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[2014] ZAGPPHC 319
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Elephant And Friends (Pty) Ltd v Palcoline (Pty) Ltd and Another (36230/2014) [2014] ZAGPPHC 319 (2 June 2014)
HIGH COURT OF
SOUTH AFRICA
(GAUTENG
DIVISION, PRETORIA)
CASE
NO: 36230/2014
DATE:
02 JUNE 2014
In
the matter between:
ELEPHANT
AND FRIENDS (PTY)
LTD
...........................................
Applicant
And
PALCOLINE
(PTY)
LTD
........................................................
First
Respondent
JUAN
VENTER
..................................................................
Second
Respondent
JUDGMENT
MAKGOKA,
J:
[1]
The applicant seeks, on an urgent basis, an interlocutory
interdict
preventing the first respondent from continuing its breach of a
franchise agreement concluded between the applicant and
the first
respondent on 15 August 2012, as franchisor and franchisee,
respectively. At all times the applicant was duly represented
by its
sole director and shareholder, Mr Mome Reichert (Reichert), while the
first respondent was represented by the second respondent,
who is the
directing mind of the first respondent.
[2]
The interim relief is sought pending the determination
of an action
to be instituted by the applicant for specific performance against
the first respondent. The franchise is that of
a pub and grill sports
bar, with a casual ambience for patrons to enjoy light meals and
drinks, to the sound of live entertainment.
[3]
The first and second respondents (the respondents),
in addition to
contesting urgency, oppose the application on the ground that the
franchise agreement is void and unenforceable
for failure to comply
with the provisions of the Consumer Protection Act 68 of 2008 (the
CPA). First, it is alleged that that disclosure
agreement, which, in
terms of the CPA, must precede the conclusion of the franchise
agreement, was not furnished at least 14 days
before the signature of
the franchise agreement. Second, it is common cause that the
applicant did not comply with regulation 3(3)
of the CPA, which
prescribes that the disclosure agreement must be accompanied by a
certificate by an auditor of the applicant
certifying certain
prescribe information about the applicant. The respondents further
contend that the relief sought by the applicant
is not competent.
[4]
Before I consider the contentions of the parties,
the following brief
background is necessary. Pursuant to the conclusion of the agreement
on 15 August 2012, the applicant provided
the necessary training and
installed and set up the systems which enabled the first respondent
to commence business. The first
respondent commenced trading on 3
September 2012. During March 2013 the parties concluded an addendum
to the agreement, in terms
of which the first respondent’s
royalties were reduced from 5% to 3%.
[5]
During December 2013 the second respondent intimated
to Reichert that
due to an incident which had occurred at the business, he wished to
be released from the agreement. No agreement
could be reached, and
Reichert indicated to the second respondent that the applicant would
hold the first respondent to the terms
of the agreement. During
February 2014 the second respondent, offered to R500 000 for the
first respondent to be released from
the agreement. Reichert rejected
the offer. Sometime later, there reports that the first respondent
was ‘de-franchising’.
What that entailed, basically, was
that the first respondent would no longer conform to the terms of the
franchise agreement with
regard to methods, standards, pricing,
specifications and operating procedures. In addition, it would no
longer be obliged to source
goods from the suppliers prescribed by
the applicant.
[6]
As a result of this, Reichert caused a letter,
dated 1 April 2014, to
be written to the second respondent, in which the second respondent
was informed, among others, that the
first respondent was not
entitled to ‘de-franchise’, and that it will be held
strictly to the terms of the agreement.
A letter was also directed to
the applicants’ suppliers on 16 May 2014, informing them that
to the extent there might be
a dispute between the applicant and the
first respondent, the franchise agreement would be enforced by the
applicant.
[7]
On 9 April 2014 the respondents’ attorneys
responded to the
letter dated 1 April 2014, in which certain further particulars were
sought with regard to the Disclosure Document,
hinting that not all
formalities had been complied with, in the build-up to the signature
of the franchise agreement. The applicant’s
attorneys responded
on 17 April 2014, and persisted that all formalities were complied
with. On 30 April 2014, the respondents’
attorneys formally
mentioned that the Disclosure Agreement was not properly
‘constituted’ as the first respondent had
not been
furnished with the information prescribed in the
Consumer Protection
Act 68 of 2008
.
[8]
In particular, it was pointed out that the disclosure
agreement was
not accompanied by a certificate by an auditor of the applicant
certifying certain prescribed information about the
company. This,
according to the respondents’
attorneys,
rendered the franchise agreement between the parties, void ab initio.
It was however, suggested that the parties should
meet after 7 May
2014 to discuss an amicable solution.
[9]
On the same day, 30 April 2014, the applicant’s
attorneys
agreed in principle to the suggestion of negotiations in an endeavor
to amicably resolve the impasse, but also placed
on record that it
had come to the applicant’s attention that an entity known as
Rhino’s Pub & Grill (Rhino) was
preparing to operate from
the same premises as the franchise business. In the light of that, it
was suggested that the parties
meet earlier than the 7 May. There was
no response to this letter, and on 5 May 2014 the applicants’
attorneys enquired from
the respondents’ attorneys whether they
were amenable to an earlier meeting. A response was demanded by 9 May
2014, failing
which legal steps were threatened.
[10]
On 13 May 2014 the respondents’ attorneys responded and
mentioned
that the first respondent had, on 7 May 2014, ceased
trading as a franchise of the applicant, and that, in the light
thereof, there
would be no purpose in convening a meeting between the
parties. In the penultimate paragraph of the letter, it was stated
that
‘the remaining issue is whether...a legal and binding
franchise agreement has been concluded’ between the parties. In
that regard, the first respondent was said to be intending to
institute a counter-claim for the repayment of all monies paid
pursuant
to the franchise agreement.
[11]
In the meanwhile, it also came to the attention of the applicant that
a lease
agreement had been signed between the landlord of the
premises from which the first respondent operated, and Rhino.
However, it
appears that the agreement was concluded by an agent of
the landlord without proper authority. In this regard, the agent of
the
landlord, Mr Tony Parau, on 16 May 2014, confirmed in writing
that he signed the lease agreement between Rhino and Jordi
Properties,
the landlord, without its authority. I shall revert to
this aspect later.
[12]
That, in brief, is the factual background to the matter. I now
briefly
consider the issue of urgency, which has been placed in
dispute by the respondents. It was contended that the applicant’s
urgency was self-created as it complained as early as 1 April 2014 of
the first respondent’s breaches of the franchise agreement,
yet
it only launched this application only on 16 May 2014. This
contention is disingenuous, as it is clear from the correspondence
between the attorneys, referred to above, that there were efforts by
the parties, through their legal representatives, to amicably
resolve
the issue.
[13]
From the tone and tenor of the correspondence, it was not
unreasonable
on the part of the applicant to assume that the matter
could be resolved amicably. It therefore created an expectation that
there
was room for a settlement. The door was therefore not shut for
a possible amicable solution. It was only on 13 May 2014 when it
was
confirmed that the first respondent had indeed perfected his
‘de-franchising’, that a point of no return was reached.
This application was launched shortly after that information was
conveyed. I am therefore satisfied that the application is urgent.
[14]
I now turn to the requisites for an interim interdict, which are
trite.
The applicant has to establish:
(a)
aprima
facie
right;
(b) a
well-grounded apprehension of irreparable harm if the interim relief
is not granted and the ultimate relief is eventually
granted;
(c)
the balance of convenience favours the granting of the interim
relief;
(d)
the absence of any other satisfactory remedy.
[15]
In order to establish its prima facie right, the applicants must
establish
that its right to enforce the franchise agreement is not
open to serious doubt. The applicant need not show that right on a
balance
of probabilities. The facts alleged by the applicant,
together only with those alleged by the respondent that the applicant
cannot
dispute, must be considered, to determine whether the
applicant should obtain relief at the trial in due course (Spur Steak
Ranches
Ltd v Saddles Steak Ranch)}
[16]
It is common cause that there has not been compliance with
regulation
3(3)
, to the extent that the disclosure agreement was not accompanied
by an auditor’s certificate as prescribed in the regulation.
The respondents argue that this renders the franchise agreement void.
The applicant contends otherwise. This is a legal dispute.
The
application of the prima facie requirement to cases
where
legal issues are in dispute is not at all clear, and has led to
different
views.
For example, in
Mariam
v
Minister
of the Interior and Another
,
the test
was
applied to a disputed point of law while in Fourie v Olivier en ‘n
Ander it was held that the test was not applicable
in such cases. In
Beecham Group Ltd v B-M Group Ltct the court applied the prima facie
right test but held that ‘where difficult
questions of law’
were raised they had to be dealt with at the trial and not at the
interlocutory stage. In Ward v Cape Peninsula
Ice Skating Club
[1]
Blignault AJ suggested it was possible to reconcile Fourie v Olivier
with Beecham if due regard is had to the expression ‘difficult
questions of law’: the reference to ‘difficult’
implied that ordinary questions of law could be decided at the
interlocutory stage of the proceedings.
[17]
In my
view, the question of law in the present case, is a difficult one
such as was contemplated in the Beecham case, involving,
as it does,
a social security ministerial regulation. As seen in the recent past,
similar Acts of parliament and their regulations
have given rise to
vexing and difficult questions of interpretation, some even reaching
the Constitutional Court.
[2]
1
have not, in the constrained nature of a busy urgent court, had the
benefit of ‘detailed argument and mature consideration’
to dispose the issue at this stage.
[18]
I have pointed out that the applicant has indicated its intention to
institute an action for enforcement of its rights in terms of the
franchise agreement. The first respondent, on the other hand,
has
also made its intention clear to file a counter-claim for the
repayment of all the monies made pursuant to the agreement. For
that
reason, I am of the view that the court which hears that action,
should best be suited to determine the validity of the franchise
agreement. It is by no means a foregone conclusion that the franchise
agreement would be declared null and void, as the court might
decide
differently, having due regard to, among others, the purpose of the
regulation and the relationship between the parties.
To that extent,
the applicant has established a clear right, although open to some
doubt.
[19]
With regard to irreparable harm, there can be
doubt about that there
is. The first respondent is, on the respondents’ own version,
in the process of continuous, serious
and wholesale breach of the
franchise agreement, as a result of which the applicant is suffering
harm to its franchise brand and
image. It should be borne in mind
that Rhino conducts the same business as the applicant, that of a pub
and grill. What the second
respondent does, effectively, is to allow
Rhino to simply replace the first respondent as a tenant in the
premises and conduct
the same business as that of the first
respondent. In this manner, he allows Rhino to ride on the back of
the goodwill of the applicant’s
franchise. That is a contrived
scheme, which is likely to result in deception and confusion, or even
dilution of the applicant’s
brand. If an interim interdict is
not granted, and the applicant ultimately succeeds in persuading the
court that the non-compliance
with the regulation does not invalidate
the agreement, there would be no way of reversing the harm that would
have been visited
upon it by the first respondent’s
4
de-franchising’.
[20]
It is not clear yet, as to the nature of the relationship
between the
second respondent and Rhino. What we know is that the second
respondent has some business relationship with the sole
director of
Rhino. To that extent, it is not a far-fetched proposition that the
second respondent facilitated the ‘take over’
of the
first respondent’s business and replaced it with that of Rhino.
I also take a dim view of the second respondent’s
conduct in
this matter. It would be recalled that he, through his attorneys,
suggested that the parties should meet after 7 May
2014, knowing
fully well that he was in the process of facilitating the ‘take
over’ by Rhino, and without disclosing
this fact to the
applicant. It is no coincidence that it was later revealed that Rhino
had commenced trading on the very same day
he suggested the meeting
should be deferred to. This demonstrates a clear lack of bona fides
on his part.
[21]
As to the balance of convenience, I must consider the applicant’s
prospects of success. I take into account that the general approach
where a contract has been concluded in non-compliance with
a
statutory provision, is that such agreement is void. However, this is
not an inflexible rule. Where, as here, the regulation
does not
expressly state that non-compliance therewith invalidates the
contract, the question as to the validity of that contract
depends on
the intention of the legislature.
[22]
To that extent, the applicant has prospects of success in persuading
the trial court that on the facts of this case, invalidity should not
arise. In para [18] above, I have alluded to the fact that
the
question of invalidity could be decided either way. On the other
hand, the only possible inconvenience on the part of the first
respondent is that it is compelled to trade as a franchise of the
applicant, which it has done since September 2012. Therefore,
nothing
unnecessarily onerous is demanded of the first respondent. For that
reason, I conclude that the balance of convenience
clearly favours
the granting of an interlocutory relief.
[23]
With regard to the final requirement, the applicant clearly has no
other
satisfactory relief. Although a claim for damages might be
instituted, there can be no measure of compensation for the harm done
to the reputation of the applicant’s franchise and brand. The
respondents contend that the applicant has only two franchise
stores,
and therefore, presumably, no large scale damage can be done. In my
view, it is precisely for that reason that an interdict
should be
granted. The applicant’s franchise is new, and the applicant,
seeking to establish it in the market, and can ill-afford
the damage
that is being done to its image. I am therefore satisfied that the
status quo should therefore be preserved.
[24]
Lastly, I deal with the respondents’ residual argument that the
relief sought by the applicant is not competent. This is premised on
the argument that the first respondent has no right to trade
from the
premises, since Rhino has signed a lease agreement in respect of the
same premises, and that Rhino will not vacate the
premises without
setting up a legal fight. The short answer to this argument is an
email to Reichert dated 21 May 2014, by the
director of Jordi
Properties, the landlord, in which he confirms the validity of the
(original) lease agreement in terms of which
the first respondent
would trade from the premises. He further states the landlord has no
intention of to sign any other lease,
and that the premises were
opened under the applicant’s franchise, and further that the
landlord supports the operation under
that name. He concludes by
saying
that
the landlord would like the business to continue under the
applicant’s franchise. This demonstrates that there is no
logistical or legal impediment in the first respondent resuming trade
at the premises.
[25]
The sum total of all the above, is that I am satisfied that the
applicant
has made out a case for an interim interdict. In the notice
of motion, the applicant has prayed for a very detailed order. In my
view, it is not necessary to fashion the order in such manner.
Indeed, some of the prayers come down to compliance with the terms
of
the franchise agreement. It would serve the purpose were the first
respondent to be ordered to comply fully with the terms of
the
franchise agreement. It is fair and just that costs should be in the
main action.
[26]
In the result I make the following order:
1.
Pending the finalization of an action in which the rights of the
parties in terms of the franchise agreement
are finally determined,
the first respondent is:
1.1 ordered to
continue operating Elephants and Friends, Helderkruin, at the
premises situated at Westways Shopping Centre, 200
Ouklip Street,
Helderkruin;
1.2 restrained
and interdicted from breaching the franchise agreement in any manner,
including but not limited to:
1.2.1
using the premises described above, for any other purpose other than
the operation of Elephants and Friends, Helderkruin;
1.2.2
making the said premises available to any person or entity, or
permitting the use of the premises for any other purpose or activity;
2.
The applicant is ordered to institute an action envisaged in
paragraph 1 above, within 15 days of the
date of this order;
3.
The costs of this application shall be costs in the main action.
TM
MAKGOKA
JUDGE
OF THE HIGH COURT
DATE OF
HEARING : 27 MAY 2014
JUDGMENT
DELIVERED : 2 JUNE 2014
FOR THE
APPLICANT : ADV. W. GIBBS
INSTRUCTED
BY : KMG
& ASSOCIATES INC., PRETORIA
FOR THE
RESPONDENTS : ADV. L. BALANCO
INSTRUCTED
BY :
CHRISTO BOTHA ATTORNEYS,
PRETORIA
1
1996 (3) SA 706
(C).
2
1959 (1) SA 213
(T).
3
1971 (3)SA274(T).
4
1977 (1)SA 50 (T).
7
Ward
v
Cape Peninsula (supra
at
498C, 498G-H).
[1]
1998 (2) SA 487 (C).
[2]
For example the
National Credit Act 34 of 2005
.