CCNZ Limited v Booth

[2012] NZHC 481

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2011-419-1231 [2012] NZHC 481

BETWEEN  CCNZ LIMITED Plaintiff

ANDDARRIN TRENT BOOTH Defendant

Hearing:         7 March 2012

Appearances: A Gilchrist for Plaintiff

D Hayes for Defendant

Judgment:      7 March 2012

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Burton & Co, P O Box 8889 Auckland 1150, for Plaintiff
Brook Law, P O Box 9600 Hamilton 3240, for Defendant

Copy for:

Andrew Gilchrist, P O Box 5444 Auckland 1141, for Plaintiff

Email:   [email protected]

D G Hayes, P O Box 9323 Hamilton 3240, for Defendant

Email:   [email protected]

CCNZ LIMITED V BOOTH HC HAM CIV-2011-419-1231 [7 March 2012]

[1]      CCNZ Ltd is a franchisor for Columbus Coffee, a chain of coffee shops based in Auckland, but with outlets both in Auckland and centres away from Auckland.  In

2007, it entered into a single unit franchise agreement with DB Café Ltd, for a café in Barton Street, Hamilton.

[2]      Mr Booth is the sole director and sole shareholder of DB Café Ltd.  He gave a guarantee of DB Café Ltd’s obligations under the franchise agreement.  DB Café Ltd went into liquidation in  August 2011.  CCNZ Ltd says that when it went into liquidation, DB Café Ltd owed it $79,050.34 for outstanding franchise service fees and unpaid product.  It also owed a further sum of $8,984.06 for unpaid advertising and promotional levies.   It claims the total sum of $88,034.40.   It sues Mr Booth under his guarantee.  It applies for summary judgment.

[3]      Mr Booth opposes the application for summary judgment and raises a number of matters in opposition.

(a)       He says that there was no consideration for the guarantee he gave.

His argument is that the consideration is passed.   He says that the relevant words of the guarantee were:

In consideration of CCNZ at the request of the guarantor agreeing to enter into the annexed franchise agreement ... the guarantor will pay ...

He says that the franchise business began operation on 13 March

2007  but  the  franchise  agreement  was  not  signed  or  dated  until

24 April 2007, after the franchise operation had already begun.  So he says that the consideration is past consideration and could not be good consideration for the giving of the guarantee.

(b)      He says that there was no consideration for the grant of the franchise.

Today he did  not  develop  this  argument  very extensively but  did address it.   He relies on the wording of the  franchise  agreement,

clause 2.1, which deals with the grant of the franchise and begins with the words:

In consideration of the payment by the franchisee to CCNZ

of the initial franchise fee ...

Mr Booth’s point is that DB Café took over an existing operation and there was no initial franchise fee payable.   He argues that in the absence of any payment of the initial franchise fee, then there was no consideration   for   the   franchise   agreement.      As   the   franchise agreement is without consideration it is not enforceable and therefore the guarantee itself would not be enforceable.

(c)      He relies on the expiry of the franchise agreement. The agreement was to run for three years, that is, up to 30 May 2010, and could be renewed.  There were express renewal provisions, but these renewal provisions were not followed.   He says that in the absence of any renewal,  the  agreement  expired  on  30  May 2010.    His  guarantee applies only to DB Café Ltd’s performance of the franchise agreement and does not extend to any contract that may have been in effect after

30 May 2010.

(d)He challenges charges for advertising contributions.   The  contract provides for the franchisee to pay two per cent of turnover towards an advertising fund. He says that he got no benefit from it.

(e)      He also makes a similar challenge to the franchise service fee payable under  the  franchise  agreement.    He  claims  not  to  have  had  any practical assistance in return for payment of the franchise service fee.

(f)      He claims misrepresentation.   He says that the plaintiff’s directors encouraged him to open a second café under the ‘Columbus’ brand, and he did this in the CentrePlace shopping centre, but he says it was an abject failure and he lost a considerable amount of money.  He  had to  use  funds  from  the  Barton  Street  operation  to  prop  up  the

CentrePlace café which eventually failed.  He claims that the plaintiff misrepresented to him the risk of opening a second café.  He claims that he was reluctant to open the café but the plaintiff’s directors told him that it was financially viable and a good idea and they would support him to get it up and run it profitably.  He says that he relied on their advice but that he got minimal assistance from the plaintiff and suffered a loss as a result of acting on its misrepresentations.

[4]      I consider the defences.

No consideration for guarantee

[5]      In  its  reply  affidavit,  the  plaintiff  provided  evidence  of  documentation showing how matters proceeded up to the signing of the franchise agreement and guarantee.     DB Café Ltd entered into an agreement to buy the café business in Barton Street on 7 February 2007.   A draft franchise agreement was sent to the lawyers for DB Café Ltd later in February 2007.   In early March 2007 CCNZ approved DB Café Ltd as a franchisee, and the lawyers for DB Café Ltd  were informed.  The franchise agreement provided to the lawyer for DB Café Ltd included the guarantee.

[6]      On the same date the lawyers for DB Café Ltd confirmed that the agreement for sale and purchase was unconditional.   DB Café Ltd and Mr Booth signed the franchise agreement including the guarantee.  The completed document was returned to the lawyers for CCNZ on 20 March 2007.

[7]      The  plaintiff  did  not  immediately  sign  the  franchise  agreement  but  on

30 March 2007 the lawyers for CCNZ confirmed to the lawyers for DB Café Ltd that CCNZ would execute it.  On that basis, DB Café Ltd completed the purchase of the café in Barton Street.  Because of the absence of personnel CCNZ did not sign the franchise agreement until later in April 2007.  It was dated 24 April 2007 and sent to the lawyers for DB Café Ltd.

[8]      I have relied on the plaintiff’s reply affidavit to make these findings.  It was not submitted that I was not entitled to rely on the documentation put in evidence in reply by the plaintiff as showing the execution of documents.    The evidence from the plaintiff’s affidavit in reply does bear out the defendant’s point that the franchise agreement was not signed by the plaintiff until after 30 March 2007. It is common ground that by that time the DB Café Ltd was already operating the franchise.

[9]      However,  it  is  important  to  apply  some  commercial  reality  to  what  has happened.   The lawyers for CCNZ sent an email to the lawyers for DB Café Ltd saying that the plaintiff would sign the agreement on 30 March 2007. There has been no suggestion that that message was unauthorised or was ineffective.  The effect of the lawyers sending that email was to bind the plaintiff into signing the franchise agreement.   That was critical because it allowed the settlement of the purchase to proceed.   Effectively, there was an effective entry into the franchise agreement on

30 March 2007.  The later signing by CCNZ in April 2007 simply ratified the actions of the lawyers.  There was not any element of past consideration because everything went into effect on 30 March 2007.

[10]     The plaintiff also pointed out that the guarantee was in  consideration  of CCNZ entering into the franchise agreement.  The guarantee was signed at the same time as DB Café Ltd signed the franchise agreement.  It was then presented to CCNZ for execution, so the execution by CCNZ following the signing of the guarantee is consistent with the wording of the guarantee.  Even if the email from the lawyers on

30 March 2007 was ineffective to create a binding contract, I would not regard the matter as fatal to the plaintiff.  The signing of the documents was close in time to the parties starting to operate the franchise agreement.   The signing of the documents after DB Café Ltd had started operating the franchise is covered by the signing having retrospective effect.  It was all part and parcel of setting up the franchise.  I cannot regard the signing in April 2007 as invalidating the contractual arrangements the parties had entered into.   To take such a technical approach would defy commercial reality.

[11]     In other areas of the law, the courts have been prepared to give retrospective effect to the signing of contractual documents after the parties have already entered

into the performance of the contract.  I have in mind authorities such as Trollope and

Colls Ltd v Atomic Power Construction Ltd.[1]

No consideration for franchise agreement

[1] Trollope and Coles Ltd v Atomic Power Construction Ltd  [1963] 1 WLR 333

[12]     Mr Gilchrist covered this in his written submissions but only briefly in oral argument.  Mr Hayes barely touched on it.  It is necessary to look at clause 2.1 of the franchise agreement:

2.1      In consideration of the payment by the Franchisee to CCNZ of the Initial Franchise Fee and in further consideration of the performance and observance of the covenants contained in the Agreement, CCNZ grants to the Franchisee the right to operate a COLUMBUS Café at the Premises providing the  facilities  and Authorised  Products  and  using  the  methods, techniques, expertise and know-how of Café brands and CCNZ to identify such business as a COLUMBUS Café for the Term and any renewed or extended term which may be agreed to.

[13]     The defendant  focused  only on  non-payment  of the initial  franchise  fee. While non-payment of the initial franchise fee is conceded, clause 2.1 also refers to other consideration to be provided, which included the performance and observance of the covenants contained in the franchise agreement.   The franchise agreement goes on to provide extensively for matters to be carried out by the franchisee.  That is clear consideration for the grant of the franchise.  The franchisee’s undertaking to carry out those obligations is consideration under clause 2.1 of the franchise agreement.

Expiry of the franchise agreement

[14]     The third defence is  based  on  the  expiry of the franchise  agreement  on

30 May 2010 at the end of the initial three year period.  For this summary judgment application, the evidence is that clause 19 of the franchise agreement, which provides procedures to renew the franchise agreement, were not followed at all.  The evidence is that neither party appears to have given attention at all to the renewal question. Effectively, 30 May 2010 came and went without either party noting that the term of the franchise had expired.  CCNZ continued to supply product to the Barton Street

operation, and DB Café Ltd continued to hold itself out as a “Columbus” café.

There is evidence in reply that Mr Booth took part in activities arranged by the plaintiff for the better running of the franchise as a whole.

[15]     The question is not so much what the parties did as a matter of fact, as what the legal interpretation of the events is.   The plaintiff says that even though the parties did nothing, there was either a variation of the franchise agreement (whereby it continued to run, notwithstanding the provisions in the agreement that it had expired) or the plaintiff says that it waived the requirement for DB Café Ltd to go through the renewal procedures.  The plaintiff also says that Mr Booth was complicit in this variation or waiver because had the sole control and management of DB Café Ltd and was as much bound up in the variation or waiver as if he were the franchisee himself.

[16]     It is appropriate to consider what the effect of DB Café Ltd continuing to operate as a “Columbus” café after 30 May 2010 was.   If this were a lease, the situation would best be described as a “holding over”.  Landlord-tenant law would not regard the continued occupation of premises by a tenant after expiry of a lease as a renewal of extension of a lease.   A lease involves the grant of an interest in land for a defined period of time.  If the parties do not renew the lease or do not extend it then the estate granted terminates, according to the terms of the original lease.

[17]     The question here is whether those principles can apply to the grant of a franchise under a franchise agreement.  This franchise agreement confers rights to use the plaintiff’s goodwill and associated intellectual property in the operation of the café.  Those rights are conferred for a defined period of time.  The agreement spells out what a franchisee has to do if it seeks a renewal of that term.

[18]     The franchise agreement is silent about variations of the agreement.  I take it that in the absence of any restriction within the agreement itself, then the parties are free to vary the agreement in writing, orally or by conduct.

[19]     The evidence is that the parties apparently did nothing which is referable to a renewal or continuation of the franchise agreement.  They simply ignored the fact.  If they simply ignored the fact, then it is hard to see how there can be a contractual

variation of the agreement.  Similarly, Mr Hayes made the point in argument that if there had been a waiver, there would have to be a knowing waiver.  It is not possible to waive something if you are unaware of the matter.

[20]     Accordingly, on the evidence as presented at this stage, it is arguable that the franchise agreement came to an end on 30 May 2010 according to its terms. It is equally arguable that when DB Café Ltd continued to operate as a “Columbus” café after 30  May 2010  and  CCNZ continued  to  supply with  product,  the  franchise agreement had not been extended.  Instead, there was a new contractual arrangement operating in place of the earlier franchise agreement.

[21]     It is now necessary to consider what the effect of that is, in terms of the defendant’s guarantee.   The defendant guaranteed the obligations of DB Café Ltd under the franchise agreement.  He did not guarantee the obligations of DB Café Ltd under any other agreement.   I accept that if the agreement had been renewed, in accordance with the renewal provisions, this guarantee would also apply to any renewed agreement.  But there is nothing within the guarantee that suggests that the defendant guaranteed the performance of DB Café Ltd under any other agreement such as an agreement that came into effect after the expiry of the initial franchise agreement.   I follow an approach similar to that in holding-over cases.   There is authority that when there is a holding-over, after the expiry of a lease, a guarantee will not extend to the holding-over unless there is express wording to that effect within the guarantee.  An authority I have in mind is City of London Corporation v

Fell.[2]

[2] City of London Corporation v Fell  [1993] QB 489.

[22]     On this point, the defendant has an arguable defence that he is not liable for the obligations of DB Café Ltd under the new arrangements that replaced the franchise agreement.  He could only be liable for defaults of the DB Café Ltd that remained outstanding as at 30 May 2010 and have not since been honoured.  CCNZ argued that Mr Booth was knowingly complicit in the change of arrangements.  That might be relevant to the question under guarantee law as to whether he has agreed to

a variation, but that argument does not answer the point that there was in fact a

variation, or extension, of the original franchise agreement.   It expired and was replaced by new contractual arrangements.

The use of advertising monies

[23]     The fourth defence is the challenge to the use of advertising monies.   The franchise agreement provides for the operation of an advertising fund.  The evidence shows  that  CCNZ accepted  that  there  was  greater  benefit  to  franchisees  in  the Auckland area than franchisees outside Auckland in the way that advertising was carried  out.    In  2008,  DB  Café  Ltd  applied  for  a  refund  of  its  advertising contribution.   The evidence shows that CCNZ recognised that there was an entitlement to a refund of $6,326 that year.  The evidence is silent as to whether that was a refund the following year.  I accept that the defendant may have an arguable defence that a refund would be claimable for the following year as well, at least on the basis of the evidence shown so far.  To that extent, there might be a potential claim by the defendant that he should not be liable for advertising, at least to the extent of the refund obtained the year before.   There is an arguable issue on that point.

The use of the franchise service fee

[24]     Mr Booth also complains that he did not get any benefit from the use of the franchise service fee.  The plaintiff’s  reply effectively dealt with that.  It is clear that the franchise service fee was in the nature of a royalty.  It did provide a return to the franchisor to fund its activities.  The services provided were those typically given by a franchisor.   Mr Booth has not established that there is an arguable defence in respect of franchise service fees.

Misrepresentation

[25]     Mr Booth’s complains of misrepresentation.   His evidence on the point is simply a generalised assertion.  He has not provided the kind of particulars that are expected if his assertions of misrepresentations were to be treated seriously.  There is no statement as to what the misrepresentations actually were.  There is no reference

to time, date, or place or who was responsible for making the misrepresentations, and no adequate explanation as to how what was stated was incorrect as a matter of fact.  If he intends to run a misrepresentation argument, he needs to do more than he has provided.   I do not find that he has raised an arguable issue in respect of misrepresentation.

Decision

[26]     Apart from those matters of defence that the defendant has raised, I find that the plaintiff has shown that in all other respects the defendant does not have any defence to the allegations in the statement of claim.

[27]     The plaintiff is not entitled to the full extent of relief that it has claimed.   It can recover from the defendant only for liabilities that had accrued and not been discharged  before  30  May  2010.    Mr  Gilchrist  has  calculated  that  amount  as

$66,597.38.   There is an adjustment to be made to that figure to account for the finding I have made about a potential advertising refund.  I have accepted that the amount of potential advertising would be $6,326.

[28]     The net effect is that I regard the plaintiff as having an unanswerable claim for the sum of $60,271.48 and I give judgment for the plaintiff for that amount.  The plaintiff is also entitled to contractual interest on that sum from 30 May 2010 to the date of judgment at the rate of 12 per cent per annum.

[29]     There is also the question of costs.  The plaintiff says that there is provision in the franchise agreement for payment for solicitor-client costs in recovery proceedings.   That is recoverable against the franchisee and the defendant has guaranteed the franchisee’s performance.   Normally the courts uphold provisions allowing recovery of solicitor-client cost in contracts, but the courts also reserve the right to consider whether the charges are reasonable.

[30]     In this case the sums the plaintiff sued for were within the jurisdiction of the District Court.  The plaintiff says that it sued for summary judgment in this court because  summary  judgment  is  not  conveniently  available  in  the  District  Court.

However I regard the use of the summary judgment procedure in this court, for a sum easily within the jurisdiction of the District Court, as using “sledge-hammer” tactics.  My present view is that while the District Court procedures do not allow for summary judgment, the plaintiff could still have used them effectively to get the kind of result it has got today, without having to go through a summary judgment application, and it could have done so at lower cost.

[31]     While it might be possible to invite the parties to give more consideration to what the amount of solicitor-client costs should be, I am conscious that the sums in this case are not large, and it is appropriate to look at the matter in the round. Accordingly, looking at the matter in the round, I award the plaintiff costs on the proceedings up till to date in the sum of $6,000 plus disbursements.

[32]     After giving judgment, I have discussed with counsel how the case should develop from here.   There are a number of options possible which may include transferring the case to the District Court.   Counsel will obviously have to take instructions.   I direct a telephone conference at 9:00am on 2 May 2012.   If the parties are able to resolve matters beforehand, they may file a joint memorandum advising the court.   Failing that, they should file memoranda before 2 May 2012, advising the court of their proposals for the continuation of the case.

..........................................

R M Bell

Associate Judge