Miscela Ltd & Ors v Coffee Republic Retail Ltd

Introduction

On 15 December 2010, Master Eyre entered summary judgment for the defendant against the 1^st claimant, Miscela Limited, in respect of paragraphs 4-15 of the Particulars of Claim. He also dismissed Miscela’s own application for summary judgment. Miscela appeals against that decision with the leave of Davis J. The issue turns on the proper construction of clause 2.2 of the Franchise Agreement between Miscela and Coffee Republic Franchising Limited (“CRFL”), and is therefore suitable for summary determination.

In late 2005, Miscela bought an existing Coffee Republic business at 40-42, High Street, Weybridge in Surrey (“the business”). The plan was for Miscela to run that business in the future. There were three separate agreements required to bring that about:

In the summer of 2009, CRUK and CRFL both went into administration. The defendant took an assignment of CRFL’s rights and obligations under the Franchise Agreement. CRUK surrendered the head lease to the landlords, and it was they who exercised the break clause in the underlease, at the end of 2009. As a result, Miscela vacated possession of the premises. Miscela now claim that these events rendered CRFL, and therefore the defendant, in breach of clause 2.2 of the Franchise Agreement. This appeal is therefore limited to a consideration of clause 2.2, and certain terms which Miscela say should be implied into the Franchise Agreement, if their interpretation of clause 2.2 is wrong.

In essence, Miscela submit that, pursuant to clause 2.2, they obtained the right to occupy the premises on Weybridge High Street. Therefore, they say, if through no fault of their own the break clause in the underlease was triggered and they were obliged to vacate the premises, they have a claim for breach of clause 2.2 against CRFL and thus, by virtue of the assignment, against the defendant. This argument relies heavily on the alleged unfairness of the result (or “the contractual absurdity”, as Mr Strauss put it) whereby Miscela – having bought the business – were left without a remedy following the exercise of the break clause. In response, the defendant submits that clause 2.2 was wholly unconnected with property rights and that, even if it was, no obligation of the kind alleged by Miscela could arise as a matter of proper construction of the Franchise Agreement.

I propose first to consider briefly the relevant law relating to contract interpretation, before going on to set out the key provisions of the three agreements. Then, having set out what I consider to be the relevant background and context of those agreements, I analyse the proper construction of clause 2.2. Thereafter, there is a final section of this Judgment, dealing with the alleged implied terms.

The Relevant Principles of Interpretation

The starting point, of course, is Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 and in particular the well-known principles, five in all, set out at pages 912H to 913F in the speech of Lord Hoffmann. In essence, a contract must be construed to ascertain “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”. Lord Hoffmann went on to say:

“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.”

This approach was restated in helpful terms by Moore-Bick LJ in Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyds LR 24. At paragraph 12 he said:

“Unless the dispute concerns a detailed document of a complex nature that can properly be assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read the words in question fairly as a whole in the context of the document as a whole and in the light of the commercial and factual background known to both parties, in order to ascertain what they were intending to achieve.”

It is always important to construe a commercial contract by reference to commercial common sense. As Lord Diplock put it in The Antaios [1985] AC 191, “if detailed semantics and syntactical analysis of the words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.” Lord Hoffmann said in Co-Op Wholesale Society Limited v Natwest Bank PLC [1995] O1 EG 111 that the court must not “re-write the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement.”

As Mr Strauss repeatedly urged on me, it is legitimate for a court, when construing a clause in a contract of this kind, to have regard to the reasonableness or otherwise of the competing interpretations. Lord Reid noted in L Shuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251E, that “the more unreasonable the result, the more unlikely it is that the parties can have intended it and, if they do intend it the more necessary it is that they shall make that intention abundantly clear.”

But the emphasis on the reasonableness or otherwise of the result cannot be taken too far. As Lord Hoffmann noted in Chartbrook Limited v Persimmon Homes Limited [2009] 1 AC 1101, at 1113, at paragraph 20 of his speech:

“…the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not an exchange for some concession elsewhere, or simply a bad bargain.”

And in the most recent case on the subject, Rainy Sky SA and Others v Kookmin Bank [2010] EWCA Civ 582, [2011] 1 All ER Comm 18, Patten LJ said at paragraph 42:

“Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the court has no alternative but to give effect to its terms. To do otherwise would be to risk imposing obligations on one or other party, which they were never willing to assume, in circumstances which amount to no more than guess work on the part of the court.”

The Three Agreements

Agreement 1 – The Business Sale Agreement 14/12/05

As noted above, pursuant to this Agreement, Miscela bought the Coffee Republic business at 40-42 High Street Weybridge, for £178,500 plus VAT. Clause 1.1 stated that it was an agreement “for the sale and purchase of the Business as a going concern.” As part of this arrangement, Miscela had to take on the contracts of employment of existing staff and the burden of other supply contracts.

Clause 2 provided that:

“2 Sale and Purchase of Assets

2.1

Subject to the terms and conditions of this Agreement, the Vendor shall sell and the Purchaser, relying on the representations of the Vendor herein contained, shall purchase the Business as a going concern and all of the Assets free from all liens, charges and encumbrances, with effect from the Completion Date.

2.2

The Assets to be sold pursuant to this Agreement shall be as follows:

a)

The Fixtures, Fittings and Equipment;

b)

The Records; and

d)

The benefits subject to the burden of the Contracts.”

Oddly, amongst the matters excluded from the sale in clause 2.3 was any goodwill in the business, which, so I would have thought, would have been an integral part of the business as a going concern.

Clause 4 provided that:

“Full Completion

4.1

This Agreement is conditional on the Purchaser entering into the Franchise Agreement and procuring that the Guarantor/Indemnitor enters into the Guarantee/Indemnity.

4.2

Completion of the sale and purchase hereby agreed shall take place on the Completion Date, at the Vendor’s offices unless otherwise agreed in writing by the parties at which

a)

the Vendor shall:

i)

place the Purchaser in effective possession and control of the Business and the Assets and occupation of the Premises…”

Schedule 2 set out in detail the fixtures, fittings and equipment that were included in the purchase price. Whilst these were plainly of significant value, I accept, notwithstanding the oddity concerning goodwill, Mr Strauss’ submission on behalf of Miscela that the principal asset was the ‘going concern’ element of the existing business.

Agreement 2 – The Underlease 20/01/06

The evidence is that, although the underlease was not in final form on 14 December 2005, a number of drafts had been considered by both sides at that date and it was at least approaching its final form. It appears that the terms set out below were all included in the draft underlease as it existed when Miscela entered into the Business Sale Agreement on 14 December, even though the final version of the underlease was not completed and approved until the following month.

The term of the underlease was 5 years, with a further 5 year option. The rent was £38,250 per annum.

Clause 6.1 dealt with forfeiture, including the right of forfeiture should Miscela, as the tenant, not perform its covenants (Clause 6.1(b)). At clause 6.1(g), forfeiture could also arise if the Franchise Agreement was “terminated for any reason.”

Clause 6.5 was in these terms:

“Break clause

The Landlord [CRUK] may at any time determine the Term by giving to the Tenant not less than one months written notice to expire at any time without reference to dates for payment of Rent and upon the expiry of which this Lease and the Term and everything herein contained shall cease and determine but without prejudice to the rights of either party against the other in respect of any antecedent claim or breach of covenant under this Lease.”

It is important to note that the second claimant, the sole director of Miscela, was aware – before any of these Agreements had been signed – that the break clause set out above represented a potential problem. In his witness statement, at paragraph 22, he refers to a telephone conversation that he had with Mr Drysdale of CRUK on or about 12 December 2005, in which he referred to the potential 10 year term of the Franchise Agreement. He goes on in that statement:

“My concern was Clause 6.5 of the underlease which on its face gave CRUK a right to break the underlease at any time and for any reason on one month’s notice. Mr Drysdale assured me that CRUK would only exercise its right to break under that clause, and would only regard itself as being entitled to do so, in the event that the first claimant, that is to say Miscela, was in serious breach of the proposed franchise agreement. That satisfied me.”

This alleged conversation gives rise to an entirely separate claim for a collateral warranty, which was the subject of a late amendment to the particulars of claim, and was not a matter that could be decided by Master Eyre. It does not therefore arise for decision before me; indeed, it could not be decided without oral evidence. In my view, it is unfortunate from a case management point of view that not all of the contractual issues are being decided together. But even though it is not a matter that I can determine, it is at least relevant to note that the break clause in the underlease, which is ultimately the cause of the difficulty in the present case, was not missed by Miscela, or somehow allowed through without any understanding of its potential effect.

Agreement 3 – The Franchise Agreement 14/12/05

Unlike the other two Agreements, this agreement was between Miscela and CRFL. There was a suggestion in the evidence that this split came about because CRUK did not qualify for membership of the British Franchising Association due to its poor financial history. That may or may not be right. Mr Small, who acts for the defendant, was unable to confirm or deny it.

The recitals of the Franchise Agreement included the following:

“A)

We have the right in the United Kingdom to operate and to franchise others to operate the Coffee Republic Delis.

B)

We have the right to licence the Marks which are associated with high standards of quality and service.

C)

We wish to expand the Coffee Republic Delis through a franchised network and are therefore willing to grant to you the rights set out herein, to enable you to operate a Coffee Republic deli from the Premises.

D)

You desire the right during the continuance of this Agreement to operate a Coffee Republic Deli from the Premises.

E)

You will enter into the Underlease in respect of the Premises.

F)

You acknowledge that you alone will carry the risk of operating Your Coffee Republic Deli…”

Clause 2 was entitled ‘Conditions, Precedent and Rights Granted’. It was clause 2.2 that dealt with ‘Rights Granted’. It was in these terms:

“Subject to you satisfying the conditions precedent in clause 2.1, we grant to you during the term and subject to the terms and conditions hereof, the rights to carry on a Coffee Republic Deli from the premises, subject to clause 4.4 in accordance with this agreement.”

Clause 4 was entitled ‘Premises’ and contained the following provisions:

“4.1

We will procure that you will be granted an Underlease in respect of the premises. The terms of the Underlease shall have first been agreed in writing by us.

4.2

In relation to the Underlease you will…

b)

comply with any notices served on you by any person entitled to the reversion expected on the term of the Underlease and to give us a copy of and full particulars of any such notices…

4.4

If the Premises becomes unavailable to run Your Coffee Republic Deli from, due to a reason other than your breach of the Underlease, you may relocate Your Coffee Republic Deli to another location, provided that:

a)

we reasonably believe the non-availability of the Premises is not due to your breach of the Underlease or this Agreement or through your failure to comply with any legal requirement;

b)

you furnish us with all such information about the new location and premises that we reasonably require;

c)

the new premises satisfy all planning and other requirements; and

d)

we approve such new location and premises, in writing, as being appropriate premises for Your Coffee Republic Deli.”

Clause 9 set out Miscela’s financial obligations. The Franchise Fee was £17,500 but there were other fees and charges which took the total payable to around £40,000 a year. Clause 13 prohibited assignment of performance on the part of Miscela, but purported to allow assignment by CRFL. Clause 14 dealt with termination and seemed, on its face, to permit termination if “the Underlease is forfeited or determined for any reason”. A sum of £20,000 was said to be payable by Miscela if the Franchise Agreement was terminated.

The Background/Context of the Agreements

What then is the background or context against which the terms of the Franchise Agreement, and indeed the other two agreements, fall to be construed? In my judgment it is made up of the following components:

As I have said, it is important to stress the involvement of the two separate companies within the Coffee Republic Group. I say that because, initially, the skeleton argument provided on behalf of Miscela contained a number of misstatements, to the effect that, for example, Miscela had paid CRFL over £200,000 for the premises and must therefore be entitled to recompense under clause 2.2 of the Franchise Agreement on the termination of the underlease. That of course was wrong, because the purchase price was paid not to CRFL, but to CRUK. Although these elisions were acknowledged by Mr Strauss in his oral submissions, he continued regularly to substitute one of the Coffee Republic companies for the other, and maintained that the fact that they were different companies “was neither here nor there”. Mr Strauss relied on no authority for that proposition, and it seems to me that it flies in the face of the usual rule that, absent particular circumstances, the rights and obligations of company X under one contract will fall to be dealt with without reference to the rights and obligations of company Y under another contract. Mr Strauss accepted that this was not a case in which he could or did seek to pierce the corporate veil.

Construction of Clause 2.2

In my judgment, it is plain that clause 2.2 did not provide Miscela with the right to occupy the premises in Weybridge, whether for 5 or 10 years, or at all. There are essentially three reasons for that conclusion.

The first concerns the rights identified in and conferred by clause 2.2. Apart from the reference in that clause to “the right to carry on a Coffee Republic Deli from the premises”, the Franchise Agreement does not further define those rights. But they must be the rights which are being granted by CRFL to Miscela and, on an analysis of the Franchise Agreement, those rights can only be the intellectual property rights referred to in recitals A and B (paragraph 22 above). Those are the only rights expressly identified in the Franchise Agreement itself. They were in any event the only rights which CRFL – as the franchisor – could offer.

Secondly, those rights did not include any property rights (such as, for example, the right to occupy the premises at 40-42, High Street, Weybridge, for a particular period), because CRFL themselves possessed no such rights. It is for that reason that clause 4.1 limited CRFL’s obligations in respect of the premises to “procure” that Miscela would be granted an underlease. Accordingly, it makes no sense for the rights in clause 2.2 to include property rights which CRFL did not have and could not therefore grant.

Of course, there was no lacuna as a result of this. The company that did possess the necessary rights (CRUK) granted them by way of the underlease. Accordingly, it is quite unnecessary to construe clause 2.2 of the Franchise Agreement between Miscela and CRFL as including property rights, because those rights were granted to Miscela by CRUK pursuant to a completely separate agreement.

Thus, as a matter of construction, the rights in clause 2.2 did not include any property rights, which were not CRFL’s to grant. That is a complete answer to Miscela’s case on construction.

There is, however, a third reason why, so it seems to me, Miscela’s claim based on clause 2.2 must fail. Assume for this purpose that I am wrong, and that clause 2.2 granted Miscela some sort of right of occupation of the premises. That right is expressly said in clause 2.2 to be subject to clause 4.4. What then is the effect of that?

In my view the answer is clear. If clause 2.2 granted some sort of right of occupation of these premises, that right was subject to clause 4.4. Clause 4.4 made plain that circumstances might arise in which the premises at 40-42, High Street, Weybridge will become unavailable to Miscela, in which case, subject to the conditions set out in clause 4.4, the Franchise Agreement may continue in respect of alternative premises.

In other words, any limited right of occupation granted by the Franchise Agreement, if that is what it was, expressly carried with it the qualification that the premises may become unavailable, and that the business may have to be relocated elsewhere. Such language is, so it seems to me, wholly inconsistent with Miscela’s suggestion that they had an unfettered right of occupation of the premises, and inconsistent with their submission that, even in a situation where the procedure under clause 4.4 had to be followed, this would not detract from the claim that they would otherwise have against CRFL for breach of clause 2.2. In my judgment, the qualification provided by clause 4.4 means that clause 2.2 did not and could not provide an unfettered right of occupation of these particular premises.

Accordingly, it seems to me that the words “subject to clause 4.4” were of great significance, if one assumes, as Miscela would have it, that clause 2.2 was providing some sort of right to occupy the premises. But in his oral submissions, Mr Strauss maintained that the words “subject to” were essentially otiose and added nothing, and he read the two provisions, that is to say clauses 2.2 and 4.4, disjunctively. In my view, it is an unpromising approach to the words used by the parties to suggest that what appears to be a deliberate decision to make one clause subject to another should be ignored. In my view, this element of the drafting was clear: on any view, there was no unfettered right to occupy these particular premises. That therefore is a third complete answer to Miscela’s case on construction.

Finally, on this point, I ought to add that I accept Mr Small’s submission that it is logically inconsistent to say, as Miscela did, that whether or not CRFL were in breach of clause 2.2 might depend on the circumstances in which the right to occupy the premises came to an end. Mr Strauss made much of the fact that clause 4.4 would operate if, for example, through no fault of CRFL, Miscela had to vacate the premises because of a fire. He suggested that this would not then be a breach of clause 2.2 on the part of CRFL, because it would not be their fault that Miscela’s occupation of the premises had ceased. He contrasted this with what actually happened, namely the triggering of the break clause. But it seems to me that there is nothing in clause 2.2 that allows for such a distinction. In my view, CRFL would be no more at fault if another company, CRUK, chose to trigger the break clause in the underlease, than they would be if there had been a fire. These inconsistencies, so it seems to me, all arise from the essential flaw in Miscela’s construction argument, which is to suggest that clause 2.2 is granting some sort of right of occupation.

Although that deals with the construction issues, it is I think necessary to deal with Miscela’s underlying complaint, which is that the result of my construction, just as with Master Eyre’s interpretation, is unfair and therefore uncommercial and contrary to common sense. Although I have sympathy with Miscela for the situation in which they now find themselves, it seems to me that there are, in truth, a number of answers to that approach to construction in the present case.

First, the fairness or otherwise of a result is usually only a relevant factor at all if there is more than one arguable interpretation of the words used. Here, for the reasons that I have given, it seems to me plain that there is only one possible interpretation of these clauses. In those circumstances the point does not even arise.

Second, if I was wrong about that and there are two viable interpretations, as I have already noted, the unfairness of the result in a particular case is only one factor to be taken into account in the interpretation of the relevant provisions. It is only in an extreme case that it could dictate the result, and it seems to me that this is far from being an extreme case.

Thirdly, the potential harshness was, on the second claimant’s case, identified and acted upon at the time. As I have said, it gives rise to the alternative case with which I am not concerned. If, having spotted the risk, he failed sufficiently to protect himself against that risk, then that must be the second claimant’s responsibility.

Fourthly, any potential harshness in these circumstances was the result of a provision in the underlease, which was an agreement with a separate company, to which CRFL (and therefore the defendant) was not a party, and in respect of which they had no control. If I have to balance respective unfairness, it might be said that it would be more unfair to render CRFL – and thus the defendant – liable for the actions of another legal entity over which they had no control, than to render Miscela liable (subject to the collateral warranty argument) for the consequences of a risk which they expressly identified at the time.

Finally, I wonder how unfair the actual result has been. In the result, Miscela traded at the Weybridge premises for 4 of the 5 years originally contemplated by the Franchise Agreement and the underlease. It is plain that they hoped for longer and, through absolutely no fault of their own, they were denied that opportunity. But it does not seem to me that trading beyond the first 5 years could be said to have ever been guaranteed.

Accordingly, for those reasons, I am not persuaded that, even if it were relevant, the alleged unfairness of the result to Miscela makes or can make any difference to the issue of interpretation. If it was less than a perfect bargain, Miscela were, and certainly should have been, aware of the risk at the time.

For those reasons I dismiss Miscela’s appeal against Master Eyre’s decision in respect of the interpretation of clause 2.2 of the Franchise Agreement.

Implied Terms

The implied terms alleged by Miscela are as follows:

It is Miscela’s case that, if they are wrong as to the interpretation of clause 2.2, as I have found they are, then these terms fall to be implied into the Franchise Agreement. In response, the defendant submits that these terms could not survive my finding as to the construction of the express terms and that, in any event, they are both unnecessary and contrary to the other terms of the Franchise Agreement.

There was a good deal of argument about the proper approach to implied terms in the light of the decision of the Privy Council in Attorney General of Belize v Belize Telecom Limited [2009] 1 WLR 1988. In that case, Lord Hoffmann said:

“21 It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer - an implied term must ‘go without saying’, it must be ‘necessary to give business efficacy’ to the contracts and so on - but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument read as a whole, against the relevant background, would reasonably be understood to mean?

22 There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is ‘necessary to give business efficacy’ to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word ‘business’, is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance v Hyman [2001] 1 AC 408 was decided. The second, conveyed by the use of the word ‘necessary’, is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.”

For what it is worth, it seems to me plain that this approach is the one which the courts must now adopt: see, for example, paragraphs 36-41 of the judgment of Aikens LJ in Thomas Crema v Cenkos Securities Limited [2010] EWCA Civ 1444, and the judgment of Arden LJ in Stena Line Limited v Merchant Navy Ratings Pension Fund Trustees Limited and Another [2011] EWCA Civ 543. But the essential issues remain as to whether the terms are strictly necessary and whether they run counter to the express terms of the Franchise Agreement.

The first point to make is straightforward. Applying Lord Hoffmann’s test, there can be no doubt that the Franchise Agreement, read as a whole against the relevant background, could not possibly be understood to mean, or to be read as including, the two implied terms that have been alleged. The reasons for that view are the same as the reasons which led me to construe the Franchise Agreement in the way that I have done in the first place. In other words, they simply do not reflect the agreement that the parties reached.

Dealing with the individual terms, it seems to me plain the first term cannot be said to be strictly necessary. To the extent that it relates to matters within CRFL’s control under the Franchise Agreement, the term does no more than say that CRFL must comply with their obligations under the Franchise Agreement. It is therefore otiose. Moreover, in the light of my conclusion as to the proper interpretation of clause 2.2, it does not appear to me that it could possibly be said that CRFL, and therefore the defendant, have acted outside those obligations.

The real problem with the first implied term, so it seems to me, is that it offends against commercial reality, because it seeks to make CRFL potentially liable for the actions of CRUK, and what may or may not happen under the underlease. As I have pointed out, CRFL were not a party to the underlease and had no means of controlling CRUK’s performance of their obligations under the underlease. The term therefore cuts across the express terms of the Franchise Agreement. It also cuts across Miscela’s clear obligation to comply with all the notices issued under the underlease. Accordingly, the alleged term is not strictly necessary, and is in fact contrary to the terms of the Franchise Agreement.

The second term exhibits exactly the same defects, because it seeks to render CRFL liable for CRUK’s decision to surrender the head lease. There is simply no basis on which such a term could be implied into the Franchise Agreement. That was not the basis of the overall agreement between the parties. CRFL cannot be liable for the actions of another company.

For those reasons, the argument as to the alleged implied terms (which, to be fair to Mr Strauss, was not at the forefront of his submissions) adds nothing and must fail. Accordingly, I also dismiss the appeal against the second element of Master Eyre’s judgment against Miscela. The judgment of Master Eyre is accordingly affirmed.