Jersey Unreported Judgments

Companies - reasons for granting the Defendant leave to appeal the judgment of the Royal Court dated 1 February 2018

[2018]JCA152

Royal Court

 

30 August 2018

Before     :

J. W. McNeill, Q.C., sitting as a Single Judge

 

Advocate J. D. Garrood for the Plaintiffs.

Mr Kevin Doyle, litigant in person, on behalf of the Defendant.

judgment

MCnEILL jA:

1.        There is before me, sitting as a single judge of the Court of Appeal, an application on behalf of the defendant for leave to appeal a judgment of the Royal Court dated 1 February 2018, Hard Rock Limited v HRCKY Limited [2018] JRC 026, leave to appeal having been refused by the Royal Court (Le Cocq, DB, sitting alone) on 12 July 2018 Hard Rock Limited and Hard Rock Café International (STP) Inc v HRCKY Limited [2018] JRC 125. 

2.        In the judgment of 1 February 2018, the Royal Court, for the reasons given there, granted an application by the plaintiffs for summary dismissal of the counterclaim of the defendant, the counterclaim being the only part of the proceedings at that time remaining as a live issue between the parties.

3.        In refusing to grant leave, the learned Deputy Bailiff proceeded upon the test set out in Crociani v Crociani [2014] (1) JLR 426 to the effect that an applicant must show (a) that the appeal has a real prospect of success, (b) a question of general principle which falls to be decided for the first time, or (c) that there is an important question of law upon which further argument and a decision of the Court of Appeal would be to the public advantage: see Crociani at paragraphs 50 and 51. 

4.        After identifying the essence of the application before him, the Deputy Bailiff pointed out that, notwithstanding the points made on behalf of the defendant as to the nature of the contract, the importance of the concept of good faith and the untruthfulness of representations, the Royal Court, in granting summary dismissal, had been satisfied that no causal link had been shown by the defendant between the defendant's allegations of bad faith and the losses claimed. 

5.        Upon that basis the learned Deputy Bailiff considered that it had not been shown that an appeal would have a real prospect of success, nor that there was a point of general principle decided for the first time on which a discussion before the Court of Appeal would be of public interest. 

6.        Before me, Mr. Doyle, for the defendant, did not take issue with the test adopted by the learned Deputy Bailiff.  His renewed application depends, therefore, upon persuading this court that an appeal against the grant of summary dismissal of the defendant's counterclaims has a real prospect of success.  If the position which emerges is, as it appeared to the Deputy Bailiff, that there was a fundamental obstacle in the way of the claim, i.e. something which is neither dependent upon a general principle falling to be decided for the first time nor on an important question of law, the first part of the test set out in Crociani is the only part which need concern the court from whom leave to appeal is sought unless the issues are so exceptional that, even absent real prospects of success, the matter should be referred to the Court of Appeal.

7.        It is also to be remembered that what is required is a prospect of success and not a guarantee of success.  A fanciful prospect is insufficient: the prospect must be palpable.  In the ordinary case, where the application comes after trial, the facts found at first instance and the discussion of law will enable an informed discussion to take place with a reasonable degree of precision.  It is a different matter where the determination has been in respect of an application for summary dismissal.  Inevitably, the determination sought to be appealed has been made in a different context. 

8.        It therefore follows, here, that the defendant is under the burden of showing that he has a real prospect of persuading the appellate court that his case should not have been dismissed summarily. 

9.        This, then, takes one back to the February decision in respect of which, also, Mr. Doyle, for the defendant, does not contend that the wrong test was adopted: rather, the contention is that it was not properly applied. 

Background

10.      Because of the nature of this application, a narration of the background can be stated shortly.  More detailed narrations can be found in other decisions regarding the issues between the parties. 

11.      In June 1999 the first plaintiff granted the defendant a franchise to operate a Hard Rock Café branded restaurant in the Cayman Islands.  Shortly thereafter, the defendant entered into a memorabilia lease with the second plaintiff, leasing items to be displayed in Hard Rock Café premises as part of the Hard Rock Café image.

12.      In June 2013 the first plaintiff purported to terminate the franchise agreement and that had the effect of also terminating the memorabilia lease.  The plaintiffs then brought proceedings in the present jurisdiction seeking recovery of sums said to be owed under the franchise agreement and, in December 2013, judgment was pronounced in their favour awarding decree for certain sums due under the franchise agreement.

13.      Upon the plaintiffs bringing proceedings in this jurisdiction, the defendant counterclaimed for alleged misrepresentation and breach of contract in relation to the franchise agreement.  The counterclaim, as amended, presented grounds of misrepresentation/dol, dol par réticence, and breach of contract in the form of breach of an implied duty of good faith. 

14.      The defendant alleged that it was induced to enter the franchise agreement by reason of misrepresentations made by an employee of the plaintiffs as to returns and anticipated profitability; misrepresentations which were untrue and which the first plaintiff either knew to be untrue of was reckless as to their truth.  As regards breach of contract, it was alleged that, in breach of a duty to act in good faith, the first plaintiff refused to accede to requests by the defendant which would have addressed the losses that were being made, notwithstanding being aware that restaurant franchises in many other locations were loss making if run in accordance with the franchise agreement. 

15.      The counterclaim duly continued as an independent action after judgment had been given on the principal claim. 

16.      It is also pertinent to note that, during a dispute as to the appropriate extent of disclosure, the Royal Court (Birt Kt., Commissioner sitting alone) Hard Rock Limited v HRCKY Limited [2017] JRC 048, on appeal from the Master, ordered the plaintiffs to give discovery of specific documents over the period 1998 - 2013.  In doing so the Royal Court indicated that, whilst information after 1999 could not be relevant to the claim of misrepresentation, it might be relevant for the claims of breach of duty of good faith when refusing requests by the defendant to depart from the model of operation required under the franchise agreement: see paragraphs 27 to 29. 

The Determination Below

17.      In proceeding to grant summary dismissal, the Royal Court (Le Cocq, DB and Jurats Nicolle and Ronge) observed that the application was brought pursuant to Rule 7/7 (1) of the Royal Court Rules 2004 (as amended), a relatively new rule which came into force on 1 June 2017.  The rule provides that the court has discretion to give summary judgment if it considers that the claim or defence has no real prospect of succeeding and there is no other compelling reason why the case or issue should be disposed of at trial. 

18.      As the Royal Court observed, the test had been considered by the court in MacFirbhisigh and Ching v CI Trustees and Others [2017] JRC 130A (Hunt, Commissioner) at paragraphs 16-19.  The court below decided to follow the principles set out in MacFirbhisigh.  In essence, those are the principles set out by Lewison J., in Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch) at paragraph 15:

"(i)      The court must consider whether the claimant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91;

(ii)       A "realistic" claim is one that carries some degree of conviction.  This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8];

(iii)      In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman;

(iv)      This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court.  In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED &F Man Liquid Products v Patel at [10];

(v)       However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application of a summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;

(vi)      Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment.  Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Limited v Bolton Pharmaceutical Co 100 Limited [2007] FSR 63;

(vii)     On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it.  The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be.  Similarly, if the applicant's case is bad in law, the sooner that is determined, the better.  If it is possible to show by evidence that although material in the form or documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success.  However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Limited v TTE Training Limited [2007] EWCA Civ 725."

19.      In proceeding to apply these principles or tests, the Royal Court first considered the defendant's good faith claim.  On this, the Royal Court found, at paragraphs 24 to 25 that it could not be said that the defendant could have no real argument to make as to the contention that every Jersey contract should be seen as containing an implied term of good faith of particular ambit and reach notwithstanding the express terms of the contract. 

20.      The Royal Court noted, however, that the claim in respect of the breach of the implied duty of good faith and cooperation, as set out in the re-amended counterclaim, was said to have prevented the defendant from taking steps to reduce or prevent the "huge losses which it has continually suffered on the restaurant side of its operation or to repay and/or recoup its investment in the Grand Cayman franchise.". 

21.      Whilst the Royal Court went on to express the view that there did not appear to be evidence to suggest breach of any term of good faith, should one exist in the contract, it observed that there did not appear to be any causal link established on the pleadings to point to losses incurred by the defendant as a result of any possible want of good faith.  As the Royal Court indicated at paragraph 31, expert evidence was to the contrary, and even the defendant's expert report indicated:

"As the restaurant was a low margin business, its operating and financial costs were too high to enable the restaurant to break even or make a profit, a substantial restructure of the restaurant operations would have been required to maintain HRCKY's profitability.  Such a restructuring [would] likely require the adoption of smaller premises, less staff, adjustments to the menu and opening hours, changes in supplier contracts, and other cost cutting measures.". 

22.      The Royal Court therefore reached the view that it would not be possible, on the case as pleaded or on the evidence from the experts, to establish what, if any, loss flowed from the alleged breach of a term of good faith.  There was, therefore, no real prospect of success of recovering any damages in respect of the good faith claim. 

23.      Turning to the defendant's claim based on dol, or fraud, the Royal Court observed that the defendant had pleaded the claim as a misrepresentation.  Here, whilst noting certain inconsistencies in the pleaded case, the Royal Court pointed out that the report of the joint experts, produced by order of the Master dated 24 January 2017, did not support the allegation of misrepresentation: see paragraphs 38 and 39 of the determination below. 

24.      Furthermore, the Royal Court considered that the "entire agreement" provision of the franchise agreement had the effect that had the defendant sought to rely upon specific representations those representations should have been contained within the franchise agreement in some form or another. 

25.      Dealing with the claim of réticence dolosive, the Royal Court identified the claim as being that the plaintiffs had induced the defendant to enter into the franchise agreement in failing to provide material facts to the defendant, such as that the restaurant part of the business was only profitable in a very few locations and, in the majority of locations, unprofitable and loss making. 

26.      As it seemed to the Royal Court, the thrust of the argument depended entirely upon whether the defendant was entitled to treat the two elements of the franchise business - the restaurant business and the merchandise business - as separate matters in respect of which separate representation should have been made.  So far as the Royal Court could see, the franchise agreement related to one business and, albeit with two elements, was a single and entire franchised operation.  Even so, the evidence available to the Royal Court suggested that the franchise business was initially profitable until external factors in 2004 caused material difficulty to the business.  In the view of the Royal Court, the defendant would not succeed in a claim of dol par réticence. 

Submissions to this Court

27.      In renewing his application on behalf of the defendant for leave to appeal, Mr. Doyle sought to respond to the views expressed by the court below and by the learned Deputy Bailiff in his refusal to grant leave to appeal.  As regards the suggestion that there was no causal link between the defendant's allegations of bad faith and the losses claimed, the contention for the defendant was that, were the plaintiffs to be forced to comply fully with the Discovery requirements, this would lead to the finding of documentation capable of establishing a causal link proving that the defendant's restaurant losses resulted from the breaches of good faith.  Mr. Doyle did not, however, seek to deal with the apparent impact of the view of the defendant's expert that a substantial restructuring of the restaurant operations would have been required, but without indicating at all whether a restructuring could be posited which would have maintained a particular level of profitability. 

28.      As regards the claim based upon dol or misrepresentation, Mr. Doyle sought to press the point that undisclosed financial documentation would prove that the plaintiff had withheld the true dichotomy of its business model and that it was aware of the predisposition of its restaurants to make heavy losses. The "entire agreement" provision was not a clear shield. 

29.      In respect of dol par réticence Mr. Doyle contended that it could be seen that the franchise agreement clearly covered two distinct, separate licenced businesses.  He contended that the plaintiffs' operating practice and profit recording kept separate note of the profits of restaurants and merchandise.  He pointed out that, although the Restaurant Profit Summaries had not yet been disclosed, Advocate Garrood had been able to indicate to the Royal Court at the Summary Dismissal Hearing (Transcript: page 97) that over half of the restaurants franchised did not make profits on their own account.  However he did not deal with the point raised by the Royal Court that it did not appear, on the evidence, that the franchise business was unprofitable until about 2004. 

30.      For the plaintiffs, Advocate Garrood relied upon the views of the Royal Court.

Discussion

31.      As with the Royal Court in its judgment of 1 February 2018, I take the individual elements of the counterclaim separately. 

32.      Looking, first, at the breach of trust claim I have noted that Mr. Doyle does not dispute that the complaints relied upon are those set out in paragraphs 19 and 20 of the re-amended counterclaim.  It follows that this claim seeks to recover losses occasioned by the first plaintiff's failure properly to engage with the defendant's repeated requests, since 2002, to be permitted to implement changes to the operation of the restaurant business so as to reduce the year by year losses that were being incurred. 

33.      As is clear from the determination of the Royal Court, this claim involves a number of complexities, but the most serious hurdle for the defendant is the failure to identify, with any reasonable degree of precision, the losses which flowed from any such breaches or the formula by which they might be calculated.  As indicated in principle (v) from Easyair, the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial.  That consideration, however, does not absolve a party from the consequences of failing to lay the basis in pleadings or supporting statements for essential elements of its case.  In the present matter, the section of the expert opinion set out at paragraph 31 of the determination of the Royal Court shows that very detailed consideration would require to be given to the necessary nature of a restructuring, the likely acceptability to the franchisor and the net financial effect.  This would require, at the very least, a firm outline but, as the Royal Court has indicated, if the case proceeded to trial as presently pleaded there is no appraisable case as to the establishment of what if any loss flowed from the alleged breach of a term of good faith. 

34.      In my judgment the point taken by the Royal Court is of fundamental importance.  Even were there to be more extensive recovery and a breach of good faith shown, the defendant's case must be capable of showing losses arising from those breaches.  The defendant's expert suggests a more fundamental problem and no clear causal link is offered.  In my judgment there is no prospect of the defendant succeeding in overturning the determination of the Royal Court that it was appropriate that this basis of claim, breach of trust, should be dismissed summarily. 

35.      The case based upon dol or fraud - here, however, pleaded as misrepresentation - is of a different nature to that pleaded on breach of trust.  If a party to a contract makes a false statement which induces the other party to enter the contract there is a defect of consent ("vice du consentement") which allows the injured party to treat the contract as void: see Steelux Holdings Limited v Mary Martine Edmonstone née Hall [2005] JRC 062 at paragraph 10 (Sir Philip Bailhache Kt, B.).

36.      Regarding this case, the concerns expressed by the Royal Court were as to the impact of certain sections of the joint expert report and of the "entire agreement" provision of the franchise agreement. 

37.      As to the former, the experts were in agreement that the defendant's actual results were broadly consistent with certain of the projections prepared in March 1999 on behalf of the first plaintiff.  However the joint report is based upon the documents available to the experts and, as was pointed out by the learned Deputy Bailiff to the plaintiffs' Advocate at the summary judgment hearing, there had not yet been full compliance with the disclosure orders. 

38.      It is clear that both Commissioner Birt and the learned Deputy Bailiff in their determinations in respect of disclosure were very firm as to what information the defendant should expect to have in order properly to present the case on the counterclaim.   Without the entirety of that evidence, evidence which should "reasonably be expected to be available at trial" (Easyair, principle (v)), it is difficult to see what weight can be placed on the current joint expert report on this matter. 

39.      Furthermore, whilst the Royal Court suggested that the "entire agreement" provision in the franchise agreement indicated that any representation should have been specifically referred to, it is not clear to me how reliance upon such a provision could save an agreement which might otherwise be vitiated by a false statement or concealment under the dol principles. 

40.      In my judgment, therefore, there is a real, as opposed to fanciful, prospect of success for the defendant in asking this court to interfere with the summary dismissal of the defendant's counterclaim in respect of this head. 

41.      I reach the same view in respect of the claim based upon dol par réticence.  The defendant claims to be entitled to treat the two elements of the franchise business - the restaurant business and the merchandise business - as separate matters in respect of which separate representations should have been made.  The Royal Court indicated that, upon its reading of the agreement, it disclosed one business, one franchise, and, albeit with two elements, was a single and entire franchised operation.  Even so, the Royal Court was cautious in reaching the view that it seemed to them 'difficult to suggest' that the plaintiffs, dealing with a party which held itself out as capable of operating the franchise in the form offered, should have provided separate information as to each of the two elements of the franchised operation. 

42.      It seems to me that the issue raised under this head might be argued to sit more properly under the sixth principle in Easyair, namely that a court should hesitate about making a final decision without a trial where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case.  As the Royal Court saw it, determination of the issue lay in an appraisal of the franchise agreement and the result, in their view, was that the proper characterisation of the franchise agreement was that it was one agreement with two elements as opposed to a matter in respect of which separate representation should have been made about each element.  However, Mr Doyle makes a potentially important point in suggesting that the plaintiffs must have kept separate note of the profits of restaurants and merchandise in order for Advocate Garrood to have been able to indicate to the court below that over half of the restaurants franchised did not make profits on their own account.

43.      There are instances when it is important in the determination of rights and obligations to identify the proper characterisation of a juristic act: similar circumstances might fall to be regarded as bilateral contact, gratuitous obligation or constitution of a trust relationship.  Often the analysis will be carried out purely by reference to an executed document; on occasion it may be permissible to refer to the matrix of fact surrounding such evidence.  Here the position appears susceptible to nuance.  The Royal Court concluded, in paragraph 51 "Although the defendant now wishes to make a distinction between elements of the business that distinction does not to us seem to be borne out by the RFA itself nor the way the business was conducted."  It appears from that statement that the Royal Court had in mind that circumstantial evidence might be of assistance.  The contention for the defendant was that a distinction should be drawn especially as it appeared that evidence would be available that the plaintiffs, for their own business purposes, kept separate record of the financial results for the two parts of the franchise: the restaurant and the merchandising.  In my judgment it cannot be said that there is a merely fanciful prospect of success for the defendant of persuading an appellate court that that the Royal Court ought not summarily to have dismissed this part of the case. 

Decision

44.      For all these reasons I grant leave to appeal in respect of the decision of the Royal Court summarily to dismiss the defendant's counterclaim insofar as based upon issues of dol and dol par réticence. 

Authorities

Hard Rock Limited v HRCKY Limited [2018] JRC 026. 

Hard Rock Limited and Hard Rock Café International (STP) Inc v HRCKY Limited [2018] JRC 125. 

Crociani v Crociani [2014] (1) JLR 426. 

Hard Rock Limited v HRCKY Limited [2017] JRC 048. 

Royal Court Rules 2004 (as amended). 

MacFirbhisigh and Ching v CI Trustees and Others [2017] JRC 130A. 

Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch). 

Steelux Holdings Limited v Mary Martine Edmonstone née Hall [2005] JRC 062.