Gloria Jean's Coffees International Pty Ltd v Daboko Ltd
| Jurisdiction | New Zealand |
| Judge | Gault J |
| Judgment Date | 28 January 2020 |
| Neutral Citation | [2020] NZHC 29 |
| Court | High Court |
| Docket Number | CIV-2018-404-1157 |
| Date | 28 January 2020 |
[2020] NZHC 29
Gault J
CIV-2018-404-1157
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA
TĀMAKI MAKAURAU ROHE
Contract — franchise agreement — whether consideration was required to vary an existing agreement — practical benefit test
D J Clark and J S Clark for the Plaintiffs
S D Campbell for the Defendant
This judgment was delivered by me on 28 January 2020 at 4:00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
This is a case about which version of a franchise agreement is binding. This judgment follows my interim judgment. 1
The defendant, Daboko Ltd, was (or is) a franchisee for Gloria Jean's coffee, and the plaintiffs are the franchisors. 2 Based on its version of the agreement, Daboko's position is that the agreement ended on 1 April 2018. In reliance on that, Daboko removed Gloria Jean's Coffees branding from the café and refused to pay franchise fees. The plaintiffs say their version of the agreement is binding, and the term of the agreement is until 2022, meaning Daboko wrongfully repudiated the agreement. The plaintiffs claim breach of contract based on their version of the franchise agreement and seek specific performance and payment of unpaid franchise fees.
I dealt with almost all of the issues in dispute in my interim decision. The parties had mixed success. I found the plaintiff's version of the agreement was binding, but that the agreement may have been varied to Daboko's version. But it seemed to me that the new terms were entirely in Daboko's favour. This meant that the outcome of the case turns on a narrow legal point that was not addressed at the main hearing: what, if any, consideration is required to vary an existing agreement? And, consequently, was the agreement successfully varied in this case?
I addressed the background to this dispute in detail in my interim judgment. I provide only a brief summary of the facts relevant to this issue now, incorporating some of my key findings.
The main person behind the defendant, Daboko, is Ms Borisova. The shareholders are her and her husband, Mr Pavlenko, who lives in Russia. She moved to New Zealand in March 2012 from Russia to study English. She stayed and sought business opportunities here. She was introduced to Mr Ewing in July 2012, who was the director of a company, Jireh International NZ Ltd (Jireh), which was the master
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.
Then, in April 2013 Mr Ewing and Ms Borisova signed a franchise agreement for the café. It was executed as a deed. Ms Borisova signed on behalf of Daboko, although at that time Daboko was not incorporated. It was subsequently incorporated on 3 May 2013.
Then, at some point in May 2013 the agreement was altered substantially. 3
I set out the material differences between the two versions:
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(a) The April version provides for a term concurrent with the lease of the premises, which is not due to expire until 31 October 2022. The altered version provides for an initial term of five years, with rights of renewal.
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(b) There are changes to the fees payable:
Plaintiffs' version
Daboko's version
Initial Trade Mark Licence Fee
$14,062.50
$200,000.00
Initial Technical Assistance Fee
$42,187.50
$11,500.00
Training Fee
$11,500.00
$11,500.00
Total
$67,750.00
$223,000.00
However, it seems that the total price for the franchise was $350,000 plus GST, and that this did not change between the two versions. There
was no satisfactory explanation of why the totals here did not reflect the price. -
(c) There was a new schedule 3, which contains technically drafted clauses disapplying significant clauses in the franchise agreement.
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(i) Clauses 1 and 2 of schedule 3 contain material changes. Clause 1 reduces the assignment fee to $25,000 after 36 months. Otherwise, the assignment fee would be equal to the current initial trade mark licence fee and initial technical assistance fee. Clause 2 waives or reduces the first right of renewal fee to $25,000. Otherwise, the renewal fee also would be equal to the current initial trade mark licence fee and initial technical assistance fee. On Daboko's case regarding the increase in the initial trade mark licence fee to $200,000, those two clauses made very substantial fee reductions from what would have otherwise applied.
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(ii) Clause 3 provides that if the franchisee does not renew the franchise, a number of clauses in the main agreement are disapplied. The most significant of these is cl 4.8, which provides 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. Under the new cl 3 of schedule 3, cl 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. Clause 3 also provides:
The Master Franchisee agrees that this is an essential term of this Franchise Agreement and is for the sole benefit of the Franchisee and that the entire agreement would not have proceeded if this essential term had not been agreed.
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(d) In physical terms, the plaintiffs' April version is signed as a deed by both parties, and Ms Borisova has initialled every page except the execution page, but Mr Ewing did not initial any of them. In Daboko's version, Mr Ewing has initialled every page, and they have both initialled the execution page.
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In 2016, Mr Ewing wished to sell Jireh's master franchise. As a part of that process, Mr Ewing on behalf of Jireh sent records of all current franchises to the first plaintiff. This included Daboko's franchise, and attached the April version of the franchise agreement.
In 2017, following issues between Jireh and its purchaser, which lead to the purchaser's receivership, the first plaintiff came to hold the master franchise.
Disputes subsequently arose between the parties and on 9 April 2018 Ms Borisova wrote to the plaintiffs referring to the expiry, under Daboko's version of the agreement, on 1 April 2018.
This was a surprise to the plaintiffs, who understood the term of the franchise not to expire until 2022.
The main dispute in this case was which version of the agreement was binding. The plaintiffs' version, being the unamended one, or Daboko's version. The plaintiffs argued that the version received in 2016 was binding, and that Daboko's version received in 2018 was effectively a sham, created not in May 2013 but much later.
There is an unusual feature of this case. Mr Ewing gave evidence for Daboko. It was his evidence that the April version was never intended to be binding, and that Daboko's version is the operative version. This was Ms Borisova's evidence too. So, both signatories to the agreement were on the same side. The plaintiffs, perhaps, always had and have an uphill battle, as none of their witnesses had direct knowledge of what occurred in 2013.
I found the April version was intended to be binding. But I did consider that the agreement may have been varied in May 2013. The plaintiffs did not overcome the difficult burden of proving the Daboko version was a sham.
A deed may be varied by simple contract. 4 I considered that Ms Borisova's initialling of the new pages, and Mr Ewing's initialling of the whole document was sufficient evidence of an intention to give legal effect to the changes. Although I rejected their evidence that the agreement was not already binding on them, I accepted the result of their actions in May 2013 would be to vary the April 2013 agreement, but with one problem. A simple contract requires consideration. I did not consider it at all clear on the evidence that Daboko provided consideration for the variation, as it seemed to me that all of the changes were in its favour.
As this consideration issue affecting whether there was a variation had not been addressed and was not straightforward, I issued the interim judgment. The parties filed further submissions, and there was a further hearing. I thank counsel for their thorough submissions on this technical point.
Under the common law, a promise is not generally binding as a contract unless it is supported by “consideration”. Consideration has been a requirement for the formation of a contract since at least the 16th Century. 5 But its relative importance tends to polarise contract lawyers and academics alike. On the one hand, it has been described as “the central core of the law of simple contract”. 6 On the other, it has been described as merely “a valuable signal that the parties intend to be bound”. 7 It is frequently viewed as a technicality.
The traditional requirement for consideration is that the person benefiting from the promise, the promisee, must either provide a benefit to the promisor in return for the promise, or suffer a detriment requested by the promisor. 8 As noted by the authors of Chitty on Contract, the two requirements are often merely the same thing looked at
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Hurlimann v Lilley
...suggested. 72 This conclusion is confirmed by the other cases cited by counsel, including Teat v Wilcocks 31 and Gloria Jean's Coffees International Pty Ltd v Daboko Ltd. 32 Those cases also addressed the requirements of consideration for a variation of 73 Although the requirement for consi......