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[2012] ZAWCHC 96
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Mr Video (Pty) Ltd v Broadway DVD City CC t/a Mr Video Strand on Broadway and Others (18783/2011) [2012] ZAWCHC 96 (24 January 2012)
Republic of South Africa
IN THE HIGH COURT OF SOUTH
AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN)
CASE NO: 18783/2011
In the matter between:
MR VIDEO
(PTY) LTD
….............................................................................
Applicant
/ Respondent
and
BROADWAY
DVD CITY CC t/a
MR
VIDEO STRAND ON BROADWAY
…...........................................
First
Respondent / Applicant
(Registration
No. CK 2006/160331/23)
IEKRAAM
JARDINE
(ID
No.: )
…......................................................................................
Second
Respondent / Applicant
ZAHIEDA
JARDINE
(ID
No.: )
…..........................................................................................
Third
Respondent / Applicant
JUDGMENT DELIVERED ON 24
JANUARY 2012
ZONDI, J:
[1] On 13 October 2011 the
applicant ("Mr Video") brought an application to this
Court for an order to have the Arbitration
Award dated 29 July 2011
made an order of Court in terms of
section 31
(1) of the
Arbitration
Act 42 of 1965
.
[2] The arbitrator rendered an
award in the following terms:
"(a) confirming
cancellation of the franchise agreement which was entered into
between the Claimant and First Defendant on
22 January 2007;
(b) directing that the
Defendants are liable, jointly and severally (the one paying the
other to be absolved) to make payment
to the Claimant of the sum of
R77 772.34, being in respect of outstanding franchise and stock
fees;
(c) directing that the
Defendants are liable jointly and severally (the one paying the
other to be absolved) to make payment to
the Claimant of the sum of
R72 637.45, being in respect of outstanding advertising levies;
(d) directing that the
Defendants are liable jointly and severally (the one paying the
other to be absolved) to make payment to
the Claimant in the sum
ofR22 143.41, being in respect of outstanding software fees;
(e) directing that the
Defendants are liable for interest in the aforesaid amounts at the
rate of 21% per annum, with effect from
1 June 2011 to date of
payment of all outstanding amounts;
(f) directing that the
Defendants are liable jointly and severally (the one paying the
other to be absolved), for the Claimant's
costs of suit (including
costs of the arbitration and the arbitrator) on the scale as between
attorney and client;
(g) directing that First
Defendant shall immediately discontinue that use of all names,
logos, marks, trade marks, trade names,
signs, structures and forms
of advertising indicative of the Claimant's trading name (Mr VIDEO,
VIDEO EXPRESS, and VIDEO EXTREME),
and cause to be made such changes
in the signs, buildings and structures as Claimant shall reasonably
direct, so as to distinguish
same from its/their former appearance
and from any business franchised by the Claimant or any business
operated by any other
franchisee in the "Mr Video" group:
(h)
directing
that First Defendant return forthwith to the Claimant, al supplies,
signage and other materials bearing the name, logo
or marks of the
Claimant;
(i)
declaring
that First Defendant's right to use the name and logo or any similar
name bearing the words "Mr Video", or
any name or logo
which may be utilised in the future by the Claimant, and any
systems, procedures and know-how associated therewith,
shall
terminate forthwith; and
(j) directing that, in the
event First Defendant fails or omits, upon request, to make the
changes referred to in terms of paragraphs
(g) and/or (h) (or as
otherwise required in terms clause 11.4.2 of the agreement referred
to in paragraph (a)), the Claimant
shall be entitled to take
whatever steps it may deem necessary to do so, including, but
without limiting the generality of the
aforegoing, entering the
First Defendant's premises and causing such changes to be made."
[3] The basis of Mr Video's
application is that the award still remains unsatisfied by the
respondents despite its existence having
been communicated to the
respondents.
[4] The respondents responded
to the application by launching on 16 November 2011 an application
on an urgent basis for the setting
aside of the franchise agreement
concluded between the first respondent and the applicant on 22
January 2007 and pursuant to
which the dispute between the parties
had been referred to arbitration.
[5] In the alternative the
respondent sought an order interdicting Mr Video from enforcing the
arbitration award made in its favour
pending the outcome of an
action to be instituted by the respondents for the rescission of the
franchise agreement. The respondents
also sought an order suspending
the hearing of Mr Video's application pending the final
determination of the action to be instituted
by the respondents.
[6] In that application the
respondents also sought an order directing the applicant to make
payment to the first respondent of
the sum of R360 000.00 for
delictual damages allegedly suffered by the first respondent by
reason of Mr Video's misrepresentation.
[7] The
ambit of the relief sought by the respondents was extended by the
respondents in a supplementary affidavit which the respondents
thereafter filed.
Mr
Petersen
who
appeared for the respondents has, however, in his heads of argument
disavowed any reliance on the supplementary affidavit
and has
confined his argument to the relief sought in the founding
affidavit.
[8] Notably
in the notice of motion the respondents do not set out the nature of
the relief which they will be seeking in their
proposed action but
upon reading para 87 of the founding affidavit it would appear that
in the proposed action they will be seeking
an order to have the
franchise agreement
u
set
aside / cancelled and claim the necessary damages"
which
in my view, to all intents and purposes, is similar to the relief
they are seeking in these proceedings.
[9] The respondents in their
application sought the setting aside of the franchise agreement on
the ground that the first respondent
was fraudulently induced by the
applicant to conclude it. The respondent do not dispute that they
are aware of the arbitration
award. They admit that it was brought
to their attention on 8 August 2011 but they contend they could not
challenge it or the
agreement forming its basis due to financial
constraints.
[10] The facts upon which they
rely for the contention that the franchise agreement was
fraudulently induced are briefly as follows:
During 2006 the second
and third respondents wanted to start a franchise business. After
conducting some research in franchise
business they got interested
in Mr Video's business model and to that end the third respondent
contacted Mr Video's regional
offices in Johannesburg with a view to
getting more information about its business model. The third
respondent spoke to one Ms
Geene who sent her an email regarding Mr
Video's business and what the projected monthly turnover and
expenses of the business
were. The respondents were informed that
the applicant's projected monthly turnover was about R90 000.00. On
the basis of these
projections the respondents formed a view that
they would be able to make a profit of approximately R24 300 per
month.
[11] The respondents also
received from Mr Video undercover of a letter dated 5 April 2006 a
document about its history and profile
as well as the set up costs
they had to pay for the franchise. In particular it was indicated in
the profile that a Mr Video
Express Store, comprising approximately
100 square metres would cost about R255 000.00 excluding VAT. These
facts impressed the
respondents and they became so much interested
in Mr Video's business model to the extent that they even visited a
website of
the Franchise Association of South Africa of which they
believed Mr Video was a member and downloaded a copy of a disclosure
document in which the obligations of the franchisor to a prospective
franchisee are set out.
[12] It is
at this stage that the respondents became aware that the disclosure
document
inter
alia
required
Mr Video to furnish a potential franchisee with firstly, written
projections in respect of levels of potential sales,
income, gross
or net profit or other financial projections for the franchise
business and had to state the assumptions on which
these projections
were based. Secondly, in terms of the disclosure document the
projections had to be clearly indicated whether
they were profit or
cash flow projections, franchise salary, capital and interest loan
repayments had to be indicated.
[13] The respondents further
allege that Mr Video exaggerated its image to them and even
undertook to support and assist them
with the negotiation of lease
contracts, purchasing of stock, ongoing training and specific
guidelines to improve turnover. Relying
on these undertakings by Mr
Video, the respondents applied for a franchise in about April 2006
and later in about November 2006
signed a franchise agreement after
paying the set up costs. In their application for a franchise the
respondents indicated Strand
area as their first preference.
[14] The franchise agreement
was entered into between Mr Video and the first respondent which is
the close corporation of which
the second and third respondents are
members. The respondents point out that when they applied for the
store they had budgeted
for R255 000.00. Thereafter the first
respondent with Mr Video's employee's advice proceeded to conclude
the lease agreement
with Shoprite in respect of Strand premises.
This took place in June 2006.
[15] The respondents further
allege that it was a tacit and/or implied term of the franchise
firstly, that Mr Video would provide
the first respondent's initial
staff with one week's store and VHS training at another Mr Video
branch; secondly, that Mr Video
would provide the staff of the first
respondent with ongoing training and specific guidelines to improve
its turnover; and thirdly,
that Mr Video would provide the first
respondent with a grand opening at the initial launch of its store.
[16] The respondents state that
the offer to purchase form which Mr Basset of Mr Video sent them on
26 August 2006, contrary to
what they had been told they would pay,
indicated the purchase price as R399 880.00 excluding VAT. When they
refused to sign
it Mr Basset told them it was too late for them to
do so as they had already concluded a lease agreement with Shoprite
and the
latter could sue them for damages if they pulled out.
Reluctantly they signed the offer to purchase.
[17] The respondents aver that
in breach of its contractual obligations, Mr Video failed to provide
training to the first respondent's
initial staff and to provide the
first respondent with a grand opening at its initial launch and as a
consequence thereof the
first respondent was unable to derive
maximum benefit of being associated with the franchise brand of Mr
Video and generate the
monthly turnover of R90 000.00 as projected
by Mr Video.
[18] The respondents point out
that the first respondent managed only to make the average monthly
gross turnover of R54 385.46
between the period December 2006 to
February 2008; R49 298.15 between March 2008 to February 2009; R41
092.96 between March 2009
to February 2010 and R36 770.93 between
March 2010 to February 2011 which they contend is far less than the
projected monthly
turnover of R90 000.00 promised by the applicant.
[19] The respondents allege
that from inception the first respondent struggled to honour the
agreement with Mr Video in respect
of royalty fees, advertising fees
and stock fees that were due and payable to it resulting in the
latter instituting legal proceedings
against them for the
cancellation of the agreement and payment of monies due in terms of
the agreement.
[20] The respondents contend
that the contract arrangement with Mr Video, from its inception
(when they were provided with the
initial projections and set-up
costs in
April 2006)
right through to the conclusion of the franchise agreement in 2007,
was done on a fraudulent basis with the intention
to cause economic
duress/pressure on the second and third respondents, which would
coerce them "to
dance
to the tune of the [applicant?
by
entering into a franchise agreement which benefited Mr Video but
prejudiced them.
[21] Mr
Video opposes the respondents' application and has raised four
points
in
limine.
The
consideration of the first point in
limine,
namely
that the respondents should not be allowed to rely on matters raised
in the supplementary affidavit as same was not filed
with leave of
the Court, has become unnecessary in view of the fact that the
respondents have disavowed any reliance on it.
[22] The
second point in
limine
raised
by Mr Video is that the relief sought by the respondents is
incompetent and ill-conceived as the agreement which they seek
to
have set aside was already cancelled by the applicant on 18 April
2011 which cancellation was confirmed by the arbitrator
in his
arbitration award.
[23] The respondents seek the
setting aside of the franchise agreement on the ground that the
first respondent, in respect of
whose obligations the second and
third respondent stood surety, was fraudulently induced by the
applicant to conclude it. It
must be emphasised that the respondents
do not in any way challenge the arbitration which was conducted
pursuant to the franchise
agreement and the award rendered under the
arbitration.
[24] It is
correct that a party who has been induced to enter into a contract
by the misrepresentation of an existing fact is
entitled to rescind
the contract provided the misrepresentation was material, was
intended to induce him to enter into the contract
and did so induce
him (Christie: The Law of Contract in South Africa 5
th
ed page
271). The effect of a misrepresentation, whether innocent or
fraudulent, is to induce in the mind of the innocent party
a mistake
of so fundamental a nature that his apparent assent to the contract
is in truth not assent at all. The innocent party
has an election.
He may either stand by the contract or claim rescission. If he
decides to rescind the contract he must do so
within a reasonable
time otherwise he may be taken to have elected to stand by the
contract. He may not partially affirm and
partially repudiate the
contract.
[25] The
question raised in the present case is whether the respondents can
still rescind the contract notwithstanding that Mr
Video has
cancelled it and has sought confirmation of its cancellation at the
arbitration. It is common cause that the franchise
agreement in the
instant matter provided for the referral to arbitration of any
dispute which may arise between the parties under
it. When the
dispute about non-compliance with certain provisions of the
agreement by the first respondent arose Mr Video pursuant
to the
agreement referred the dispute for arbitration in which it
inter
alia
sought
certain relief and confirmation of the cancellation of the
agreement. This was granted by the arbitrator.
[26] The
object of cancellation is to terminate the primary obligations of
the contract there and then but not retrospectively
whereas the
effect of rescission of the contract when it is claimed was induced
by misrepresentation is to set aside the contract
ab
initio.
[27]
Christie
supra points out at 539 that:
"Termination of the
primary obligations of the contract (the obligations of both parties
to perform) does not terminate all
secondary obligations, such as
the obligation to pay damages for breach or (unless a contrary
intention appears) the obligation
to abide by an arbitration to
abide by an arbitration clause in the contract".
[28] In my
view the respondents' claim for rescission must fail for two
reasons. Firstly, where one party to a contract has, as
a result of
its breach, cancelled the contract the other party may not in an
attempt the escape the effect and consequences of
cancellation seek
to rescind the contract on the ground that it was induced by
misrepresentation. This is so because a party
who wishes to rescind
the contract on the ground of misrepresentation must decide whether
it wishes to stand by the contract
or rescind it. It may not wait
for the other party to take steps in the enforcement of the contract
before taking its decision
to rescind the contract. In the present
case the contract was for 10 years and subject to extension for
another 10 years. It
was concluded in January 2007 and the parties
acted in accordance with its terms until it was cancelled by the
applicant on 18
April 2011. In that period the first respondent
never sought its rescission on the basis of the facts which it now
alleges. Secondly,
the statements which the respondent contend were
made by the applicant with an intention to induce the first
respondent to enter
into the contract which it otherwise would not
have entered into do not, in my view, constitute misrepresentation
and as such
do not afford a basis for the rescission of the
franchise agreement. For instance the monthly turnover of R90 000.00
was not
guaranteed but projected. The document in which the
projections are given makes it clear that
"the
projections are in no way any guarantee from the [franchisor] to the
[franchisee] or any third party, that the figures
presented will be
achieved"
[29] With regard to the quoted
set up costs it is clear to me that the set up costs which the first
respondent was quoted were
based on the store size of 100 square
metres. The first respondent's store size is 112 square metres and
this may explain the
difference between what the first respondent
was quoted and what it was asked to pay.
[30] In the circumstances I
find that the statements made by the applicants do not constitute
misrepresentation. The applicant
did not make statements complained
of by the respondents with an intention to induce the first
respondent to enter into the contract,
or to conceal from it facts
the knowledge of which would cause it to refrain from entering into
the contract. If the first respondent
was of the view that it was
induced to enter into the contract it should have participated in
the arbitration proceedings and
raised the defence which it now
seeks to raise. The respondents may not seek to escape the
consequences of the arbitration which
was conducted with their full
knowledge by seeking rescission of the agreement pursuant to which
the arbitration was conducted.
They should have sought the setting
aside of the arbitration award in order to regain the opportunity
which they lost when the
arbitration proceeded in their absence.
[31] In light of the conclusion
I have reached it follows therefore that the respondent's claim for
damages in the sum of R360
000.00 and other interim interdictory
relief must fail as the cancelled franchise agreement which the
respondents want to rescind
was validly concluded.
[32] It follows therefore that
the order sought by the applicant in the main application should
succeed. In the result the following
order is made:
1. the arbitration award of
Adv. M L Sher dated 29 July 2011 is made an order of Court in terms
of
section 31
(1) of the
Arbitration Act 42 of 1965
. The respondents
to pay costs of the applicant's application on a scale between
attorney and client jointly and severally.
2. the respondents are ordered
to pay the costs of the application on a party and party scale.
D H ZONDI