England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Claim No: HQ 06X02321 St Dunstan's House 133-137 Fetter Lane London, EC4A 1HD
		23rd October 2007

His Honour Judge Peter Coulson QC:

A. INTRODUCTION

1. The Jani-King organisation is based in America. It is the largest commercial cleaning franchise company in the world. The Claimant is responsible for its operations in Great Britain. Although the Claimant has its own management, sales and cleaning departments, its principal business comes through the sale of franchise agreements. The prospective franchisee is trained in the Jani-King cleaning system and then offered a certain amount of initial business by the Claimant. Thereafter, the franchisee will be offered new contracts negotiated by the Claimant's sales team, and also encouraged to seek its own cleaning contracts. The purpose is to provide a standardised cleaning service utilising the Jani-King system and manual.
2. The Second and Third Defendants signed a franchise agreement ("the first franchise agreement") with the Claimant on 3 September 2003. There was also an addendum to that first franchise agreement, also dated 3 September 2003. The documents demonstrate that, between 15 and 19 September 2003, the Second and Third Defendants went through the Jani-King initial training process. Thereafter, they commenced operating under the first franchise agreement. The parties had agreed that, over the first two years, they would be provided by the Claimant with initial business which comprised cleaning contracts that paid a cumulative total of £22,000 per month. It appears that this figure for initial business was achieved in April 2004.
3. For reasons which are explored in greater detail below, later in 2004, the Claimant required all its franchisees to enter into a new franchise agreement. By this time, the Second and Third Defendants had set up a company called Pula Enterprises Ltd, the First Defendant in these proceedings, to act as the corporate franchisee under the new agreement. The extent of the Third Defendant's formal involvement in that company is unclear. When the second franchise agreement was signed on 26 November 2004, the parties were therefore the Claimant and the First Defendant. For reasons which will become apparent below, it is this second franchise agreement that lies at the heart of these proceedings. There was an addendum to the second franchise agreement, also dated 26 November 2004 and, following further changes to the Claimant's commercial strategy, a second addendum dated 28 April 2005. This second addendum to the franchise agreement was signed by the Claimant and the First Defendant, and by the Second and Third Defendants as guarantors.
4. On 1 August 2006, the Second Defendant wrote to the Claimant on behalf of the First Defendant, purporting to terminate the franchise agreement. The letter suggested that the Claimant was in breach of the terms of the second franchise agreement, although no details of the alleged breaches were identified. It was and is the Claimant's case that this letter constituted a wrongful repudiation of the second franchise agreement. These proceedings were commenced on 10^th August 2006, seeking damages in consequence of that wrongful repudiation. By way of their defence and counterclaim, the Defendants sought to justify the termination by reference to alleged breaches by the Claimant of the second franchise agreement. It is the Claimant's case that those alleged breaches are based on an erroneous construction of the express terms of the second franchise agreement and/or are founded on implied terms which cannot be justified in fact or in law. In consequence, the Claimant obtained an order from Master Fontaine dated 18 June 2007 for the hearing of certain preliminary issues arising out of the Defendants' construction of the second franchise agreement. This Judgment is solely concerned with the answers to those preliminary issues.
5. Although the Second and Third Defendants were present on 18 June, and were thus aware of this hearing of the preliminary issues, and although they provided witness statements to the Claimant's solicitors on 10 August 2007 dealing with the issues, all subsequent attempts to contact them have proved unsuccessful. The address in High Wycombe that had been used for the purposes of contacting the Defendants appears now to be unoccupied. The telephone numbers provided are live but are always switched to voicemail. The Claimant suspects that the Second and Third Defendants have gone back to South Africa, from whence they originally came.
6. In those circumstances, Mr Evans-Tovey, who appeared on behalf of the Claimant, invited me (pursuant to CPR Part 39) to continue to deal with the Preliminary Issues in the absence of the Defendants. In accordance with the over-riding objective (CPR 1.1), and because the issues raised are almost entirely matters of construction, I acceded to that request. In reaching the conclusions set out in this Judgment, I have had regard to the written and oral evidence of Mr Ian Thomas, a director of the Claimant. I have also had regard to the written statements of the Second and Third Defendants, referred to above, although I consider that most of their content relates to matters which are irrelevant to the issues with which I am presently concerned. I have also paid particular regard to the Defendants' pleaded defence, which was settled by experienced commercial counsel. I have been carefully through the documents, including the many agreements between the parties. As to the relevant principles of law, I should express my gratitude to the considerable assistance on this topic that I have received from Mr Evans-Tovey.

B. THE CORRECT APPROACH TO ISSUES OF CONSTRUCTION

B1. The Importance Of The Factual Background

7. The leading case on this area of the law is, of course, Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. In his speech, Lord Hoffmann identified five key principles relating to the interpretation of contracts. For present purposes they can be summarised as follows:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent …

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean …

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require Judges to attribute to the parties an intention which they plainly could not have had …"

8. In BCC v Ali [2001] 1 AC 251 Lord Hoffmann said that the true test of admissible extrinsic evidence was "anything which a reasonable man would have considered relevant" and he went on to say that, in Investors Compensation Scheme, he was:

"… certainly not encouraging a trawl through 'background' which could not have made a reasonable person think that the parties must have departed from conventional usage."

9. There has been a certain amount of debate as to whether or not the factual matrix is always relevant to questions of construction, or only admissible where the words are ambiguous or open to dispute. It seems clear that this debate has been settled firmly in favour of the principle that the factual matrix should always be considered, even if the wording is unambiguous and sensible: see, for example, Westminster CC v National Asylum Support Services [2002] UKHL 38; [2002] 1 WLR 2956; and Static Control Components (Europe) Ltd v Egan [2004] EWCA Civ 392; [2004] 2 Lloyds 429. Most recently, in Chartbrooke Ltd v Persimmon Homes Ltd & Ors [2007] EWHC 409 (Ch); [2007] All ER (Comm) 1083, Briggs J said at paragraph 36 that ambiguity was no longer a pre-requisite for recourse to the admissible background.
10. Despite that principle, it is plain, as Lord Hoffmann noted in Investors Compensation Scheme, and reiterated in BCC v Ali, that the most important source of information about the agreement is the contract itself, and not the surrounding documentation. As to the way in which the court should perform the necessary balancing act between the two, I find myself particularly attracted to the reasoning of Buxton LJ in Wayne Martin v David Wilson Homes Ltd [2004] EWCA Civ 1027; [2004] E3 EGLR 77; when he said:

"One has to remember, when looking at issues about the factual matrix, that although reference to that matrix is not limited to cases where the words are clearly ambiguous, the first place where one expects to find the meaning of the words and the intention of the draftsman is in the words themselves. If they yield a fairly clear solution, and in my judgment these words do, then one has to pause long before concluding that at that point the draftsman has used words with a meaning that do not fit in with the objective that he was seeking to attain."

B2. The Relevance Of Previous Contracts

11. I should also say a word about the relevance of previous contracts. As outlined above, this is a case where there were a series of agreements. The question arises, at least tangentially, as to the extent to which a previous contract can be regarded as relevant to the construction of a later contract. It seems to me that the proper approach was summarised by Rix LJ in HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co & Ors [2001] 2 Lloyds LR 161, at page 179, where at paragraph 83 he said:

"In principle, it would seem to me that it is always admissible to look at prior contracts as part of the matrix or surrounding circumstances of a later contract. I do not see how the parole evidence rule can exclude prior contracts, as distinct from mere negotiations. The difficulty of course is that, where the later contract is intended to supersede the prior contract, it may in the generality of cases simply be useless to try to construe the later contract by reference to the earlier one. Ex hypothesi, the later contract replaces the earlier one and it is likely to be impossible to say that the parties have not wished to alter the terms of their earlier bargain. The earlier contract is unlikely therefore to be of much, if any, assistance. Where the later contract is identical, its construction can stand on its own feet, and in any event its construction should be undertaken primarily by reference to its own overall terms. Where the later contract differs from the earlier contract, prima facie the difference is a deliberate decision to depart from the earlier wording, which again provides no assistance. Therefore a cautious and sceptical approach to finding any assistance in the earlier contract seems to me to be a sound principle. What I doubt, however, is that such a principle can be elevated into a conclusive rule of law."

12. With these various principles in mind I now turn to consider the agreements between the parties.

C. THE RELEVANT AGREEMENTS

C1. The Background To The First Franchise Agreement

13. There are no specific matters arising from the factual background to the first franchise agreement which have been pleaded by either side as having relevance to these proceedings and, more particularly, to these preliminary issues. Indeed I note that the defence does not admit that the first franchise agreement is of any relevance at all. It seems to me that the relevant background to the first franchise agreement can be stated shortly as follows:

a) Jani-King had developed a commercial cleaning system which was perceived as having a number of benefits;

b) Through the Claimant, they offered a franchise arrangement whereby interested parties could be trained in the Jani-King system, and offered a level of initial business (the precise level being chosen by the franchisee himself);

c) The Second and Third Defendants considered that they would be able to make a profit operating as the franchisees of the Claimant.

C2. The First Franchise Agreement

14. The first franchise agreement was dated 3 September 2003. Clause 7 set out the Claimant's obligations in respect of initial business. The detail of that initial business was set out in Schedule 1. The parties agreed that the initial offering period would be 540 days and that, during that time, the Claimant would offer the Second and Third Defendants initial business up to £22,000 per month, within a 50 mile radius from Bristol City Centre.
15. The initial term was for 7 years. The initial franchise fee was £81,000 together with VAT, making a total of £95,175.
16. It is unnecessary in this Judgment to set out any of the other terms of the first franchise agreement, since the Claimant does not rely on the first agreement and, as previously noted, the Defendants' pleaded case does not admit the relevance of the first agreement at all. Likewise, although there were two addenda to the first agreement, one also dated 3 September 2003, and the second dated 19 November 2003, it does not appear that any point now turns on either of those supplemental agreements.

C3. The Background To The Second Franchise Agreement

17. The relevant background to the second franchise agreement is as follows:

a) By 2004, the Claimant was aware that market conditions for its commercial cleaning operations were changing. In particular, it was becoming apparent that the ultimate consumers of the cleaning services being offered were no longer prepared to deal at a local level but wanted to negotiate regional or even national cleaning contracts. This had the obvious advantage, to them, of economies of scale.

b) These changes meant that it became even more important for the Claimant to be able to offer a standard service, which was less dependent on the variable consistency and quality of the individual franchisees. A greater degree of standardisation was required.

c) Accordingly, by March 2004, a new franchise agreement was being proposed by the Claimant to all of its existing franchisees, including the Second and Third Defendants. These were sent out in draft in June under cover of a letter dated 7 June 2004. The drafts had been amended and approved by the Claimant's solicitors. The Claimant recommended to its franchisees that they seek legal advice before deciding whether or not to enter into the new franchise agreement.

d) In addition, both parties wanted the new franchise agreement to be between the Claimant and a company owned/controlled by the Second and Third Defendants. Doubtless for that reason, the Claimant referred to the new agreement as "the new corporate franchise agreement". The First Defendant was set up in order to become the franchisee under the new agreement.

C4. The Second Franchise Agreement

18. The second franchise agreement was dated 26 November 2004. It was made between the Claimant and the First Defendant. Schedule 1 stated that the term of the second franchise agreement was 20 years and referred to the initial franchise fee of £95,175 including VAT "which has been paid in full in accordance with the First Franchise Agreement".
19. I set out below those clauses of the second franchise agreement which are at the heart of the Defendants' defence and counterclaim. They are:

Clause 9: Franchisor's Continuing Obligations

"Provided that the Franchisee shall not be in breach of a substantial term of this agreement during the currency hereof the Franchisor shall:

9.1 offer appropriate assistance and guidance until the Franchisee has been offered Customer Accounts that generate initial gross monthly invoices as required by the Plan;

9.2 give the Franchisee, such reasonable continuing assistance and advice as the Franchisor in its sole discretion considers necessary for the efficient running of the Franchisee's Jani-King Business when the Franchisor in its sole discretion considers it to be necessary to provide 'on the spot' help and advice;

…

9.5 at the Franchisee's expense and request make available to the Franchisee with reasonable promptness a member of the Franchisor's staff competent to provide reasonable advice in connection with the system or recommend to the Franchisee such independent experts as may appear necessary: the Franchisee being responsible for the fees and expenses of such experts …"

Clause 13: Training

"13.1 The Franchisor shall provide an initial training programme for the Franchisee and any guarantor of the Franchisee's Jani-King business up to a maximum of two persons in the operation of the Franchisee's Jani-King Business using the System …"

Clause 26: Termination

This clause provided the Claimant with the right to terminate the agreement by notice in writing on the occurrence of almost 30 different events, most of which were related (in one way or another) to some degree of default on the part of the First Defendant.

Schedule 1

As noted above, Schedule 1 provided that the term was 20 years. It also referred to the fact that the initial franchise fee had been "paid in full". In relation to the initial training programme, Schedule 1 said that the "initial training programme [was] satisfactorily completed on 19 September 2003 under the terms of the first franchise agreement".

Schedule 2

Schedule 2 identified the initial business of £22,000 per month. It recorded that "initial business offered to 31 May 2004" was £22,000 and, as against "initial business outstanding as at end 31 May 2004", the Schedule recorded the figure of "£0.00". There were additional pages to Schedule 2 identifying how the £22,000 had been built up, and demonstrating that the cumulative target of £22,000 had been reached on or about 22 April 2004.

20. There was a first addendum to the second franchise agreement which was also dated 26 November 2004. Nothing turns on the terms of that first addendum.

C5. The Background To The Second Addendum To The Second Franchise Agreement

21. In the first part of 2005, the Claimant spent some time considering how the level of service provided by the different franchisees could be improved and the necessary consistency in standards maintained and enhanced. They concluded that they could do this by implementing an audit programme and developing an IP system which (amongst other things) ensured that supervisors, employed by the franchisees, made regular visits to see the cleaning work in action.
22. I consider that the background to the second addendum is adequately summarised at recitals (c) and (d) of the addendum of 28 April 2005. These read as follows:

"(C) As a result, Jani-King has:

(1) implemented an Audit Programme to assess whether its franchisees are implementing the Seeing Is Believing Criteria (SIB criteria) and Care as part of the Jani-King System,

(2) developed an IP system to allow franchisees to implement and measure performance of the Manager Role and Supervisor Role through Journey Plans, Random Accompaniments and Tracking.

(D) The Audit Programme aims to:

(1) provide an advisory service to franchisees identifying the key (ie potential contract losing) issues in Accounts being serviced by franchisees,

(2) protect Jani-King customers, Jani-King accounts and the Jani-King brand."

C6. Second Addendum To Second Franchise Agreement

23. The bulk of the second addendum is concerned with the training agreement, the IP agreement and the Audit Programme. Clause 1, however, is entitled 'Settlement of Claims' and is in the following terms:

"1.1 The Franchisee and Guarantors warrant that there are no facts or circumstances giving rise to any claims by the Franchisee or Guarantors against Jani-King.

1.2 The Franchisee and Guarantors agree that there are no sums due or accruing to the Franchisee by Jani-King under the Franchise Agreement.

1.3 If and to the extent that there may be any claims against Jani-King and/or sums due by Jani-King to the Franchisee and/or Guarantors, the Franchisee and Guarantors expressly agree that any and all claims (including any claims against the directors, officers or employees of Jani-King) are hereby fully and finally settled on the terms of this Agreement. The Franchisee and Guarantors undertake not to bring any proceedings against Jani-King (or its directors, officers or employees of Jani-King) in respect of any Claims …"

D. PRELIMINARY ISSUES 1 AND 2: INITIAL BUSINESS OBLIGATIONS

D1. Preliminary Issue 1

24. Preliminary Issue 1 is in the following terms:

"1. Whether the parties agreed that the obligation ordinarily on the Claimant under Clause 9.1 did not arise under the second franchise agreement or had been discharged by June 2004 and in any event by the date of the Second Franchise Agreement."

This issue arises because the Defendants allege that the Claimant failed to provide them with any initial business pursuant to the second franchise agreement. The issue, in essence, comes down to whether the parties intended that a second round of initial business would be provided as a result of the second franchise agreement, or whether the obligation to provide the initial business up to £22,000 per month was the Claimant's only obligation in this regard, and one which they had fulfilled some months before the second franchise agreement was entered into in November 2004.

D2. Construction

25. I have concluded that, on the true construction of the second franchise agreement, the parties did not intend that any further initial business would be provided by the Claimant to the Defendants after November 2004. The principal reason for that conclusion lies in the terms of Schedule 2. That Schedule stated that, for the purposes of the second franchise agreement, the initial business was to be a cumulative total of £22,000 per month. The Schedule also made plain that this sum had been offered to the Defendants by way of initial business by 31 May 2004, and that there was therefore no outstanding initial business at the date of the second franchise agreement. This is the only possible explanation for the express words: "initial business outstanding…£0.00". The rest of Schedule 2 makes clear how and when the cumulative figure of £22,000 was achieved. In those circumstances, I regard it as clear beyond doubt that, by the time of the second franchise agreement, there was no further obligation on the part of the Claimant to provide initial business.
26. I am conscious that this construction makes Clause 9.1 of the second franchise agreement redundant. A Court should always think long and hard before arriving at a construction which renders otiose a part of the written agreement (see, for example, Re Strand Music Hall Co Ltd (1865) 35 Beav. 153), although there is a good deal of modern authority to the effect that this presumption against surplusage is relatively weak (see, for example, Arbuthnott v Fagan [1995] C.L.C. 1396). However, it seems to me plain that Clause 9.1 was simply a part of the general terms of the Claimant's standard form franchise agreement, sent out to all prospective franchisees, and was thus overridden by the specific contents of Schedule 2, which related directly to the position as between the Claimant and the Defendants. It is a rule of construction that specific conditions should outweigh the general if there is a conflict between them: see, by way of recent example, Lord Bingham's speech in Homburg Houtimport BV v Agrosin Private Ltd [2003] 2 WLR 711.
27. I am fortified in this conclusion by the terms of Schedule 1, another part of the contract that was specific to the relationship between the Claimant and the Defendants. That made plain that the initial franchise fee had been paid in full, in accordance with the first franchise agreement. In other words, there was no question of the Claimant seeking a further franchise fee from the Defendants. They did not seek such a fee, because such a fee had already been paid in accordance with the first franchise agreement. In precisely the same way, the Defendants were not entitled to further initial business from the Claimant, because the Claimant had provided the agreed initial business in full, again pursuant to the terms of the first franchise agreement.

D3. Factual Background

28. I ask myself whether the factual background, set out at paragraph 17 above, can make any difference to this conclusion. In my judgment, it only serves further to strengthen that conclusion. From that background, it is plain that the second franchise agreement was required to amend and modernise the existing arrangement between the Claimant and the Second and Third Defendants, and to put in their new corporate entity as the franchisee. There was no question of that second agreement taking the relationship between the parties back to square one, and there is nothing in any of the surrounding documents that indicates even a passing suggestion by the Defendants that they were entitled to additional initial business (or, for that matter, that the Claimant was entitled to a further fee). Thus I consider that the factual background only confirms my construction of Clause 9.1 and, in particular, the specific words of Schedules 1 and 2.

D4. Preliminary Issue 2

29. Preliminary Issue 2 is in the following terms:

"2. Even if Clause 9.1 was breached by the Claimant, whether

(a) any claim based upon a breach of Clause 9.1 has been settled by Clause 1.3 of the Second Addendum;

(b) alternatively, whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of Clause 9.1."

This issue arises by way of a full-back argument on the part of the Claimant: if, contrary to my primary view, there was an obligation by the Claimant to provide further initial business, has the claim for breach of that obligation been compromised by the terms of the second addendum agreement of 28 April 2005 (paragraphs 21-23 above)?

D5. Analysis

30. Assuming that I am wrong in my construction of Clause 9.1, then the Claimant was in breach of Clause 9.1 because it failed to provide a further round of initial business following the second franchise agreement of 26 November 2004. Such a claim for breach would plainly have been in existence by 28 April 2005, when the second addendum to the second franchise agreement was agreed. Clause 1.3 of that agreement states that any existing claims against the Claimant were fully and finally settled by the terms of the addendum and that the Defendants undertook not to bring any proceedings in respect of such claims. It is impossible to see an answer to the contention that, if there was a claim in respect of outstanding initial business by April 2005, it was therefore compromised by the clear and unequivocal terms of the second addendum.
31. Accordingly, I conclude that, even if my construction of Clause 9.1 is wrong, so that the Claimant was in breach of its obligations under Clause 9.1, any claim for damages for breach arose immediately after the second franchise agreement was signed on 26 November 2004 and was therefore settled by Clause 1.3 of the second addendum of April 2005. That provision unequivocally settled "any claims" against the Claimant and made plain that such claims would not be the subject of proceedings.

E. PRELIMINARY ISSUES 3 AND 4: ASSISTANCE AND ADVICE

E1. Preliminary Issue 3

32. Preliminary Issue 3 is in the following terms:

"Whether as a matter of necessary implication and/or by operation of law the Claimant's discretion under Clause 9.2 of the second franchise agreement had to be exercised reasonably."

This issue arises because, at paragraph 7(2) of the Defendant's defence, it is averred that:

"As a matter of necessary implication and/or by operation of law, the Claimant's discretion pursuant to this Clause had to be exercised reasonably."

The Defendants then go on in their pleaded defence to make a series of allegations against the Claimant, to the effect that the Claimant was in breach of its obligation under Clause 9.2, because it failed to exercise its discretion reasonably. Without the implied term, the pleaded allegations would be doomed to fail.

E2. The Law

33. I consider that there is clear Court of Appeal authority, which is obviously binding on me, for the proposition that there is no need or room in this agreement to imply the term contended for by the Defendants. In Ludgate Insurance Company Limited v Citibank NA [1998] Lloyds LR 221, it was submitted that a contractual obligation to exercise discretion was qualified by an implication of reasonableness, even if such qualification was not expressly stated in the contract. The Court of Appeal rejected this argument in round terms. At paragraphs 35 and 36 of his judgment, Brooke LJ said as follows:

"35. It is very well established that the circumstances in which a court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited. We were referred to Weinberger v Inglis [1919] AC 606; Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896; Docker v Hyams [1961] 1 Lloyd's Rep 487 and The Product Star [1993] 1 Lloyd's Rep 397. These cases show that provided the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.

36. Mr Rowland sought to derive comfort from some of the language used by Leggatt LJ with whom the other members of this court agreed, in The Product Star at page 404 in support of a contention that the courts are more ready today to apply a standard of objective reasonableness when assessing whether a discretionary decision can stand. That Leggatt LJ had not the slightest intention of watering down the well established test is manifest from the passages of his judgment … in which he applied the law to the facts, where it is clear that he is using the epithet 'unreasonable' to characterise a view which no reasonable decision-maker could reasonably have formed on the material before him."

34. It seems to me that this judgment, expressed in typically trenchant terms by Brooke LJ, constitutes a complete answer to Preliminary Issue 3. There can be no basis in law for the implied term contended for by the Defendants at paragraph 7(2) of their defence. In exercising its discretion under Clause 9.2 of the contract, the Claimant was obliged to exercise that discretion honestly and in good faith, and for the purposes for which it was conferred. The Claimant was also obliged to ensure that it was a true exercise of discretion and was not capricious, or arbitrary, or so outrageous in its defiance of reason that it could be categorised as perverse. No breach of that nature (which would have to be clearly spelled out) is alleged against the Claimant in the Defendants' pleading. Any lesser allegation would not constitute a breach of the obligation at Clause 9.2. Accordingly, the alleged breaches, which are based on the incorrect premise that the obligation must be exercised reasonably, cannot succeed.

E3. Preliminary Issue 4

35. The terms of Preliminary Issue 4 are as follows:

"Whether the facts and matters alleged in the second sentence of paragraph 24(3), even if proved, would by reason of the dates alleged have amounted to a breach of Clause 9.5 of the second franchise agreement; alternatively whether any claim based upon a breach of Clause 9.5 has been settled by Clause 1.3 of the second addendum; in the further alternative whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clause 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of Clause 9.5."

36. There are essentially two limbs to this issue. Clause 9.5 of the second franchise agreement is concerned with the Claimant's obligation to provide a member of staff to give advice. Only one breach of this obligation is alleged, at paragraph 24(3) of the defence. The relevant breach is dated July 2004. Accordingly, the first point is the Claimant's case that this could not have been a breach of the second franchise agreement at all, because the second franchise agreement did not come into force until November 2004.
37. The second limb of Preliminary Issue 4 is the same as that covered by Preliminary Issue 2 above, namely that if, contrary to the Claimant's primary case, the Claimant was in breach of Clause 9.5, that claim for breach was settled by the terms of the second addendum of 28 April 2005.

E4. Analysis

38. Paragraph 24(3) of the defence alleges that a Mr Knox was provided by the Claimant in July 2004 to manage the business whilst Mr and Mrs Bruce were on holiday and that he was not competent to provide the required assistance and advice. It seems clear to me that this cannot be a breach of the second franchise agreement because the agreement (and therefore the obligation at Clause 9.5), did not come into existence until November 2004. There is nothing in the second franchise agreement to indicate that it was in any way retrospective, neither is such a suggestion pleaded by the Defendants in their defence. The allegation is therefore doomed to fail.
39. In those circumstances it is probably unnecessary for me to deal with the second limb of Preliminary Issue 4. However, precisely the same points arise in respect of it as arise under Preliminary Issue 2 (see paragraphs 29-31 above). If there was a breach of Clause 9.5 it seems to me it must have been settled by the terms of the second addendum of 28 April 2005. Therefore no claim can arise in any event.

F. PRELIMINARY ISSUE 5: TRAINING

F1 Preliminary Issue 5

40. The terms of Preliminary Issue 5 are as follows:

"Whether the parties agreed that the obligations ordinarily on the Claimant under Clauses 13.1 and 13.3 did not arise under the second franchise agreement or had been discharged on 19 September 2003 and in any event by the date of the second franchise agreement; alternatively whether any claim based upon a breach of Clauses 13.1 and 13.3 has been settled by Clause 1.3 of the second addendum; in the further alternative whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed or recovered by Pula for the alleged breach of Clauses 13.1 and 13.3."

In other words, the issues that arise here are precisely the same as those that arise under Preliminary Issues 1 and 2 in relation to the initial business obligations, which have been dealt with above at paragraphs 24-31.

F.2 Construction

41. For precisely the same reasons as outlined in paragraphs 25-28 above in relation to initial business, I reject the suggestion that, as a matter of the true construction of the second franchise agreement, the Claimant was obliged to provide a further initial training programme to the Defendants. The reason for this can be found in the express wording of Schedule 1, which stated that the initial training programme had been "satisfactorily completed on 19 September 2003 under the terms of the first franchise agreement". Accordingly, although on their face the general provisions of Clauses 13.1 and 13.3 obliged the Claimant to offer an initial training programme, the words of Schedule 1 (which was specific to the relationship between these parties) recorded that such a programme had been satisfactorily completed. There was therefore no further obligation on the part of the Claimant to offer another initial training programme.
42. Again I acknowledge that this construction means that Clause 13.1 is redundant. Again, it seems to me that this is the result of using a standard form of words in Clause 13 and a 'case-specific' form of words in Schedule 1. The specific should outweigh the general in such circumstances, and therefore the wording in Schedule 1 must be interpreted as meaning that there was no obligation on the part of the Claimant to provide a (further) initial training programme.

F3. Background

43. Again, I consider that a consideration of the factual background only serves to confirm my conclusion as to the true construction of the relevant provisions. There is no dispute that the Second and Third Defendants went on the Claimant's initial training course between 15 and 19 September 2003; indeed, according to the questionnaire which they completed at the end of that programme, they both gave it a very positive assessment. There is nothing in the documents to suggest that the Defendants ever thought that they were obliged (or entitled) to go on a further training course once the second franchise agreement had been reached, and no indication of what they might have hoped to gain from going through the initial course all over again.. They had been trained by November 2004 and were running what was, on all the evidence, a successful franchise. Neither they nor the Claimant apparently thought that there was any further need for training. Accordingly, the factual position only bears out what I consider to be the true construction of the second franchise agreement.

F4. The Fallback Position

44. For the same reasons as are outlined in paragraphs 29-31 above, I consider that, if I am wrong, and there was a breach of Clause 13.1 and 13.3 of the second franchise agreement, any such claim was compromised by the express words of the second addendum. There is therefore no claim in any event.

G. PRELIMINARY ISSUES 6, 9, 10 AND 11: TRUST AND CONFIDENCE

G1. Preliminary Issue 6

45. Preliminary Issue 6 is in the following terms:

"Whether as a matter of necessary implication and/or by operation of law there was an implied term of the Second Franchise Agreement that the Claimant would not act in such a way as to destroy or seriously damage the relationship of trust and confidence between the Claimant and Pula, including for the avoidance of doubt whether there was a relationship of trust and confidence between the Claimant and Pula."

This issue arises out of the implied term alleged at paragraph 8 of the defence, to the effect that there was a relationship of trust and confidence between the Claimant and the First Defendant, and the consequential allegations of breach of that implied term at paragraph 25 of the defence.

G2. Implication Of Terms/General

46. It is unnecessary for me to set out at length in this Judgment the general principles relating to the implication of terms into contracts such as this. It is trite law that a term will only be implied into a contract if it is necessary to give efficacy to that contract: see The Moorcock [1889] 14 PD 64, at 68. In Trollope & Colls v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, at page 609, Lord Pearson said:

"An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract; it is not enough for the court to find that such a term will have been adopted by the parties as reasonable even if it had been suggested to them; it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves."

47. The question for any court considering an alleged implied term is to ask whether the contract was "inefficacious, futile and absurd" without the alleged implied term: see the speeches in the House of Lords in Tai Hing v Liu Chong Hing Bank [1986] AC 80 at 104, citing Liverpool City Council v Irwin [1977] AC 239.

G3. Implication Of Term As To Trust And Confidence

48. If I was unconstrained by authority, I would conclude that the implied term alleged by the Defendant at paragraph 8 of their defence does not come close to meeting the test of necessity set out above. The contract works perfectly well without it.
49. Further, I consider that there is authority directly in point which demonstrates that, in a complex commercial contract of this sort, there is no room for the implied term alleged. In Bedfordshire County Council v Fitzpatrick Contractors Ltd [1998] 62 Con LR 64, Dyson J (as he then was) rejected the contention that a highway maintenance contract included an implied term as to trust and confidence. He found that the implied term contended for did not satisfy the test of necessity and went on to say this:

"Second, the court should in any event be very slow to imply into a contract a term, especially one which is couched in rather general terms, where the contract contains numerous detailed express terms such as the contract in this case. In my judgment, in such a case, the court should only do so where there is a clear lacuna. The parties in this case took a great deal of trouble to spell out with precision and in detail the terms that were to govern their contractual relationships. The alleged implied term is expressed in broad and imprecise language. I can see no justification for grafting such a term onto a carefully drafted contract such as this."

I would respectfully adopt that reasoning and approach in the present case.

50. There is a third reason why I reject the alleged implied term. It is well established that, in a contract of employment, an implied term of trust and confidence is to be implied: see Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666 at 670. Indeed, in Bedfordshire CC, Dyson J distinguished between, on the one hand, contracts of employment, where such a term truly was necessary to make the contract work, and on the other, commercial arrangements of the sort with which he was dealing, where such a term did not satisfy the test of necessity. That leads on to this question: was the relationship between the Claimant and the Defendants in this case, being a relationship between a franchisor and a franchisee, closer to the commercial arrangement in Bedfordshire CC, or a contract of employment?
51. I am in no doubt that, as a matter of common sense, and on the authorities, the relationship is much closer to an ordinary commercial relationship, than one between employer and employee. There are a variety of reasons for this. First, Clause 32.11 of the second franchise agreement expressly stated that the Defendants' relationship with the Claimant was that of an independent contractor and was not a relationship of either agency or employment.
52. Secondly, the authorities demonstrate that the relationship between franchisor and franchisee is akin to the relationship between lessor and lessee. In Kall Kwik Printing (UK) Ltd v Frank Clarence Rush [1996] FSR 114 at 119, HHJ Cooke said:

"One way perhaps of looking at a franchise agreement is that this is a form of lease of goodwill for a term of years, with an obligation on the tenant, as it were, to retransfer the subject matter of the lease at the end of the lease in whatever state it is. So to that extent there is an obligation to transfer goodwill in a particular form which is much more akin, I think, to the goodwill cases than to the servant cases."

Likewise, in Dyno-Rod v Reeve [1999] FSR 149, at page 153, Neuberger J (as he then was) said that, whilst a franchise arrangement fell somewhere between the vendor/purchaser cases and the employer/employee cases, he agreed with HHJ Cooke that the franchise agreement was closer to a vendor/purchaser agreement and thought that the lease analogy had its attractions.

53. Accordingly, I find that, not only was this not a contract of employment, it was not even akin to such a contract. It was closer to the commercial relationship that existed in Bedfordshire CC. That is a third reason why I reject the implication of the alleged term as to trust and confidence in the present case.

G4. Preliminary Issues 9, 10 and 11

54. The terms of Preliminary Issues 9, 10 and 11 were as follows:

"9. Whether the facts and matters alleged in paragraph 25(1), even if proved would, by reason of the dates alleged, have amounted to a breach of the alleged implied term in the second franchise agreement of trust and confidence; alternatively whether, even if there had been a breach of the alleged implied term of trust and confidence by reason of the matters alleged in paragraph 25(1), any claim based upon such breach has been settled by Clause 1.3 of the second addendum; alternatively whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of the implied term as a result of the matters alleged in paragraph 25(1).

10. Whether the facts and matters alleged in paragraph 25(2), even if proved would, by reason of the dates alleged, have amounted to a breach of the alleged implied term in the second franchise agreement of trust and confidence; alternatively whether, even if there had been a breach of the alleged implied term of trust and confidence by reason of the matters alleged in paragraph 25(2), any claim based upon such a breach has been settled by Clause 1.3 of the second addendum; alternatively whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of the implied term as a result of the matters alleged in paragraph 25(2).

11. Whether the facts and matters alleged in paragraph 25(3), even if proved would, by reason of the dates alleged, have amounted to a breach of the alleged implied term in the second franchise agreement of trust and confidence; alternatively whether, even if there had been a breach of the alleged implied term of trust and confidence by reason of the matters alleged in paragraph 25(3), any claim based upon such a breach has been settled by Clause 1.3 of the second addendum; alternatively whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of the implied term as a result of the matters alleged in paragraph 25(3)."

55. These issues arise in this way. Even if, contrary to my finding, the contract contained the alleged implied term as to trust and confidence, the Claimant alleges that the claims outlined in paragraphs 25(1), (2) and (3) of the defence and counterclaim cannot legitimately be brought by the Defendant. This is because:

a) The facts and matters alleged arose before the second franchise agreement was signed and cannot therefore amount to breaches of that agreement;

b) Any such claims were compromised as a result of the terms of the second addendum to the second franchise agreement.

G5. Analysis

56. If, contrary to my conclusion set out above, the contract contained the alleged implied term as to trust and confidence, then it seems to me that the allegations of paragraphs 25(1), (2) and (3) are doomed to fail. They allege breaches of the second franchise agreement, respectively, in March 2004, July 2004 and September 2004. All such events occurred before the second franchise agreement was signed. As I have already noted, there is nothing to suggest that the second franchise agreement was in any way retrospective, or that the Defendants even suggest such a case. Thus the matters alleged in those sub-paragraphs cannot amount to breaches of the second franchise agreement in any event.
57. Further, for the reasons set out at paragraphs 29-31 above, even if there was such an implied term, and even if these three claims could be brought as breaches of the second franchise agreement, all such claims would have been settled by the clear terms of the second addendum of 28 April 2005. These claims are therefore doomed to fail.

H. PRELIMINARY ISSUE 7: TERMINATION ON NOTICE

H1. Preliminary Issue 7

58. The terms of Preliminary Issue 7 are as follows:

"7. Whether as a matter of necessary implication and/or by operation of law there was an implied term of the second franchise agreement that it was terminable by Pula on reasonable notice to be given by Pula and if so what was reasonable notice in the circumstances."

This claim arises by reason of paragraph 9 of the Defendant's defence, which alleges that there was an implied term of the second franchise agreement that it was "terminable by Pula on reasonable notice to be given by Pula to the Claimant. Pula's case is that a reasonable period for such notice was 30 days, alternatively 3 months, alternatively such other period as the court shall determine." The relevance of this further implied term is apparent from paragraph 31 of the Defendants' defence which alleges that, even if the First Defendant was in repudiatory breach by writing as it did on 1 August 2006, the First Defendant was always entitled to terminate the second franchise agreement in accordance with the implied term, so that "the Claimant's claim must be confined to the fees that would have been payable during that period of notice".

H2. Implication Of Terms/General

59. I have already set out, at paragraphs 46 and 47 of this Judgment, the general principles of law applicable to the implication of terms into contracts such as this. The term must be necessary, not merely reasonable.

H3. Implication Of Term As To Termination On Reasonable Notice

60. Where commercial contracts have no fixed term, the courts have been willing to imply a notice provision of the sort alleged: see, for example, Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] 1 WLR 1387. However, Mr Evans-Tovey was unable to identify any case in which an implied term as to termination on reasonable notice was implied into a contract with a fixed term. That is, perhaps, unsurprising: the whole point of a commercial contract which will last for a particular period (or until a specified event has happened) is that the contracting parties are committed to both the contract and each other for a known period. It seems to me that it would make a nonsense of such an arrangement if either party could give notice of termination at any time during the term, with minimal consequences, because, say, that party has received a more attractive proposal from someone else.
61. In addition, it is of course trite law that the court will never imply a term which is inconsistent with the express terms of the contract or which introduces an obligation which goes beyond the limits of the express terms that have been agreed. In Broome v Pardess Co-Operative Society of Orange Growers (Est 1900) Ltd [1940] 1 All ER 603, recently cited with approval by Patten J in WX Investments Ltd v Begg [2002] 1 WLR 2849, MacKinnon LJ said:

"Where the parties have made an express provision as regards some matter with regard to the contract, it is, and must be, extremely difficult for either of them to say in regard to that subject-matter, as to which there is an express provision, that there is also an implied provision or condition in the contract."

H4. Analysis

62. I am in no doubt that it is wholly unnecessary to imply the alleged term into the second franchise agreement. There are a number of different reasons for this. First and foremost, this was a contract which had a fixed term. There is no authority that suggests that there can ever be room, in a fixed term contract, for an implied termination provision of the sort alleged. For the reasons stated in paragraph 60 above, it is difficult to see how such a term could ever be implied into a fixed term contract.
63. Secondly, Clause 4.1 provided that the second franchise agreement "will continue in force thereafter for the term, unless and until terminated in accordance with the terms set out in this agreement". That makes it clear that termination could occur only in accordance with the express provisions of the second franchise agreement. In those circumstances, I conclude that the implied term relied on by the Defendants is contrary to Clause 4.1 of the second franchise agreement, because it seeks to provide for a termination process which is not 'set out in this agreement'. There can be no basis in fact or in law for implying a term into the second franchise agreement that is contrary to the express terms of that agreement.
64. Thirdly, Clause 26 of the second franchise agreement contained detailed provisions allowing the Claimant to terminate the agreement, on the occurrence of a variety of events, on 30 days notice. That again must point strongly to the conclusion that the parties did not intend that the right to terminate on 30 days notice was somehow shared by the Defendant, but not expressed in the second franchise agreement at all. Moreover, if the Defendants are right, and they had an unfettered right to terminate on 30 days notice, regardless of the circumstances, then (through the implied term) they would find themselves in a much more beneficial position than the Claimant, who could only terminate under Clause 26 on the happening of very particular events, usually requiring default on the part of the First Defendant. That anomaly, too, makes it plain that there can be no room in the second franchise agreement for the term alleged.
65. There is a suggestion in documents emanating from the Defendants that the second franchise agreement was in some way unfair because it provided the Claimant with a variety of reasons for early termination, but allowed the Defendant no similar rights. Plainly, questions of fairness are irrelevant to the implication of contract terms: as noted above, the basis for the implication of any term must be necessity, never reasonableness. Moreover, it cannot be said that a term contract of this sort is unreasonable merely because there were no express rights on the part of the Defendants to terminate. The Defendants would have been able to terminate at common law had the Claimant been in breach of the agreement. Beyond that, it seems to me that, maintaining the analogy between a franchise agreement and a lease originally drawn by HHJ Cooke in Kall Kwik, a term contract of this sort is akin to a lengthy lease without a break clause.
66. For all these reasons, therefore, I reject the alleged implication of the term purporting to allow the Defendants to terminate on notice.

I. PRELIMINARY ISSUE 8: NEGATIVE CASH FLOW

I1. Preliminary Issue 8

67. The terms of Preliminary Issue 8 are as follows:

"Whether, even if there had been a breach of Clause 15.1.36 in relation to the Brewsters Bridgewater customer account, any claim based upon such a breach has been settled by Clause 1.3 of the second addendum; alternatively whether the Claimant is entitled to damages for breach of the warranty and/or promises in Clauses 1.1 and 1.2 of the second addendum equal to any sum claimed and recovered by Pula for the alleged breach of Clause 15.1.36."

68. This issue arises in this way. At paragraph 24(5)(a) of their defence, the Defendants allege that the Claimant was in breach of Clause 15.1.36 in respect of a particular contract. The Claimant alleges that, even if that were right, on the Defendant's own pleading, the breach occurred before the second addendum to the second franchise agreement was agreed and was therefore settled by the terms of that addendum.

I2. Discussion

69. Clause 15.1.36 was designed to allow the Claimant to negotiate national accounts with customers and to transfer to the Defendants contracts from other franchisees. In either case, Clause 15.1.36.1 expressly obliged the Claimant to take such steps as it reasonably deemed appropriate to remove any negative cash flow that the Defendant would otherwise suffer as a result of servicing that particular contract.
70. Paragraph 24(5) of the defence alleges four breaches of that obligation. I am not concerned with those alleged at sub-paragraphs (b) – (d) inclusive. The allegation at (a) is in respect of a sale in December 2004 to Brewsters in Bridgewater, the allegation being that the sales person who sold the contract at this time failed to take any or any proper account of the extent of the work required, by comparison with the charges agreed. It seems clear, therefore, that the relevant breach occurred in December 2004. That was at a time when the second franchise agreement was in force. A claim for breach therefore existed as at 28 April 2005, and was thus settled by the addendum agreement of that date (see paragraphs 29-31 above).

J. SUMMARY OF ANSWERS TO PRELIMINARY ISSUES

J1. Preliminary Issue 1

71. I have concluded that there was no obligation on the part of the Claimant under the second franchise agreement to provide any further initial business, because the parties were agreed that the initial business had already been supplied. My reasons are set out at paragraphs 24-28 above.

J2. Preliminary Issue 2

72. I have concluded that if, contrary to my primary view, the Claimant was obliged to provide further initial business under the second franchise agreement, the Claimant was in breach of that obligation from November 2004 onwards, and therefore any claim based on that breach was compromised by the terms of the second addendum of 28 April 2005. My reasons are set out at paragraphs 29-31 above.

J3. Preliminary Issue 3

73. I have concluded that there was no implied term as to the reasonable exercise of discretion. My reasons are set out at paragraphs 32-34 above.

J4. Preliminary Issue 4

74. I have concluded that the claim at paragraph 24(3) of the defence cannot amount to a breach of the second franchise agreement because the relevant event occurred before the second franchise agreement was agreed. Alternatively I have concluded that any claim was compromised by the second addendum agreement. My reasons are set out at paragraphs 35-39 above.

J5. Preliminary Issue 5

75. I have reached the same conclusion on Preliminary Issue 5 as I have reached on Preliminary Issues 1 and 2, and for very similar reasons. Those reasons are set out at paragraphs 40-44 above. There was no obligation to provide initial training under the second franchise agreement and, even if I was wrong about that, any claim for breach was compromised by the terms of the second addendum.

J6. Preliminary Issues 6, 9, 10 and 11

76. I have concluded that there was no implied term as to trust and confidence for the reasons set out at paragraphs 45-53 above. However, if I were wrong about that and there was such an implied term, the claims made in the defence at paragraphs 25(1), (2) and (3) could not amount to breaches of the second franchise agreement because the relevant events occurred before the agreement had been reached. Furthermore if I was also wrong about that, then any such claims would have been compromised by the second addendum agreement. The reasons for these subsidiary conclusions are set out at paragraphs 54-57 above.

J7. Preliminary Issue 7

77. I have concluded that there was no implied term allowing the Defendant to terminate on notice. Such a term was contrary to the express terms of the contract and could not be regarded as necessary in any event. My reasons are set out at paragraphs 58-66 above.

J8. Preliminary Issue 8

78. I have concluded that, if the Claimant was in breach of Clause 15.1.36.1 then the claim at paragraph 24(5)(a) was compromised by the terms of the second addendum of 28 April 2005. My reasons are set out at paragraphs 67-70 above.