Before : |
Sir Michael Birt, Commissioner, sitting alone. |
|||
Between |
Hard Rock Limited |
First Plaintiff |
|
|
And |
Hard Rock Café International (STP) Inc. |
Second Plaintiff |
|
|
And |
HRCKY Limited |
Defendant |
|
|
Advocate J. D. Garrood for the Plaintiffs.
Advocate N. M. Sanders for the Defendant.
judgment
the commissioner:
1. This is an appeal by the defendant against that part of the decision of the Master, Hard Rock Limited-v-HRCKY Limited [2016] JRC 157, whereby he refused to order specific discovery of certain documents.
2. Shortly following the hearing, I announced my decision to allow the appeal and to order certain specific discovery. An Act was drawn up to reflect that decision. I now give my reasons.
3. The first plaintiff is a Jersey company forming part of the Hard Rock group of companies. It enters into franchise agreements for the Hard Rock Group. The second plaintiff is a New York Corporation and is the vehicle within the Hard Rock Group which enters into memorabilia leasing agreements for items displayed in Hard Rock Café premises as part of the Hard Rock Café image.
4. On 11th June, 1999, (the "franchise agreement") the first plaintiff granted the defendant a franchise to operate a Hard Rock Café branded restaurant in the Cayman Islands. Shortly afterwards the defendant entered into a memorabilia lease with the second plaintiff.
5. The first plaintiff purported to terminate the franchise agreement in June 2013 and this had the effect of also terminating the memorabilia lease.
6. In due course the plaintiffs brought proceedings in this jurisdiction seeking recovery of sums said to be owed under the franchise agreement. The defendant has counterclaimed for alleged misrepresentation and breach of contract in relation to the franchise agreement.
7. On 19th December, 2013, the Master gave judgment, Hard Rock Ltd and another-v-HRCKY Limited [2013] JRC 244B, in which he declared that the franchise agreement (and therefore the memorabilia lease) had been lawfully terminated and awarding certain sums against the defendant as being due under the franchise agreement. Accordingly, since then, the only live matter before this Court has been the counterclaim of the defendant.
8. As amended, the counterclaim is based on the grounds of misrepresentation/dol, dol par reticence, and breach of contract, namely breach of an implied duty of good faith.
9. In briefest outline, the defendant alleges that it was induced to enter the franchise agreement by reason of misrepresentations made by a Mr Sam Marable, an employee of the Hard Rock group, as to returns, anticipated profitability and other matters, which misrepresentations were untrue and where the first plaintiff knew them to be untrue or was reckless as to their truth. It is alleged that it knew at the time of making the representations that the franchises in many other locations were loss making/unprofitable if run in accordance with requirements of the franchise agreement. As to breach of contract, it is pleaded that the first plaintiff was aware that franchises in many other locations were loss making/unprofitable if run in accordance with the franchise agreement, particularly with reference to the restaurant side, but in breach of the duty to act in good faith, refused to accede to requests by the defendant that would have addressed the losses that were being made. The defendant claims to have suffered losses as a result of the fraudulent or reckless misrepresentations and the breach of the duty of good faith and seeks damages as a result.
10. Mutual discovery was given in the ordinary way but the defendant considered the discovery given by the plaintiffs to be insufficient and accordingly issued a summons seeking specific discovery of a substantial number of documents. That is the matter which came before the Master and was the subject of the judgment under appeal, which was issued on 9th September, 2016.
11. The Master reminded himself (at para 7) of the test for specific discovery taken from the head note of Vilsmeier v A1 Airports International Limited and P1 International Limited [2014] JLR N 26 as follows:
"On an application for a specific discovery, an applicant is required to show (a) a prime facie case that the defendant has, or has had, documents that have not been disclosed; (b) that the documents in question are relevant to matters in issue in the case - relevance is determined, primarily, by reference to the issues pleaded; and (c) that an order for specific discovery is necessary for disposing fairly of the case... Specific discovery should not be ordered where it is sought solely for cross-examination as to credit...."
I agree that that is the appropriate test.
12. The specific discovery sought by the defendant was wide ranging and was contained at paragraphs 1.1 to 1.16 of its summons as set out by the Master at paragraph 4 of his judgment. The two paragraphs of the summons which were refused by the Master and which form the subject of this appeal were in the following terms:
"1.7 Profit and loss accounts (and any accounting or financial records and reports and other documents relating to and/or which form the basis of the profit and loss accounts) and Profit Summary for the Hard Rock Café units in San Juan, St Thomas and Key West for the period 1988 - 2013 inclusive.
1.8 The following documents prepared for each of the financial periods from 1998 to 2004 and 2011 to 2013 inclusive:-
(i) Hard Rock Café - Active Units - Cafés Restaurant Only Summary
(ii) Hard Rock Café - Active Units - Cafés Restaurant EBIT (%)
(iii) Hard Rock Café - Active Units - Cafés Restaurant + Merchandise Summary
(iv) Hard Rock Café - Active Units - Cafés Industry Benchmark Comparison."
13. It emerged before the Master that there were two categories of Hard Rock Café. Some were run by the Hard Rock group itself. These have been referred to as 'corporate cafés'. Others (like that run by the defendant) were operated by entities which had entered into a franchise agreement (franchise cafés). The main difference was that franchise cafés had to pay royalties to the Hard Rock group.
14. The Master made fairly wide ranging orders (although not as wide ranging as the extremely broad orders sought by the defendant) in respect of the provision of financial information about franchise cafés. As set out at paragraph 32 of his judgment, he considered that this was relevant to the issues raised by the counterclaim.
15. However, he took a different view in relation to the corporate cafés. He summarised his decision at paragraph 29 of his judgment as follows:
"In respect of these records [i.e. records of corporate cafés] I could see how the defendant might contend, by reference to the performance of other cafés and restaurants run by the Hard Rock group itself, that performance of such cafés and restaurants might be relevant to the plaintiffs' knowledge of the profitability of the restaurant side of a business as distinct from the restaurant and merchandise sales combined. However I was not satisfied that I should order disclosure of this information. This was firstly because the defendant's claims concerned operation of a franchise agreement. Information in relation to other cafés and restaurants which were run by the Hard Rock group itself was not comparing like with like. Such businesses did not have to pay royalties or licence fees. Their profitability was not therefore affected, unlike franchise agreements, by having to pay royalties to the Hard Rock group. Even if some form of comparison can be made, in my view the relevance is marginal at best. However the request in any event failed the test of necessity. To require the plaintiffs to provide information on all cafés operated by the Hard Rock group itself between 1999 and 2013 is oppressive. The number of cafés in operation by the Hard Rock group itself appeared to have ranged between 40 and over 100 during the period requested. To require up to 100 cafés, if not more, to produce information about their financial information, even on an annual basis, goes too far and is burdensome, in particular where any comparison that can be made is not like for like and is only of marginal relevance as I have set out above. In addition, to the extent that the defendant wishes to advance arguments either through expert evidence or by way of cross examination, it already has material that has been disclosed or come into the defendant's possession which allows it to put such questions as it wishes to in relation to the profitability of cafés run by the Hard Rock group and what that might mean in relation to the profitability of franchise operations."
16. He therefore refused the request at para 1.7 of the summons which related to three specific corporate cafés, namely those at St Juan, St Thomas and Key West. As to the request at paragraph 1.8, he considered this in conjunction with other wide ranging paragraphs in the summons which referred to information about the Hard Rock group itself. He refused this request for similar reasons.
17. Advocate Sanders submitted that information about the performance of the corporate cafés is relevant to both the claims in both misrepresentation and breach of contract. The Master was provided with the fifth affidavit of Mr Kevin Doyle, the principal of the defendant. This set out some of the background and explained why specific discovery as requested in the summons was necessary.
18. Mr Doyle has sworn a sixth affidavit for the purposes of this appeal. That goes into further detail.
19. It appears that Mr Marable had initially produced a report in October 1998 analysing the prospects of operating a corporate café in the Cayman Islands ("Cayman"). Subsequently, in March/April 1999, Mr Doyle had meetings with Mr Marable, who assisted Mr Doyle with the production of financial proformas and budgets. He told Mr Doyle that, in coming to those figures, he had drawn heavily on the corporate cafés operated in St Juan, St Thomas and Key West which he considered were reasonable comparators for projecting how the Cayman café would perform. He also used figures from the Miami corporate café. Mr Doyle states that he prepared a final report (the "Final Report") on behalf of the defendant setting out the anticipated costs and revenues of the proposed Cayman franchise. This was used by the defendant to obtain bank financing. He states that the Final Report incorporated costs, revenue and profit forecasts based upon the projections provided by Mr Marable, which were in turn based on the financial performance of a number of corporate cafés which Mr Marable considered to be good comparators. Mr Doyle exhibited the Final Report to his sixth affidavit and that Report stated specifically that the revenue projections were based on the corporate cafés at St Juan and St Thomas and the cost projections were based upon those of the corporate café in Miami, increased to take account of the higher costs in Cayman.
20. Advocate Sanders argued therefore that it was clear that the figures from the named corporate cafés were considered relevant, at the time, to the franchise café to be run by the defendant. The documents sought at para 1.7 of the summons were therefore clearly relevant to whether there had been any misrepresentation.
21. As to the documents at para 1.8, the fifth and sixth affidavits of Mr Doyle showed that there existed Profit Summaries in relation to the corporate cafés generally because the defendant was in possession of such Profit Summaries for the period 2005 - 2010. The Profit Summaries already in the defendant's possession supported the allegation that the plaintiffs were aware that the restaurant business was loss making and showed a very different picture from the representations made by the plaintiffs in 1999, a mere 6 years earlier. It was therefore relevant to have the Profit Summaries for the earlier period and also for the later period in relation to the allegation of breach of contract.
22. Advocate Garrood argued that this was no more than a fishing expedition and that the Master was right to reach the decision which he did in relation to corporate cafés. There was no evidence before the Court that the corporate cafés at St Juan, St Thomas and Key West were useful comparators. In particular two of them were in US territories and had the benefit of US Customs regimes while Key West was in the mainland United States.
23. Furthermore, Advocate Garrood produced at the hearing a number of documents which, he submitted, suggested that Mr Doyle had advised on the position in Cayman prior to 1999 as a consultant and was therefore very familiar with the position. It was suggested that there was no question of Mr Doyle relying on information provided by Mr Marable; rather he relied upon his own expertise and knowledge. The fact was that the Cayman operation was a franchise operation whereas what was now being sought was detailed information about corporate cafés, where different financial considerations applied. As the Master said, such information could only be of marginal relevance and it was not necessary or proportionate to order specific discovery. He further suggested that the Profit Summaries relied upon by the defendant did not show such a negative position as the defendant suggested.
24. He further submitted that, even if I was against him in relation to information about the position in 1999, information in later periods could not be relevant to whether there had been any misrepresentations or dol at the time of the franchise agreement.
25. The sixth affidavit of Mr Doyle has provided more detailed information than was before the Master.
26. I am satisfied that disclosure of documents concerning the performance of the corporate cafés at St Juan, St Thomas and Key West is relevant to the issues raised in the counterclaim and it is necessary and proportionate to order their disclosure. I would summarise my reasons as follows:
(i) There is evidence to suggest that Mr Marable on behalf of the first plaintiff purported to extract figures from one or more of these corporate cafés and provided that information to Mr Doyle. That information was used by Mr Doyle in the preparation of the Final Report and that is expressly stated to be the case in the Final Report.
(ii) In those circumstances, it seems to me undoubtedly relevant to see the figures for those corporate cafés in order to assess whether the information provided by Mr Marable was accurate or not.
(iii) I do not regard this as unduly onerous. During the course of the hearing I clarified with Advocate Sanders that he was not seeking all the underlying documentation in relation to the accounts of the three cafés. He was merely seeking the profit and loss accounts of those three corporate cafés for the relevant period together with Profit Summaries (in the form clearly already available because of the documents already in the possession of the defendant) together with evidence as to the allocation of costs between the restaurant and merchandise operations for each of the cafés which again would seem to be available judging by documents already in the possession of the defendant for later periods.
27. I agree that disclosure should be for the period 1998 - 2013 inclusive. Whilst information after 1999 cannot be relevant to the claim of misrepresentation, it may be relevant for the claims of breach of the duty of good faith in that, if the documents show that the plaintiffs were aware of financial difficulties in their corporate cafés in later periods, it may well be relevant to whether they were acting in good faith when refusing requests by the defendant to depart from the model of operation required under the franchise agreement.
28. As to paragraph 1.8, I consider that these documents are relevant for the same reasons. There are reasonable grounds for thinking that these documents will provide information about the performance of corporate cafés and the restaurant side of the business in particular. Again, I consider it relevant both in relation to the claims of misrepresentation (so far as the information is available for 1999 and earlier years) and to the claim for breach of contract.
29. I also consider that it is proportionate to order the disclosure of such documents and that such documents exist. The defendant is already in possession of documents collating this information under the four headings for the years 2005 - 2010 and it is therefore reasonable to think that such information has been collated for the earlier and later years.
30. It is for these reasons that I allowed this appeal and ordered that the plaintiffs give specific discovery in the following terms:
(i) With regard to the Hard Rock Café units in St Juan, St Thomas and Key West:-
(a) Profit and loss accounts for the period 1998 - 2013 inclusive;
(b) Profit Summaries in the form appearing at document 436 of the defendant's list of documents served on 24th November, 2015, for the periods 1998 and 2003 - 2013 and;
(c) Documents evidencing the allocation of costs as between restaurant and retail operations for each café during the periods 1998 - 2013 as recorded in the Profit Summary at document 436 and in the documents to be disclosed pursuant to (i) and (ii) respectively.
(ii) The following documents prepared for each of the financial periods from 1998 - 2004 and 2011 to 2013 inclusive, in the form appearing at or materially similar to documents 445, 447, 453, 454 and 457 of the defendant's list of documents served on 24th September, 2015:-
(a) Hard Rock Café - Active Units - Cafés Restaurant Only Summary;
(b) Hard Rock Café - Active Units - Cafés Restaurant EBIT (%);
(c) Hard Rock Café - Active Units - Cafés Restaurant + Merchandise Summary;
(d) Hard Rock Café - Active Units - Cafés Industry Benchmark comparison.
Authorities
Hard Rock Limited-v-HRCKY Limited [2016] JRC 157.
Hard Rock Ltd and another-v-HRCKY Limited [2013] JRC 244B.
Vilsmeier v A1 Airports International Limited and P1 International Limited [2014] (1) JLR Note 26.