specifications, standards and operating procedures […] and with the FRANCHISOR’s requirements for inventory, packaging, the décor, format and image of a BLOCKBUSTER Video Store, as they may be developed or changed by FRANCHISOR from time to time.”
[30]Exhibit “L”; PCB 404 – 5
45 The letter noted there were approximately 10,000 movie discs in the store and offered $2.25 (inclusive of GST) per unit for the movie discs used in the store –
“… that meet Blockbuster’s current quality corporate standards. The Franchisor will not purchase any movie discs that have been defaced, are not working properly and are not of merchantable quality. We note that most of the discs in store have been defaced. The damage to those movie titles would be a considerable expense for the Franchisor to repair (if repairable).”
46 The letter went on to make an offer for various other assets, but added:
“Any other assets not mentioned within this letter, will be deemed as not meeting Blockbuster’s current quality corporate standards and therefore are excluded from the assets to be purchased by the Franchisor.”
47 The defendant’s letter went on to deal with the question of rental arrears and required the plaintiff –
“… to make payment of the rental arrears and continue to pay rent pursuant to your obligations under the Lease until such time as a transfer of the lease is entered into. We require you to confirm by close of business today, 30 January 2012, that you will bring your rental arrears up to date.”
48 In my view, having required the plaintiff to close the store, this letter misconceived and thus misrepresented the effect of clause 18.18. It was in fact the obligation of the defendant to indemnify the plaintiff for rent, outgoings and charges, from the time it required the plaintiff to close the store.
49 On 30 January 2012, the plaintiff’s solicitors wrote to the defendant. The letter pointed out that the agreement did not define “quality standards for Blockbuster Video Stores” as “Blockbuster Corporate Standards”. The letter also drew attention to clause 18.18 of the agreement, requiring the defendant to indemnify the plaintiff for rent and costs charged by the landlord where the defendant required the plaintiff to close the store.[31]
[31]Exhibit 19; DCB 92 – 95
50 On 31 January 2012, the defendant was advised in writing by the landlord that its application had been successful.[32] But the landlord did not agree to terminate the old lease with the plaintiff. Instead, the landlord agreed to an assignment of the existing sub-lease to the defendant. The letter made clear the landlord agreed to an assignment to the defendant subject to the arrears of rental and other outstanding money which had accrued since the store was closed being brought up to date. The defendant could have paid those arrears, as it was bound to do by the agreement, but chose not to do so. In my view, it was in breach of the agreement by not doing so.
[32]PCB 601. See also paragraph [27A] of the Defence
51 On 1 February 2012, new solicitors for the defendant responded to the plaintiff’s letter of 30 January 2012.[33] The letter conspicuously avoided a discussion of the fact the agreement does not define what is meant by the expression “current quality corporate standards” and, required a response to the offer to purchase some of the assets. The letter also dealt with the issue of arrears of rental and pointed out that clause 18.18 of the agreement only requires the defendant to indemnify the plaintiff if it assumes possession of the site and, is unable to enter into a new lease. Again, in my view, this letter incorrectly misunderstood the effect of clause 18.18 and was in error. The defendant succeeded in negotiating an assignment of the lease on reasonable terms and could have taken an assignment but it refused to pay the outstanding rent arrears and other charges for which, in my view, it was responsible by the terms of clause 18.18 of the agreement and was thus in breach of the agreement.
[33]Exhibit 20; DCB 96
52 Here, the defendant could have taken an assignment of the existing lease. But the relationship between the parties had collapsed because of the strident approach adopted by the defendant. In my view, clause 18.18 of the agreement was framed in terms to give to the defendant the option to continue to operate the store on the expiry of the agreement and, for that purpose, the defendant could control what happened with the store, pending “closing” or, settlement, being the payment for all of the assets of the store. The agreement provided for a period of ninety days before “closing” would occur and the defendant could operate the store during that period by appointing a manager to run the store. Alternatively, it could choose to close the store, which is the option the defendant opted for here. In my view, by choosing the second option, the defendant assumed possession of the store as envisaged by the agreement and became responsible for the payment of rent and outgoings for the store from that point on. That means from 11 January 2012.
53 On 14 February 2012, the defendant’s solicitors wrote to the landlord noting the landlord had agreed to the assignment of the lease and agreed to the defendant giving a bank guarantee and meeting public liability insurance requirements.[34]
[34]Exhibit 23; PCB 605
54 Exhibit 7 is a redacted copy of a letter from the defendant’s solicitors to the plaintiff’s solicitors dated 27 February 2012.[35] In this letter, the defendant’s solicitors point out again that the plaintiff is liable for rent and outgoings from 11 January 2012. In my view, in that respect the letter was in error for the reasons set out above.
[35]DCB 108
55 Although the landlord had agreed to assign the lease to the defendant, prior to settlement and handing over of the executed assignment, the landlord required payment of all arrears of rent and outgoings. The defendant held to its position that these arrears were the liability of the plaintiff until it assumed possession of the store. As at 29 February 2012, the arrears amounted to $46,731.46. These matters are recorded in an email from the defendant’s solicitors to the landlord.[36]
[36]Exhibit 24; PCB 619
56 On 13 March 2012, the defendant’s solicitors wrote to the plaintiff’s solicitors. The letter was “without prejudice” but a redacted version went into evidence.[37] The letter deals with arrears of payments under the lease and, requires the arrears be remedied. The letter also required the plaintiff to itemise a list of assets that it says the defendant is to purchase. This letter is also wrong for the reasons set out above. In not taking responsibility for payment of rent, charges and outgoings under the lease and in not purchasing all of the assets of the store, the defendant was acting in breach of the agreement.
[37]Exhibit 4; DCB 128
57 The following day, the plaintiff’s solicitors responded. Again, the letter was without prejudice but a redacted version went into evidence.[38] In this letter, the parties were clearly at odds as to the proper interpretation of clause 18.18 of the agreement and, whether or not the defendant was obliged to indemnify the plaintiff for arrears under the lease.
[38]Exhibit 25; DCB 130 – 1
58 On 17 March 2012, the landlord terminated the lease for the premises and re-entered possession. It follows that the defendant at no time continued to operate the store as a Blockbuster Video Store after expiry of the agreement and did not purchase from the plaintiff all of the assets of the store.
59 By its Statement of Claim, the plaintiff claims damages from the defendant for what it claims are breaches of the agreement. It claims the defendant breached the agreement by failing to purchase all of the assets in accordance with the agreement and that the defendant breached the agreement by failing to indemnify the plaintiff for the rent and outgoings from the time that it assumed possession of the store. The plaintiff also claims the defendant breached the agreement by failing to use reasonable efforts to terminate the existing lease and enter into a new lease with the landlord.
60 When the plaintiff took the sub-lease for the store, it was required to give a bank guarantee to the landlord for the performance of its financial obligations under the lease. The amount of the guarantee was $9,331.00. The plaintiff lost that sum when the landlord called up the guarantee, having terminated the lease for failure to pay the rent, charges and outgoings and after closure of the store. The plaintiff claims that sum which it claims it has lost because of the defendant’s failure to indemnify it for outstanding rent, charges and outgoings after it assumed possession of the store.
61 In my view, the amount paid by the plaintiff’s bank under a bank guarantee to the landlord is recoverable by the plaintiff from the defendant in damages. The amount of the guarantee was damages incurred by the plaintiff as a direct result of the breach by the defendant of its obligation to indemnify the plaintiff for rent, charges and outgoings as provided for in clause 18.18 of the agreement. That sum will be recoverable by the plaintiff.
62 I turn to the issue of what amount of damages the plaintiff is entitled to recover as a result of the defendant’s breaches of the agreement by failing to acquire all of the assets of the store.
63 The agreement provided for how the assets of the store were to be valued. They were to be valued at “fair market value as determined as of the date of termination or expiration of” the agreement.[39] The agreement also provided for what was to occur if the parties were unable to agree on a fair market value of the assets. In that event, the fair market value was to be determined by an independent valuer selected and agreed between the parties, and if they were unable to agree upon a valuer, each of the parties was to select a valuer and those valuers would select a third valuer “and the fair market value shall be deemed to be the average of the three (3) independent appraisals”.[40]
[39]Clause 18.15
[40]Clause 18.16
64 The parties could not agree between themselves upon a fair market value of the assets. Each of them appointed a valuer. But the valuation process provided for in the agreement was frustrated by the defendant. In my view, deliberately so.
65 The plaintiff appointed Mr Glenn Aylward as its valuer by letter dated 4 April 2012.[41] Mr Aylward had in fact completed a valuation of the assets in writing on 3 April 2012 in which he valued all of the assets in the store in the sum of $95,936.00[42] on what he said was a “going concern” basis. Mr Aylward gave evidence, which I accept, that when he valued the assets, the store was fitted out with the fixtures and fittings and the videos and computers and games et cetera were located at Mr Hollier’s home.[43]
[41]PCB 406
[42]PCB 372 – 387
[43]T78
66 The valuation of Mr Stevens describes what is meant by “Going Concern Value/Existing Use” as being “The value of plant and equipment, installed in its present situation, of known condition producing a product, or providing a service for the proprietor in continuing use”. It went on to say:
“The Going Concern/Existing Use Value is a sum of the total, having regard to each individual unit producing a part, but all being necessary to produce the whole. There can be no Going Concern/Existing Use Value attributable to any single unit in a production complex, with the exception of a single unit capable of producing the finished product.”[44]
[44]PCB 380
67 Mr Aylward also valued the assets in the store at “Auction Value” of $17,058.00 and at “Market Value” of $61,224.00. “Auction Value” is described as being:
“The gross amount realisable at a properly promoted, conducted and attended public auction sale held by this company under forced sale conditions, and present day economic trends.”
68 The agreement did not contemplate a valuation based upon the auction value of the assets and this part of Mr Aylward’s valuation must be rejected.
69 As to the question of Market Value, Mr Aylward’s valuation describes this in these terms:
“FAIR MARKET VALUE
Fair Market Value and / or Probate Valuations is the ruling market value at the time of the evaluation, that is, what one might expect to pay for the same kind of unit, in the same condition or wear and tear, on the floor of a reputable merchant’s showroom.”[45]
[45]PCB 380
70 The defendant appointed Mr Paul Stevens as its valuer. He inspected the assets on 5 April 2012 and gave three separate values to the assets. He assessed the fair market value of the assets “in situ” in the sum of $71,360. He assessed the fair market value “ex situ” in the sum of $32,990. His valuation also provided a value for only those assets said to meet “BB Corporate Standards” in the sum of only $280.00.[46]
[46]DCB 14
71 In my view, there is no evidence in this case of there being in existence at the time of expiry of the lease “Blockbuster Corporate Standards” applicable to any of the plaintiff’s assets and, even if there were, there is no evidence as to how or in what way any of the assets failed to comply with “Blockbuster Corporate Standards”. The valuation of Mr Stevens of $280.00 for only those assets said to comply with “Blockbuster Corporate Standards” must be rejected. Mr Stevens gave evidence that the assets he valued at $280.00 were not selected by him but by the defendant.[47]
[47]T139
72 Mr Stevens gave evidence that when he carried out his valuation which was done partly at the store and partly at the home of Mr Holier where some of the assets were then located, that Mr Holier was present. He was clear in his evidence that the presence of Mr Holier and anything he may have said did not influence his valuation.[48]
[48]T139, L19 – 30
73 The valuation process as provided for in the agreement assumes the assets will be valued as if in the store, because the whole process assumes the defendant, by acquiring all of the assets in the store, will continue to use those assets in continuing to operate the store. For these reasons, the valuation of Mr Stevens based upon the assets being “ex situ” must also be rejected.
74 A copy of the Aylward valuation was provided by the plaintiff’s solicitors to the defendant’s solicitors on 10 April 2012 by email. In the same email, the plaintiff’s solicitors informed the defendant’s solicitors that the client’s respective valuers were in the process of jointly instructing Mr Jim Wiggan to provide a third and, independent valuation.[49] The defendant’s solicitors replied on 11 April 2012 that its client valuer, Mr Stevens, had not agreed to the appointment of Mr Wiggan.[50]
[49]PCB 408
[50]PCB 407
75 In fact what the defendant’s solicitors had asserted in relation to the appointment of Mr Wiggan was wrong. Mr Stevens gave specific evidence that he did agree to the appointment of Mr Jim Wiggan as a third independent valuer.[51]
[51]T141, L26-31 and T142, L1-18
76 Under the terms of the agreement, the valuation and purchase of assets was to be completed by 9 April 2012, that is, ninety (90) days after the defendant gave notice that it would purchase all of the assets in the store. The defendant’s solicitors acknowledged receipt of Mr Aylward’s report on 10 April 2012.[52]
[52]Exhibit “V”; PCB 420
77 On 12 April 2012, the plaintiff’s lawyers reminded the defendant’s lawyers about the contractual mechanism for determining the fair market value of the assets.[53]
[53]PCB 420
78 On 20 April 2012, in a letter to the plaintiff’s solicitors, the defendant’s solicitors again stated that Mr Stevens had not agreed to the appointment of Mr Wiggan and, that he was not “independent” within the meaning of clause 18.16.[54] On 2 May 2012, the defendant’s lawyers, in a letter to the plaintiff’s lawyers, stated that, in their opinion, the integrity of the process by which Mr Stevens made his valuation had been compromised by Mr Hollier’s conduct, in that Mr Hollier spoke to Mr Stevens about his views of the values of the assets and the method of valuation.[55] In a subsequent letter dated 14 May 2012, Mr Hollier’s conduct in speaking with Mr Stevens had been elevated by the defendant and its solicitors to “unethical and inappropriate behaviour”.[56] That letter also required all of the assets be returned to the store for valuation, ignoring the fact the store had been vacated and the sub-lease terminated by the landlord, because the defendant had refused to comply with its obligation under the agreement to indemnify the plaintiff for arrears of rent and other outgoings which in turn had been caused by the defendant’s demand that the plaintiff close the store.
[54]PCB 425
[55]PCB 429
[56]PCB 432
79 There was no basis whatsoever for the defendant or its solicitors to assert that Mr Stevens’ independence had been compromised by Mr Hollier. Indeed, the evidence of Mr Stevens itself proves this point. Further, there was no basis whatsoever for the defendant or its solicitors to assert that Mr Stevens had not agreed to the appointment of Mr Wiggan as a third independent valuer. Again, this is proved by the evidence of Mr Stevens. I find that the defendant set about frustrating the intent of the agreement as to the valuation of the assets by raising issues which were nothing more than ‘red herrings’. In so doing, it was again in breach of the agreement and, apart from the other breaches of the agreement by the defendant that I have earlier referred to, the plaintiff is entitled to damages for breach of contract on this account alone.
80 I have found that the defendant breached the agreement by not acquiring all of the assets of the store and also by failing to indemnify the plaintiff in respect of ongoing liability under the lease from the time it required the plaintiff to close the store. For each of those breaches, the plaintiff is entitled to damages.
81 The loss to the plaintiff arising from the first breach of the agreement is the fair market value for the assets in the store that the defendant failed to pay to the plaintiff. For the reasons set out above, the mechanism under the agreement for calculating the fair market value was frustrated. But there is no reason why I cannot calculate from the evidence what the fair market value of all of the assets of the store was at the time the agreement expired. Mr Aylward’s valuation of the “Market Value’ of the assets was $61,224.00.[57] On the other hand, Mr Stevens assessed the fair market value of the assets “in situ” in the sum of $71,360.[58]
[57]PCB 373
[58]DCB 14
82 It can be seen that there is not a lot of difference between the two valuations or in the approaches taken to the valuations by both valuers. Doing the best I can, and having regard to the fact the valuations on these bases are so close, in my view, the two valuations should be averaged so that I find that at the time of the expiry of the agreement, the fair market value of the assets in the store was $66,292.00 and this is the amount of damages to which the plaintiff is entitled owing to the defendant’s failure to purchase all of the assets in the store.
83 I have not used Mr Aylward’s valuation based on “Going Concern Value/Existing Use” because this method, in my view, was not a method of valuation contemplated by the agreement.
84 As to damages resulting from the failure to indemnify for ongoing liability under the lease, the amount claimed is for the amount paid by the plaintiff’s bank under the guarantee of $9,331.00. Mr Harrison argued that exhibit ‘G’[59] shows that as at 25 January 2012, there was $16,270.73 owing to the landlord, of which $6,425.73 was for rent, promotions and outgoings. But there is no evidence that there was any rent owing as at 11 January 2012 when the plaintiff vacated the store. Mr Holier gave evidence about exhibit ‘G’ but it was never suggested to him that he was in arrears of rent at the time of termination of the agreement.[60] In my view, all of the evidence points to the arrears accumulating only after the defendant required the plaintiff to close the store, at which point its only source of income ceased. In my judgment, the plaintiff is entitled to recover as damages, the amount paid out by its bank on the guarantee to the landlord.
[59]PCB 569
[60]T20
85 For these reasons, there will be judgment for the plaintiff on the claim in the sum of $62,299.40, calculated as follows:
(a) Damages for failure to purchase the assets of the store $66,292.00
(b) Plus loss of guarantee $9,331.00
_________
(c) Total damages $75,623.00
(d) Less amount owing to defendant set off $13,323.60
_________
(e) Net Damages on Claim $62,299.40
=========
86 The defendant’s counterclaim is otherwise dismissed and the claim against the second defendant by counterclaim, Mr Holier, is dismissed.
87 I will hear the parties on other orders including calculation of damages by way of interest and costs.
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