Gloria Jean's Coffees International Pty Limited v RFG (NZ) Limited
[2019] NZHC 1097
•17 May 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1157
[2019] NZHC 1097
BETWEEN GLORIA JEAN’S COFFEES
INTERNATIONAL PTY LIMITED
First PlaintiffRFG (NZ) LIMITED
Second PlaintiffAND
DABOKO LIMITED
Defendant
Hearing: 18, 19, and 20 February 2019 Appearances:
D J Clark and J Matheson for the Plaintiffs
JWA Johnson and S Campbell for the Defendant
Judgment:
17 May 2019
INTERIM JUDGMENT OF GAULT J
This judgment was delivered by me on 17 May 2019 at 4:00 p.m. pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Solicitors:
Mr D J Clark and Ms J M Matheson, Wilson McKay, Solicitors, Auckland
Mr JWA Johnson and Mr S Campbell, Wynn Williams, Solicitors, Christchurch
GLORIA JEAN’S COFFEES INTERNATIONAL PTY LTD v DABOKO LTD [2019] NZHC 1097 [17 May 2019]
[1] There is a café at 68 Victoria Street West, on the corner of Victoria Street West and Federal Street, near SkyCity in Auckland.
[2] It used to be run by the defendant as a Gloria Jean’s Coffees franchise. The defendant ended the franchise relationship in 2018, and continues to run the café independently. The plaintiffs say the defendant was not entitled to end the franchise arrangement and continue to operate the café in the same premises.
[3] This case is mostly about which version of a franchise agreement is binding. There are two versions, one which is alleged to have been finalised in April 2013, and the other in May 2013.
[4] The first plaintiff, Gloria Jean’s Coffees International Pty Ltd (GJC), is the owner of the intellectual property for the Gloria Jean’s Coffees franchise system worldwide, except for the United States. As head franchisor, GJC grants rights to master franchisees in country territories to develop franchisee stores within each territory.
[5] The second plaintiff, RFG (NZ) Ltd, is the New Zealand representative of the first plaintiff in New Zealand. Both of the plaintiffs are ultimately owned by Retail Food Group Ltd, a publicly listed company on the Australian Stock Exchange. There was initially an issue about RFG (NZ) Ltd’s status as plaintiff, but the joinder of GJC overcame that, and I refer to each of RFG (NZ) Ltd and Retail Food Group (Australia) as RFG.
[6] The defendant, Daboko Ltd (Daboko), is a company incorporated in 2013 to become a franchisee of Gloria Jean’s Coffees and operate the café.
[7] The sole director of Daboko is Ms Darina Borisova (also known as Ms van Dorf), who moved to New Zealand from Russia in March 2012 to study English. The two shareholders of Daboko are Ms Borisova and her husband and business partner, Mr Dimitri Pavlenko, who lives in Russia.
[8] The plaintiffs say the April 2013 version of the agreement is binding. They face an unusual difficulty: both individuals involved at the time say the May 2013 version is binding. The plaintiffs say the May 2013 version was manufactured much later than 2013 and is not enforceable.
[9] Both versions are dated 1 April 2013 with the execution clause signed, but it became clear that neither version was actually signed on that date. Daboko says 1 April 2013 is the commencement date, not the date of signing.
[10] A key difference between the versions is the term of the franchise agreement specified in schedule 1. The version relied on by the plaintiffs provides for a term “concurrent with initial term of the lease”, meaning the lease for the 68 Victoria Street West site, which is not due to expire until 31 October 2022. The version relied on by Daboko provided for an initial five year term, with rights of renewal.
[11] Daboko says that it did not elect to renew the franchise agreement and accordingly it came to an end on 1 April 2018. Further, in the plaintiffs’ version, clause 4.8 provided that upon expiry the master franchisee or its nominee has the right to assume the franchisee’s status under the lease and replace the franchisee as lessee. In Daboko’s version, there is a schedule 3 of which clause 3 provides that clause 4.8 does not apply and the franchisee can continue to trade from the premises for its own purposes free from restriction or trade restraint.
[12] Daboko has removed Gloria Jean’s Coffees branding from the café and refused to pay franchise fees. The plaintiffs claim breach of contract based on their version of the franchise agreement and seek specific performance and payment of unpaid franchise fees.
[13] Following an application for interim injunction, orders were made by consent prohibiting Daboko from selling its business located at 68 Victoria Street or a sale of its shares pending further order.
Background
[14] After Ms Borisova’s arrival in New Zealand, she was introduced to Mr Paul Ewing by a mutual friend in July 2012. Mr Ewing was the sole director of a company named Jireh International NZ Ltd (Jireh), which was the master franchisee for Gloria Jean’s Coffees in New Zealand. Ms Borisova was looking for business opportunities, and, through Mr Ewing, who took her to meetings so she could learn about doing business in New Zealand, she became aware of the possibility of taking over the café as a Gloria Jean’s franchisee. She expressed interest to Mr Ewing in September 2012.
[15] Jireh executed an Agreement to Lease 68 Victoria Street West from the landlord, J & J Ko Investment Ltd, dated 17 October 2012 and a Deed of Lease dated 15 May 2013, each for a term of 10 years with a 10 year renewal.
[16] In April/May 2013 Mr Ewing and Ms Borisova signed a franchise agreement for the café. I will return to this in more detail.
[17] Jireh, Daboko and the landlord executed a Deed of Assignment of Lease for 68 Victoria Street West dated 13 December 2013, with Mr Ewing as guarantor.
[18] In 2016 Mr Ewing wished to sell Jireh’s master franchise rights to Boost Group Ltd (Boost), a company associated with Mr Eric Chase. This involved a replacement master franchise agreement dated 7 July 2016 between GJC and Mr Ewing’s new company, GJ Holdings New Zealand Ltd (GJHNZ) as trustee for the XDS Trust, before assignment by GJHNZ to Boost.
[19] The consent of GJC was required to assign the master franchise. For that purpose, Mr Ewing provided details of all of the franchisee stores to GJC in September 2016. In particular, on 20 September 2016 Mr Ewing provided to Mr Chiu of RFG on behalf of GJC the copy of the franchise agreement that is relied on by the plaintiffs, together with the Agreement to Lease, the Lease and the Assignment of Lease. GJC collated the details from each of the franchise agreements received into a spreadsheet. Relevantly, the spreadsheet described the 68 Victoria Street store franchise as follows:
Commencement Date 01/04/13
Expiration Date Concurrent with lease
[20] Mr Chiu sent the spreadsheet to Mr Ewing on 21 September 2016 seeking his comments, at least as to whether the SkyCity store was a different store from those listed. Mr Ewing confirmed the Sky City store was 68 Victoria Street West but did not comment on the references in the spreadsheet to the terms of the franchise.
[21] GJC granted consent to the assignment on 29 September 2016. Franchisees, including Daboko, were then notified that Boost had taken over the master franchise.
[22] Issues arose between GJHNZ (Mr Ewing) and Boost (Mr Chase). Mr Chase refused to repay vendor finance based on alleged misrepresentations by Mr Ewing during the sale. This resulted in GJHNZ appointing receivers to Boost on or about 27 September 2017. Separate proceedings are ongoing in relation to the issues between those parties.
[23] As a result of the receivership, GJC exercised its right to terminate the master franchise agreement with Boost. On 4 October 2017 RFG, on behalf of GJC, wrote to Ms Borisova explaining that the master franchise had been terminated, stating “we have taken on the day-to-day functions of the master franchisee” and “your franchise agreement has now been assigned to us, effective immediately”.
[24] Daboko did not pay its October and November 2017 invoices for franchise fees on time. Daboko paid a portion of the outstanding fees on 8 January 2018. Following correspondence from RFG, Daboko paid a portion of the December 2017 and January 2018 fees on 19 February 2018. RFG noted these were short payments on 20 February 2018, and followed up again on 9 and 11 March 2018. On 15 March 2018 Ms Borisova wrote to RFG disputing the marketing and technical assistance fees invoiced to explain Daboko’s part payment. Ms Borisova said Daboko had paid the trademark fees in full (referring to the Continuing Trade Mark Licence Fee of 2%, which is not in dispute).
[25] Mr Audley of RFG replied to Ms Borisova on 9 April 2018 addressing the issues raised. Ms Borisova sent an email in response on 20 April 2018 attaching six payment records and indicating she would reply to the correspondence the next week.
[26] Having not received a reply, Mr Audley sent a follow up email on 14 May 2018. Ms Borisova replied to Mr Audley by email attaching a letter on 16 May 2018. In that letter Ms Borisova stated that the 9 April 2018 letter did not address Daboko’s concerns. Ms Borisova’s letter then stated:
Accordingly, as the term of the franchise agreement expired on 1 April 2018, and was not renewed, we do not intend to continue our Gloria Jean’s franchise.
Schedule 3 to the franchise agreement allows us to continue to operate our Sky City site as a (non Gloria Jean’s) café if we don’t renew the agreement.
[27] Ms Borisova’s email also attached the version of the franchise agreement relied on by Daboko.
[28] This was a surprise to Mr Audley as he understood the franchise agreement did not expire until 2022, based on the franchise agreement Mr Ewing had provided in 2016.
[29] It is common ground that the substantive differences between the two versions of the franchise agreement comprise changes to schedule 1 (the different term already referred to and different fees) and the addition in Daboko’s version of a schedule 3 containing special conditions, in particular the change to clause 4.8 to which I have also already referred.
[30] The plaintiffs rely on the franchise agreement provided to them by Mr Ewing in 2016. Daboko says this was signed as a non-binding draft in mid-April 2013 and Daboko’s version is the binding franchise agreement. Daboko says this was finalised in May 2013. The plaintiffs do not accept this and go so far as to say Daboko’s version was created much later. Indeed, Mr Clark, counsel for the plaintiffs, characterised Daboko’s version of the franchise agreement as a sham.
Issues
[31] As I have said, the overriding dispute in this case is which version of the franchise agreement binds the parties. To resolve this dispute, the following issues need to be determined:
(a)Did the parties to the franchise agreement signed in April 2013 intend to be bound?
(b)When was the April 2013 document altered?
(c)Did the altered version become the binding franchise agreement?
(d)Was the agreement ratified by Daboko?
There are then two further, separate issues:
(a)Is the franchise agreement enforceable by the plaintiffs?
(b)Are further franchise fees payable?
Approach to evidence
[33] Before turning to these issues, I deal with the approach to be taken to the evidence, given the plaintiffs’ case challenges the credibility and reliability of Daboko’s evidence.
[34] Mr Johnson, counsel for Daboko, referred to the authorities on the approach when applying the civil balance of probability standard of proof in the case of serious allegations,1 and Mr Clark rightly accepted that care is needed. As the majority of the Supreme Court stated in Z v Dental Complaints Assessment Committee, “the quality of the evidence required to meet that fixed standard may differ in cogency, depending on what is at stake”.2
[35] As this case calls for credibility or at least reliability findings, I note that New Zealand courts focus on a critical analysis of the evidence with an emphasis on consistency and how the evidence relates to other material.3
1 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [101]; and
Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 (HL) at 586.
2 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [101].
3 Burden v Debonaire Furniture Ltd [2017] NZHC 1553 at [49] per Thomas J.
[36]In Street v Fountaine the Court of Appeal stated:4
In assessing this evidence we have weighed, as we are bound to, the impact on memory of the passage of time and the circumstances in which memories are recalled. Any memory is malleable and can be affected by the context in which it is called to mind.
[37] I also have regard to the approach of testing oral evidence by reference to documents. As Nugee J stated recently in Glenn v Watson:5
… Despite the primacy which our trial system has long given to oral evidence, it is by now a commonplace that the memory even of witnesses who are doing their honest best is often unreliable (see Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) at [15]-[23] per Leggatt J); and in cases of fraud when the credibility of witnesses is in issue, it has long been recognised to be essential to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities (The Ocean Frost [1985] 1 Ll Rep 1, 57 per Robert Goff LJ).
[38] Here, it must also be said, there are questions about the completeness of the documentary record. I will come back to this.
Did the parties to the franchise agreement signed in April 2013 intend to be bound?
[39] The relevant legal principle is not in dispute. An intention to be immediately bound is a prerequisite to formation of a contract.6
[40] It is well established in contract law that the Courts apply an objective test when determining whether two or more parties have reached an agreement.7 This includes determining whether there is an intent to create legal relations.8
4 Street v Fountaine [2018] NZCA 55 at [128].
5 Glenn v Watson [2018] EWHC 2016 (Ch) at [58].
6 Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand [2002] 2 NZLR 433 (CA) at [53].
7 Smith v Hughes (1871) LR 6 QB 597; Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (CA) at 266; and Denny v Hancock (1870) LR 6 Ch App 1.
8 RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co [2010] UKSC 14, [2010] 1 WLR 753 at [45] per Lord Clarke.
[41] A Court examines the whole of the context between the parties to determine if there is an agreement.9 This includes communications that have passed between the parties, both written and oral, and their conduct. The communications are assessed from the perspective of a reasonable person in the position of the party receiving the communication.10 That is, what is important is not what is in the minds of the parties, but what a reasonable person in the place of each party would interpret the other party’s communications to mean.
[42] The inquiry is not, however, wholly objective. If a party knows the counterparty does not intend to create legal relations, the party cannot enforce a contract based on objective appearance.11 Likewise, a party who did not intend to be bound cannot invoke the objective test so as to bind the other party to the contract.12 A similar rule prevents an offeree from accepting an offer on terms consistent with the objective evidence, when in fact he or she knows that the offeror did not intend to agree those terms.13
[43] Mr Johnson acknowledged that in the case of a commercial agreement, it will tend to be presumed that the parties intended to create legal relations and make a contract where there is evidence of apparent agreement and sufficiency of consideration.14 That presumption can be displaced where there is evidence that the parties intended that no legal relations be created.15 The onus of proving there was no such intention is on the party who asserts that no legal effect was intended, in this case
9 At [45] per Lord Clarke; Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 (QB) at 619 per Lloyd LJ; and Canterbury FM Broadcasting Ltd v Daniels (1988) 2 NZBLC 103,535 at 103,541 per Hardie Boys J.
10 Firm PI 1 v Zurich [2014] NZSC 147, [2015] 1 NZLR 432 at [60] per Arnold J; and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HC) at 912 per Lord Hoffmann.
11 Pateman v Pay (1974) 263 EG 467; and Attrill v Dresdner Kleinwort Ltd [2013] EWCA Civ 394 at [86].
12 Lark v Outwaite [1991] 2 Lloyd’s Rep 132 (QB) at 141. See also Beesly v Hallwood Estates Ltd [1960] 1 WLR 549 (ChD) at 558-559.
13 Hartog v Colin & Shields [1939] 3 All ER 566 (KB).
14 Fleming v Beevers [1994] 1 NZLR 385 (CA) at 389; Rose and Frank Co v JR Crompton and Bros Ltd [1923] 2 KB 261 (CA) at 288; McInnes v Gross [2017] EWHC 46 (QB) at [77]; Fleming v Beevers [1994] 1 NZLR 385 (CA) at 389; and Jeremy Finn, Stephen Todd and Matthew Barber Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at 167.
15 Adaras Developments Ltd v Marcona Corp [1975] 1 NZLR 324 (SC) at 332; and Rose and Frank Co v JR Crompton and Bros Ltd [1923] 2 KB 261 (CA) at 288.
Daboko, and the onus is a heavy one.16 Related to this, if a party signs an agreement, then there is a strong presumption they are bound by its contents.17
[44] Finally, a powerful factor in support of a binding agreement is if either or both parties have acted as though the agreement is binding.18 In other words, it will be relevant if the parties have subsequently acted as though the agreement is binding.19
[45] The plaintiffs were not party to the franchise agreement and acknowledge they have no witnesses with direct evidence as to the circumstances of its formation. The plaintiffs’ witnesses focused on their dealings with the parties to the franchise agreement from 2016 onwards, which caused them to doubt the position claimed by Daboko. Both Ms Borisova and Mr Ewing gave evidence that even though they signed the agreement in April 2013, it was intended to be a draft. However, the plaintiffs claim that the evidence of Ms Borisova and Mr Ewing for Daboko should not be accepted as credible. It is necessary to consider their evidence in some detail.
[46] I preface reference to their evidence by noting that, on its face, the franchise agreement signed in April 2013 appears to be a binding agreement. The execution clause provides for execution as a deed. It appears to be signed by Mr Ewing for Jireh and by Ms Borisova for Daboko and personally as guarantor. All three signatures appear to have been witnessed (the first two signatures by the same witness and the guarantor’s signature by a different witness).
[47] However, there are two apparent irregularities. First, Mr Ewing did not initial all the pages, which he said was because it was intended to be a draft. Aside from its relevance to intention, which I will address, I doubt this irregularity is material.
16 Edwards v Skyways Ltd [1964] 1 WLR 349 (QB) at 355; Bahamas Oil Refining Co v Kristiansands Tankrederei A/S (The Polyduke) [1978] 1 Lloyd’s Rep 211 (QB); Attrill v Dresdner Kleinwort Ltd [2013] EWCA Civ 394 at [80]; and Busst v Bouma HC Hamilton CP6/93, 20 June 1996 (partially overturned in Bouma v Busst (1998) 6 NZBLC 102,457 (CA), but not on this point).
17 L’Estrange v F Graucob Ltd [1934] 2 KB 394 (Divisional Court); and Parker v South Eastern Ry Co (1887) 2 CPD 416 (CA) at 421.
18 Trentham v Archital Lucifer [1993] 1 Lloyds Rep 25 (CA) at 27; and Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWCA Civ 1334, [2010] 2 All ER (Comm) 788 at [21].
19 Such evidence being admissible, particularly where both parties act consistently: Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
[48] Second, Daboko was not incorporated until 3 May 2013. Mr Johnson submitted that the fact that the document was signed before Daboko existed gives rise to an inference that the parties did not want the agreement to be binding. As he accepted, pre-incorporation contracts may be ratified after incorporation but that requires a clear adoptive act.20 He submitted the plaintiffs have not pleaded or proved ratification.
[49] As to the pleadings, it is true that the third amended statement of claim does not mention ratification. Unsurprisingly given the date on the document, the plaintiffs pleaded that on 1 April 2013 Daboko entered into the franchise agreement with Jireh (and set out the relevant terms). Daboko’s amended defence denied the paragraph and stated that it “entered a franchise agreement within [sic] Jireh dated 1 April 2013” and that the agreement “was signed and commenced in May 2013” and that the plaintiffs’ version was a non-binding draft. I do not consider there is a pleading issue here. The contract issue between the parties is sufficiently clear on the pleadings. Daboko did not plead its date of incorporation and I do not consider that the plaintiffs are barred from relying on ratification if they establish that their version was more than a non-binding draft.
[50] I will return to the issue of ratification after I have discussed which version of the contract is binding.
Ms Borisova’s evidence
[51] Ms Borisova said that when she told Mr Ewing that she wanted to become a franchisee at the SkyCity site she told him that she needed her husband’s approval because he was funding the deal. She eventually convinced her husband about the opportunity and then had to negotiate the terms with Mr Ewing. Mr Ewing sent Ms Borisova a draft “standard franchise agreement” to look at on 5 April 2013. She sent this to her husband and he provided her with a list of questions which she sent to Mr Ewing.
20 Taylor v Todd [2004] 3 NZLR 76 (HC) at [54]-[56].
[52] On 10 April 2013 Mr Ewing emailed her saying that he had offered this price to her because they were friends, but she needed to make up her mind by the end of the week otherwise he would sell it to a Chinese franchisee. Ms Borisova said that because Mr Ewing was getting frustrated and wanted a commitment from her that she would actually proceed, she agreed to sign in mid-April 2013 on the basis that the terms of the agreement were still to be negotiated. She said she only signed a working draft to show commitment to the purchase. She noted that Mr Ewing did not initial the agreement. She said she was not given a copy – Mr Ewing kept it until they negotiated the deal and she was ready to pay the money.
[53] In cross-examination, Ms Borisova acknowledged that signing was the only way she could give Mr Ewing the commitment he wanted and have the store she wanted. She also said she couldn’t remember the exact date she signed but it was mid to late April. She said she signed at Mr Ewing’s apartment (he was upstairs from her apartment in the same building). A lady who was staying with her signed as witness, although Ms Borisova said that she and Mr Ewing signed in his apartment and then went down to her apartment to get the witness to sign. Mr Ewing kept the document and Ms Borisova did not send a copy to her husband.
[54] She also said that she managed to convince her husband later, just before he gave her the money, mid to end of April 2013. Rather than a change to her evidence in chief where she referred to convincing her husband about the opportunity earlier, she seemed to be focusing in cross-examination on convincing him on the detail. There was dispute as to whether negotiations continued after the mid-April signing.
[55]In relation to the total price for the store, Ms Borisova thought she paid
$350,000 plus GST, although she said her husband has all the records (which were not discovered).
Mr Ewing’s evidence
[56] Mr Ewing said that Jireh entered into an agreement to lease 68 Victoria Street West on 17 October 2012 and he guaranteed Jireh’s obligations under the lease up to
$105,000 plus GST (one year’s rent). He secured the site untenanted because it was a prime location that used to be a Starbucks (which he understood was not performing
to expectations), so it was already fitted out as a coffee store. Jireh had a one month rent free period from 1 November 2012 and from then on it was paying rent and outgoings totalling $12,432.60 per month. Jireh needed to find a tenant to avoid this becoming a burden. Mr Ewing said it was not until April 2013 that Ms Borisova started to express serious interest, by which point Jireh had burned substantial cash on the lease and Mr Ewing wanted to put a stop to that.
[57] Mr Ewing said that Ms Borisova expressed interest before Christmas 2012, he thought around December. She said she was serious but she would have to talk to her husband about the opportunity. These discussions went on for over two months. Around mid to late March 2013 Mr Ewing said to Ms Borisova that if she wanted the store he needed more of a commitment than just her saying she wanted it. He needed her to sign a franchise agreement as a sign of good faith and her willingness to commit.
[58] He sent her a standard form agreement on 5 April 2013 so she could see what the agreement looked like. After that he printed it out with the corrected address in schedule 1 and got her to sign it on the agreed basis that the deal was still to be negotiated after she talked with her husband. He said he only signed the back page and didn’t see any point in initialling the pages because he knew the terms of the deal would change. The agreement was only signed at this early stage to ensure that Ms Borisova was serious. It was essentially a draft agreement because the commercial terms had not been finalised.
[59] Mr Ewing acknowledged that in an earlier affidavit he had said he did not sign the agreement at this point which, having checked the document, was not correct. What he meant to say was that he did not initial every page. He signed the signature page only. He said he did not think he had signed it because he was not intending to be bound by it given Ms Borisova did not actually agree to the terms in the schedule, and that he indicated the lack of full agreement by not initialling the pages.
[60] Mr Ewing said that as the deal progressed and looked more like it was going to come off, he emailed her thanking her for taking the SkyCity store on 9 April 2013, and around this time instructed his assistant to produce some pro forma invoices to try
and generate cashflow to push the project ahead. He said he did not believe they were paid.
[61] In relation to this invoicing, he also said that when Ms Borisova signed the initial draft agreement he asked Jireh’s administrator (his sister-in-law) to issue an invoice for $50,000 plus GST. This was an invoice dated 9 April 2013 addressed to Darina Borisova or Nominated Company. Mr Ewing said it was issued as a matter of routine and, in a sense, was meant to represent the deposit on the deal when it was finalised.
[62] The next day Ms Borisova followed up with more questions that had come from her husband, including a request that Mr Ewing assign the head lease to her.
[63] Mr Ewing said it got to a point where he needed a firmer commitment and on 10 April 2013 he told Ms Borisova she needed to make up her mind by the end of the week or he would sell the store to one of his Chinese franchisees that was expressing interest. The sequence of his evidence in chief suggested this was after signing, but in cross-examination he said that they signed in mid-April.
[64] Mr Ewing explained the standard form franchise agreement. He said that the standard terms in the body of the franchise agreement included the initial term and fees. He said the first two figures in the plaintiffs’ version totalled $50,000 plus GST at 12.5%, the prevailing rate when he first received the template as master franchisee.
[65] Mr Ewing said that when Ms Borisova signed and initialled the draft agreement the first time it was photocopied and put in Jireh’s codafile storage system.
[66] In cross-examination, Mr Ewing suggested that only a week before incorporation he started getting testy as it was dragging on; he said “here’s an agreement, I want to come to an agreement”. But then he accepted that was earlier, on 10 April. Later in his evidence, he mentioned his testy email again as though it was later in time.
[67] When asked about the signing, he said he met with Ms Borisova at his apartment, showed her the agreement and said:
As a sign of good faith can you please sign this. I realise that you need Dim’s approval because he’s supplying the finance, and he may have other conditions,” so I said, “But can you please do that for me?” And she reluctantly did that. I said, “It’s not a binding deal at the moment. The company’s not registered but it shows me that you really want to and intend, that your intention to go forward on the deal.
[68]He said they went down to her apartment and both signatures were witnessed.
[69]When asked why he didn’t give Ms Borisova a copy Mr Ewing said:
Well it was just for me. It was just a sign of good faith for me and that she wanted to go ahead with it. She didn’t want Dimitri to know that she’d actually signed it. It was just a personal thing. I pressed for it. I said I need more than words. This has been dragging on for months. I’m incurring, you know, $12,000 plus per month on this. Its April. You said you wanted to do it. Are you going to do it? And I was just pressing her to get something out of her. There was no money involved. She couldn’t give me the money because she didn’t have any. She was totally reliant on getting Dim’s approval, not only for the deal to go ahead but also for the funding.
[70] Mr Ewing said he had no intention of enforcing the agreement otherwise he would have given Ms Borisova a copy.
Documents
[71] No original of the franchise agreement signed in April 2013 was produced. Ms Borisova said Mr Ewing kept it and she was not given a copy.
[72] The contemporaneous correspondence, which is limited, indicates that Ms Borisova expressed interest in a Gloria Jean’s Coffee franchise in September 2012. On 14 September 2012 Mr Ewing emailed her saying the set up cost (ex GST) would be $350,000–$400,000 plus a franchise fee of $50,000. Rent would be $130,000–
$135,000 plus GST per annum.
[73] On 2 April 2013 Mr Ewing sent Ms Borisova a copy of the monthly rental invoice he had received from the landlord’s agent showing $12,432.60 owing.
[74] Mr Ewing sent Ms Borisova a “standard Franchise Agreement” to look at on 5 April 2013 at 2:18 am.21 He had already inserted Ms Borisova’s details into schedule 1 and her name in the execution page.
[75]On 9 April 2013 at 2:53 pm Mr Ewing emailed Ms Borisova stating:
Thank you for choosing Gloria Jean’s Coffees Franchise.
We are delighted that you have chosen the premises at 28 [sic] Victoria Street West, Auckland CBD as the location for your store.
The payment of the following will secure the premises; Franchise Fee of $50,000 + GST,
Leasing Fee $10,000 + GST
Architect Fee of $10,000 + GST
The budget for the Franchise will be $350,000 + GST and as agreed you will provide furniture at your cost.
We will provide you with a general breakdown of the $350,000 + GST which include the Franchise Fee, Leasing Fee and Architects Fee.
We will assign the lease to you in due course or sub-lease at our discretion…
[76] At 3:12 pm that same day, Mr Ewing emailed Ms Borisova Jireh’s bank account details referring to an amount of $80,500. Then at 4:54 pm that same day Mr Ewing emailed Ms Borisova three tax invoices “relating to your Franchise”. They were addressed to “Darina Borisova or Nominated Company” and were as follows:
Invoice 00014367 Initial Trademark Licence $50,000 + GST Invoice 00014368
Site Design Fee
$10,000 + GST
Invoice 00014369
Architect Fee
$10,000 + GST
[77] Ms Borisova in cross-examination said the $50,000 invoice was not paid. She said it was early negotiation and she did not reply to Mr Ewing.
[78] On 10 April 2013 at 12:32 am Mr Ewing emailed Ms Borisova a breakdown of the $350,000 plus GST:
21 The time zone is not always stated on the emails but makes no real difference to the sequence.
Description Amount $ ex GST 1 Initial Franchise Fee 50,000 2 Training Fee 10,000 3 Architects Fee 15,000 4 Leasing Fee 10,000 5 Consents/Administration 2,352 6 Project Management 5,000 7 Shop Fit out 130,000 8 Furniture 0 9 Signage 20,000 10 Feature Lights (Provisional sum) 5,197 11 Equipment 104,584 Sub Total 352,135 Rounded down to $350,000
[79]In cross-examination, Ms Borisova said this was pre-negotiation.
[80] Ms Borisova emailed her husband on 10 April 2013 at 12:52 am stating (translated into English):
Also, Paul promised to provide me with a document, which will allow us to put our own sign up and carry on working independently in the event if [sic] something happens to him or to the brand.
I believe that this is great as it gives us even more security.
[81]I will return to the significance of this promise.
[82]Mr Pavlenko replied to Ms Borisova five minutes later, at 12:57 am:
Do you understand that once you make a deposit, you get bound by the time frame and have to pay rent?
I will not transfer any money anywhere until I have read the contract. That’s for sure.
[83] On 10 April 2013 at 12:18 pm Mr Ewing emailed Ms Borisova stating “I agree to assign the head lease to you or your nominated entity. I will have a deed of assignment drawn to formalize this arrangement.”
[84] On 10 April 2013 at 5:02 pm Mr Ewing emailed his answers to Ms Borisova’s list of questions. Ms Borisova forwarded those answers to her husband. Two of Mr Ewing’s answers are relevant:
(a)Answer 5 included:
The lease holder is responsible for the rent. As the MF has taken the site off the market you will pay rent from 12th April 2013.
(b)Answer 8 included:
ASB did not renew the head lease and therefore the starbucks premises was not renewed. Fortunately I was able to obtain a head lease through a private connection that new [sic] the landlord which effectively cut starbucks out of the picture. (Starbucks wanted the site but he gave it to me because of my personal relationship).
[85] On 10 April 2013 at 5:11 pm Mr Ewing emailed Ms Borisova saying that he had offered this price to her because they were friends, but she needed to make up her mind by the end of the week otherwise he would sell it to a Chinese franchisee. Ms Borisova also forwarded that email to her husband within a few minutes. 10 April 2013 was a Wednesday and Ms Borisova accepted in evidence that Mr Ewing wanted her to make her mind up by the Friday.
[86]On 11 April 2013 at 7:05 pm Mr Pavlenko emailed Ms Borisova:
i believe that this is a very good offer and agree with it
the only thing is that having to pay money now I will lose interests [sic] of the month
I would like to suggest that either I pay some amount like 50k but the rent starts from the 1st of May thus I compensate the loss of interests [sic] OR
if we pay for the half of April than [sic] I would like to do it at the end of the month not to interrupt my agreement with the bank
can we do so?
Discussion
[87] I was not particularly persuaded by the subjective claims of Ms Borisova and Mr Ewing that they signed the franchise agreement as a “draft” and did not intend to be bound. They both signed the execution part of the deed and arranged to have a witness sign. The significance they sought to attach to Mr Ewing not initialling the agreement seemed unlikely and self-serving. In any event, Ms Borisova knew that Mr Ewing wanted a commitment from her that she would actually proceed. She acknowledged that she wanted the store and knew her husband would give her the money, and that Mr Ewing had been paying rent for quite a while so he wanted to sell as soon as possible. She acknowledged she was in between the two of them. It was perhaps revealing that Mr Ewing said in cross-examination for the first time that Ms Borisova didn’t want her husband to know that she’d actually signed it. Mr Ewing also said that he wanted Ms Borisova to sign to show commitment. He had already issued three tax invoices and, despite characterising them as pro forma, he hoped they would generate cashflow. He wanted Ms Borisova to pay.
[88] Ms Borisova and Mr Ewing also said when they signed in mid-April 2013 that terms of the agreement were still to be negotiated, and that negotiations continued after signing. The parties’ conduct after signing can be relevant to the question of an intention to be bound.22 However, the fact that parties intend to negotiate further is not necessarily inconsistent with a binding agreement. They could be agreeing to commit but acknowledging the intention to negotiate a variation to their agreement. For subsequent conduct to displace the normal presumption that parties intended to create legal relations when they signed a commercial written agreement, it needs to be clear and do more than evidence negotiations to vary the agreement.
[89] Here, there is no correspondence recording such further negotiations. While Ms Borisova and Mr Ewing said that negotiations continued, I do not consider it is sufficiently clear that any such negotiations displace the normal presumption. In any event, if it is accepted that the parties entered into a valid franchise agreement in May 2013, that would novate or vary any April agreement. That is the next main issue – when was the April 2013 document altered?
22 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
Conclusion
[90] I consider that the presumption that the parties intended to create legal relations when they executed the franchise agreement as a deed has not been displaced. So there was a contract between Jireh and Ms Borisova in April 2013.23 This is not, however, determinative, as it was still open to the parties to vary the contract, at least while Jireh retained the rights as franchisor.
When was the April 2013 document altered?
[91] Before dealing with the evidence on this issue, I note that Mr Johnson raised a further pleading point. As Mr Johnson characterised the plaintiffs’ case, it depends on Daboko and Mr Ewing’s company as master franchisee creating the Daboko document at a time when those parties were not able to validly enter into or vary the contractual arrangement between them, which means after assignment of the franchise agreement to Boost in September 2016. He submitted the parties could legitimately have agreed to novate or vary the franchise agreement at any time prior to that assignment. Mr Johnson submitted that if the plaintiffs are asserting that the Daboko agreement was manufactured by Ms Borisova and Mr Ewing in late 2016 because of hostility towards Boost, that allegation was not pleaded, nor properly put.
[92] The plaintiffs’ case does include the assertion that the Daboko version of the agreement was not signed in May 2013 but much later. However, Mr Clark submitted that the plaintiffs are suing in contract on the version of the agreement they have and are not required to plead fraud. Daboko is defending the claim on the basis that the plaintiffs’ version was never binding or was novated by the Daboko version. I consider it is clear on the pleadings that the plaintiffs dispute that the Daboko version is genuine.
[93] I also consider the plaintiffs’ case in this regard was sufficiently put to Daboko’s witnesses. I will deal with this further in the context of the evidence.
[94] I make one further preliminary observation in relation to Mr Johnson’s characterisation of the plaintiffs’ case. I consider that Jireh and Daboko’s ability to
23 Not Daboko, because it was not yet incorporated. I resolve this issue below.
novate or vary the franchise agreement ceased at the latest on 7 July 2016, the date of the replacement master franchise agreement between GJC and Mr Ewing’s new company, GJHNZ. I say at the latest as any back-dating may also be problematic.
[95] No original of the franchise agreement relied on by Daboko was produced. The copy relied on by Daboko appears the same as the version signed in April 2013 except for the following:
(a)the replaced schedules and initialling by Mr Ewing already referred to;
(b)the execution pages are initialled by Ms Borisova as well, and moved to the end whereas they appeared between schedules 1 and 2 in the April 2013 version;
(c)there were some additional discrepancies not raised as significant at the hearing, which might merely be errors in the common bundle – some pages appear copied at an angle,24 some pages appear copied at reduced size,25 and there are some missing pages.26
Ms Borisova’s evidence on the alterations
[96] Ms Borisova said that the negotiations continued after she signed in mid-April 2013, with her husband telling her the terms that she needed to include in the agreement and her discussing them with Mr Ewing. Mr Ewing agreed to these changes. Ms Borisova said that Mr Ewing printed a new schedule 1 and a schedule 3 and changed those pages. He then initialled the entire agreement. Ms Borisova said she only had to initial the two new schedules. She could not remember whether she was ever given a copy.
[97] Ms Borisova said that Daboko was incorporated on 3 May 2013, after she and Mr Ewing had reached a concluded deal.
24 Cover page, at least one of the contents pages, page 7, 8, 17, 24, 33, 36 and 37.
25 Pages 6, 23, 27 and 28.
26 Pages 10, 16 and 20.
[98] Ms Borisova said one agreed change was to the initial term. Mr Ewing wanted 10 years but her husband wanted each 10 years broken into five years. She said she could not comprehend little details like that.
[99] Ms Borisova said that she and her husband would never have agreed to the terms in the plaintiffs’ agreement for the following reasons:
(a)her future in New Zealand was uncertain because of her visa and immigration status;
(b)she was not sure the business would succeed given Starbucks had failed or not performed as expected;
(c)her husband had been involved with franchises which made him more cautious; and
(d)her English was not good so she did not want to get stuck in a long term deal.
[100] She said for these reasons they did not want a 10 year term – they wanted a right to terminate but Mr Ewing would not agree, so they compromised on five years with three rights of renewal. She said they agreed to pay a higher franchise fee of
$200,000. One of the reasons for this was because Mr Ewing had agreed to their other terms.
[101] In cross-examination, Ms Borisova said that even though her husband wanted only a five year franchise commitment, he wanted an assignment of the 10 year lease, although she couldn’t comprehend those details in 2013.
[102] In relation to her husband’s email of 11 April 2013 referred to at [86] above, Ms Borisova suggested in cross-examination that her husband was only saying he liked the price and the site but was not saying anything about other things, such as her immigration and that she needed different terms. Later in her cross-examination, she suggested that at the time her husband sent this email he was confused about the location of the store.
[103] Ms Borisova said that she never sent her husband a copy of the revised schedules. Mr Ewing just typed them up, printed them in his apartment, replaced those pages and she signed them. Mr Ewing initialled every page of the agreement. No-one else was there. She thought that was between 3 and 6 May 2013. Ms Borisova thought she took the original.
[104] It was properly put to Ms Borisova, and she denied, that she and Mr Ewing put their version of the agreement together later, at the time they had a massive falling out with Boost.
Mr Ewing’s evidence on the alterations
[105] Mr Ewing said that eventually, in around late April or early May 2013, Ms Borisova told him the terms she would need in order to get her husband over the line. Mr Ewing agreed to them. He printed new schedules out with those terms, replaced the schedules that Ms Borisova had already initialled and signed, and then he initialled the entire agreement, including the new schedules, to show that it was binding. This happened in early May, after Daboko was incorporated as a company and just before Daboko made payments to Jireh. He said he gave Ms Borisova a copy and kept a copy.
[106] He said that the two changes Ms Borisova wanted were a shorter five year initial term and an ability to run the store independently of Gloria Jean’s if something happened to Mr Ewing or Jireh. Mr Ewing said he understood this was because Ms Borisova was only getting into the business because of their friendship. Mr Ewing said that he wanted a higher fee for the trademark licence and Ms Borisova agreed to pay the increased amount in large part because of the concessions he made to her requests.
[107]Mr Ewing said that he included the further newly negotiated terms in schedule
3. He said he did not agree that Daboko could simply run independently if something happened to him or the Gloria Jean’s brand but he did include a term allowing Daboko not to renew the franchise agreement and continue trading independently after five years. He said Ms Borisova and her husband did not want to be bound by a 10 year franchise term so Mr Ewing said “let’s meet in the middle”.
[108] He said that in exchange for those concessions Jireh got a higher price for the rights to run the store. He said the trade-off for the shorter period was an increased trademark licencing fee of $200,000.
[109] Mr Ewing also said that Jireh agreed to the changes because there was financial pressure to obtain a franchisee to shift the fixed lease costs. Ms Borisova did not need bank finance, which was advantageous for Jireh in terms of getting the deal done without the time expanding.
[110] He said that Ms Borisova and her husband were reluctant to proceed with a 10 year term because of uncertainty about her immigration status and uncertainty about the coffee business, given that Starbucks had not been performing as well as expected and there were road works scheduled adjacent to the site. Mr Ewing said there was not the same commercial risk with the lease. Further, the lease had already been negotiated and was either ‘take it or leave it’.
[111] Mr Ewing also said the $294,000 transferred to Jireh on 7 May 2013 was on account of two invoices, which he described as invoices for the trademark licence fee and for equipment. He said when the May 2013 invoices were issued he forgot to reverse the earlier 9 April 2013 invoice. He said that any amendments to the accounts were made when he sits down with the accountant to do end of year financials (although this did not occur until years later).
[112] Mr Ewing explained how the wrong agreement was stored and sent in 2016. He said he must have forgotten to replace the physical agreement so the codafile document was never updated. He did not know what he had done with the original of the correct agreement, but it was likely thrown away in one of the clean outs Jireh had after the sale to Boost. As part of the sale process to Boost, Bayleys Real Estate was commissioned to undertake the marketing and sale. He arranged for his brother or sister in law to send all physical files to Bayleys to scan. This included the incorrect draft agreement. The agreements that Bayleys had scanned were also sent by mistake by Mr Ewing to GJC later in 2016 so it could consent. He did not review them. When Mr Chiu asked him if the details of all the agreements were correct, he just assumed they were and confirmed this without looking at them.
[113] In cross-examination, Mr Ewing said (as Ms Borisova had) that Mr Pavlenko liked the site and he liked the $350,000 price but he thought it was on Victoria and Queen Street.
[114] When asked about a five year franchise term but a 10 year lease, Mr Ewing explained that he knew Ms Borisova “couldn’t do it by herself. So I’m thinking no way in the world is she gonna, once she commits is she going to get out.” At that time there was no assignment of the lease but Mr Ewing said he had promised to assign and he did make a reference, if that was not possible, to a sublease, or, if that was not possible, a licence. He understood it was difficult for a landlord to refuse assignment. He had their verbal assurance to cover his guarantee and took them at their word.
[115] Mr Ewing said Mr Pavlenko’s approval came through the week before incorporation. Mr Ewing said “we had an agreement basically at that stage which triggered the company formation. I conceded on the term. So we did a deal that basically towards the end of that week before the 3rd and the money came through after that weekend.” He later said he thought his initialling was after incorporation, as he had said in his evidence-in-chief.
[116]Mr Ewing also said:
I said, well I'm gonna put the initial trademark fee up, I’ve given it to 450, normally – you know 350, I’d normally charge 450 for it. I still need to make my margins over it. Fortunately with that site there was an existing shop fit, all the counters and the plumbing, electrics everything were vested in the site in the lease that Jireh held at the time. So I didn't have to go and do a whole new extensive fit out which allowed me really to maintain my profitability, my margins. I got a better, it was better for me to have an intangible for tax reasons, intangible asset.
[117] In relation to signing, he said that in his apartment he “tapped the schedules out on his laptop on the Saturday evening”. Ms Borisova was there and they signed “then and there”. He inserted the new pages Ms Borisova had initialled into the agreement he already had and “ditched the other pages”. Then he initialled “so at that stage, I considered that we had a finalised deal on that date”.
[118] When asked about the importance of his initialling, Mr Ewing said (for the first time): “Well they’re Russian. I wanted to be careful.” Mr Ewing accepted he had not initialled any of the other franchise agreements that were produced.
[119] He said that he took a copy for himself and was pretty sure he gave Ms Borisova the actual agreement. He said he kept his copy in his apartment. He could remember putting it in his drawer in his bedroom for safe keeping. It stayed there for some time and eventually he moved out of the apartment and it was misplaced.
[120] It was properly put to Mr Ewing, and he denied, that the difficulties in the relationship between Daboko and Boost, and Mr Ewing’s own relationship with Boost and Mr Chase, drove him and Ms Borisova at that point in time to come up with the franchise agreement that Daboko relies on.
Mr Chase’s evidence regarding the agreement sent to Boost in 2016
[121] Mr Chase of Boost gave evidence for the plaintiffs. In addition to confirming that he received copies of all the franchise documents from Bayleys in March 2016, including the franchise agreement relied on by the plaintiffs, he said at no stage was he made aware of the version now relied on by Daboko, despite having numerous meetings with Mr Ewing about the franchise system in the six month period between receipt of the franchise agreements from Bayleys and settlement of the purchase in September 2016. Mr Chase also said that following settlement of the purchase, Boost never received original versions of the franchise agreements for any of the stores despite numerous requests and an obligation to assist for a period post-settlement.
Daboko’s decision not to renew and subsequent dealings in 2017/2018
[122] Ms Borisova explained that she did not renew the agreement and did not pay advertising and technical assistance fees for largely the same reasons. She perceives that the Gloria Jean’s brand is in decline. She said Daboko had no technical support since September 2016 with no attendance by the master franchisee. There was no advertising for her store from when Boost took over in 2016. There was no operations manager from around July 2017. She did not have confidence in the general manager
for the New Zealand brand. There have been a large number of stores that have closed across Australia and New Zealand and RFG has faced significant financial difficulties. She also referred to the Australian Parliamentary inquiry into franchising, including RFG. When GJC/RFG took over, there was no operational or technical support and no store visits to help her. Because of these issues she eventually decided that she would not renew.
[123] In cross-examination, when asked whether her criticisms of lack of support were more focused on Boost, she said that when RFG took over it just became worse, and at some point she stopped paying fees. Ms Borisova denied that she decided not to pay when RFG took over, saying she was hoping that a big company like RFG would be able to provide the same support as she had when she bought the business.
[124] Ms Borisova thought she made the decision not to renew the franchise agreement around August or September 2017. Daboko needed to give written notice seven months prior if it wanted to renew and she had already made up her mind that she would not do that. In cross examination, she suggested she decided when Boost went into receivership. She said she did not tell the plaintiffs because she didn’t have to. Nor did she tell her store manager, Mr Pua. She said she might have mentioned it to Mr Ewing in passing but did not discuss it with him. She said she had made up her mind and just checked to make sure he would still help her.
[125] Mr Ewing said he has been consulting to Daboko since sometime around mid- 2017. He said Ms Borisova first mentioned to him around late 2017 or early 2018 that she might debrand when the five year term was up because of a complete lack of support. In cross-examination, he said it was not long after the receivers were appointed.
[126] Mr Audley of RFG was suspicious about Ms Borisova’s delay following his letter of 9 April 2018 and suggested the Daboko agreement may have been created in April/May 2018 if not earlier when Boost purchased the master franchise.
[127] Ms Borisova explained the delay was because she went to seek legal advice from Mr Starrenburg at Harmos Horton Lusk and met him a few times. It also was
school holidays and she went to Fiji and when back she met Mr Starrenburg a few more times and he wrote the letter and she sent it to Mr Audley on 16 May 2018.
[128] Ms Borisova said there was no particular reason for attaching the Daboko version of the agreement to her 16 May 2018 letter to Mr Audley of RFG. She said her lawyer had attached it to the email with the letter he had drafted for her to send and she just forwarded it on to Mr Audley.
[129] In relation to de-branding the store, Ms Borisova said she and her husband turned up to the store and started covering some signs and removing others. In cross- examination, she was asked about photos that Ms Chase of RFG had taken in May 2018. These indicated that some Gloria Jean’s signage remained. When asked about the Gloria Jean’s cups in use, Ms Borisova said that they belonged to her regular customers.
[130] Ms Borisova was cross-examined about inconsistencies in her lawyer’s correspondence once the dispute about the correct version of the franchise agreement surfaced in May 2018. In response to the first letter from the plaintiffs’ solicitors, her (then) solicitors, Harmos Horton Lusk, stated on 29 May 2018 that “Daboko has not signed or otherwise agreed to a franchise agreement with a 1 November 2022 expiry date” and “Daboko cannot be bound by an agreement to which it is not a party”.
[131] The next response from Ms Borisova’s new solicitors included the following separate statements:
On 1 April 2013 Daboko entered into a “Gloria Jean’s Coffees Franchise Agreement” (the Franchise Agreement) with Jireh International Limited (Jireh). The Franchise Agreement has been fully executed by each page being initialled and the agreement being properly executed by all parties.
[The plaintiffs’ version] has not been validly executed.
Our client advises that [the plaintiffs’ version] was never executed.
The Franchise Agreement was amended to align with the lease agreement Daboko entered into.
Daboko accepts that it has initialled the [plaintiffs’ version]. However, this was inadvertent.
Daboko is willing to make the original Franchise Agreement available for inspection at our offices in Auckland.
[132] The plaintiffs’ solicitors also wrote to Mr Ewing’s counsel but received no response. Mr Ewing said in cross-examination that he responded, or transmitted the message, through Ms Borisova’s lawyers.
Mr Lockhart’s evidence
[133] Mr Lockhart, a chartered accountant, gave evidence for Daboko. His firm acts as the accounting firm for both Daboko and Jireh. Mr Lockhart understood that Daboko had a franchise fee of $200,000 (including GST). He said this franchise was comprised of an initial term of five years with three rights of renewal of five years each. Ms Borisova told him this when he first started acting for her. He clarified that he started acting for Daboko in 2014 and received an MYOB file in about October or November 2014 (which was not discovered by Daboko27). It was then that his firm got a printout of Daboko’s balance sheet and went through it in late 2014, at which point he could see that the figure for the intangible property trademark fee was
$223,000. He then said Mr Ewing confirmed the same term and rights of renewal when they were completing the 2014 annual accounts in about November 2106. His evidence then covered his dealings and documents during his firm’s work on the accounts in late 2016-early 2017. The 2014 accounts were only finalised in December 2016 and signed off in April 2017.
[134] Later in his evidence, he said when he first started acting for Daboko in 2014 he was informed by Ms Borisova that the trademark licence value was $200,000. He said she provided him with the two invoices dated 8 May 2013. He clarified that she provided them in 2015 or early 2016.
[135] Mr Lockhart also referred to the $50,000 initial trademark licence fee dated 9 April 2013. He understood it was not paid and was recorded as an account payable for Daboko. That was why in the 2014 and 2015 accounts the trademark value was recorded as the combined amount of $173,913.04 and $50,000 (excluding GST).
[197] The clear act of ratification does not necessarily have to be an express declaration: ratification can be inferred from inaction, or from conduct. However, whatever action is or is not taken, it needs to be objectively intended to be an act of ratification. The point was summarised well in Yona International Ltd v La Reunion Francaise Societe Anonyme d’Assurances et de Reassurances:57
Ratification can no doubt be inferred without difficulty from silence or inactivity in cases where the principal, by failing to disown the transaction, allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorized. That is probably no more than a form of ratification by conduct.
[198] An example where conduct was insufficient to constitute ratification is Elders Pastoral Ltd v Gibbs.58 The defendant entered into a pre-incorporation contract for the supply of goods, but he received and used the goods himself before incorporation. After incorporation, the defendant merely continued to receive the goods, without any change indicating an intent that the company ratified the agreement. The Court held this was not a sufficient act of ratification.59
57 Yona International Ltd v La Reunion Francaise Societe Anonyme d'Assurances et de Reassurances [1996] 2 Lloyd’s Rep 84 (QB) at 106. Albeit not in a pre-incorporation context, but the rationale seems to apply equally well, and this passage was cited with approval in Clark v Libra Developments [2007] 2 NZLR 709 (CA) at [165].
58 Elders Pastoral v Gibbs [1988] 1 NZLR 596 (HC).
59 Elders Pastoral v Gibbs [1988] 1 NZLR 596 (HC). See also NZ Maintenance Team Ltd v Taigel (1991) 5 NZCLC 67,397 (HC), where the Court held that mere use of goods supplied under a contract was not a sufficient act of ratification.
[199] Clark v Libra Developments fell on the other side of the line.60 In that case, at issue was whether a pre-incorporation partnership agreement between Mr Clark and Libra was ratified by Libra. The Court of Appeal held that Libra’s invoicing Mr Clark for its employee’s wages was enough to ratify the agreement because that was an act that was inconsistent with treating the agreement as unauthorised.
[200] When attempting to infer ratification from conduct, therefore, a key consideration is whether the company acted in a way that was only consistent with it ratifying the contract. If it could have done the act without objectively realising it were ratifying the conduct, then this will not be sufficient.
[201] I consider that Daboko did ratify the agreement (whether or not it was varied). As I have said, a company may ratify an agreement by conduct, which will occur if such conduct would only be consistent with ratifying the agreement. Here, as I have described earlier, Jireh issued two invoices to Daboko dated 8 May 2013 marked as paid after its sole director had transferred $294,000 the day before. This is conduct by Daboko that is only consistent with ratifying the agreement. Daboko would not pay money pursuant to an agreement it had not ratified.
[202] It could perhaps be argued that Ms Borisova’s initialling the altered agreement in May 2013 was a sufficient act of ratification, but given she was also a party in her personal capacity, I do not consider her initialling is conduct that is only consistent with ratification.
[203] The exact time the agreement was ratified does not matter. As long as ratification occurred within a reasonable time, the contract is binding on the company as though the company had been a party to the contract when it was made.61
60 Clark v Libra Developments [2007] 2 NZLR 709 (CA).
61 Companies Act 1993, s 182(3).
Conclusion on the plaintiffs’ claim for specific performance of the franchise agreement
[204] To summarise the position I have reached, I have determined that the plaintiffs’ version of the agreement was intended to be binding when it was signed in April 2013, so was enforceable between Jireh and Ms Borisova.
[205] I have also determined that Ms Borisova and Mr Ewing intended to give legal effect to their changes in May 2013 and the result of their actions was to vary the April 2013 agreement if there was sufficient consideration flowing from Ms Borisova to support the variation, such variation seemingly being wholly in her favour.
[206] I have also determined that Daboko ratified the agreement (whether or not it was varied) through its conduct, so the agreement became enforceable against it.
[207] In terms of whether GJC can enforce the agreement, GJC, rather than RFG, took over the rights of the master franchisee. With GJC’s joinder, any issue of status was resolved. I consider that GJC can enforce the franchise agreement against Daboko on the basis of GJC’s termination of the master franchise agreement with Boost and assignment of the franchise agreement to GJC.
[208] If the April 2013 agreement was not varied by the May 2013 agreement, I would be willing to make an order for specific performance in favour of GJC rather than awarding damages in lieu on the basis that the franchise agreement is a commercial contract and damages would not be an adequate remedy,62 particularly for the loss of the Sky City store site. Daboko did not submit otherwise.
[209] Accordingly, the plaintiffs’ claim for specific performance of its version of the franchise agreement (and a declaration that the Daboko version is void ab initio)63 depends on the consideration issue, upon which I will hear further submissions.
62 Attorney-General for England and Wales v R [2002] 2 NZLR 91 (CA) at [94]; Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL) at 11; and DSJ (Pte) Ltd v TPF Restaurants Ltd (t/a Burger King) HC Auckland CP168/96, 23 December 1997 at [107] per Giles J.
63 A declaration would seem unnecessary if specific performance were granted.
Are further franchise fees payable?
[210]The plaintiffs seek to recover unpaid franchise fees.
[211] As indicated, Daboko says that the franchisor failed to provide support as required under the franchise agreement. In response, the plaintiffs say they have performed. They also point to clause 3.5 of the franchise agreement (which is the same in both versions), which is in terms:
The Franchisee agrees that it will not withhold any amounts payable under this Agreement on the grounds of alleged non-performance of the Master Franchisee.
[212] That is exactly what Daboko did. Mr Johnson submits that clause 3.5 of the franchise agreement does not prevent Daboko from defending a claim based on non-performance. I am not entirely convinced by this submission. Under this clause, it may be the only remedy for non-performance is by set-off through raising a counterclaim. But, as the parties addressed whether there was performance, I do not find it necessary to decide this part of the claim on that basis.
[213] Schedule 1 of the Daboko version of the franchise agreement provided for the following monthly fees:
Continuing Trade Mark Licence Fee 2% of Gross Sales Continuing Technical Assistance Fee 4% of Gross Sales Advertising Contribution 2% of Gross Sales
[214] I understand Daboko paid GJC/RFG the monthly Continuing Trade Mark Licence Fee until 30 March 2018 but not the other two fees.
[215] Neither party put much focus on this issue, particularly in closing submissions. The plaintiffs submitted that Daboko’s criticisms could only be levelled at Boost. Daboko asserted a partial failure of consideration, submitting that the franchise agreement is divisible in terms of the fees payable and that “technical assistance” had not been provided. Daboko submitted that the plaintiffs’ evidence referred to providing what were described as only the most general services, such as stock management, to support the claim for “technical assistance”. Mr Johnson submitted
the plaintiffs have, or ought to have, all the information in their possession to prove the provision of technical assistance and marketing, but only provided vague statements and fleeting references. He referred in particular to the fact that the advertising fund required by clause 7.2 was not produced and submitted that adverse inferences should be drawn. Mr Johnson submitted that the evidence failed to establish the plaintiffs provided the services and, given that Daboko has incurred extra staffing costs as a result, Daboko should not have to pay the fees sought.
[216] Even accepting the plaintiffs must prove their case and it is not for Daboko to prove a negative, in circumstances where the franchise agreement provides for franchise fees to be paid on the basis of a percentage of the franchisee’s gross sales, and where the plaintiffs have provided some evidence, albeit general, of their services, Daboko has at least an evidential onus to substantiate its allegation of lack of consideration. As I have indicated, with the exception of one minor instance in March 2018,64 the focus of Ms Borisova’s criticisms related to the earlier period when Boost was the master franchisee. I consider that the franchise fees are payable at least prior to 1 April 2018 (and beyond depending on the consideration issue).
[217] According to the plaintiffs’ account statement, the amount outstanding for fees up to March 2018 is $56,548.13 (including GST). If the agreement did not expire, the amount outstanding up to September 2018 is $120,751.59 and the plaintiffs claim for the subsequent period on the basis of an average turnover. I invite counsel to provide an updated calculation in their further submissions.
[218] The plaintiffs also seek interest pursuant to clause 3.3 of the franchise agreement, which provides that any amount not paid by the franchisee to the master franchisee when due will bear late payment interest calculated on a daily basis from the due date at a rate equal to 2% above the overdraft rate of a major bank in New Zealand nominated by the master franchisee. In the statement of claim the plaintiffs nominated Westpac Bank.
64 Above at [140](i).
[219] I conclude that GJC is entitled to judgment for unpaid franchise fees plus interest calculated in accordance with clause 3.3 of the franchise agreement. I will determine quantum in my final judgment.
Result
[220] GJC is entitled to judgment on liability for unpaid franchise fees plus interest calculated in accordance with clause 3.3 of the franchise agreement.
[221]Costs will be dealt with in my final judgment.
Gault J
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