Burger King v King Franchises

This is an application in an action arising out of disputed termination at a Burger King franchise in Cyprus. As I am clear in my mind what the outcome should be I am going to give judgment on the spot.

The Claimants, Burger King Corporation and Burger King Europe, granted the Defendants, King Franchises Limited, rights under development and some franchise agreements in 2003 and 2008. After the parties fell out they later entered into a severance agreement, dealing with matters that had arisen as at 2011.

On this application Miss Dillmott represents the Claimants and Miss Klaedes represents the Defendants. For the Claimants I have two witness statements from Miss Knox and one from the Claimant’s Cyprus lawyer Mr Kiriakedes. For the Defendants I have witness statements from a Mr Condras, who deals with company law, Mr Constanduras, a financial consultant, from Mr Yantiles, the managing director of the Second Defendant, and also from Messrs Pantelis, Christoferou and Laigos, dealing with the conditions of the restaurants run under the franchise by the Defendants.

This is, of course, not the trial of the action; this is an application for summary judgment or to strike out. I will treat it as an application for summary judgment. The application cannot succeed unless the Claimants can show that the Defendant has no real prospect of success. I have regard to the case law on the principles particularly, those set out by the then Lewison J in The Federal Republic of Nigeria v. St Helena. Some of the particular considerations which arise in this case are that the court must consider whether the defendant has a realistic as opposed to a fanciful prospect of success. In reaching a conclusion a Court must not conduct a mini trial, but that does not mean that the Court must take at face value without analysis everything that a Defendant 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.

As I say, the parties entered into development agreements in 2003 and 2008, by which the First Defendant was to be the franchisee and the Second Defendant, Laser, was to guarantee those obligations. The duration of each development agreement was five years. The Defendants had an exclusive right to develop Burger King restaurants in Cyprus and there were franchise agreements in conventional terms to be entered into when these came on stream. The First Defendant had to keep open a minimum of five restaurants and had to open further restaurants in accordance with a development schedule. The First Respondent had to make a payment on the opening of each new restaurant and pay royalties, broadly five per cent of gross sales.

Burger King was entitled to terminate the franchise agreements by giving notice in writing and without compensation if the franchisee ceased to occupy the restaurant, ceased to operate a franchised restaurant, failed to pay any sum due within 10 days of demand, transferred its rights under a franchise agreement or was in breach of any other obligation. In the event of termination the franchisee had to cease using Burger King’s trademarks, return operating manuals, remove signs and do the other customary acts of disengagement from a franchise.

It is common ground in a sense that the Defendants were for some time in breach of their obligations under the development agreements. On 10th February 2011 Burger King sent to Laser a letter setting out a series of alleged breaches of the development and franchise agreements. Those breaches were under the heading “violation of the development agreement opening for the third year; potential violation of the development agreement and contribution; violation of the franchise agreement outstanding payments; violation of the franchise agreement OER” -- that is operational excellent review results -- an aspect which has not been relied on by the Claimants in this application, and various other matters.

The parties had discussions following the receipt of that letter and this led to a settlement agreement, which is a crucial contract in this dispute. The settlement agreement between the parties dated 7^th March 2011, but apparently signed a month later, begins with a number of preliminary statements. The parties acknowledge that they are parties to a development agreement dated 26^th February 2008. KF and Laser, that is the two Defendants, acknowledge that they are in breach of both the development agreements and the franchise agreements as notified by the Claimants in their letter of 10^th February 2011 and they then enter into a series of arrangements. The Defendants are to be joint debtors; there is an undertaking that had not existed before to pay debts to the suppliers of the Defendants. There are undertakings to pay outstanding money, unpaid royalties over a period of time and there are other provisions which broadly relax the strict commitments entered into by the earlier agreements.

Under the settlement agreement, as opposed to the earlier ones, English law has been chosen and this Court is to have jurisdiction. At the end of paragraph 7 the parties expressly agree that this agreement shall not supersede either the DA or the FA’s exhibited by the parties -- that is the development agreements and franchise agreements -- unless expressly provided. Therefore those agreements shall remain fully valid and effective among the parties. It is also expressly understood that any breach of this agreement by KF and Laser, as the Defendants are known, shall entitle the Claimant to terminate the same as well as to terminate the other agreements without further notice.

The parties no doubt did their best to give effect to the settlement agreement and there is a letter or note of 21^st September, from Mr Yanetlis, the managing director of Laser, to Mr Rousseau, a director and general manager of Burger King, referring to plans and hopes and continuing arrangements to fulfil orders. As at September relationships with suppliers are said to be improving, and debts were almost 80 per cent settled:

“Also from the end of 2010 we initiate and extensively strengthened our relationship with Van Os the exclusive Burger King logistics and distribution company of Dutch Burger King stores.” (Quote unchecked)

As a result of the alleged failure by the Defendants to comply with the settlement agreement after a warning letter had been sent, a letter of termination was sent by, in effect, the Claimants to the Defendants on 20^th February 2012, terminating upon the grounds set out in that letter.

In the Settlement Agreement the Defendants had acknowledged breaches of the prior agreements, as I say, a failure to pay suppliers and various other matters. It seems from the pleadings that the Defendants have admitted other matters alleged by the Claimants as well. They admit to failing to pay all the instalments required by the settlement agreement, to not paying royalties after the execution of the settlement agreement, notwithstanding a demand in writing. They admit failing to adhere to the development schedule, to closing two restaurants and failing to pay the initial franchise fee of US $50,000 on another franchise agreement. Thus there were breaches and on the face of it, therefore, the Claimants were justified in terminating.

The Claimants seek a declaration as to their right to terminate each of the relevant contracts, the payment of some €376,000 another €4m in damages and various other relief. The defence is not a satisfactory document and the Defendants have put forwarded an amended defence and counterclaim which they seek permission to bring in by way of amendment. In the ordinary way, of course, there would be no problem about them doing that. In a proposed counterclaim the Defendants seek a series of different remedies, including return of €350,000 paid by the Defendants to the Claimants as franchise fees, €100,000 for losses relating to particular restaurants, as well as €6m as compensation for a variety of other breaches.

The defences which the Defendants say have a real prospect of success, or rather that the Claimants cannot show have no real prospect of success, are set out somewhat confusingly in the witness statements and in the proposed pleading, but are summarised in Miss Klaedes skeleton argument as follows:

“It is alleged that the settlement agreement was entered into as a result of duress and/or coercion and/or force or threats.” (Quote unchecked)

They Defendants say that by failing to comply with the settlement agreement or to recognise it, they marked the fact that it had been entered into by duress. Various breaches of operational standards are also denied, albeit those are not relied on by the Claimants for today’s purposes, which denials are supported by some of the witness statements.

The Defendants also say that the settlement agreement was entered into by them without express and/or special resolution of the board and/or the company’s directors’ approval. The first development agreement cannot be relied upon for that reason and also because it has expired. There were numerous failures by the Claimants to train managers and do other tasks which they undertook under the terms of various agreements. And it is said, I think as part of the duress/coercion defence, that the Defendants were forced to close a number of their restaurants prior to termination. As part of a campaign the Claimants allegedly gave instructions to suppliers not to supply Burger King products to the Defendants. The dispute should be referred to arbitration. There are various other points relied upon.

I need not deal with the defence which relies upon arbitration, because it is clear beyond doubt that none of these agreements has an enforceable arbitration clause. That potential defence will get nowhere.

The Defendants rely upon the list of witness statements which I mentioned earlier. Although the Claimants put in their witness statements some time ago these only came in a week or so ago. The most important of the witness statements is that of Mr Yanetlis, the managing director of Laser. He deals with the background. He points to various events in the past which he says demonstrate that the Claimants from the beginning of a franchise relationship were flexible and waived their rights under the development agreement. He says that various of the agreements were signed by individuals who had no authority to enter into those transactions. He alleges in general terms the coercion or duress case. He emphasises that he made it his goal to run Burger King restaurants in Cyprus that would be of the highest quality food and hygiene standards. He gives what he describes as particulars and details of coercion, duress and undue influence, but for the most part those are taken from the pleadings and are expressed in very general terms. He says that allegations of insufficient operating standards were fabricated as part of the coercion and he then gives details of what he says were undue influence. He alleges that there were instructions by Burger King to suppliers to tell them not to supply further goods or credit to the Defendants and he says that by September 2011 they had cleared and made payment of over 80 per cent of old outstanding invoices.

This and the other witness statements are not detailed. They are not supported by contemporaneous documents. For example, the claim about suppliers is based entirely upon assertion by the witness. The Claimants say that it is more likely that refusal to supply was the result of those suppliers not being paid, a matter which was of concern to the Claimants as one can see from the Settlement Agreement.

The Claimants also rely upon what they call an unauthorised restaurant Ayia Napa. That is a restaurant which it is agreed is open or was open potentially in breach of the agreements. It was opened by a company called the Drain Pop(?). The Claimants have produced evidence showing that Drain Pop is within the Laser Group and is closely related to another company, Peach Noak(?), owned by Mr Eltetta, executive vice president and managing director of the Defendants. There has been no real attempt by the Defendants to refute that evidence.

I turn to the potential defences, the first one is lack of authority. That seemed initially to be a mixture of a claim of ultra vires, a claim that there was some breach of the Memorandum or the Articles and an allegation that the individuals who executed the agreements had no authority to do so. It has turned out that the potential defence is one of a lack of authority of the individuals who signed the documents. There is evidence from Mr Cocuneros, a Cypriot lawyer admitted to practice in that country, but like the lawyer for the Claimants, Mr Kiriakedes, he is not an independent expert. There are no signs from the information put forward to support the claim that he is a person with particular expertise in company law. It seems clear that the laws of Cyprus and England are, in this area, very similar.

The Claimants submit that the factual premise for some of the claims about directors is wrong and I am satisfied from what I have been shown that that is right. But it seems to me entirely unnecessary to make a detailed examination of that topic because it is clear the Defendants have either ratified the second development agreement and the other documents or are estopped from denying its enforceability. The Defendants entered into the second development agreement and took the benefit most obviously by opening up three restaurants. Similar observations relate to the franchise agreements.

The Settlement Agreement has been adopted, to put it mildly, by the Defendants. It was signed by Mr Yanetlis himself, the managing director of Laser and a director of the First Defendant. The signature on the Settlement Agreement is the same as that on his witness statement; although I appreciate it is not the Court’s duty to make a close forensic examination of signatures. Moreover, in proceedings in Cyprus which have been brought on the basis that they are ancillary to these proceedings, the Defendants expressly seek to rely upon the agreement, as one sees from a statement from Mr Eltetta himself. He says in the Cyprus proceedings:

“The settlement agreement was signed for the purpose of a full settlement of all disputes by the parties. The only contract that can be taken in mind by the court is the second settlement agreement dated 7^th April 2011.” (Quote unchecked)

Thus, so far as those questions of authority are concerned, not only are they unattractive from a commercial point of view but there is no prospect whatever of them being improved upon between now and the trial. Therefore there is no real prospect of them succeeding.

The next defence is that of what is called “economic duress.” There is no dispute between the parties about the applicable principles. We did not look at the authorities in any detail because it seemed to me -- and this was not disputed by Miss Klaedes -- that the principles were accurately and helpfully summarised at pages 17 and 18 of the Claimants’ skeleton argument. This is, as it were, lawful act economic duress. Wrongful or illegitimate threats can constitute duress. If a party’s consent is induced by pressure which the law does not regard as legitimate, that consent will be treated in law as revocable. Threatening to carry out something within one’s rights will not normally amount to duress. There is a quotation from Chitty:

“A party relies on its existing contractual rights to drive a hard bargain is not on that ground alone guilty.” (Quote unchecked)

The Court of Appeal in Seekey v. Ketch observed that it would be a relatively rare case in which lawful act duress could be established in a commercial context. There would have to be immoral or unconscionable pressure. There is no doubt that the relationship between a large franchisor and a smaller franchisee is potentially open to abuse, but the facts would have to be very striking to give rise to the defence of economic duress.

The economic duress is said to apply to the Settlement Agreement. The Claimants say that it was clear that at that point there were unpaid royalties, outstanding debts and other admissions of breaches in the past and therefore there was a legal entitlement to make demands upon the Defendants. Furthermore, it is improbable that there was economic duress in play in the negotiation of the Settlement Agreement bearing in mind that it contained a variety of relaxations of existing contractual obligations. The Claimants say that there was no threat to stop supplying goods. There is no evidence, as I have said, to support the Defendants’ case beyond assertion. It is clear from the terms of the Settlement Agreement that Burger King wanted the suppliers paid. But there is no evidence of nor any apparent motive for Burger King to pressure them to stop dealing with the Defendants. Some of the things relied upon by the Defendants in support of their economic duress claim appear to have happened after but not before the Settlement Agreement was entered into.

There has been no sign of protest about the alleged duress. Indeed what the Defendants rely upon is their failure to comply with the terms of the settlement agreement as being of itself evidence that they were trying not to affirm it and that they objected to its terms. Ingenious though that and the other arguments are, those particular points seem to me to have no prospect whatever of success. The fact is there is nothing to indicate around the time of the settlement agreement that the Defendants were unhappy about it. They did not complain about it later and it is an agreement which they affirm for other purposes when it suits them.

There are in the papers but not strongly pressed in argument or the skeleton argument, claims of undue influence. These are commercial parties entering into franchise agreements, they are all companies, they are well away from the categories of relationships where undue influence can arise.

The Defendants allege failures by Burger King to do a variety of things which it is said they should have done during the course of this relationship. These are referred to in the defence and proposed amended counterclaim. These are difficult to address for a number of reasons. First, it is not clear what their effect is said to be upon the rights of the Claimants to terminate. Secondly, it is not explained how these grievances give rise to identifiable breaches of contract by the Claimants. It does not seem to me that there is any real prospect of these complaints ever amounting to material to show there is a real prospect of successfully defending the claim.

Another matter which is urged more strongly in argument than it had been previously is the allegation of waiver. That appears in the pleading and it is also in the witness statement of the Defendants’ managing director. Broadly it is said that there had been breaches over a long period of time by the Defendants. Those breaches have been waived by the Claimants. If they had not been so waived the Claimants would have done something about them both in the past and at least well before now.

The Claimants acknowledge that there may well be many breaches of the agreements which, over the course of time, they have chosen not to pursue or had not been aware of, but they deny that there is any waiver. There is a no waiver clause in the franchise agreements, albeit not in the others. As the authorities cited by the Defendants’ counsel point out, in order to have a waiver in a commercial context you need clear evidence of unequivocal acceptance of breaches of contract by the Claimants. If there is one thing that the Claimants have not been doing since they started serving notices and invoking their rights against the Defendants it is waiving. If one looks at the correspondence as a whole and the evidence there is nothing to support the claim of waiver. There is no evidence that the Claimants have unequivocally, in knowledge of the breaches, accepted that they would not be the cause of further complaint or action.

The submissions of Miss Klaedes also involve a claim that this Court should not deal with this matter at all, the reason being the pending proceedings in Cyprus. An application for provisional measures was brought by the Claimants in Cyprus in support of this action. It was heard in December and judgment is awaited. It is suggested to me that there is a risk if I determine this matter today of inconsistent judgments. I reject that submission. It is improbable that there is a risk of inconsistent judgments in a context where in Cyprus the Defendants themselves assert the validity of the Settlement Agreement and where the proceedings are expressly brought as being ancillary to this action.

It is also suggested that there is a risk of inconsistent judgments in the proceedings brought in relation to the Ayia Napa restaurant against Drain Pop Limited. I am told that third party proceedings have been brought against parties to this action in those proceedings and there is again a risk of inconsistent judgments. It seems to me improbable there is a risk of inconsistent judgments. Even if there were such a risk that does not in any sense affect my duty to decide this case on its merits today. The Defendants do not contest the jurisdiction and rightly so. This potential complication should not prevent me reaching a conclusion.

I therefore reach the conclusion that, for the reasons I have given, that the Defendants have no real prospect of successfully defending the claim.

I will now hear from the Claimants’ counsel and then from the Defendants about matters arising.