IN THE HIGH COURT OF SOUTH AFRICA
(CAPE OF GOOD HOPE PROVINCIAL DIVISION)
CASE NO.: 7980/2004 In the matter between:
UNILEVER SOUTH AFRICA ICE CREAM (PTY) LIMITED Plaintiff (known as OLA SOUTH AFRICA (PTY) LIMITED)
and
STEPHAN ROLAND JEPSON Defendant ___________________________________________________________________
JUDGMENT DELIVERED ON 14 MARCH 2007
___________________________________________________________________
[1] The plaintiff is Unilever South Africa Ice Cream (Pty) Limited, known as Ola South Africa (Pty) Limited prior to 1 September 2004
[2] At all relevant times the plaintiff has been a large manufacturer of ice cream world wide, using the brand name “Ola”, with its major business consisting of two components, namely: (a) “impulse” ice cream, being a single portion of ice cream in distinct packaging; and (b) “take home” ice cream, being in tubs and sold in supermarkets.
[3] Prior to 26 May 2003 Pleasure Foods (Pty) Limited (“Pleasure Foods”) was the franchisor of inter alia the Milky Lane franchises and Pleasure Foods
Intellectual Property Company (Pty) Limited (“Pleasure Foods Intellectual Property”) was the owner of the trademark “Milky Lane”.
[4] The Milky Lane franchise has existed for years and has consisted of retail food outlets, selling foodstuffs such as ice cream products, waffles, juices, cakes and hot drinks.
[5] The defendant managed Milky Lane outlets for seven years before he became a Milky Lane franchisee during 1999.
[6] On 12 August 2000 the defendant concluded a written franchise agreement with Pleasure Foods for a Milky Lane outlet in Mitchell’s Plain (“the Mitchell’s Agreement”) with the effective date being 1 September 1999.
[7] On 18 and 20 March 2003 the defendant concluded three written franchise agreements with Pleasure Foods for two outlets in Sea Point and one in Three Anchor Bay. The effective dates were 31 August 2001 in respect of the Three Anchor Bay outlet and 1 March 2003 in respect of the Sea Point outlets. For ease of reference these agreements will be referred to as the
“Sea Point Agreements”.
[8] On 26 May 2003 the plaintiff concluded a written agreement with Pleasure Foods and Pleasure Foods Intellectual Property in terms of which the plaintiff acquired all the rights and obligations of Pleasure Foods pursuant to all franchise agreements between the latter and the various franchisees of inter
alia Milky Lane businesses, as well as the Milky Lane trademarks owned by Pleasure Foods Intellectual Property.
[9] On 29 May 2003 the plaintiff notified the defendant in writing of the aforesaid acquisition.
[10] After the aforesaid takeover by the plaintiff, the defendant continued to operate the Mitchell’s Plain and Sea Point Milky Lane franchises and from June 2003 until 2004 the plaintiff collected royalty payments in respect of those franchises from the defendant by way of the debit orders in favour of Pleasure Foods that were in place at the time of the plaintiff’s acquisition of Pleasure Foods’ interest in the Milky Lane franchise business.
[11] It is common cause that the plaintiff combined “Ola” and “Milky Lane” brands and that both brands featured in the get-up which the plaintiff prescribed to Milky Lane franchisees. In addition, the plaintiff created its own recipe for ice cream which the franchisees had to purchase from the plaintiff, whereas, before the takeover by the plaintiff, franchisees had to purchase ice cream from an entity called CAS.
[12] The defendant resisted the change in get-up and insisted on not making use of the “Ola” brand at all in his businesses. He also refused to purchase ice cream from the plaintiff and continued to purchase ice cream from CAS as before the takeover by the plaintiff.
[13] On 11 December 2003 the plaintiff’s attorneys informed the defendant in writing that he was in breach of one of the Sea Point franchise agreements as he had closed the said business and he was informed that the relevant franchise agreement would be cancelled by the plaintiff in the event of the defendant’s failure to recommence trading within ten days of the letter of demand.
[14] During March 2004 the plaintiff’s attorneys informed the defendant in writing that he was in breach of the other two Sea Point franchise agreements and the Mitchell’s Plain agreement in various respects, including the failure to have available for sale products prescribed by the plaintiff. The defendant was informed in those letters that the said franchise agreements would be cancelled by the plaintiff in the event of the defendant’s failure to meet the plaintiff’s demands within ten days of the letters of demand.
[15] It is common cause that the defendant did not comply with the plaintiff’s aforesaid demands and that the plaintiff’s attorneys gave written notice to the defendant of the plaintiff’s cancellation of the franchise agreements in terms of which the defendant was a Milky Lane franchisee.
[16] The plaintiff instituted an action against the defendant, claiming: (a) An order declaring the franchise agreements in terms of which the defendant was a Milky Lane franchisee, to be cancelled; (b) Payment of the amount of R612 725.31, being damages resulting from the defendant’s breach of the agreement and calculated in accordance with a formula provided for in the written franchise agreements; (c) Interest on the said sum a tempore morae;
(d) An order directing the defendant to return to the plaintiff the latter’s manual comprising the Disclosure Document, the Operations Manual, the Suppliers Manual and the Service Manual; (e) Costs of suit on the scale as between attorney and client, as provided for in the written agreements.
[17] The defendant raised various defences which will be dealt with individually below.
Paragraph 5.1 of the Plea
[18] It was pleaded in paragraph 5.1 of the defendant’s amended plea that the plaintiff could not, in law, acquire the rights and obligations of Pleasure Foods to the franchise agreements without the consent of the defendant, which consent was never obtained.
[19] It is trite that a delegation may only be effected by agreement between all concerned. See Christie, The Law of Contract in South Africa, 5th edition at 462.
[20] Clause 28.3 of the Sea Point agreements provided as follows:
“The franchisor may cede, assign, transfer or make over this agreement or all or any of its rights hereunder whether as security for debt or any other cause to any person at any time as it may in its discretion think fit”.
On the face of it the defendant, by signing the Sea Point agreements, therefore consented in advance to a delegation to any person.
[21] The Mitchell’s Plain agreement, however, did not contain a clause similar to the afore-quoted clause 28.3. It must, therefore, be determined whether the defendant expressly or by implication consented to the delegation in respect of the Mitchell’s Plain agreement. See, Christie, supra, at 463 where it is stated that “the common intention of all three parties that a delegation should take place may be expressed or it may be implied from circumstances, including the conduct of the parties”. The onus was on the plaintiff to prove such a delegation. See, Christie, supra.
The plaintiff relies on the following circumstances for its contention that the defendant, through his conduct, agreed to the delegation. After the takeover by the plaintiff, the defendant continued to pay royalties to the plaintiff. The defendant attended meetings organised by the plaintiff and continued to conduct his businesses with the knowledge that Pleasure Foods was no longer involved.
However, the payment of royalties in itself is not conclusive. The plaintiff merely collected royalties by continuing to use the debit order signed in favour of Pleasure Foods. This does not necessarily result in an inference of delegation. See by way of analogy the following situations contemplated in Christie, supra: “Delegation is not a necessary inference from the pointing out by the debtor to the creditor of a fund from which payment may be obtained (an action that is at the most an assignation); nor from the creditor’s mere knowledge that a third party has agreed with the debtor to pay (at most a mandate); nor from the sending of an account by the creditor to the third party (possibly due to confusion, or mandate, assignation or expromissio; nor
from the acceptance by the creditor of a periodical or part payment from the third party (at most mandate, assignation or expromissio); nor, for the same reason, from the creditor’s acceptance of a negotiable instrument from the third party”.
The mere fact that the defendant attended meetings is not conclusive either.
What transpired at those meetings is important. The following appears from the documentation handed in during the hearing. On 4 August 2003 the defendant communicated to the plaintiff that he “must be allowed to proceed with the shop as planned before Ola took over”. In an e-mail dated 1 September 2003 from a representative of the plaintiff the following was stated with reference to the defendant: “Still believes that the sale is not legal and his agreements can not be seeded (sic) to Ola, Retsol or any other business”.
There are many other examples of the defendant’s refusal to co-operate with the plaintiff, such as his refusal to utilise the get-up prescribed by the plaintiff and his refusal to buy ice cream from the plaintiff.
The mere fact that the defendant continued with the Milky Lane franchise businesses after the takeover by Pleasure Foods in itself does not take the matter any further. Besides, Pleasure Foods, Pleasure Foods Intellectual Property and the plaintiff provided for such a scenario where, pending the consent of a franchisee, the relevant business would continue to operate.
See clause 6 of the written agreement in terms of which the plaintiff acquired the Milky Lane franchise business.
The defendant testified that he refused to sign debit orders in favour of the plaintiff as he did not have an agreement with the plaintiff.
In the premises the plaintiff has failed to discharge the onus to prove that the defendant agreed to the delegation relating to the Mitchell’s Plain franchise.
[22] It therefore remains to consider the balance of the defences raised by the defendant in respect of the Sea Point agreements.
Paragraph 5.2.1 of the Plea
[23] In paragraph 5.2.1 of the amended plea, the defendant pleaded that the afore- quoted clause 28.3 did not provide for the assignment of the franchise agreements to a competitor of the Milky Lane business. In this regard counsel for the defendant referred me to the principle of delectus personae applicable to cessions as dealt with in LAWSA (2nd edition) volume 2, part 2, para 38. However, this argument is fundamentally flawed. Firstly, the principle dealt with in LAWSA as aforesaid pertains to a cession without the consent of a debtor. Conversely, a delegation pre-supposes the consent of a debtor. Secondly, clause 28.3 of the Sea Point agreements was cast in such broad terms that there was no room to exclude from its operation a delegation to a competitor of the Milky Lane business. Thirdly, there is no basis on which such a tacit term (which, by implication, is contended for by the defendant) can be inferred. It is trite that tacit terms are not easily inferred.
Cf City of Cape Town (CMC Administration) v Bourbon-Leftley and Another NNO 2006 (3) SA 488 (SCA) at 494F-495B.
Paragraph 5.2.2.1 of the Plea
[24] In paragraph 5.2.2.1 of the amended plea it was pleaded by the defendant that the discretion provided to Pleasure Foods in clause 28.3, being an unfettered discretion, rendered the clause void and unenforceable. There is no basis in law for this defence. The way in which the discretion is to be exercised is another issue but the mere provision for such a discretion does not make the clause void and unenforceable. See NBS Boland Bank Ltd v One Berg River Drive CC and Others; Deeb and Another v Absa Bank Ltd; Friedman v Standard Bank of SA Ltd 1999 (4) SA 928 (SCA) at 936- 937, paras [24]-[28].
Paragraph 5.2.2.2 of the Plea
[25] In paragraph 5.2.2.2 of the amended plea the defendant pleaded that, to the extent that clause 28.3 may be interpreted as importing a tacit term that the discretion should be reasonably exercised, Pleasure Foods failed to exercise such discretion reasonably in that it purported to assign the franchise agreements to the plaintiff who was a direct competitor of the Milky Lane franchise businesses at the time, which assignment was accordingly calculated to lead to the demise of the Milky Lane brand/trademark as it was known, and was therefore unreasonable.
I accept that, in the exercise of its discretion provided for in clause 28.3, Pleasure Foods had to exercise the discretion arbitrium bono vire. If that
were not the case, it could lead to patently unreasonable and absurd results such as the transfer of Pleasure Foods’ rights and obligations to a party without any ability and/or means whatsoever to fulfil the role of a franchisor.
In deciding whether the discretion was exercised reasonably an objective standard is to be applied. Cf Remini v Basson 1993 (3) SA 204 (N) at 210H-211B. Applying an objective standard, nothing unreasonable can be found, in principle, in the assignment of the franchise agreements to a direct competitor. In any event, the evidence shows that the nature of the businesses conducted by the plaintiff and the Milky Lane businesses differed materially. Finally, there is no evidence to support the statement in the plea that the “assignment was accordingly calculated to lead to the demise of the Milky Lane brand/trademark as it was known, and was therefore unreasonable”.
Paragraph 5.2.3 of the Plea
[25] It was pleaded in paragraph 5.2.3 of the amended plea that, initially, on 16 September 1999 one franchise agreement was signed in respect of the three Sea Point outlets and that the afore-quoted clause 28.3 was not incorporated in that agreement. During March 2003 Pleasure Foods prevailed upon the defendant to agree to new, separate, written agreements in respect of the three Sea Point outlets. Unbeknown to the defendant, Pleasure Foods and the plaintiff had, at the time, commenced negotiations for the sale by Pleasure Foods to the plaintiff of its business. The Ola retail business under- performed and the plaintiff sought to acquire the Milky Lane franchise in order to expand the Ola brand through the Milky Lane outlets and at the expense of
Milky Lane. In the circumstances Pleasure Foods and the plaintiff were under a duty to disclose the said facts and the change to clause 28.3 to defendant but intentionally, alternatively negligently, failed to do so. The defendant would not have consented to the new clause 28.3 had he been aware thereof. In the result, according to the defendant, the plaintiff was not entitled to rely on clause 28.3.
[26] The onus was on the defendant to establish that he was not bound by the signed agreements containing the afore-quoted clause 28.3. Cf Tesoriero v BHY JO Investments Share Block (Pty) Ltd 2000 (1) SA 167 (W) at 175 F- H.
[27] Neither the original nor a copy of the alleged earlier written agreement in respect of the three Sea Point outlets was introduced into evidence and during cross-examination the defendant in fact testified that he did not know whether that agreement contained a clause similar to the afore-quoted clause 28.3.
[28] No evidence was adduced to show that the Ola retail business under- performed and that plaintiff sought to acquire the Milky Lane franchise in order to expand the Ola brand through the Milky Lane outlets, and at the expense of Milky Lane.
[29] In the premises, and particularly in view of the fact that the defendant could not even say whether there had indeed been a change to clause 28 as alleged in the plea, he failed to discharge the onus to establish that he was
not bound by the afore-quoted clause 28.3 in view of the considerations alleged in clause 5.2.3 of his plea as set out above.
Paragraph 5.3 of the Plea
[30] In paragraph 5.3 of the amended plea the defendant raised the defence that the assignment created an additional burden and/or prejudice to the position of the defendant which effectively meant that Pleasure Foods had “sold out”
its Milky Lane franchisees to its main competitor. The assignment was accordingly incompetent in law without the specific consent of the defendant which was not sought or given. In this regard it was alleged in the plea that the plaintiff was insufficiently dedicated, incapable of complying with the franchisor’s obligations and in fact did not comply therewith, the trade name and trademark were changed from Milky Lane to Ola Milky Lane and the get- up was changed materially. It was further alleged that the plaintiff changed the recipe of the ice cream, the type of products, the type of receptacles for the ice cream and the names depicted thereon, the advertising and the menus. Franchisees were enjoined to purchase their ice cream products from the plaintiff directly which was not the case with Pleasure Foods and in the process the plaintiff materially increased the cost of products to franchisees to their prejudice. The plaintiff increased the royalties and advertising payments. As a result of the aforegoing, the plaintiff was incapable of sustaining and/or expanding the Milky Lane franchise business as envisaged in the main franchise agreement.
[31] Mr McKenzie testified on behalf of the plaintiff. He is a director and shareholder of Retail Solutions (Pty) Limited (known as “Retsol”), previously known as C-Max Investments (Pty) Limited. Retsol has an exceptionally experienced team with expertise in the operation of franchises and retail businesses. It has its own brands but also renders services on an outsource basis.
On 26 May 2003 the plaintiff and Retsol entered into a written agreement in terms of which the plaintiff appointed Retsol as an independent contractor to exclusively provide management services to the plaintiff relating to inter alia the Milky Lane franchise business. Whilst they both sold ice cream, the plaintiff and the Milky Lane business were not in competition with each other as they operated in very different environments. The Milky Lane business entailed “quick service” whereas the plaintiff focused on “traditional retail”.
The takeover by the plaintiff was in the interest of Milky Lane as the plaintiff, the world’s largest ice cream manufacturer, was very powerful and the idea was to turn Milky Lane into a worldwide name through the plaintiff. It was definitely not the intention to engineer the demise of the Milky Lane brand.
As it had considerable brand equity, the intention was to build on it and to merely enhance its core products. In general, brands need to be revamped approximately every four years and by 2003 Milky Lane had not been revamped for eight to ten years. Retsol conducted market research which showed that such a revamp was overdue. All the changes effected after the takeover by the plaintiff, including the combination of the brand names “Ola”
and ”Milky Lane” enhanced the Milky Lane franchise business. Whereas ice cream had been bought from CAS (who owned the recipe) before, Retsol
realised the importance of having control over the core product and ownership of the recipe. The product purchased from CAS was therefore enhanced by the plaintiff in accordance with a recipe specifically created for and owned by the plaintiff. It resulted in a consistent and better product available to franchisees. The aforesaid improvements did not result in increased royalties for existing franchisees or compulsory increased advertising payments.
Advertising was extensive and included television coverage. The net result was unprecedented growth. The 88 Milky Lane franchises in South Africa in 2003 grew to 106 in 2007. Sales, too, have grown substantially. In general, franchisees are very profitable and content. Whilst the plaintiff initially found it difficult to get franchisees for new outlets, there is presently a waiting list.
[32] Mr McKenzie’s aforesaid evidence was largely either not disputed or could not be gainsaid. Consequently, there is no merit in the defence set out in paragraph 5.3 of the plea that the takeover by the plaintiff created an additional burden and/or prejudice to the position of the defendant.
Paragraph 7 bis of the Plea
[33] It was pleaded in paragraph 7 bis 1 of the amended plea that, in addressing the aforesaid written notices of demand to the defendant, the plaintiff purported to rely on and enforce a franchise agreement which was materially different to the one conducted in terms of the franchise agreements between Pleasure Foods and the defendant. Alternatively, and in any event, it was pleaded by the defendant that the franchise agreements between him and Pleasure Foods were synallagmatic contracts. The plaintiff was accordingly
under a duty to perform and/or to tender to perform its obligations towards the defendant pursuant to and arising from a Milky Lane franchise and in the process was enjoined to make available and deliver to the defendant, subject only to improvements and/or expansions to the brand, the undiluted use of the Milky Lane trade name and registered trademark, the Milky Lane product, undiluted Milky Lane advertising material, Milky Lane menus, all things provided for in the said franchise agreement in relation to the conduct and expansion of the Milky Lane brand and franchise and not to operate the franchise as one which advertised and sold competing products such as Ola.
The plaintiff failed to perform its obligations as aforesaid and in seeking to enforce an Ola franchise. The defendant was therefore excused from performance.
[34] The clear wording of the franchise agreements between Pleasure Foods and the defendant puts paid to the aforesaid defence. Clause 2 provided that it was the prerogative of the franchisor to determine from time to time the trademarks, get-up, manual, core products and suppliers to be used. What the plaintiff therefore did was provided for in the franchise agreements between Pleasure Foods and the defendant.
[35] The defendant was therefore in breach of the Sea Point agreements and the plaintiff was entitled to cancel those agreements.
Damages
[36] In terms of clause 24.2.10 of the Sea Point agreements, damages claimed by the franchisor in the event of a cancellation of the agreement as a result of a breach of the agreements by the defendant, was to be calculated in accordance with the definition of “damages amount” in clause 2.8.32. That definition provides for “an amount calculated in accordance with the formula
A/Bx C where: A is the aggregate of all royalties actually paid to the franchisor by the franchisee in terms of this agreement; B is the aggregate number of completed calendar months that have expired since the effective date; C is the aggregate number of completed calendar months in respect of the unexpired portion of this agreement”.
[37] During oral argument in this Court it was agreed between the parties that, should damages be payable to the plaintiff in accordance with the aforesaid formula, the sum of such damages will be R315 680.72 in respect of the Sea Point agreements.
[38] It was argued on behalf of the defendant that the formula provided for in clause 2.8.32 should not be applied as the plaintiff failed to adduce evidence to show that any damages had been suffered.
[39] It stands to reason that, had the defendant not breached the Sea Point agreements, resulting in the cancellation thereof, the plaintiff would have continued to receive royalties in respect of the Sea Point outlets. The plaintiff therefore evidently suffered damages and the computation thereof is provided for in the Sea Point agreements, more particularly clause 2.8.32.
[40] It was pleaded in the amended plea that clause 2.8.32 constituted a penalty clause within the meaning of section 3 of the Conventional Penalties Act, 15 of 1962, and that the damages/penalty claimed by the plaintiff were out of proportion to the prejudice suffered by it as a consequence of the defendant’s alleged breaches. In the premises, the amount of the penalty/damages is subject to reduction according to the defendant. During oral argument, however, it was conceded by counsel for the defendant that, should the formula in clause 2.8.32 be applicable, no evidence was adduced to warrant a reduction.
[41] In terms of clause 24.9 of the Sea Point agreements, the franchisee shall be liable to pay all the franchisor’s legal costs as between attorney and own client.
[42] In the circumstances I grant judgment in favour of the plaintiff and an order is made in the following terms:
1. The franchise agreements annexed to the plaintiff’s particulars of claim, marked “B”, “C” and “D” respectively, are declared to be cancelled.
2. The defendant is ordered to pay the sum of R315 680.72 to the plaintiff plus interest on the aforesaid sum computed at the prescribed statutory rate from date of judgment to date of payment.
3. The defendant is directed to return to the plaintiff the latter’s manual comprising the Disclosure Document, the Operations Manual, the Suppliers Manual and the Service Manual.
4. The defendant shall pay the plaintiff’s costs of suit on the scale as between attorney and client.
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VAN ROOYEN, AJ
